Government Policy Toward Commercial Aviation: Competition and the Regulation of Rates 9780231883214

Table of contents :
Contents
I. Introduction
II. The Government's Role in the Establishment of Scheduled Air Transportation
III. Commercial Aviation in Transition from Insecurity to Security of Investment
IV. Failure of Competition in the Coordination of the Air Routes
V. Failure of Competition in Reletting the Mail Contracts
VI. Regulation of Mail Rates: Domestic Services
VII. Foreign Air Transportation—Certificates of Convenience and Necessity
VIII. Mail Rate Regulation: Foreign Services
IX. Conclusion
Bibliography
Index

Citation preview

Government Policy Toward Commercial Aviation

Government Policy Toward Commercial Aviation Competition and the Regulation of Kates By GILBERT GOODMAN ASSISTANT PROFESSOR OF ECONOMICS WAYNE UNIVERSITY

New

York

: Morningside

Heights

KING'S C R O W N PRESS

1944

COPYRIGHT 1944 BY GILBERT

GOODMAN

Printed in the U n i t e d States of

America

King's Crown Press is a division of Columbia University Press organized for the purpose of making certain scholarly material available at minimum cost. Toward that end, the publishers have adopted every reasonable economy except such as would interfere with a legible format. The worl^ is presented substantially as submitted by the author, without the usual editorial attention of Columbia University Press.

To My Mother

Contents I. II.

Introduction The Government's Role in the Establishment of Scheduled Air Transportation

III.

IV.

V. VI. VII.

VIII. IX.

I

Commercial Aviation in Transition from Insecurity to Security of Investment

4

13

Failure of Competition in the Coordination of the Air Routes

22

Failure of Competition in Reletting the Mail Contracts

45

Regulation of Mail Rates: Domestic Services

59

Foreign Air Transportation—Certificates of Convenience and Necessity

76

Mail Rate Regulation: Foreign Services

99

Conclusion

no

Bibliography

115

Index

119

Chapter One Introduction

T

HIS study deals with the subject of government policy with respect to scheduled air transportation.

Whenever the government undertakes the regulation of business en-

terprise a question inevitably arises about the extent to which monopolistic control should be permitted. In some instances it encourages a degree of competition while in others it permits monopoly. In the beginning there was a sharp difference of opinion between Congress and the executive over the amount of monopoly which should be permitted in commercial aviation. Congress originally insisted that unlimited competition should be preserved, but the Postmaster General, who had immediate contact with the industry, believed that competition should be restricted. Since economic conditions militated against the effectiveness of competition, Congress had to give way, and it eventually abandoned competition in favor of a system of certificates of convenience and necessity. With the abandonment of free competition, the government, to protect itself, undertook the regulation of mail rates. This regulation was first established in 1928 with the introduction of the route certificate system. It became increasingly effective as competition dwindled. T h i s study examines the policies of the government with respect to commercial aviation—particularly as it concerns competition and the regulation of mail rates. It deals first with competition. Chapter T w o pictures the government's role in establishing commercial aviation, and Chapter Three shows how competition, together with arbitrary rate setting, subjected the carriers' investments to undue risks, and how they were relieved from such risks through the abandonment of unrestricted competition and the establishment of a satisfactory system of mail rate regulation. Chapter F o u r shows how competition failed in the coordination of the air routes. Chapter Five shows how competition failed in the reletting of the mail contracts—and how it was abandoned in favor of a system of certificates of convenience

INTRODUCTION

2

and necessity under the Civil Aeronautics Act. The analysis of the policies of the Civil Aeronautics Authority under these certificates—with special emphasis on its attitude toward competition—is reserved for Chapter Seven on foreign air transportation. Certain factors in the situation made it nccessary to divide the treatment of the certificates of convenience between Chapters Five and Seven. In the first place, although the Act had been passed at the time I composed Chapter Five, the Authority had not as yet acted on any applications for certificates. In the second place, within the sphere of the domestic services, competition did not constitute an issue because all applications came under the "grandfather clause." 1 In the foreign air services, however, while many of the certificates also came under the "grandfather clause," some were for new services, and one of the latter—that of American Export Air Lines— was for a competing service. It seemed, therefore, that foreign air transportation would afford much better opportunities than the domestic for analyzing the Authority's policy, under the certificates, toward competition. For these reasons the last part of Chapter Five, which deals with the abandonment of unregulated competition, analyzes the general provisions of the Civil Aeronautics Act concerning the certificates, and the analysis of the Authority's policies is reserved to Chapter Seven. And because the foreign and domestic air services were placed on the same footing by the Act, the policies laid down by the Authority for foreign services apply to the domestic services as well. The latter part of the study deals mainly with the regulation of mail rates. Congress, realizing that when competition fails, regulation of rates must be employed to protect the public, provided for regulation of mail 1

" W i t h one exception, the previous opinions of the Authority in passing on applications

f o r Certificates of Public C o n v e n i e n c e and Necessity have dealt w i t h the issuance of such certificates to existing carriers, pursuant to the so-called 'grandfather clause' of the Act contained in section 4 0 1 ( e ) , thereof, and such applications w e r e for certificates a u t h o r i z i n g the continuance of service over those routes operated or authorized by the Postmaster General prior to the effective date of the A c t . In such proceedings the principal issues before the A u t h o r i t y w e r e the citizenship of the A p p l i c a n t ; the scope and continuity of its operations or the scope of its authorization f r o m the Postmaster General to transport mail . . .

In those proceedings, broad

questions of the public convenience and necessity for the service applied for w e r e precluded by the statute f r o m c o m i n g before the Authority for determination. In the instant case, h o w e v e r , the A u t h o r i t y for the first time faces the questions presented by the general provisions of the A c t r e g a r d i n g the issuance of certificates of public convenience and necessity for new routes and services, and, that b e i n g the case, it seems proper to review, at the threshold of o u r determination of this proceeding, some of the considerations raised by the specific statutory provisions u p o n w h i c h that determination must rest." Civil Aeronautics A u t h o r i t y ,

Docket

N o . 1 6 3 , O r d e r s Serial N u m b e r 55, Pan A m e r i c a n A i r w a y s of D e l . Application for Certificate f o r T r a n s a d a n t i c Service, pp. 3 - 4 .

INTRODUCTION

3

rates, when, through the route certificates of 1928, it made its first departure from competition. This regulation was, however, hampered by the fact that, being a non-technical body, Congress failed to grasp the economic aspects of air transportation and frequently worked at cross purposes. Thus at one time, although it provided that mail rates should be fair and reasonable, it set maximums on such rates. All its policies on the regulation of mail rates from their inception under the route certificates, through the regulation by the Inter-State Commerce Commission, to the regulation by the Civil Aeronautics Authority are discussed in Chapters Six and Eight. A word should be added about the treatment of mail rate regulation under the Civil Aeronautics Act. When Chapter Six was written the Act had already been passed but the Authority had handed down but few decisions in air mail rate cases. That chapter, therefore, was limited to an analysis of the general provisions of the Act. The Authority had, however, already decided several foreign mail rate cases and its decisions presented certain issues which were not likely to appear in domestic mail rate cases. It seemed best, therefore, to analyze the Authority's policies in connection with the foreign services rather than the domestic. Since it was impossible, however, to discuss mail rate fixing in the foreign services without first taking up the nature and development of the services themselves, the analysis of mail rate regulation under the Civil Aeronautics Act is divided between Chapters Six and Eight. Chapter Six, dealing with mail rate regulation in the domestic services, analyzes the general provisions of the Civil Aeronautics Act. Then Chapter Seven discusses the origin and development of the foreign services.2 Chapter Eight, dealing with mail rates in the foreign services, takes up the second part of the discussion of mail rate regulation and analyzes the Authority's policies under the Act. Since the domestic services are on the same footing as the foreign, the principles laid down by the Authority in the foreign mail rate cases apply with equal force to all. ' T h e discussion of the origin of the foreign services is in connection with the treatment of the Authority's policies under the certificates of convenience and necessity.

Chapter Two

The Government's Role in the Establishment of Scheduled Air Transportation

W

h e n airplanes were invented in 1903, they were regarded as toys, and they were first used as a means of sport. D u r i n g the first w o r l d

war, however, their extensive signal and bomb-carrying w o r k proved them

capable of sustained flight and pointed to the possibility of their use in commercial air transportation. D u r i n g the years immediately

following

the w a r considerable haphazard flying w a s done, but it was impossible for scheduled air transportation to be established because certain serious obstacles stood in the w a y of safe operation. T h e s e obstacles were partly of a technical nature, such as the provision of landing fields and aids to navigation, and pardy of an economic nature, such as the

financing

of

these physical factors. Moreover, the extremely h i g h cost of operation prevented air traffic f r o m developing, and this was an obstacle w h i c h seemed almost impossible to overcome. Fortunately private enterprise was not left to face these obstacles by itself, because the advantages of air transportation to the public induced the government to take a hand in the situation. T H E CONTRIBUTION OF T H E A I R W A Y

W h e n a n y t h i n g w e n t w r o n g w i t h an airplane in flight, it was not like a truck w h i c h could d r a w up alongside the h i g h w a y until repairs were m a d e w h i c h w o u l d permit it to g o on. It had to find a landing field within reasonable distance, and if it could not do so, the result was an accident w h i c h often destroyed both plane and cargo. T h e spectacular character of these accidents deterred people f r o m using air transportation. Passenger traffic was particularly affected, but express traffic, because of its inability to obtain insurance, was also retarded. A s l o n g as fear of accidents kept traffic f r o m developing, the industry could not get e n o u g h revenue to maintain operations. It was this danger f r o m interrupted flying that was responsible for the invention of the airway. It was recognized that, since even the most reliable

GOVERNMENT'S EARLY ROLE

5

equipment was bound to fail occasionally, the only way to cut down disastrous accidents was to provide safe landing opportunities along the entire route. Since kinetic energy of planes carries them thirty miles after their motors fail, providing landing fields at thirty-mile intervals along the entire route made it possible for planes to land safely at all times.1 Locating the routes over terrain suitable for landing, and establishing necessary emergency fields cut down considerably the danger from accidentally interrupted flight, and by doing so gave the industry a long push toward safe operation and laid the basis for attracting traffic to air transportation. The courses which were equipped with intermediate landing fields for safe flying were designated as airu/ays. Navigation at night was the next problem that had to be solved. Planes were originally navigated to their destination by referring to prominent objects on the ground. Flying from one city to another they usually followed some prominent feature of the terrain, such as a highway or a railroad track. At night, however, darkness grounded the planes, thus robbing aviation of its speed advantage over other means of transportation. It was speed which enabled the industry to command a premium for its services, and if that speed advantage was to be lost through grounding planes at night, aviation lost its special advantage. This problem was solved by equipping the airways with beacon light systems. Beacons are powerful lights which can be seen, on clear nights, from heights of fifteen hundred feet, for ten miles. Locating them at tenmile intervals along the entire route enabled planes, by hopping from one beacon to another, to reach their destination even though darkness hid ground objects from view.2 T h e third problem to be solved was that presented by bad weather, which had much the same effect as darkness since it made visual contact with the ground impossible. Neither the airways as originally established, nor the beacon systems made flying during bad weather possible. Time was still lost through the grounding of planes and scheduled operation was still impossible. Without regularity and dependability of service, air transportation could not attract business and could not develop selfsustaining traffic. This last barrier to scheduled air transportation was finally overcome 1

Bureau of Air Commerce, Annual Report, p. 5. At present the intermediate landing fields are spaced at fifty-mile intervals. First Annual Report, Civil Aeronautics Authority, p. 10. 2 Ibid., p. 6. There were 2,016 beacons on the airways in 1939. first Annual Report, Civil Aeronautics Authority, p. 8.

GOVERNMENTS EARLY ROLE

6

by the invention of the radio beam, which made safe flying possible in almost all kinds of weather. These beams, sent out by radio stations, are four-directional and arc able to keep planes, equipped with suitable receivers, on their courses.3 The figure below illustrates how they make trans-

portation independent of the weather. Circle L is the radio station sending out beams L M , L N , L P , L O . Planes, by adjusting their receivers to the length of radio beam L M will automatically be guided to point M on their course a hundred miles away. If another beam radiating station, L 1 is set up two hundred miles away from station L , so that beam L * M touches beam L M , planes with receivers properly adjusted, will be directed another 200 miles on their course, without any guidance from the pilots. Placing beam generating stations along the entire airway makes air navigation independent of the weather since planes, by following the beams, are automatically guided to their destination. 4 T h e figure on page seven presents graphically the elements that make 5

Aeronautics Bulletin No. 2 7 : Aeronautic Radio, pp. 5 - 6 .

* There were two hundred and thirty-seven beam generating stations on the airways in 1 9 3 9 . First Annual Report, Civil Aeronautics Authority, p. 8.

8

GOVERNMENTS EARLY ROLE

up an airway between New York and Chicago. It shows five beam radiating stations along the route. A pilot with receivers properly adjusted can direct his plane without reference to land marks. Should motor trouble make it necessary for planes to land before they reach their destination they can be brought down on an intermediate landing field, such as NS. When pilots prefer flying at night without the beam they can do so by following the beacon lights which arc spaced at ten-mile intervals, as represented by the dark lines with the circles on each end. While the airways removed the physical obstacles to safe scheduled operation there still remained the twofold economic problem, arising in part out of the necessity of constructing and operating the airways system, and in part out of the high costs of flying operations. Neither of these problems could be solved through private initiative. REASONS FOR GOVERNMENT ACTION: CONSTRUCTION AND MAINTENANCE OF AIRWAYS

Airways represented large capital investments and their maintenance was expensive. They could accommodate a specific number of planes at any given time. A n airway of two thousand miles in length, if planes were spaced 100 miles apart, could allow passage to 20 planes in one direction at the same time. Furthermore, since radio beams extend infinitely into the air, the airways extended upward as high as planes can fly. If planes were assigned to different altitudes, fifteen hundred feet apart, and assuming a practical maximum flight altitude of 10,000 feet, the plane capacity of the airway could be increased six times—to a hundred and twenty at one time. Where air carriers had sufficient traffic to use their full capacity private ownership of the airways would have done no harm. However, at the time the airways were first invented the light traffic would have enabled the carriers to use only a small part of their maximum capacity. Yet private ownership would have preempted their use to their respective owners and, should traffic have increased eventually to justify several operators on the same route, it would have prevented other carriers from flying over it. For example, if the airway between N e w York and Chicago were owned and operated by United Air Lines that company could have kept American Air Lines, or any other carrier, from using it. If American Air Lines wanted to fly between the same cities it would have had to build an airway of its own. Yet the traffic existing at the time would have permitted the carriers to utilize both airways at only a fraction of their ca-

GOVERNMENTS

EARLY

ROLE

9

parity. This would have increased the capital and maintenance costs per unit of transportation service. But if the airways were built and operated by the government and made available to the public, they would be used more fully and they would reduce costs which would attract traffic and encourage the industry. Private ownership of the airways would have hampered air transportation in other ways. The first airway constructed between two cities would presumably have preempted the best flying territory. The second airway would have had to be built on territory less suitable for flying purposes, which would have interfered with safety and militated against widespread use of air transportation. Finally the air mail contract system made private property in the airways inadvisable. As was previously mentioned, passenger and express traffic could not pay rates high enough to cover operating costs. T o overcome the resulting losses the government awarded contracts to the air carriers to carry mail. These contracts which were to be relet every four years might be awarded to some other carriers when they were advertised for bids. Air carriers losing their mail contracts would have been left with airways for which they would have had no use other than to carry passengers and express—a type of traffic on which they would incur heavy losses. REASON FOR GOVERNMENT ACTION: OPERATING DEFICITS

Government construction and maintenance of airways would aid the industry in two ways: by providing the physical conditions for scheduled air transportation, and by relieving the air carriers of the cost of building and operating them. But even so, the costs of air transportation would be too high to command sufficient traffic to maintain scheduled operation. Scheduled air transportation commands rates above those charged by railroads because of the time it saves. However, the premium charged could ndt exceed the value of the time saved to the shipper. As a result the rates whlx E

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3 13 13

were entitled. U s i n g columns four through fourteen one can compute the m a x i m u m compensation on any route. T h u s a route on w h i c h the mail loads were 1,250 pounds and w h i c h had all special service features for w h i c h the formula allowed, could get a m a x i m u m compensation of $1.36 per airplane mile—consisting of the $.90 base rate, plus $.15 for night

flying,

$.02 for difficult terrain, $.025 for f o g on the route, $.06 for 2-way radio o n planes, $.075 for thirty-passenger accommodations, and $.13 for multimotored equipment. 8 T h i s formula was used until A u g u s t 1933 w h e n it 7 This formula was in effect from May i , 1930 to March 31, 1931. Post Office Department, Annual Report for 1931, p. 126. * It should be emphasized that the rate formula did not give the carriers contractual rights which they could enforce in the courts. As was pointed out on a previous occasion, the Postmaster General repeatedly reduced the compensation below the amounts to which the carriers were entitled according to the formula. Nevertheless the formula did enable the Postmaster General to adjust the carriers' compensation to the type of service which they performed rather than to the individual carrier's cost of that service—thereby preventing inefficient carriers from passing their high costs on the public. Thus the formula given above fixed the compensation for night flying at $.15 per airplane mile for all carriers regardless whether, on account of inefficiency, the costs of individual carriers were above that.

62

DOMESTIC MAIL

RATES

was abandoned because so much of the special equipment had become standard on planes that it could no longer be used as a differentiating factor in compensation. THE SPACE METHOD OF COMPENSATION

Between 1925 and 1930 the Postmaster General, w h e n he asked for bids, specified that the bids be expressed in dollars per pound for specific routes as a whole. Of course, when carriers submitted their bids they did take distance into consideration. F o r example, in computing the monthly compensations of the carriers the Postmaster General would multiply the amount of mail they carried, in terms of pounds, by the rates which were accepted for the routes as a whole. Distance thus figured only indirectly in determining the compensation. 0 A s a result the government's cost of carrying the mail increased because of the extra charge the carriers made for assuming the risk of uncertainty as to the amount of mail that would turn up on the routes. 1 0 Moreover, w h e n through mail went over several routes (it should be remembered that the air routes at that time were short and disconnected) to get to its destination, each carrier received the full rate even though he carried it over only part of the route. T h e Postmaster General recommended that a space-distance f o r m of compensation be adopted under which he would contract for specific space on planes and pay for it at definite rates per airplane mile. N o t only would carriers, freed f r o m the risk of fluctuating mail loads, be able to reduce their charges but the Postmaster General would have to pay only for the actual distances that the through mail was carried. THE MAIL SUBSIDY

T h e A i r Mail Act of 1930 authorized the space-distance f o r m of compensation under which the Postmaster General could pay a m a x i m u m of 8 T h e tabic on the preceding page w a s constructed in 1 9 3 1 — u n d e r the A i r M a i l A c t of 1 9 3 0 w h i c h c h a n g e d the basis of the compensation to a space-distance basis. See i m m e d i a t e l y b e l o w , and also page 6 3 . 10 W h e n carriers had to submit bids they had to assume a certain a m o u n t of mail on the route. Since they originally did not h a v e any previous records to g o by, in m a k i n g their estimates they took chances that the actual a m o u n t s of mail m i g h t turn out to be less than the amounts they assumed. T h e possible losses induced the carriers to include in their bids a l l o w ances f o r the risk. T h e resulting increase in the cost of c a r r y i n g the mail led the Postmaster G e n e r a l to r e c o m m e n d that the g o v e r n m e n t contract w i t h the carriers f o r specific amounts of space on their planes. ( S i n c e the space occupied by mail w a s i r r e g u l a r l y shaped it could not be m e a s u r e d directly. T h e r e f o r e he proposed that the space be d e r i v e d by c o n v e r t i n g the w e i g h t of the mail into space equivalents at nine pounds to the cubic f o o t . ) T h i s w o u l d relieve the carriers of the risk resulting f r o m the uncertainty of the a m o u n t s of mail traffic and enable them to decrease their charges f o r c a r r y i n g the m a i l .

DOMESTIC MAIL RATES $1.25 per airplane m i l e .

11

63

T h i s change, it was generally agreed, was de-

sirable. Yet it was not certain that the amount of mail that would exist on the routes would be sufficient to fill the space for which the Postmaster General contracted. Should the mail turn out less than the amount contracted for, the carriers' pay would exceed the government's revenue from the air mail. T h e difference would constitute a subsidy to the air mail and place the assistance to scheduled air transportation on a subsidy basis. 1 2 T H E AIR M A I L ACT OF

I934

W h e n the contracts were relet after they were cancelled in 1934, the rates reverted to a contract status. But the Air Mail Act of that year reestablished the dual system of contract and regulated rates. N e w mail services were established through contracts under which the rates were in effect for one year. A t the end of the year the contracts were indefinitely extended and the rates under them were determined by the Interstate Commerce Commission. 1 8 T h e rates fixed by the Commission were to be fair and reasonable but were not to exceed $ . 3 3 % per airplane mile for loads of 300 pounds or less. Loads in excess of 300 pounds were to be paid for at one tenth of the contract rate for each one hundred pounds provided the compensation did not exceed $.40 per airplane mile. Furthermore, the rates were to be such that the revenue f r o m the air mail was to equal the payments to the carriers by July 1 , 1938. 1 4 COMMISSION

REGULATION

W h e n the Commission started rate hearings in August, 1934, it had to determine the cost of carrying the mail, since fair and reasonable rates are rates that cover costs of operation that have been efficiently incurred. Because the costs of carrying mail, passengers, and express were incurred 11 Before 1930 the rates under the route certificates were on a weight basis but thereafter they were on a space-distance basis. 12 It should be emphasized that it was not the subsidy but rather its form that was new. It will be recalled that under the percentage-of-revenue form of compensation the payment for carrying the mail could never exceed the revenue from i t The $3.00 per pound maximum under the weight form of compensation, with the $ . 1 0 postage then in effect, retained the selfsustaining character of the air mail. Reductions in postage in 1927, however, brought deficits on the air mail. This subsidy came as an incidental to the change in the postage rates, while under the space method of compensation it seemed a part of the form of payment itself. The Postmaster General was to contract with the carriers for amounts of space to keep them going even though the amount of mail actually sent was less than the amount contracted for. 11 The temporary contracts were extended for nine months but for the purpose of rate regulation they were treated as if they had already been indefinitely extended. This meant that the rates under the contracts became immediately subject to Commission regulation. 14 Public No. 308, U.S. Statutes at Large, 1 9 3 3 - 1 9 3 4 , Vol. I, pp. 933-939, Sections 3(a) and 6(a).

64

DOMESTIC MAIL

RATES

jointly, it was necessary to allocate them between the three types of traffic. 18 The method that suggested itself was the reduction of all traffic to a poundmile basis 1 6 and the division of the costs on that basis. COST

ALLOCATION

Under this method of cost allocation, all traffic was reduced to poundmiles by multiplying the weight of the traffic by the lengths of the routes. T h e costs were then divided on the basis of the ratio in which the poundmiles in each service stood to one another. F o r example, one thousand pounds of mail on a route five hundred miles long give five hundred thousand pound-miles. Five passengers, at two hundred pounds per passenger, also give five hundred thousand pound-miles, and three hundred pounds of express and excess baggage give 150,000 pound-miles. T h e pound-miles in these services thus stand in a ratio of 1 :i ¡.33 to one another. Costs on this route would then be divided according to the same ratio and the Commission could then fix rates to cover the mail's share of the costs. This cost allocation would have been satisfactory except for the fact that the Commission found it difficult to decide which weights to use in computing the pound-miles. It will be recalled that the Postmaster General contracted with the carriers for minimum amounts of space—sufficient to carry 300 pounds of mail. It frequently happened, however, that the actual amounts carried were less than the amounts contracted for. T h e same was true of passenger traffic. T h e planes had facilities for a certain number of passengers, but frequently they carried less than the number which they could accommodate. 1 7 T h e Commission, then, had to decide whether to T h e earners proposed a method of rate making that would have made it unnecessary to allocate costs between the three types of traffic. They suggested that the Commission deduct the revenue from passengers and express from their total costs of operation, and charge the difference to the mail traffic. T h e Commission rejected this method of determining rates since it would have burdened the government with the consequences of the carriers' inefficiency. Regardless of how high the costs, the rates would have had to be high enough to cover them. I.C.C. Report», Vol. 206, p. 720. 18 A pound-mile is one pound carried one mile. One pound carried one hundred miles would give the same number of pound-miles as one hundred pounds carried one mile. 17 Carriers had to provide facilities to accommodate the m a x i m u m number of passengers that wanted service during the year. Since passenger traffic was highly seasonal the average number of passengers that was actually carried was less than the planes could have carried had they used their facilities fully. Furthermore, with a large secular growth of passenger traffic the carriers had to order planes with much greater facilities than the passenger traffic which existed at the moment warranted. This, too, made the average number of passengers that were carried smaller than the number which the planes could have carried had they been used at their f u l l capacity.

DOMESTIC MAIL RATES

65

use the amount o£ mail for which the contracts called, or the amount that was actually carried; whether to use the passenger accommodations or the number of passengers that were actually carried. These alternatives gave rise to three ways to allocate costs. T h e first proposed using the contract amount of mail and the passenger capacity of planes. T h e second proposed using the actual amount of mail and number of passengers that were carried. T h e third proposed using the amount of mail as called for by the contracts and the number of passengers that were actually carried. CONTRACT A M O U N T S OF M A I L AND PASSENGER C A P A C I T Y OF P L A N E S

According to the first method the Commission would multiply the amount of mail for which the Postmaster General contracted by the length of the route. It would also multiply the number of passenger seats by the weight per passenger, and the result by the length of the route. Finally, it would multiply the weight of express and excess baggage by the route mileage. It would then allocate costs according to the pound-miles. T h e Commission, however, found that this would assign costs to passenger traffic very much larger than the number of passengers that were actually carried warranted. F r o m the beginning of operations on the temporary contracts to October 3 1 , 1934, the passenger revenue load factor 1 8 for all routes was forty-nine per cent. On this basis passenger traffic would have had to bear more than twice the costs that could be charged to it according to the passengers that were actually carried. A C T U A L A M O U N T OF M A I L AND N U M B E R

OF PASSENGERS

CARRIED

According to the second method the Commission would use the actual amount of mail, the actual number of passengers, and the actual weights of express and excess baggage. It found that this method, too, was unsatisfactory since the carriers had actually incurred the costs, and, whenever they were called on, had to provide the space for which they contracted. It would not have been fair to the other traffic to relieve the mail of such costs. The passenger revenue load factor is the ratio between the number of passengers that were carried on the planes and the passenger capacity of the planes. For example, when a plane can accommodate ten passengers but actually carries only five the revenue load factor is fifty per cent.

66

DOMESTIC MAIL RATES CONTRACTED F O R M A I L

AND A C T U A L N U M B E R

OF

PASSENGERS

CARRIED

Finally, according to the third form the Commission would use the amount of mail that the contracts called for, and the actual number of passengers that were carried. T h e pound-miles in express and excess baggage would be computed as under the previous forms. While the Commission was not quite satisfied with this method it was more favorably inclined to it than to the others. COST

ASSIGNMENT

While this allocation determined how much of the carriers' total costs belonged to each type of traffic, it did not in itself tell how much of these costs should be assigned to each. It was quite clear that if passengers and express were made to bear all of the costs that should be assigned to them, they would disappear from the airways and scheduled air transportation would revert to a contract carrier status—something Congress had been trying to get away from. It had been the policy of Congress to establish aviation for the sake of passenger and express as well as mail traffic. It was to that end it had provided the subsidy to offset the losses on passengers and express. This was presumptive evidence that it had not intended that passengers and express should bear the entire costs that could be charged to them. Had the Commission forced that traffic to bear all the costs that were assignable to it, it not only would have failed to fulfill the intent of Congress, but would also have wasted all money and effort which Congress had spent to convert the industry from a contractor carrying mail for the Post Office Department to a common carrier serving the public as a whole. Furthermore, it would have ignored the "what the traffic will bear" principle of rate regulation. 19 According to this principle, whenever traffic can not bear its share of total costs it is charged the rates it can bear pro1 9 Of course, even if the Commission had made passenger traffic bear all the costs that could be assigned to it, according to the cost allocation method which the Commission used, some passenger traffic would have continued to exist anyway. Some people have skills so great that their services command very high prices. Such people at times receive a hundred dollars per day—or even more. They would pay high prices for plane travel, so long as air transportation saved them some rime. This type of passenger traffic could bear very high rates. T h e question though is whether there were enough passengers of this type to afford the carriers sufficient traffic to enable them to maintain operations. While there were no quantitative studies on this point the Commission felt that if passenger traffic were made to bear all the costs that could be assigned to it, most of the passenger traffic, except for the type described above, would disappear from the air routes and the air transport companies would have lost their character as common earners and would have become simply mail contractors for the government.

DOMESTIC MAIL RATES

67

vided they are sufficient to cover the variable costs. H a d the Commission forced this traffic to bear all its costs, it would have ignored this principle altogether in fixing rates. 20 FIXING AIR M A I L

RATES

Having decided the portion of the cost each type of traffic should bear, the Commission was then ready to fix for each mail route mail rates that would cover the costs that were assigned to the mail traffic. 21 H a d it been able to devise a rate formula the Commission could have fixed the carriers' pay according to the type of service they rendered rather than according to each carrier's cost of performing that service. (See footnote 8 on p. 6 1 ) However, since the different operating conditions on the routes made it impossible to construct such a formula the Commission had to fix separate rates for each route. But the Commission found that, since the carriers' unit costs varied with the amount of plane miles that were flown per month, a fixed mail rate would sometimes more than cover the carriers' costs, and fail to cover them at other times. It, therefore, decided to set rates for each route which would, within certain limits, vary with the amount of plane miles which were flown over it per month. Let us look at this further. T h e mail contracts between the Post Office Department and the carriers specified the lengths of the routes as well as the number of mail schedules which the carriers were to operate per month. T h e monthly plane miles over the routes were then determined by multiplying the 20

I.C.C. Reports, Vol. 206, pp. 7 1 5 - 7 2 4 . Before fixing specific rates for various routes the Commission had to decide whether losses on exclusive passenger and express schedules and on off-line services should be taken into consideration in fixing rates. Both exclusive passenger and express schedules and off-line services were operated at considerable losses. T h e carriers contended that the Commission should take these losses into consideration in fixing rates for carrying the mail—citing Section 6 ( e ) of the A i r Mail Act of 1 9 3 4 , in support of their contention. That section directed the Commission to take into account the carriers' revenue from all sources in fixing air mail rates. This, the carriers claimed, meant losses from all sources as well as profits. However, the Commission, while recognizing that losses on exclusive passenger and express schedules should, to a certain extent (the Commission did not specify to what extent) be taken into account in fixing mail rates, refused to grant similar treatment to off-line services. It pointed out that its authority to fix rates did not rest on Section 6 ( e ) . That section simply required that the rates it fixed should be such that the revenue from the air mail should cover the compensation to the carriers by July i , 1 9 3 8 . T h e authority to fix rates was given by Section 6 ( a ) which ordered the Commission " t o fix fair and reasonable rates of compensation for the transportation of air mail by airplane and (the) services connected therewith on each air mail route." This, the Commission ruled, meant that only services on air mail routes were to be taken into account in fixing air mail rates. Since off-line services were off the mail routes, losses on them could not be given consideration in fixing rates. 21

68

DOMESTIC MAIL

RATES

lengths of the routes by the number of schedules that were specified in the mail contracts. This gave the monthly plane miles according to the mail contracts. However, since the Post Office Department reserved the right, when mail traffic turned out larger than was expected, to require carriers to fly additional mail schedules, the actual plane miles per month frequendy turned out larger than the contracts specified. On the other hand, since, on account of weather, scheduled flights were sometimes cancelled, the actual plane miles fell, at times, below the amount for which the contracts called. With many of the carriers' costs fixed, the varying amount of plane miles over the routes caused corresponding variations in the carriers' unit costs—sometimes lowering them, 22 and raising them at other times. A fixed mail rate per plane mile would, therefore, sometimes give the carriers revenue more than enough to cover their costs and at other times not enough. T h e Commission, therefore, decided to set rates which applied to specified monthly plane mileages—and when the actual mileages dropped below the base ones to increase the mail rates, and to decrease them when the actual mileages turned out to be above the base mileages. 23 T h e table on page 69 gives the rates which the Commission ordered and the base mileages to which the rates applied. Column one gives the air mail routes, column two the base rates, and column three the monthly mileages. On route number one, between N e w York and San Francisco, the base rate was $.31 per airplane mile for a base mileage of 500,000. For every ten per cent rise above the base mileage the rate per airplane mile decreased one cent, while for every ten per cent drop below it, the rate increased one cent. The Commission ordered, however, that the actual rates should not diverge from the base rates by more than 22 While an increase in the monthly plane miles lowered the mail rates per airplane mile, an increase in the size of the mail load per plane made it necessary, on account of the rate maxima, to increase them. T h e law, it will be recalled, provided that mail rates should not exceed $ . 3 3 % per airplane mile. Mail in excess of 300 pounds was to be paid f o r at Mo of the contract rate for each hundred pounds, but the compensation was not to exceed $.40 per airplane mile regardless of the size of the mail load. Therefore, when mail loads were very heavy, not only did carriers carry part of the mail at reduced pay, but some of it without compensation altogether. Thus a carrier whose mail loads averaged 700 pounds per plane received $.33^6 per airplane mile for the first 300 pounds, $ . 1 0 for the next 300 pounds—but nothing for the last hundred pounds. H e thus carried fourteen per cent of the mail without any pay whatever. On the other hand, a carrier with an average load of only 300 pounds received full pay f o r the entire load which he carried. T h e Commission, therefore, to make both carriers' rates equitable in relation to each other, had to grant the first carrier a higher base rate per airplane mile to make up for that part of the load which he carried without pay. Thus an increase in the size of the mail load made it necessary, in spite of the carriers' fixed costs, to increase the mail rate per airplane mile. 2 ' I.C.C. 206, pp. 7 2 5 - 7 2 6 .

69

DOMESTIC MAIL RATES

Route I.

2. 3456. 78. 910. 11. 12.

i314. 1516.

Base Rate Per Airplane Mile «•31

.24

•25

.26 .28 .26 •33% .29 aS .29 •V •33% •33% •33% •27 •25

COMMISSION RATES

24

Monthly Mileage

Route

Base Rate Per Airplane Mile

18. 19. 20. 21. 22. 23* 24.

•31

500,000 600,000 155,000 160,000 70,000 145,000 150,000 110,000 55,000 55,000 170,000 60,000 45,000 80,000 64,000 45,000

26. 2728. 29. 30. 32-

•33% •31 •32 .28 .26 .28 .33% .32 •33 Va .29 .29 .28 •33y3

Monthly Mileage 25,000 45,000 30,000 19,000 36,000 50,000 85,000 63,000 40,000 50,000 24,000 25,000 32,000 55,000 15,500

five ccnts. When the actual plane mileage differed from the base enough to change the rate five cents, the changed conditions on the route were held to warrant a reexamination of the entire rate structure. WEIGHT CREDIT SCHEDULES

Having fixed the rates, the Commission had next to decide whether the carriers should be paid for mail that was carried on weight credit trips at the same rate as that carried on regular mail schedules, or whether that mail should simply be credited to the regular schedules. T h e problem rose out of the practice of carrying some of the mail, with the permission of the Department, on exclusive passenger and express schedules. T h e contracts which set up air mail routes specified a certain number o£ mail flights. A s was explained previously, the carriers frequently operated other schedules for passengers and express. It often happened that the loads on mail flights were so heavy that carriers had to turn passengers away in order to accommodate the mail. This not only meant that they lost revenue, but that they also violated their contract obligations which required them to provide passenger accommodations on all mail flights. As a result the carriers frequently put some of the mail on exclusive passenger and express schedules which were then designated as "weight credit" schedules. From the time the contracts were let until the Commission fixed the 14

Ibid, pp. 725-727.

70

DOMESTIC MAIL

RATES

rates, the Post Office credited the mail that was carried on weight credit trips to the regular schedules and paid for it only when the total exceeded 300 pounds—and then only at the reduced rates provided by law. T h e carriers, however, claimed that the mail on weight credit schedules should be paid for as if these were regular mail schedules.25 They pointed out that they had to start the weight credit schedules to provide passenger facilities on mail schedules. They further pointed out that the mail was frequently so heavy that the authorized flights could not accommodate all of it. If they had not transferred some, additional mail schedules would have been necessary. Hence such schedules were really substitute mail schedules, and the loads that were carried on them should be paid for as if they had been carried on a regular mail trip. The Commission held with the carriers and ordered that the rates should apply to weight credit schedules just as if they had been authorized mail schedules. 20 THE

AIK

MAIL

A C T OF

I935

The regulation by the Commission, while undoubtedly an improvement over the old system, was subjected to considerable criticism. It was pointed out that some of the policies established by the Commission were based on interpretations read into the Air Mail Act of 1934, rather than on explicit provisions of the law itself. This was particularly true, it was charged, with regard to its decision on weight credit trips and on off-line services. As a result the Air Mail Act of 1935 provided that carriers should not claim specific compensation for weight credit mail, and ordered the 25 T h e issue involved can be seen more clearly by examining the case of a route on which the mail loads average 700 pounds—300 of which are carried on weight credit. Before the Commission fixed the rates, the Department added the 300 pounds weight credit mail to the mail that was carried on the regular mail schedule and paid for it as follows: $ . 3 3 % for the first three hundred pounds, $ . 1 0 for the next 300 pounds, while the last one hundred pounds were carried without pay altogether. T h e carriers claimed, however, that the weight credit schedules should have been treated the same as regular mail schedules. T h e compensation, then, would have been as follows: $ . 3 3 % for the three hundred pounds that were carried on the authorized schedule, $ . 3 3 % for the three hundred pounds that were carried on weight credit schedules, and $ . 0 3 3 for the one hundred pounds that were carried on the regular schedule. 28 " T h e m a x i m u m rates named in the act are for application to airplane miles, and in the absence of any expression in the act to the contrary, it must be presumed that Congress intended that the reasonable rates to be fixed by us, as well as its own m a x i m u m rates should apply, to each airplane mile flown with mail, whether on exclusive mail trips, authorized mail and passenger trips, or trips scheduled for exclusive passenger service. . . . If analogy is to exist between reasonable rates and reasonable cost of service, the rates must be determined with reference to service actually performed. If mail moves in two flights instead of one, twice as much mileage should be used in determining the compensation of the service." I.C.C. 206, Dec. 1 9 3 4 March, 1 9 3 5 , p. 7 1 7 .

DOMESTIC MAIL RATES Interstate resulting, schedules operating

7*

Commerce Commission, when it fixed rates, to ignore losses in its opinion, from unprofitable maintenance of non-mail when the gross receipts from them failed to meet the additional expenses. 27 INTERPRETATION OF T H E ACT—WEIGHT CREDIT TRIPS

The act made it necessary for the Commission to change many policies which it had established. T h e first issue that came up concerned weight credit trips. The act prohibited carriers from claiming specific payment for mail that was carried on them. The carriers nevertheless claimed that this did not prevent the Commission from taking into account losses incurred on such schedules in fixing rates on the authorized schedules.28 The Postmaster General, on the other hand, contended that since weight credit trips were non-mail schedules (he contended they were such), losses on them could not be taken into account in fixing rates whenever their gross receipts failed to meet the additional operating expenses. The Commission pointed out, however, that at the time the act was passed mail was actually being carried on the weight credit trips. Therefore, when Congress excluded losses from non-mail schedules it could not have meant to include these schedules.29 As a result the Commission took into account losses incurred on mail that was carried on weight credit trips when it fixed rates for carrying mail on authorized schedules. EXCLUSIVE PASSENGER AND EXPRESS SCHEDULES

T h e provision concerning maintenance of non-mail schedules made it necessary to interpret the phrase "additional operating expenses." As has been stated on several previous occasions, the Act of 1935 prohibited the Commission, when fixing rates, to consider losses on non-mail schedules 17

6(0.

U.S. Statutes at Large, 1935-1936, Vol. 49, Part I, pp. 614-620. Section 4(b) and Section

" What this claim amounted to was that the Commission should fix rates on authorized mail schedules high enough to make up for the loss of revenue on weight credit schedules. Fairness in races undoubtedly required that the Commission grant the carriers' request—although one may very well doubt whether that had actually been the intent of Congress. ** "Obviously the only 'non-mail schedules' which can be used for the transportation of mail on a weight-credit basis under the authority of section 3(b) is a schedule on which no pay or weight credit mail is being transported at the time of authorization, or in other words, an exclusively passenger and express schedule. To consider that the 'non-mail schedules' to be disregarded for the purpose of Section 6(e) embrace not only exclusively passenger and express schedules but also schedules used for the transportation of mail on a weight credit basis would thus result in a different construction of the terms 'non-mail schedule' in the same act" Air Mail Docket No. I, I.C.C, Vol. 122, April-July, 1937, pp. 759-761.

DOMESTIC MAIL RATES when the revenue on them was less than the additional operating expenses. T h e Postmaster General contended that "additional operating expenses" were that part of total operating expenses—including overhead—which could be charged to exclusive passenger and express schedules on the basis of the plane miles flown in that service. For example, when the monthly plane miles were 500,000, and 100,000 had been flown in exclusive passenger and express service, the additional operating expenses chargeable to that service were one fifth of the total costs.30 The carriers, on the other hand, contended that since many of their costs were fixed, and would continue the same even though exclusive passenger and express services were completely eliminated, Congress could not have included fixed costs as part of the "additional operating expenses." These expenses could include only those additional expenses that were caused by the establishment of the exclusive passenger and express service. 31 The Commission held with the carriers. OFF-LINE

SERVICES

Finally, the Commission had to decide whether or not losses on off-line services should be taken into account in fixing mail rates. The carriers contended that since off-line services carried only passengers and express they were non-mail schedules under the Act of 1935, and as such losses on them should be taken into account in fixing mail rates, whenever the revenue on them was enough to cover the additional operating expenses. But 30 " T h e latter (the Postmaster General) gives results of this analysis in totals from beginning of operations to February 29, 1936, and shows allocations to various services in proportions that revenue miles flown or engine hours operated in each service bear to the total." I.C.C. 2 2 5 , Sept. 1 9 3 7 - J a n . 1 9 3 8 , pp. 2 9 - 3 0 . 81 "It [American Airlines] points out that, in many respects, the operating expenses would not be lowered by a discontinuance of its exclusive passenger service, citing as examples fixed monthly rentals paid for airports, and amortization, depreciation, and maintenance of buildings among other items, and that because of a wide difference in expenses associated with different schedules and equipment, the expenses assignable to each schedule depend not alone on the total mileage flown on a route, but also on the type of equipment flown on each schedule. Certain expenses in the maintenance of air mail service are unavoidable. One witness testified that petitioner's business had its inception in transporting air mail and that facilities established and maintained on the different routes, together with the organization that has been created to afford safe and efficient operations, for the most part would be necessary if no passengers were carried. T h e expenses may be increased by the maintenance of other services also, but such services can not make less the cost of carrying the mail. In view of these considerations it is not reasonable to conclude that under the wording of the act losses resulting from the unprofitable maintenance of non-mail schedules should include any part of these expenses which would properly be necessary to the maintenance of mail schedules; and it cannot be said that any part of those expenses which are constant regardless of the volume of schedules are 'additional' expenses resulting from the maintenance of non-mail schedules." I.C.C. 225, Sept. 1 9 3 7 - J a n . 1 9 3 8 , pp. 2 9 - 3 0 .

DOMESTIC

MAIL RATES

73

the Commission distinguished between off-line services and non-mail schedules, holding that non-mail schedules were operated over the same route over which the mail was flown but that off-line services were operated over routes adjacent to the mail routes. A s a result, the Commission declared the off-line services could not be included among the non-mail schedules. T h e y not only had to cover all operating expenses, but also had to share proportionately in all overhead. 32 SHORTCOMINGS UNDER COMMISSION REGULATION

By the time Congress recast its aviation policies in 1938 it was clear that rate regulation in commercial aviation suffered from two serious shortcomings, namely: ( 1 ) Restrictions on the Interstate Commerce Commission's authority to set rates, and (2) Lack of authority to regulate rates for passenger and express traffic. RESTRICTIONS ON COMMISSION'S AUTHORITY

T h e restrictions on the Commission's authority prevented it from granting carriers rates in excess of $.40 per airplane mile, and from granting them compensation for mail which they carried under weight credit arrangements. Where these restrictions reduced the carriers' revenues below operating costs they contributed to the carriers' financial difficulties. T h e exclusion of off-line services from consideration in fixing rates for carrying mail threatened to eliminate such services altogether. Such elimination might have worked hardship on carriers since the services, being feeder lines, frequently brought considerable revenue to the main routes—revenue conceivably greater than the losses which the carriers sustained in operating those services. W h a t was needed was some measure to subject all air services to the test of public interest so that no air services could be established unless they were required by public convenience. However, once such services were permitted the Commission should have been allowed to grant all the revenue which they needed to cover operating expenses—without any restrictions. • 2 " I t is contended that the term ' n o n - m a i l schedule' includes off-line service. T h e r e is a difference, h o w e v e r , b e t w e e n schedules and service. A schedule contemplates a trip or series of trips, at a fixed time, w h e r e a s a service contemplates the entire function of a carrier. T h e n o n m a i l schedules referred to in the a m e n d m e n t of Section 6 ( e ) are non-mail schedules over the air mail route». If Congress had said that w e disregard the losses f r o m operations of off-line service, u s i n g a measure of operating expenses only additional expenses occasioned thereby it w o u l d have referred not merely to n o n - m a i l schedules but to service off the line of the air mail routes." A i r Mail D o c k e t N o . 1 3 , I . C . C . 226, J a n - M a r c h , 1938, pp. 7 6 5 - 7 6 6 .

74

DOMESTIC MAIL

RATES

LACK, OF AUTHORITY TO REGULATE RATES FOR PASSENGER AND EXPRESS TRAFFIC

T h e Commission had no direct authority

33

to fix rates for passenger

and express traffic. This made possible uneconomic competition for such traffic through reduction in rates. Where such competition led to losses it contributed to the carriers' financial difficulties, or, made necessary additional government assistance through higher mail rates. REGULATION UNDER THE CIVIL AERONAUTICS ACT

T h e Civil Aeronautics Act of 1938 abolished all rate maxima, all distinctions between mail and non-mail services, and between on-line and offline operations, and created the Civil Aeronautics Authority to regulate and fix rates for all traffic. Rates were to be fair and reasonable—the only restriction made was that the routes for which rates were fixed should be essential to the commerce of the United States, the Postal Service, and the national defense, and that the services on the routes should be performed efficiently. 34 Furthermore, the Act of 1938 placed passenger and express 83 T h e C o m m i s s i o n did h a v e indirect, t h o u g h ineffective, control o v e r passenger rate» t h r o u g h its p o w e r to allocate costs between the three d i f f e r e n t types of traffic. P r e s u m a b l y , to a v o i d losses carriers w o u l d charge h i g h e n o u g h passenger and express rates to cover the costs w h i c h the C o m m i s s i o n assigned to t h e m . Y e t f r e q u e n t l y that d i d not h a p p e n . C o m p e t i t i o n f o r passenger traffic o f t e n reduced rates so m u c h that the resulting losses threatened the carriers' solvency. Theoretically that w a s only the carriers' concern. Y e t if the g o v e r n m e n t permitted t h e m to g o u n d e r , all of its efforts to build u p the industry w o u l d be w a s t e d . O n the other h a n d , w h e n the g o v e r n m e n t did come to the carriers' assistance, it assumed the consequences of the u n e c o n o m i c competition f o r passenger traffic. T h e best w a y to a v o i d this w a s to prevent this u n economic competition by subjecting passenger and express traffic to regulation by the A u t h o r i t y just as mail traffic w a s . 84 " T h e A u t h o r i t y is e m p o w e r e d a n d directed, u p o n its o w n initiative or upon the initiative of the Postmaster G e n e r a l or an air carrier, ( i ) to fix a n d d e t e r m i n e f r o m time to time, a f t e r notice and h e a r i n g , the f a i r and reasonable rates of compensation for the transportation of mail by aircraft. . . . I n d e t e r m i n i n g the rate in each case the A u t h o r i t y shall take into consideration a m o n g other things . . . the need of each such air carrier for compensation for the transportation of mail sufficient to insure the p e r f o r m a n c e of such service, a n d , together with all other r e v e n u e of the air carrier under honest m a n a g e m e n t , to maintain and continue the d e v e l o p m e n t of air transportation to the extent and of the character a n d quality required for the c o m m e r c e of the United States, the Postal Service, and the national d e f e n s e . " Public NTo. 706, U . S . Statutes at L a r g e , 7 5 t h C o n g r e s s , 3 r d Session, J u n e 2 3 , 1 9 3 8 , V o l . 52, pp. 9 7 3 - 1 0 3 0 . Section 4 0 6 ( a ) a n d ( b ) . A l s o " I t shall be the duty of every air carrier to provide and f u r n i s h interstate and overseas air transportation, as authorized by its certificate, upon reasonable request therefor a n d to provide reasonable through service in such air transportation in connection with other air carriers; to provide s a f e and a d e q u a t e service, e q u i p m e n t , and facilities in connection w i t h such transportation; to establish, observe, and enforce just and reasonable classifications, rules, regulations, a n d practices relating to such air transportation; and in case of such joint rates, fares, and charges, to establish just, reasonable, and equitable divisions thereof as between air carriers participating therein w h i c h shall not u n d u l y p r e f e r or prejudice any of such partici-

DOMESTIC MAIL RATES

75

under the jurisdiction of the Authority, thereby rounding out rate regulation for commercial aviation. 35 T h e elimination of cost allocation and the distinctions between types of service simplified rate regulation greatly. A s a result the Authority has devoted its entire attention in the ten individual rate hearings it has held to finding out whether the services were essential to the commerce of the country, the Postal Service, and national defense, and whether the service has been performed efficiently or not. It has exhibited remarkable diligence in examining these matters but it has established no principles or generalizations. Each rate decision has been a case by itself. pa ting carriers." Ibid., Section 4 0 4 ( a ) . Also " E v e r y air carrier and every foreign carrier shall Ale with the Authority, and print, and keep open to public inspection, tariffs showing all rates, fares, and charges f o r air transportation between points served by it and points served by any other carrier or foreign air carrier when through service and through rates shall have been established, and showing to the extent required by the regulations of the Authority all classifications, rules, regulations, practices, services in connection with such air transportation. Tariffs shall be filed, posted, and published in such form and manner, and shall contain such information, as the Authority shall by regulation prescribe; and the Authority is empowered to reject any tariff so filed which is not consistent with this section and such regulations. A n y tariff so rejected shall be void." Ibid., Section 4 0 3 ( a ) . T h e act also prohibited rebating and personal and local discrimination. See Sections 4 0 3 ( a ) and 404(b). * 5 A t the time this chapter was written the Authority had not as yet handed down many decisions in domestic air mail rate cases. It had, however, acted in several foreign rate cases. Moreover, certain issues which came up in foreign rate cases were not likely to appear in domestic cases. Since the provisions of the Civil Aeronautics Act pertaining to the regulation of rates apply as effectively to the foreign services as well as to the domestic services, it seemed advisable to analyze the Authority's policies under that Act in connection with the foreign services. T h e Authority's rate regulation policies are therefore reserved to Chapter VIII.—Mail Rate Regulation: Foreign Services. See also T h e Introduction, p. 3 , for further discussion on this point.

Chapter

Seven

Foreign Air Transportation—Certificates of Convenience and Necessity the Air Mail Act of 1925 and the Air Commerce Act of 1926, through the assistance they provided, established within the country scheduled air transportation on a commercial basis, they made no provision for service to foreign countries. The obstacles in the way loomed so large that extension of the service to foreign countries seemed at the time to be a matter for the future. 1 By 1928, however, the success of the first transcontinental air mail route had established so much confidence in long distance flying that it seemed, except for the fact that the cost of operation would have been prohibitive, quite feasible to extend our air service to foreign countries. Congress, through the Foreign Air Mail Act of 1928, authorized the Postmaster General to award contracts to carry mail between the United States and its Possessions and foreign countries to lowest bidders.2 This enabled the carriers to inaugurate our foreign air services which have developed until at present they consist of three branches. These are: ALTHOUGH

I. The South American Service II. The Transpacific Service 1. San Francisco-Hong Kong 2. San Francisco-New Zealand III. The Transatlantic Service 1 First, and most difficult, were the great distances to cover, which could not be flown until aircraft were developed strong enough to carry, in addition to fuel and crew, a paying load. All air service to foreign countries, except that to South America and Canada, must cross large bodies of water. Long distances have to be flown non-stop by planes carrying large supplies of gasoline and oil. The commercial load which planes could carry was limited; as a result service could not be inaugurated until larger planes were developed. Since the foreign services, moreover, extend to foreign ports and frequendy traverse foreign territories, our government could not provide the same aids to navigation that it furnished domestic carriers. Thus the whole problem did not seem to be an immediate issue, and as a result, the air mail act that established domestic service failed to provide the assistance that was eventually needed to establish foreign air transportation. 2 Public No. 107, U.S. Statutes at Large, 1 9 2 7 - 1 9 2 8 , p. 248.

FOREIGN AIR TRANSPORTATION

77

1. New York-Bermuda 2. New York-European Terminals T H E SOUTH AMERICAN SERVICES

Ever since its inception the aviation industry has tackled its problems piecemeal—attacking the easier tasks first and proceeding to the more difficult ones. In the extension of service to foreign fields air transportation to South America 8 presented the fewest difficulties and consequendy the greatest opportunities for success. It involved less travel across water than service to any other continent, and being essentially over land, could be provided more readily with navigation facilities and with landing fields. The frequency of landing fields, by reducing the length of the uninterrupted flights, cut down the amount of fuel to be carried and increased the payload. Since South America was not a single country but a continent of many nations, extension of service involved, not only provision of service from the border of the United States to the border of South America, but also extension of service to make air transportation available to every country and every major center. The air routes through that continent, therefore, were made to pass through as many countries as traffic conditions require. The service from Key West, Florida, to Havana, Cuba, was the first to be established, through Foreign Air Mail Contract No. 4 / It was extended to the Canal Zone under Contract No. 5 which established service from Key West to Cristobal (Canal Zone) by way of Cuba, Mexico, British Honduras, Honduras, Nicaragua, and Costa Rica, and was subscquendy extended, through an agreement with the Postmaster General, to Dutch Guiana by way of Colombia, Trinidad, Venezuela, and British Guiana. 8 This route not only connected us with the northern part of South America, but passing through Mexico and the countries in Central America, provided air service to those countries as well. It left the West Indies, however, without service to the United States or to South American countries. The gap was filled by Contract No. 6, which established an air route from Key West to the Dominican Republic by way of Cuba and Haiti. 8 Since this route was later extended by way of the Virgin Islands to Port of Spain, Trinidad and since the Central American route No. 5 from Key 8 South America refers not only to the countries south of the Canal Zone but also all of the West Indies, Cuba, Mexico, and Central America. * Senate Document No. 70, 72nd Congress, 1st Session, pp. 7 1 3 - 7 1 5 . • Ibid., pp. 717-720. • Ibid., p. 725.

78

FOREIGN

AIR

TRANSPORTATION

West to Dutch Guiana passed through Port of Spain also, traffic on route No. 6 could get to Dutch Guiana by transferring at Port of Spain to the planes flying Route N o . 5. Contracts Nos. 4, 5, and 6 thus connected us with the northern coast of South America by way of both Central America and the West Indies, but left us without service south of Dutch Guiana along the eastern coast and south of the Canal Zone along the western coast of South America. East coast service was provided by Contract N o . 10 which established a route from Dutch Guiana to Buenos Aires, by way of Natal and Rio de Janeiro, and service along the west coast by Contract N o . 9 which connected Cristobal with Santiago, Chile, by way of Colombia, Ecuador, and Peru. Later the service was extended f r o m Santiago to Buenos Aires by way of Mendoza and Cordoba. 7 It will be noticed that all air services from the United States to South America originated in Florida, and that all southern United States west of Florida was without air connections to South America. Contract N o . 8 .set up a route from Brownsville, Texas, to Mexico City, Mexico, which was subsequently extended to Guatemala and Honduras. 8 Through Contract N o . 7, service was also established between K e y West and Nassau in the Bahama Islands. 9 TRANSPACIFIC

SERVICE

T h e experience gained in South America made possible the extension of service to other foreign spheres. Asia and Europe provided the greatest prospects, but service to these continents involved flying the Atlantic and the Pacific. T h e Pacific route to China was over three times the length of the Atlantic route to Europe. T h e shorter route might have been the first to be tried, but Atlantic weather conditions were so unfavorable that it seemed advisable to tackle the Pacific Ocean first. In the Pacific, moreover, numerous islands provided bases for rest and refueling stops. Plans for the service to China, therefore, were prepared, and the American carriers began negotiations for operating rights in Shanghai, and in H o n g K o n g . 1 0 LANDING RIGHTS

IN

CHINA

It was essential, since the commerce of China centers upon Shanghai and since the Chinese traffic was considered necessary to the success of trans7

8 9 Ibid., pp. 7 3 7 - 7 3 9 ; also 7 4 0 - 7 4 6 . Ibid., pp. 7 3 1 - 7 3 7 . Ibid., pp. 7 2 8 - 7 3 1 . Each nation is sovereign in the air over its territory. Carriers must get permission to operate in foreign nations, and in the case of China, for reasons connected with national policies, the government did not permit foreign companies to establish services there. 10

FOREIGN

AIR TRANSPORTATION

79

pacific service, that the planes from San Francisco should have their eastern terminal in Shanghai. The Chinese Government, however, did not permit foreign air carriers to operate within the country. To get around its prohibition Pan American Airways of Nevada by gaining control over China Airways Federal Inc. acquired a forty-five per cent interest in the China National Aviation Corporation. The other fifty-five per cent of the China National was owned by the Chinese Government. The China National Aviation Corporation then organized Route No. 3 in China to extend from Canton to Shanghai by way of Hong Kong. 11 Since it was intended that the transpacific service proper should extend from San Francisco to Hong Kong, the acquisition of the Canton-Shanghai route afforded an outlet to the interior of China. Since Hawaii, Guam, and Midway were all under the sovereignty of the United States, Hong Kong was then the only point on the route at which landing rights had to be obtained. HONG KONG LANDING RIGHTS

Landing rights at Hong Kong presented some difficulties since the transpacific service, when it came, would have an advantage over Imperial Airways service, for while Imperial service took about thirteen days to fly from England to China the transpacific service was to take only six. Traffic would ultimately be able to reach London faster by way of San Francisco and New York, than by way of Asia and Africa. For this reason the British Government withheld permission to land at Hong Kong. Only after the carrier had obtained permission from the Portuguese Government to land at Macau—some distance away, did the British Government change its mind. 12 In 1935, after the Hong Kong rights had been granted, the Postmaster General awarded a mail contract for the route, and the carrier began mail and freight service. The planes carried no passenger traffic until September, 1936. 13 T H E N E W ZEALAND SERVICE

The other transpacific route was from San Francisco to New Zealand. Plans for this service had been laid as early as 1934, and survey flights had actually begun in 1935 after the New Zealand Government granted landing rights at Auckland. The service was to proceed by way of Kingman Reef 11

Civil Aeronautics Authority, Docket No. 6-4O6(A)-I, Orders Serial Number 1 7 1 , pp.

30-3211

Transpacific Rate Case, Docket No. 6-4O6(A)-I, Transcript of Hearing, Vol. I, pp. 3 1 - 4 2 . " C i v i l Aeronautics Authority, Docket No. 6 - 4 0 1 - E - I , Orders Serial No. 78, p. 4.

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and Pago Pago. Survey flights continued, carrying property and mail, until January i i , 1938, when the Samoan Clipper was lost on its way from Pago Pago to Auckland. Service was interrupted until August, 1939, when survey flights were again made. Later, service was inaugurated over this route by way of Los Angeles, Honolulu, Canton Island, and N e w Caledonia under a certificate of convenience and necessity which the Civil Aeronautics Authority issued on June 10, 1940. 14 THE TRANSATLANTIC SERVICE A l t h o u g h the transatlantic route offered the best traffic prospects, service to E u r o p e was postponed until the experience gained on the South A m e r i can and the transpacific operations could be used to overcome its obstacles to navigation. T w o routes f r o m N e w Y o r k to Europe were available, the northern route, by way of N e w f o u n d l a n d and Ireland, and the southern route, by way of Bermuda, the Azores, and Lisbon. Weather conditions over both were generally worse than conditions over the Pacific. N a v i g a tion over the northern route was, however, possible with reasonable safety d u r i n g three summer months of the year. T h e southern route, while safer than the northern, was less desirable because it was much longer. Obviously, to obtain the advantages of both routes without the disadvantages, the service had to be planned to use the northern route during the summer months, while weather permitted, and to change to the southern route f o r the rest of the year. T h e service was inaugurated on that basis. A s usual, extension of air transportation across the Atlantic was taken u p piecemeal, by inaugurating service f r o m N e w Y o r k to Bermuda first. Experience gained over this route was applied to the main problem—service to Europe. Bermuda granted landing rights in 1937, on a reciprocal basis—our government authorizing Imperial A i r w a y s to operate f r o m B e r m u d a to N e w Y o r k . 1 6 Service was begun in June, 1937, and in F e b r u a r y , 1938, the Postmaster General awarded a mail contract to the route. I n 1939, under a certificate of convenience and necessity, service was extended across the Atlantic to E u r o p e . 1 6 14

Civil Aeronautics Authority, Docket No. 6-401 (E)-2, pp. 9-16; also pp. 22-33. Civil Aeronautics Authority, Docket No. 37~4o6(A)-i, Orders Serial Number 407, pp. 6-7. 18 Civil Aeronautics Authority, Docket No. 163, Orders Serial Number 55, pp. 1 - 2 . 18

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THE PAN AMERICAN AIRWAYS

81

SYSTEM

Air transportation to foreign countries is provided, with one exception, by the companies within the Pan American Airways System. 17 It will be well, in order to give a better idea of the relationship between the air carriers that operate the foreign services, and their relationship to the parent company, to describe that system. The Pan American Airways System consists of Pan American Airways Corporation of Delaware—the holding company of the system—and three main operating corporations: Pan American Airways of New York, Pan American Airways of Nevada, and Pan American Airways Company of Delaware. The New York company operates the South American service, the Nevada company the transpacific service, and the Delaware company the transadantic service.18 The New York company originally held the air mail contracts for the routes along the eastern coast of South America by way of the West Indies and Central America; and also the mail contract for the western coast of South America, not entirely, but jointly with the Grace company, through their common ownership of Pan AmericanGrace Airways. Pan American Airways of New York is completely owned by Pan American Airways Corporation of Delaware. The Nevada company, which provides the San Francisco-Hong Kong and San FranciscoAuckland services, is completely owned by the New York company— which is, as we have seen above—in turn completely owned by Pan American Airways Corporation of Delaware. Finally, the Pan American Airways Company of Delaware provides the Bermuda and European services and is owned completely by Pan American Airways Corporation of Delaware. The parent company explains this rather complicated intercorporate structure on the ground that some foreign countries impose their corporate taxes on the basis of corporation's total assets. Were all foreign services conducted by one company the tax would apply in each case not only to the amount of actual capital that was devoted to the services in each country but on all the assets that the corporation employs in all its foreign services. By having separate corporations provide the services to each continent the system escapes the extraordinarily high taxes that it would otherwise have to pay. 19 1 T The exception is the service across the Atlantic which is provided by both the Pan American Airways System and American Export Air Lines. 1 8 Civil Aeronautic! Authority Transcript of Hearing, Docket No. 6-4O6(A)-I, Volume I, pp. 50-53. 1 ( Besides the three major operating companies already mentioned Pan American Airwayi

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FOREIGN AIR TRANSPORTATION UNDER T H E FOREIGN AIR

MAIL

CONTRACT SYSTEM

Although the Foreign A i r Mail Act of 1928 did not inaugurate servicc to foreign countries until three years after the air services were established within the country, the foreign and domestic air transportation systems were originally very much alike. A s in the case of domestic air transportation, the contracts for mail to foreign countries were let through competitive bidding; the mail rates were originally determined by contract between the carrier and the Postmaster General, and the mail contracts were terminal contracts that were to be relet when they expired. While the foreign contract system continued more or less satisfactorily for some time, since contracts were not to expire for ten years, the domestic mail contract system was running into trouble. T h e fact that the domestic contract expired at the end of four years prevented carriers from making investments to improve the service. T h e y were afraid that they would lose the contracts when they were relet. A s a result, when the A i r Mail Act of 1928 provided that the contracts could be converted into route certificates which extended their life for ten years from the date they were let, the A c t was made applicable to domestic air transportation only. T h a t act not only extended the life of the domestic contracts but also provided that the rates under them should thereafter be determined through regulation rather than through competition. T h u s , while the rates in the foreign system continued as they had been fixed in the contracts, the rates under the domestic system came to be increasingly determined by regulation. T h e differences between the two systems were increased further when, with the indefinite extension of the domestic contracts in 1934 and with the prohibition in 1935 against air mail carriers' establishing off-line services in the vicinity of other carriers, competition was increasingly eliminated from domestic air transportation. T h e n by 1938, conditions in the domestic system were so unsatisfactory on account of the cumbersome method of regulating rates under the A i r Mail Act of 1934, and on account of the division of jurisdiction between the Department of Commerce, the Post Office Department and the Interstate Commerce Commission, that Congress wanted to reorientate its entire policy toward commercial aviation. It was then that it ran into the problem of determining the place of our foreign services in our air transportation system. T h e question was whether our foreign Corporation of Delaware also owns the Pacific Alaska Airways which provides service between Seattle and Alaska. It also own« many other subsidiaries of a minor character.

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83

system should be permitted to continue separately f r o m the domestic, or whether it should be brought back to the same basis as the domestic system —the position which both occupied when they were originally established. There were two schools of thought on the matter. One felt that foreign air transportation differed so fundamentally f r o m the domestic that it should be altogether separate and different. Those w h o held this view favored putting the foreign service under the jurisdiction of the Maritime Commission, on the theory that it has much more in common with the maritime industry—particularly that part which is engaged in foreign transportation—than it has with the domestic air transportation industry. T h e other school of thought felt that air transportation had characteristics which differentiated it from all other forms of transportation and that the problems that it had to meet were uniquely its own. Since this was true of foreign air transportation as well as domestic, they argued that it would be best to subject them both to the jurisdiction of the same regulating authority and to the same standards of economic regulation—except in those specific instances which called for special treatment. A p parently the latter view prevailed with Congress, for the Civil Aeronautics Act placed the service to foreign countries on substantially the same basis as it put the domestic air service. CERTIFICATES OF P U B L I C C O N V E N I E N C E A N D N E C E S S I T Y THE GRANDFATHER

UNDER

CLAUSE

T h e Civil Aeronautics Act, to prevent carriers f r o m establishing competing services in areas where traffic is not enough to support more than one carrier, established a system of certificates of public convenience and necessity requiring all carriers to prove their services in the public interest. 20 However, Congress realizing that many carriers would, in cases where they could not prove their existing air services in the public interest, lose the investments which they made in them, decided to preserve the status quo in the industry by inserting a "grandfathers clause" 20

21

in the A c t ,

" N o air carrier shall engage in any air transportation unless there is in force a certificate issued by the Authority authorizing such an air carrier to engage in such air transportation." The act further directs that a certificate should be issued only where "the applicant is fit, willing, and able to perform such air transportation properly . . . and . . . [where] such transportation is required by the public convenience and necessity; otherwise it shall be denied." Public No. 706, 75th Congress, Chapter 601—3rd Session, Section 4 0 1 ( a ) and (d) ( 1 ) . 21 The phrase seems to stem from the practice by many southern states of letting citizens vote without passing the literacy tests provided their grandfathers had the right to vote. Originally these states, to prevent negroes from voting, passed laws which made passing literacy test a qualification of voting. These tests did prevent most colored people from voting—but they

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according to which all earners were to be granted certificates of public convenience for the air services which they operated at the time the Act went into effect regardless whether they could show those services to be in the public interest or not. 22 CERTIFICATES OF CONVENIENCE UNDER GRANDFATHER CLAUSE—ISSUES INVOLVED

The Civil Aeronautics Act established two classes of certificates of convenience and necessity: one for existing services, and the other for new services. The standards that the Act applied to certificates for existing services were altogether different from those it applied to certificates for new services. In the case of old services, no large issues were involved. The carriers, to get a certificate of convenience under the grandfather clause, had only to prove that they had operated the services during the grandfather period. On the other hand, in order to get a certificate for new service, they had to show that it was in the public interest. This involved, as will be shown later, not only a definition of public interest and its application to also disenfranchised many white people. T o return the voting privilege to the latter many states passed laws enabling citizens to vote even though they failed the literacy tests provided their grandfathers had the right to vote. Since the Civil Aeronautics Act authorized certificates of convenience for all air services which were in existence at the time the Act went into effect, even though they may not have been in the public interest, such certificates came to be k n o w n as certificates under the "grandfather clause." 22 T h e Act distinguished between passenger and express traffic and mail traffic. It provided that a certificate of convenience authorizing a carrier to carry passengers and express over his route should be issued under the "grandfather clause" only if the carrier had carried such traffic over the route between May 1 4 , 1 9 3 8 and the date at which the Act became effective. As to a certificate of convenience to carry mail, however: 'Tf any applicant who makes application f o r a certificate within one hundred and twenty days after the date of enactment of this Act shall show that, f r o m May 1 4 , 1 9 3 8 , until the effective date of this section, it, or its predecessor in interest, was an air carrier, continuously operating as such . . . the Authority, upon proof of such fact only, shall . . . issue a certificate or certificates, authorizing such applicant to engage in air transportation ( A ) with respect to all classes of traffic for which authorization is sought, except mail, between the terminals and intermediate points between which it, or its predecessor, so continuously operated between May 1 8 , 1 9 3 8 and the effective date of this section, and ( B ) with respect to mail and all other classes of traffic for which authorization is sought, between the terminal and intermediate points between which the applicant or its predecessor was authorized by the Postmaster General prior to the effective date of this section, to engage in the transportation of mail." T h e Authority has held that a carrier must prove that he carried mail and other traffic not only between terminal points but also between all intermediate points of the route. For example, on the route from Dutch Guiana to Buenos Aires, if the carrier carried only passengers and express from Natal to Rio de Janeiro, Brazil, then the certificate of convenience and necessity would authorize the carrying of all traffic over the route under the grandfather clause, except that it would specify that the carrier could carry only passengers and express between Natal and Rio de Janeiro. Ibid., Section 4 0 1 ( e ) ( i ) .

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85

eases where the proposed service was the sole service over the route, but also its application to cases where the new service would compete with existing service. Nevertheless, while the certificates of convenience under the grandfather clause presented no difficult issues, the Authority decided certain points of policy. These points can be listed under three headings: Proof of carrier's citizenship, proof of operation during the grandfather period, and specification of intermediate points on the routes. Proof of Citizenship: The Act requires that carriers, to obtain certificates of convenience, must be citizens of the United States or its possessions. Section r of the Act defines a corporate citizen as a company that is incorporated in the United States or in any of its Territories or Possessions, whose stock is owned, to the extent of seventy-five per cent, by citizens of the United States, and whose president and two thirds of whose board of directors arc citizens. Proof of American incorporation and of the citizenship of executive personnel is not difficult. Proving the stockholders' citizenship, however, required more effort and entailed considerable cost, not only because of the complications arising out of the intercorporate relationships, but also because of the changing character of the corporate stockholders. For example, when Pan American Airways, Inc., applies for a certificate of convenience for service to South America under the grandfather clause, it is required to prove the citizenship of its stockholders. Suppose, then, it shows that its stock is owned by Pan American Airways Corporation of Delaware and that the latter is incorporated in the United States. Is that sufficient to prove the carrier's citizenship ? What if the Delaware corporation's stock is owned by people of foreign countries—would the operating carrier still be a citizen ? The Authority held that carriers had to prove not only that the parent company was incorporated in the United States but also that its president, its board of directors, and seventy-five per cent of its stockholders are citizens also. In cases such as the Pan American Airways of Nevada whose stock was owned by Pan American Airways of New York, the Nevada company had to prove not only the citizenship of its own stockholders, but also the citizenship of the New York company's stockholders and the citizenship of the Delaware Corporation stockholders. This was difficult. The three main foreign services are operated by three carriers, each of which is owned cither by another carrier or by the parent holding company. Sincc the hearings on applications for certificates of convenience were not held simultaneously each carrier in turn had to prove the citizenship of the parent corporation. It was possible that stock-

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holders of the parent company had changed between the hearings on one carrier's application and the hearings on the application of another. Since proof of stockholders' citizenship is time consuming and costly, successive proofs would have increased the burden of the procedure both to the Authority and to the carriers. As a result the Authority ruled that it would accept the proof of the parent company's citizenship in the case of one carrier as adequate proof of its citizenship in the case of the others, even though the holding company's stock might have passed to non-citizens in the meantime. 23 Proof of Operation During Grandfather Period: T h e carrier had to prove that he had operated during the grandfather period the services for which he applied. Proof of carrying mail has not been difficult. T h e Post Office Department could certify to the mail service, or the carrier could present copies of the contracts themselves. Proof of passenger and property service was more difficult. It could, however, be done by submitting announcements of schedules. Occasionally a question might arise as to temporary interruptions of service during the grandfather period—whether they constituted an abandonment of the service and disqualified the carrier from claim for a certificate. But on the whole, proof of operations has been fairly easy. Specification of Intermediate Points: T h e major issue that arose in connection with certificates for existing services concerned the degree to which the Authority should specify the intermediate points on routes. T h e Act provided that the Authority should specify all terminal and intermediate points except in the case of foreign service, where the certificates should do so only to the extent that the Authority considered practicable. Otherwise it should name the terminal points only—leaving it to the carrier to select the points along the route through which the service is to proceed. 24 For example, the service from Cristobal to Santiago, Chile, could proceed by way of Cali and Tumaco, Colombia; Guayaquil, Ecuador; Talara, Chiclayo, Trujillo, and Lima, Peru; Arequipa, Arica, and Antofagasta, Chile. It might, on the other hand, reach the same terminal point by going from 28 24

C i v i l Aeronautics A u t h o r i t y , D o c k e t N o . i 4 - 4 0 i ( E ) - i , O r d e r s Serial N u m b e r 5 9 2 , p. 5 .

" E a c h certificate issued u n d e r this section shall specify the terminal and intermediate points, if any, between w h i c h the air carrier is authorized to e n g a g e in air transportation and the service to be rendered. . . . A certificate issued u n d e r this section to e n g a g e in f o r e i g n air transportation shall, i n s o f a r as operation is to take place w i t h i n the U n i t e d States, designate the terminal and intermediate points only i n s o f a r as the authority shall d e e m practicable, a n d otherwise shall designate only the general route or routes to be f o l l o w e d . " Public A c t N o . 7 0 6 , 7 5 t h C o n g r e s s , Chapter 6 0 1 — 3 r d Session, Section 4 0 1 ( b ) .

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Cali to Quito instead of to Tumaco. Either city might act as an intermediate point between Cali and Guayaquil on the main route to Santiago. The carriers contended that the certificates of convenience should designate only the terminal points, and leave it to them to decide whether service should proceed by way of Tumaco or by way of Quito. In order to provide elasticity in their operations, the Authority, they claimed, should let them decide when intermediate points should be abandoned or new ones added. An air carrier from a foreign country might threaten to come into the vicinity of the company's operations because the latter did not provide service to a nearby city. Once that foreign carrier got a foothold it might branch out into the whole area and draw much traffic away from the American carrier. T o ward off this threat the latter would have to act quickly to extend its service to the point in question. If he had to petition the Authority for permission to include another intermediate point on his route, he might be too late to meet the emergency. Therefore, the carriers argued, it would be impractical to specify in the certificates of convenience the intermediate points. The Authority ruled, however, that while the law allows it to omit intermediate points from certificates where it finds it impractical not to do so, it was not impractical to specify the intermediate points that had come up for consideration. All the certificates for foreign service, therefore, name not only the terminal points but the intermediate points as well.25 SERVICE BETWEEN ROUTES OPERATED BY THE SAME CARRIER

A similar issue concerned the right to provide service between points on different routes. The carriers regarded all routes which they operated as one system, and they requested permission under their certificates to operate not only between the terminal and intermediate points of the same route but also from points on one route to points on another. Thus, Pan American Airways of New York had operated from Brownsville, Texas, to Guatemala under Foreign Air Mail Contract No. 8. It also operated, under Contract No. 6, from Florida to Port of Spain by way of Haiti and Puerto Rico. The carriers contended that they should be permitted to operate, not only from Brownsville to Guatemala by way of Mexico City and Honduras, and from Florida to Port of Spain but also from Mexico City—the intermediate point on Route No. 8—to Haiti—the intermediate point on Route 28 Civil Aeronautics Authority, Docket No. 14-401 ( E ) - i , Orders Serial Number 592, pp. 9-11.

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N o . 6. T h e Authority, however, held that such construction of the Act would not only broaden the rights of the carriers beyond the intentions of Congress, since it would authorize them to serve between points which they had not served during the grandfather period, but would also cause an overlapping of services and a confusion of rights that Congress could not have intended. 26 Hence, the Authority restricted the carriers' operations to the terminal and intermediate points that were specified in the certificates of convenience, except in cases where operating between points on different routes was necessary to provide through service. For example, Pan American Airways of N e w York operated from Florida to Trinidad by way of Haiti and Puerto Rico. It also operated from Dutch Guiana to Buenos Aires, Argentina. T h e Authority permitted operations from a point on the Florida-Trinidad service to a point on the Guiana-Brazil service since such service was necessary to provide through transportation from Florida to Argentina. CERTIFICATE OF CONVENIENCE FOR SOUTH AMERICAN SERVICE— PAN AMERICAN AIRWAYS OF NEW YORK

T h e Civil Aeronautics Act authorized all existing carriers to continue operations for 120 days after it became effective, while they were applying for certificates of convenience. After they had filed their applications, they could continue their services until the Authority either granted or denied their applications. Acting under this provision of the Act, Pan American Airways of N e w York and Pan American-Grace Airways applied for certificates for service to and through South America—the former for service along the eastern coast by way of Mexico, Central America, and the West Indies, and the latter for service along the western coast from the Canal Zone to Chile, and through Mendoza and Cordoba to Argentina—also from Arequipa, Chile to L a Paz, Bolivia down to Buenos Aires. Pan American Airways of N e w York held Foreign Air Mail Contracts Nos. 4> 5> 6, 7, 8, and 10 while Pan American-Grace Airways held Foreign Air Mail Contract No. 9. Both carriers applied for certificates for the services that were covered by their contracts. As already pointed out, certificates under the grandfather clause presented no major issues other than the "Finally, a construction of section 4 0 1 ( c ) ( 1 ) ( B ) which authorizes transportation between points on different air mail routes would lead to such hopeless duplication and confusion of rights that Congress clearly could not have intended any such result." Transcontinental and Western Air Inc., Application for Certificate of Convenience and Necessity, Civil Aeronautics Authority, Docket No. 1 7 - 4 0 1 ( E ) - i , p. 1 3 . See also Civil Aeronautics Authority, Docket N o . 1 4 - 4 0 1 ( E ) - i , pp. 9 - 1 3 .

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89

verification that the services for which the carriers applied corresponded to the services which they had actually operated. Verification of the services in the present application did present some difficulties, since these services had changed considerably from what they had originally been under the mail contracts. By agreement between the carriers and the Postmaster General many intermediate points on the routes had been dropped and others had been added as traffic conditions required. Even terminal points had at times been changed. After examining the evidence as to operations during the grandfather period, however, and after satisfying itself as to the citizenship of the carriers and their ability to provide the service, the Authority issued a certificate to Pan American Airways of Neu> Yorf^ for service along the eastern coast of South America by way of Mexico, Central America, and the West Indies, and one to Pan American-Grace Airways for service along the western coast of South America. Pan American Airways' certificate authorized the company to provide air transportation: ( a ) Between the Terminal point Miami, Florida, the intermediate points Antilla, Cuba; Port-au-Prince, Haiti; San Pedro de Macoris, Dominican Republic; San Juan, Puerto Rico; Charlotte Amalie (St. T h o m a s ) , Virgin Islands; St. Johns, Antigua; Pointe a Pitre, Guadeloupe, Ft. de France, Martinique; Port of Spain, Trinidad; Georgetown, British Guiana; Paramaribo, Surinam (Dutch G u i a n a ) ; Cayenne, French Guiana; Belem (Para), Sao L u i z (Maranhao), L u i z Correa (except with respect to mail), Camocim, Areia Branca (except with respect to mail), Natal, Recife (Pernambuco), Maceio (except with respect to mail), Aracaju (except with respect to mail), Sao Salvador (Bahia), Caravellas (except with respect to mail), Victoria, Rio de Janeiro, and Porto Alegro, Brazil; Montevideo, Uruguay; and the terminal point Buenos Aires, Argentina; and also between the intermediate point Rio de Janeiro, Brazil, and the terminal point Buenos Aires, Argentina; via the intermediate points Sao Paulo, Curityba (except with respect to mail), Iguassu Falls (except with respect to mail), Brazil; and Asuncion, Paraguay; and also, except with respect to mail, between the intermediate point Port-au-Prince, Haiti, the intermediate point Santiago, Cuba, and the terminal point Kingston, Jamaica. (b) Between the terminal point Miami, Florida, the intermediate point Havana, Cuba, and the terminal point Merida, Mexico. (c) Between the terminal point Miami, Florida, the intermediate points

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Cicnfuegos, Cuba, and Kingston, Jamaica, and the terminal point Cristobal, Canal Zone; and also between the intermediate point Kingston, Jamaica, and the terminal point Barranquilla, Colombia. ( d ) Between the terminal point Miami, Florida, the intermediate point Cat Cay, Bahama Islands (except with respect to mail) and the terminal point Nassau, Bahama Islands. (e) Between the terminal point Brownsville, Texas, the intermediate points Tampico, Mexico City, and Tapachula, Mexico; Guatemala City, Guatemala; San Salvador, El Salvador; Tegucigalpa, Republic of Honduras; Managua, Nicaragua; San José, Costa Rica; David, Panama; Balboa, Canal Zone (Ancon, Canal Zone, or Panama City, Panama) ; and the terminal point Cristobal, Canal Zone. (£) Between the terminal point Cristobal, Canal Zone, the intermediate points Barranquilla, Colombia; Maracaibo, Coro, La Guaira, Guanta, and Caripito, Venezuela; and the terminal point Port of Spain, Trinidad. ( g ) Between the terminal point Cristobal, Canal Zone, and the terminal point Turbo, Colombia. 2 7 Pan American-Grace Airways' certificate authorized that company to provide air transportation: Between the terminal point Cristobal, Canal Zone, the intermediate points Cali and Tumaco, Colombia; Guayaquil, Ecuador;

Talara,

Chiclayo (except with respect to mail), Trujillo, Lima and Arequipa, Peru; Arica, Antofagasta, and Santiago, Chile; Mendoza and Córdoba, Argentina; and the terminal point Buenos Aires, Argentina; and also between the intermediate point Arequipa, Peru, and the terminal point Buenos Aires, Argentina, via the intermediate points Arica, Chile (except with respect to m a i l ) ; La Paz, Oruro, Uyuni, and Villazon, Bolivia; Jujuy, Salta, Tucuman, and Córdoba, Argentina. 2 8 C E R T I F I C A T E OF C O N V E N I E N C E FOR T R A N S P A C I F I C PAN AMERICAN

SERVICE—

A I R W A Y S OF NEVADA

W e have seen that the transpacific service consists of two branches—from San Francisco to Hong Kong and from San Francisco to New Zealand. Both branches are operated by Pan American Airways of Nevada. During 27 28

Ibid., pp. 1 6 - 1 8 . Civil Aeronautics Authority, Docket No. 38-401 ( E ) - i , Orders Serial Number 589, p. 10.

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September and October, 1938, the carricr applied for certificates to operate both services. The Authority rejected the application for New Zealand service under the grandfather clause on the ground that the carrier had not proved that it operated during the grandfather period, but it granted a certificate of convenience under the section of the Act which provided for new service. The application for the San Francisco-Hong Kong service specified Honolulu, Midway Island, Wake Island, Guam, Manila, Macau and Hong Kong as intermediate points. The Authority granted the certificate as requested by the carrier.29 TRANSATLANTIC SERVICE: NEW

YORK-BERMUDA

Pan American Airways Company of Delaware had been the carrier on the Bermuda route since 1937, and had carried mail over it since 1938 under Contract No. 17. On October 20,1938, the company applied for a certificate of convenience for this route. The issue under this application was the degree to which the Authority should specify the intermediate points on the route. This carricr felt that it would have to change terminals quite often on account of weather conditions between New York and Bermuda. Examining the evidence, however, the Authority named New York and Hamilton as the terminal points on the route, specifying that the carrier could use Baltimore, Norfolk, or Charleston instead of New York as alternative terminals whenever weather conditions made it necessary.30 CERTIFICATES OF CONVENIENCE FOR NEW SERVICE

As a standard which the Authority could apply to certificates of convenience under the grandfather clause, it demanded operation by the carriers of the services under consideration between May 18,1938 and the time the Civil Aeronautics Act became effective. As a standard for new services, however, the Authority demanded proof that they were in the public interest. This meant that it not only had to define the public interest, but had also to determine in specific cases whether or not the service was to the public good. From the actions of the Authority one gathers that it determined public interest by the amount of passenger, property, and mail traffic that existed over a route and by the extent to which such traffic would benefit from transportation by air. ,0

Civil Aeronautics Authority, Docket No. 6-4OI(E)-I, Orders Serial Number 78, pp. 7-8. Civil Aeronautics Authority, Docket No. 37-401 ( E ) - i , Orders Serial Number 205, pp.

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CERTIFICATE OF CONVENIENCE AND NECESSITY FOR TRANSATLANTIC SERVICE—PAN AMERICAN AIRWAYS COMPANY OF DELAWARE P a n A m e r i c a n A i r w a y s C o m p a n y of D e l a w a r e applied to the C i v i l A e r o nautics A u t h o r i t y o n F e b r u a r y 13, 1939, for a certificate of convenience a u t h o r i z i n g service b e t w e e n the U n i t e d States a n d E n g l a n d , and b e t w e e n the U n i t e d States a n d F r a n c e by w a y either of the N o r t h e r n route or of the S o u t h e r n route. P r o v i n g the service to be in the public interest w a s not difficult, since the transatlantic routes possessed m o r e traffic possibilities than any other f o r e i g n service. N o r did the carrier have difficulty in p r o v i n g its ability to p e r f o r m the service. A m a j o r p r o b l e m d i d arise, h o w e v e r , in connection w i t h the n u m b e r of schedules that the carrier c o u l d operate u n d e r its certificate of c o n v e n i e n c e . Section 4 0 1 ( f ) of the A c t provides t h a t : N o t e r m , c o n d i t i o n , or limitation of a certificate shall restrict the right of an air carrier to add or c h a n g e schedules, e q u i p m e n t , a c c o m m o d a t i o n s a n d facilities for p e r f o r m i n g the a u t h o r i z e d transportation or service as the d e v e l o p m e n t of the business and the d e m a n d s of the public require. T h e carrier c o n t e n d e d that the declaration of the l a w w a s clear, a n d that the A u t h o r i t y c o u l d not limit the n u m b e r of schedules the c o m p a n y c o u l d operate to f o r e i g n countries. S u c h an interpretation w o u l d , h o w e v e r , h a v e prevented the A u t h o r i t y f r o m c a r r y i n g out the m a n d a t e of C o n g r e s s to encourage c o m p e t i t i o n in air transportation as touch as public interest required, since if the carrier operated e n o u g h schedules to use u p all the l a n d i n g rights in f o r e i g n countries w h i c h our g o v e r n m e n t had negotiated, the A u t h o r i t y c o u l d not a u t h o r i z e a c o m p e t i n g service over the same route, even t h o u g h it considered a n e w service to be in the public interest. Foreign

air services d i f f e r f r o m

domestic

in

that

they

proceed

to

terminals a n d t h r o u g h intermediate points that are located in countries other than the point of o r i g i n . Since nations are sovereign over the air above their lands carriers m u s t obtain the right to land or to pass over. Before 1938 carriers h a d negotiated their o w n l a n d i n g rights. Indeed, the air mail contracts that were let before that date specifically required carriers to obtain l a n d i n g rights t h r o u g h their o w n efforts and at their o w n expense. Since privately negotiated l a n d i n g rights w e r e frequently obtained o n an exclusive basis, the f o r e i g n country a g r e e i n g not to g r a n t similar rights to c o m p e t i n g carriers, they f r e q u e n t l y led to m o n o p o l y . M o n o p o l y h a d not a l w a y s been undesirable in the case of the S o u t h A m e r i c a n a n d transpacific routes, o n w h i c h limited traffic m a d e duplication of service

FOREIGN AIR

TRANSPORTATION

93

undesirable. As a result privately negotiated landing rights had not been regarded with disfavor. In the Atlantic service, traffic, however, was so great that it could very well support several carriers over the route. Privately negotiated rights could under these circumstances lead to monopoly although competition might in fact be more to the public interest. Accordingly, under certain circumstances,31 the Department of State negotiated landing rights and assigned them to such carriers as the Civil Aeronautics Authority designated to operate over the routes which the landing rights covered. Governmentally negotiated landing rights are usually obtained on a reciprocal basis. Thus our Department of State has obtained the right for an American carrier to land in England twice a week and has agreed in turn to permit a British carrier to land in New York. Our Government has also obtained the right to make intermediate stops in Canada and Ireland when the northern route is used. In France, also, landing rights were obtained on a reciprocal basis—each country granting the other four weekly landings.32 Now, if the certificates of convenience did not limit the number of landings such carriers could make, the carrier first to obtain 1 1 It should not be concluded, from the foregoing, that governmentally negotiated rights are at all times preferable to privately negotiated rights. On the contrary, negotiation by the government may give quite unsatisfactory' results—particularly in cases where the traffic between the countries concerned is limited and is largely of American origin. Governments ordinarily grant each other landing rights on reciprocal basis only. This works no hardship where the traffic is large enough to support two or more carriers and where it originates on both sides in equal amounts. But suppose the traffic between the United States and a foreign country, such as Belgium or Norway, is so small that it can at best support only one carrier. If, in order to get the right for an American carrier to land in those countries, w e have to permit a carrier from each country to land in the United States, the traffic would be diluted to such an extent that it would be impossible for both carriers to operate except with a prohibitive amount of government assistance. T h e situation becomes particularly bad when the traffic originates largely in the United States. For example, suppose passenger traffic amounted to 250 one w a y — o r 500 passengers computed on a round trip basis. This makes ten passengers per week both ways. W e will also assume that 75 per cent of the passengers are of American origin. Suppose, now, that ten passengers per trip are required each way to make it possible for one carrier to operate with only a moderate amount of subsidy from the government on the air mail. If, in order to get permission for an American air carrier to operate between the United States and Belgium w e have to grant a Belgian carrier permission to operate between Belgium and the United States, the passenger traffic will decrease to five per trip for each carrier. But this number will not support the carriers unless the government steps in and makes up for the reduced revenue by increasing the subsidy on the air mail. The required increase in subsidy may become so large as to make the entire service prohibitive. However, a private carrier might be able to negotiate a right to provide service to Belgium, not on a reciprocal basis, but through an outright payment for the privilege. While pride may prevent one nation from granting another nation landing rights except on a reciprocal basis, it might grant the same rights to private carriers. For that reason, it would not be correct to say that it is the set policy of the government at present to take over the negotiation of landing rights. M

Civil Aeronautics Authority, Docket No. 103, Orders Serial Number 55, pp. 1 2 - 1 4 .

94

FOREIGN AIR

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a certificate by increasing his schedules until he had used up all landing rights could prevent competing carriers from starting service. Even though the Authority were convinced that competing services were in the public interest it could not issue a certificate since such carriers could not land in the countries concerned. The Authority could not, then, discharge its mandate to encourage competition. It ruled, therefore, that limiting the number of landings under the certificates for foreign service is not a limitation on schedules but is primarily a development of its duty to preserve and encourage competition. Consequendy, the Authority limited Pan American Airways to two weekly landings at European terminals 3 3 and left it to the company to decide whether both landings should be made in England, or both in France, or whether one should be in England and one in France. T h e Authority felt that the carrier should be free to decide this problem according to the demands for service to the two countries. Since the Authority did not know how the traffic to the two countries compared it felt that it was best to allow the carrier to arrange the schedules to England and France according to its best judgment. T R A N S A T L A N T I C S E R V I C E — A M E R I C A N EXPORT AIR L I N E S

Although the transatlantic service was a new service, it was not a competing one. Hence the only issue the Authority had to decide concerned the public interest. Competition had come up, at first, only incidentally —in connection with limiting the schedules under the certificates of convenience. American Export Air Lines' application for service to England, France, and Italy, however, raised the whole problem of the relation of competing services to the public interest.34 On May 9, 1939, American Export Air Lines applied to the Authority for a certificate of convenience which would authorize service to England, France, and Italy. Pan Amcriu

Civil Aeronautics Authority, Docket No. 55, Orders Serial Number 55, pp. 20-24. The company requested the following certificates in its application: (a) A permanent certificate to operate from New York to Marseilles, France, to carry passengers, mail, and property. (b) A permanent certificate to operate between New York and Southhampton, England, with an intermediate stop at Foynes, Ireland. (c) A temporary certificate for service between New York and Marseilles to carry mail and property pending inauguration of scheduled weekly round trip service. (d) A temporary certificate authorizing service from New York to Rome by way of Lisbon, Portugal and Barcelona, Spain, as long as service to England and France is prohibited by the President's Proclamation under the Neutrality Act of 1939. (e) A temporary certificate for service between Rome and New York pending inauguration of scheduled weekly round trip service carrying mail, persons, and property on Route No. 4. Civil Aeronautics Authority, Docket No. 238, Orders Serial Number 581, pp. 2 - 4 .

FOREIGN

AIR TRANSPORTATION

95

can Airways of Delaware, whom the Authority permitted to intervene in the case, contended that authorization of another service across the Atlantic would violate the spirit on which systems of certificates of convenience are based and would ignore all precedents which federal regulating agencies have established under laws that were substantially similar to the Civil Aeronautics Act. The aim of all certificates of convenience, Pan American contended, is to eliminate the evils resulting from competition of new services when existing services are adequate to meet the current public demand, and when the carriers are willing and able to expand their facilities as expansion is needed. It was the very fact that new services frequently so diluted existing traffic that neither carrier could cover expenses that induced Congress to set up the system of certificates. T o authorize a competing service across the Atlantic when its own service was adequate and at a time when it was ready to expand its facilities to meet any increases in the demand would violate the spirit of the system of certificates. Pan American further claimed that the proposed competing service would violate all precedents of regulating bodies. T o support its contention it quoted the Interstate Commerce Commission under the Motor Carrier Act as follows: It is likewise true . . . however . . . that maintenance of sound economic conditions in the motor industry would be jeopardized by allowing new operators to enter a field in competition with existing carriers who are furnishing adequate, efficient, and economical service. The record wholly fails to establish that the existing service is inefficient in these respects.38 American Export, on the other hand, contended that the system of certificates of convenience which the Civil Aeronautics Act established differed markedly from systems set up by other Acts. Unlike the other Acts, the Civil Aeronautics Act specifically requires that the Authority should regard competition "to the extent necessary to assure the sound development of an air transportation system properly adapted to the needs of the foreign and domestic commerce of the United States, of the Postal Service, and of the national defense" as in the public interest and should take it into account in issuing certificates of public convenience. Some competition, then, must be permitted under the Act. It was this requirement that distinguishes the Civil Aeronautics Act from the Motor Carrier Act of 1935 ™ Ibid., p. 26.

96

FOREIGN

AIR

TRANSPORTATION

and made the precedents under the latter Act inapplicable to the application for the present service. The Authority did not agree with either contention. It pointed out that both lines wanted to decide the issue merely through a construction placed on words or phrases in the statute. Pan American wanted to exclude competing services purely on the basis of the meaning it assigned to certificates of convenience, while American Export wanted to compel authorization of the service on the theory that the Declaration of Policy makes some competition at least mandatory. The Authority held that the Act neither prohibits nor requires competition, but leaves it to the Authority to decide in each specific case whether or not competition will serve the public interest. In the case of the proposed service, it pointed out that the function of regulation in monopolistic industries is to protect the public against unreasonable rates. T h e Authority's jurisdiction over foreign air transportation is not complete, however, since it was not given power to fix rates for the passenger and property carried to foreign countries. Thus the public can not depend on economic regulation to provide the same degree of protection in foreign service as it does in domestic air transportation. Competition, consequently, is more important in foreign air transportation than in domestic. It makes possible the comparison of equipment, personnel, and costs, which would develop the air transportation system which Congress intended. The Authority further pointed out that its view did not contravene accepted principles of public utility regulation. It conceded that ( i ) where a public utility serves a territory which it pioneered, (2) where its service is efficient, (3) where it properly fulfills its duty to the public, (4) and where existing service has reached the saturation point, it would be against the spirit of the certificates to authorize a competing service. Fairness would require that existing carriers be protected against additional competition. But where all of the above conditions do not exist it may be to the public interest to permit competition—and even to encourage it. This is particularly true of the transatlantic service where the traffic possibilities seem almost unlimited. T o support its view, the Authority quoted the Interstate Commerce Commission to the effect that "regulated monopoly is not a complete substitute for competition. The latter fosters research and experimentation and induces refinements in service which are not likely otherwise to be accomplished. . . . It must be accepted as an exception or qualification of the rule laid down in the cases above mentioned (decisions of the Interstate Commerce Commission to the effect that

FOREIGN

AIR TRANSPORTATION

97

duplication of adequate existing service is unwarranted) that an additional service may be required in the public interest even though an existing operator is supplying q u a n t u m what appears to be sufficient service, where there is lacking any worthy competitor of such operator in its o w n field and where the available business is ample to support another operator."

38

T h e Authority thus held that f r o m the point of v i e w of competition and of the amount of available traffic the proposed service was in the public interest. It had, however, to decide another issue before it could authorize the competing service. T h e President's Proclamation under the Neutrality A c t of 1939 had prohibited service to E n g l a n d and France. W h e n in M a y 1939 American Export applied f o r authority to provide service across the Atlantic war had not yet broken out. B y the time the hearings on the application were opened, however, hostilities had begun and as a result the President, exercising his authority under the Neutrality Act, had prohibited service to both E n g l a n d and France. T h e Authority then had to decide whether it could hold that service to prohibited areas w a s in the public interest. P a n A m e r i c a n A i r w a y s contended that since service to both E n g l a n d and F r a n c e was illegal it could not be in the public interest and that the Authority could not authorize it. A m e r i c a n Export, on the other hand, contended that public convenience had nothing to do with the legality of the service. Public convenience, it said, simply means that the public would benefit if such service existed. T h e r e is no question but that the public would benefit since the competing service w o u l d

increase

schedules and lower rates. Furthermore, the applicant pointed out that the Declaration of Policy required the Authority to see whether the certificates for which carriers applied would promote air transportation of a type that would be adapted to the future as well as the present needs of the country. Certificates might, in other words, be issued not only because they were conducive to present needs but also to future needs. Since there is no question but that there w o u l d be a public need of the service when the w a r was over and conditions had again become normal, the Authority could issue the certificate. T h e Authority decided, however, that the term " f u t u r e " as used in the A c t meant predictable future. Conditions in Europe were then so uncertain, however, and so unforeseeable, that it was impossible to make a finding as to what the public convenience would be at the end of the w a r . " Ibid., pp. 29-34.

98

FOREIGN AIR

TRANSPORTATION

For that reason it rejected the application for service to England, France, and Italy without prejudice so that the carrier would be able to apply for the service when the war ended. In rejecting the application for service to Italy, however, the Authority inquired whether it could not grant it in part. The application for service to England and Francc was so drawn up that it could be granted or rejected only as a whole, but the application for service to Italy mentioned Lisbon, Portugal, as an intermediate point on the route. Since the Civil Aeronautics Act permitted the Authority to grant applications either in whole or in part, it decided to authorize American Export to provide service, carrying property and mail (this is all the company asked for on this route) to Lisbon. The certificate of convenience was a temporary one to last till the end of the war when it could be made permanent by an application to the Authority within 60 days after the war ended.

Chapter Eight

Mail Rate Regulation: Foreign Services

W

HEN the Civil Aeronautics Act subjected foreign air services as well as domestic to the system of certificates of convenience it not only subjected competition to the test of public interest, but it changed the nature of rate regulation also. If the government wanted commercial aviation to develop, it was necessary for the government to see to it that the carriers received enough revenue to cover their costs of operation. Since passenger and express traffic could not bear rates which would cover costs, the government had to make up the differences through the mail rates. Congress recognized this obligation by ordering that the rates for transportation of mail should be fair and reasonable, and that they should, together with the income from all other sources, provide sufficient revenue so that the carriers could carry out those services which their certificates of convenience recognize as being in the public interest.1 According to this provision, then, the mail had to carry all costs not covered by the revenue from passengers and express. The determination of mail rates, then, resolved itself into the deduction of passenger and express revenues from the total costs of operation, and the assignment of the balance to the mail service.2 1 Civil Aeronautic» Act, Public No. 706, 75th Congress, 3rd Session, Section 406(a) and (b). ' I t will be recalled that the Interstate Commerce Commission had rejected this theory of rite making when carriers proposed it in 1934. At the rate hearing that year, the carriers had proposed that the Commission should fix the mail rates by deducting the revenue from pauengers and express from the total costs and assigning the difference to the mail. This propotal was not unreasonable for, since passengers and express could not bear high enough rate» to cover the costs, the government had to make up the difference. However, if the Commission had accepted this proposal, the carriers could have saddled the public with the burden of all their economically unsound and unjustifiable services. Establishment of air service», it will be remembered, was perfecdy free, and many carriers established schedules for passengers and express exclusively and off-line services. Since such services frequendy failed to cover even variable costs, the carriers could, if the Commission had accepted their proposal, have passed on all losses on such services to the government. For this reason the Commission had refused to take into account results of operation on off-line services in fixing mail rates. For the same reason Congress ordered the Commission, in 1935, to ignore nonmail schedules whenever the revenue from them failed to cover variable costs of operation. Yet, while these restrictions on rates were essential to protect the government, they compli-

100

FOREIGN MAIL

RATES

TRANSPACIFIC RATE CASE—SAN FRANCISCO TO HONG KONG

After the Civil Aeronautics Act became effective, Pan American Airways of Nevada asked the Civil Aeronautics Authority to fix a fair and reasonable rate for carrying the mail from San Francisco to H o n g K o n g . T h e original rate had been fixed by Foreign A i r Mail Contract N o . 17 at $2.00 per airplane mile—the maximum which the Foreign Air Mail Act of 1928 permitted.* Even though Pan American had voluntarily submitted that rate while bidding on the route, however, the company had been losing quite heavily on its operations. A s a result, it asked the Authority for $3,920,640 per year for fifty-two round trips, and for $8.00 per pound of mail carried f r o m G u a m to Honolulu, and $16.00 per pound of mail from G u a m to San Francisco. 4 T o support its request the company submitted cost estimates as well as estimates of its revenue from sources other than United States mail. T h e Authority examined these estimates on the basis of: ( 1 ) return on investment; (2) developmental costs; (3) costs of affiliation; (4) and direct and indirect costs. RETURN

ON INVESTED

CAPITAL

Capital plays an important role in production—and has played an increasingly important role in scheduled air transportation; return on invested capital has come to constitute a larger and larger part in costs of air transport operation. While it is safe to permit private concerns in competitive business to decide for themselves how much return on investment they are to include in production costs, in regulated industries it is necessary for the regulating authority to ascertain that the return is not excessive, since it must allow rates high enough to cover costs of operation. T h e cated the rate-making process, for they made necessary the allocation of costs among all three types of traffic on the same mail schedules, and the allocation of costs between mail, exclusive passenger and express, and off-line schedules, since many costs were incurred jointly. T h e carriers felt that the exclusion of many off-line services from consideration was arbitrary since they frequendy fed much traffic to main routes and were economically justifiable even though they did not cover their own variable costs. T h e certificates of convenience simply made certain that all services that had been or were to be established were essential to the public interest. Since passengers and express still could not cover costs, the government had to make up the difference. Congress did this by removing all restrictions on rates and by ordering that mail rates should give the carriers enough revenue to provide those services which the Authority has declared, through the certificates of convenience, to be essential to the public interest. * Public No. 1 0 7 , U . S . Statutes at Large, 1 9 2 7 - 1 9 2 8 , p. 248. 4 Transpacific Rate Case, Civil Aeronautics Authority, Docket No. 6 - 4 0 6 ( A ) - i , Orders Serial Number 1 7 1 , p. 2.

FOREIGN MAIL RATES

IOI

claimed capital investment must not be excessive, and the rate of return must not be too high. There has been much controversy over the prices that are to be used to determine the value of the capital employed in the industry —the prices originally paid or current prices. When the Civil Aeronautics Authority ruled however, after Pan American of Nevada had claimed $850,000 as fair return on a capital investment of $8,576,571 as part of its cost of operation, that it would not include a return on a fixed investment base in fixing mail rates, it skirted the entire controversy over valuation that has raged in public utility regulation.® While this marked departure from orthodoxy simplified rate regulation, it might not fare too well in the courts, in view of the fact that the right to a fair return on the value of the property is protected by the Constitution. If it could be shown in the courts that the rates fixed by the Authority failed to provide a fair return on the value of the invested capital—how would the courts rule on their constitutionality? The courts might hold such rates constitutional on the grounds that a fair return on the carriers' total capital could not come out of fair and reasonable mail rates as such, but must come out of a subsidy granted by the government. The Civil Aeronautics Act ordered the Authority to fix fair and reasonable rates. Had this provision been the only one that governed air mail rates the Authority would have had to allocate the carriers' costs, then fix mail rates to cover the costs allocated to the mail traffic—the costs including a fair return on the value of the property devoted to carrying the mail. Such rates would not give the carriers a fair return on their total investment, since the passenger and express traffic could not bear their portion of the total costs. The only way the carriers could get a fair return on the value of their total capital was by getting a subsidy on the mail. N o w while the carriers could claim a fair return on the value of the property employed in carrying the mail, they could not claim a return on the value of their total investment as a matter of constitutional right. It is true that the government could grant a subsidy large enough to provide a return on the value of their total capital, if it chose, but the carriers can not demand it as part of their property rights. As long as the rates provided a fair return on the value of the property employed in carrying the mail, even though they failed to provide a fair return on the carriers' total investment, they might be held constitutional. 5

Ibid., pp. 43-45-

FOREIGN

102

MAIL

RATES

DEVELOPMENTAL COSTS

T h e capital investment of $8,576,571 which Pan American Airways of Nevada had claimed represented the physical assets which it used in the service, but did not constitute all the expenses which it had incurred in establishing services across the Pacific. Many expenses were for intangibles which did not show up among the physical assets, such as expenses incurred in negotiating landing rights, and those incurred in making survey flights. These expenses, which are as much a part of the cost of inaugurating the service as those that result in more tangible capital items, are grouped as developmental costs. They amounted—according to the company—to $2,346,505, of which $1,733,860 were developmental costs proper and $612,645 were interest during the developmental period. 9 T h e developmental costs proper consisted of $396,010 that were spent to acquire the service within China, and of $1,337,849 that were spent to establish service from San Francisco to H o n g Kong. T h e carrier had, since 1935, been amortizing these costs on a ten year basis, and it requested permission to continue at the same rate by including the same amount as part of its cost of operation.* Ordinarily developmental costs do not present unusual difficulties, but in this case they raised three problems: (1) T h e definition of the developmental period; (2) T h e propriety of certain items as developmental costs; and (3) T h e rate at which the costs are to be amortized. THE DEFINITION OF THE DEVELOPMENTAL PERIOD

T h e developmental period ordinarily ends when the service is actually inaugurated. Where there is no question about the date of the inauguration, it is not difficult to define the developmental period. In the case of the transpacific service it was hard to decide whether service had started with the transportation of property and mail, or with the transportation of passengers. Plans for the service had been made as early as 1933 and survey flights had begun in 1935. T h e company had carried both mail and property on those flights. Passenger service was not inaugurated until 1936. Had the developmental period ended in 1935 or had it continued until the inauguration of passenger service in 1936? This question was of great moment to the carrier. If the developmental period had ended in 1935 all losses on the survey flights would have to be written off as losses on past operations, but if the developmental period had continued until 1936 they 6

Ibid., p. 30.

7

Ibid., p. 30.

FOREIGN

MAIL

RATES

103

would be part of developmental costs and could be recovered through amortization. Arguments were offered on both sides of the question. The attorneys for the Post Office Department contended that the developmental period is the period between the time the plans for the service were initiated and the time traffic is actually carried on a commercial basis. Since the carrier actually carried both mail and express in 1935 the developmental period ended then. Losses incurred subsequent to 1935 should, therefore, not be included in developmental costs. Attorneys for the carrier argued, on the other hand, that the developmental period continued from the time plans for the service were initiated until the carrier could carry all the traffic for which the service was designed. Since passengers could not have been carried with proper safety until the experimental flights of 1936 were all concluded, all expenses through 1936 should be included in developmental costs.8 T h e Authority upheld the carriers' contention and ruled that, until passenger service had been inaugurated, all expenses of the service were developmental in character.9 PROPRIETY OF CERTAIN DEVELOPMENTAL COSTS

T h e transpacific service, it will be recalled, consisted of two routes: from San Francisco to H o n g Kong, and from Canton to Shanghai by way of Hong Kong. T h e Canton-Shanghai service had originally seemed essential to the financial success of the entire transpacific service, and on this score, the carrier contended that the expenses incurred in acquiring it should be included as part of the developmental costs on the longer route. Three hundred ninety-six thousand ten dollars out of a total of $1,733,860 represented developmental costs on the Canton route. The Authority ruled, however, that the relationship between the two routes was not close enough to make them a unit, and that the acquisition of the service within China was the purchase of an independent service not properly to be included in the developmental costs. It further pointed out that a large part of the $396,010 consisted of operating losses and was not developmental costs. Only fifty thousand dollars of the amount claimed as developmental costs was allowed—the fifty thousand dollars spent negotiating the right to land at Hong K o n g and Macau. 10 The Authority approved the developmental costs on the service from San Francisco to Hong Kong as claimed • Ibid., p. 36.

• Ibid., pp. 36-37.

10

Ibid., pp. 30-34.

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RATES

by the earner, but reduced the interest during the developmental period from ten per cent to five.11 RATE OF AMORTIZATION

Pan American had, since 1935, been amortizing these costs by including one tenth of the total in its annual operating cost—hoping to retire them completely by the time its mail contra« expired in 1935. 1 2 It asked permission to continue doing so under the rates fixed by the Authority. Ordinarily the rate at which developmental costs arc amortized should present no great issue, since the sooner they are retired the sooner the government is freed from paying interest on them. T h e Authority felt, however, that, since neither passengers nor express could at present help to pay the developmental costs, a rate of amortization that was too rapid would saddle the government with the entire burden. A t the time the revenue from passengers and express did not cover even the variable costs. Since there was some prospect that within a reasonable time passenger and express traffic might be able to bear part of the overhead and their share of the developmental costs, by spreading the amortization over a long period, the government might be relieved of part of the developmental costs. It was f o r this reason that the Authority ruled that the amortization rate based on a ten year period was too rapid and that the costs should be amortized by including ten per cent of passenger and property revenue in its operating costs—spreading the amortization over a thirty year period instead of ten. A s soon as the passenger and express traffic were able to bear their share of the total costs, this arrangement would transfer a part of the amortization to them. Since the carrier had been amortizing the costs since 1935 the Authority ordered that the new rate should apply only to the balance. 1 3 AFFILIATION COSTS

Pan American of Nevada was one of the three main operating units of the system controlled by Pan American Airways Corporation of Delaware. T h e parent company performed many services for the operating companies. Frequently subsidiaries pay ordinary prices for commodities and services which they buy from the parent company and include such costs among their own production costs. All the subsidiaries of the Delaware corporation benefited jointly from its services, however, and could not be charged any 11

Ibid., pp. 34-37.

12

Ibid., pp. 39-42.

18

Ibid., p. 43.

FOREIGN MAIL RATES

105

specific sums for them. The parent company simply apportioned its costs among the major operating carriers according to the number of airports which they operated on their various routes. While the Authority did not feel that this method of allocating the joint cost of the system was wholly satisfactory, it gave its approval.14 DIRECT AND INDIRECT COSTS

The Authority approved the direct and indirect costs as they were submitted by the carrier, except for minor items. Among these were the depreciation on propellers and the reserve for self-insurance. The carrier had computed the depreciation on propellers on the basis of a two year life expectancy. The Authority felt that the depreciation should be based on a longer life. It felt also that the reserve for self-insurance was excessive compared to the amount that the carrier paid for insurance with private companies. Pan American was paying a premium of ten per cent of the value of its aircraft for insurance up to seventy per cent of the value. When computed on the insured part of the aircraft only the premium amounted to fourteen per cent. The company had covered the balance of the aircraft by setting aside eleven and one half per cent of its value as a reserve for selfinsurance, and it had included that reserve as part of its cost of operation. The Authority pointed out that the reserve for self-insurance amounted to thirty per cent of the value of the aircraft which it covered—compared to the premium of fourteen per cent paid to private companies. The Authority held this reserve excessive.18 REVENUE FROM OPERATIONS—SOURCES OTHER THAN UNITED STATES MAIL

Since the compensation for carrying the mail was to cover all costs above the revenue from non-mail sources, the Authority, before it could fix the mail rates, had to estimate that revenue. Before 1938, all revenue which the carriers had received for carrying mail of foreign countries belonged to the Post Office Department. At that time, the only revenue other than mail which the carriers had was passenger and express revenue. After the Civil Aeronautics Act became effective, however, the revenue from foreign air mail was retained by the carriers themselves.18 In order, then, to esti14 18

18 Ibid., p. 29. Ibid., pp. 26-27. Public No. 107, U.S. Statutes at Large, 1927-1928, p. 248.

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FOREIGN MAIL

RATES

mate their revenue from other sources, the Authority had to consider the revenue from passengers and express and from the mail carried for foreign governments. In its estimate of foreign mail revenue, the carrier included revenue from Philippine mail, arguing that, since the Islands had a post office of their own, the mail was really foreign mail. It claimed separate compensation also for eastbound mail from Guam to Honolulu, and to San Francisco, and from Honolulu to San Francisco, on the theory that it is more logical to consider it foreign than domestic mail. 1 7 Citing the Act's definition of United States mail as mail of the United States, Puerto Rico, Canal Zone, the Philippine Islands and all other possessions, the Authority denied the carriers' request. 18 Classification of Philippine and Hawaiian mail as domestic cut down the estimated revenue from foreign mail, and made necessary a corresponding increase in compensation for United States mail. The Authority found that the estimate of passenger and express traffic which the carrier had submitted was too small; the carrier had overestimated the weight per passenger and underestimated the amount of passenger traffic. After making the necessary adjustments the Authority decided that all revenue from sources other than United States mail should amount to $i,oio,ooo. 19 COMPENSATION

ON TRANSPACIFIC

ROUTE

The Authority fixed the compensation for transpacific mail at $3.35 per airplane mile when mail loads were 1,000 pounds or less between San Francisco and Manila, Philippine Islands. When the mail loads exceeded 1,000 pounds, the carrier was to be paid one dollar per pound for every thousand miles. For mail between Manila and Hong Kong or Manila and Macau, the carrier was to get $4,950 per round trip. 20 THE TRANSATLANTIC RATE

CASE

The only other major rate case in the foreign service concerned the service across the Atlantic. Pan American Airways Company of Delaware asked the Authority on March 13, 1939, to fix mail rates between New York and European terminals. Since its certificate authorized it to operate two schedules per week, and since it intended eventually to expand the service to four per week, it based its estimate of fair compensation according to 17 Transpacific Rate Case, Civil Aeronautics Authority, Docket No. 6 - 4 O 6 ( A ) - I , Orders Serial Number 1 7 1 , pp. 2 1 - 2 3 . 18 19 20 Ibid., p. 22. Ibid., p. 23. Ibid., p. 47.

FOREIGN

MAIL RATES

107

the number of schedules it might be operating. Its estimates of fair compensation were as follows: 2 1 Based Based Based Based

on on on on

one schedule per week two schedules per week three schedules per week four schedules per week

$2,738,940 3,819,444 4,389,888 4,711,332

On the whole this case presented no new issues, except for the problem of apportioning the developmental costs and the joint costs between the European and the Bermuda services. DEVELOPMENTAL

COSTS

The carrier claimed $948,481 as developmental costs on the transatlantic service. This consisted of $600,000 expenses incurred in establishing the service from New York to Bermuda, and $300,000 from New York to Europe. Pan American charged both items to the operations to Europe on the theory that the Bermuda service had been but one step in the establishment of transportation to England and France. Navigation difficulties due to weather conditions had made necessary the establishment of the European service by stages. Only the experience gained in the Bermuda flights made possible the service to both England and France. Consequently, they argued, the costs of these operations really belong to the European service. The Authority disagreed with this view, holding that the Bermuda service had been established independently. It permitted the carrier to include only $300,000 as developmental costs on the longer route.22 ALLOCATION OF J O I N T COSTS

Joint costs presented a problem similar to that of the developmental costs. T h e company argued that the service to Europe was the main service, that the service to Bermuda was only a subsidiary, and that it should be free from all costs which both services had in common. The Authority ruled, however, that the Bermuda service is independent and should be made to bear the full share of operating costs.23 21 Transatlantic Rate Case, Civil Aeronautics Authority, Docket No. 202, Orders Serial Number 80, p. 14. 42 23 Ibid., pp. 48-52. Ibid., pp. 29-30.

FOREIGN MAIL RATES

io8

COMPENSATION ON THE TRANSATLANTIC ROUTE

Since the cost of service depends on the amount of service on the route —many costs of operation remaining fixed—the Authority had to fix its compensation on the basis either of one or of two schedules per week. T h e carrier, according to its certificate, could operate the number it desired. T h e Authority offered the following as fair compensation: 2 4 I. Based on one schedule per week: 1. Per outbound trip from N e w York to London over the northern route, $28,700. 2. Per outbound trip from N e w York to Marseilles, France, over the southern route, $31,200. 3. Per outbound trip from N e w Y o r k to London over the southern route, $31,500. II. Based on two schedules per week: 1. Per trip from N e w York to London by way of the northern route, $21,200. 2. Per trip from N e w York to Marseilles, France, by way of the southern route, $23,400. 3. Per trip from N e w York to London by way of the southern route, $23,600. PASSENGER AND EXPRESS SERVICE

A m o n g the shortcomings of rate regulation under the Air Mail Acts of 1934 and 1935 had been the fact that the regulating authority had no jurisdiction over rates for passenger and express traffic. There had been nothing to prevent carriers from uneconomically reducing rates on competitive passenger and express traffic hoping to recoup the losses by getting higher compensation for the mail. T o prevent carriers from competing, at public expense, for passenger and express traffic, it was necessary to subject rates for passenger and express traffic, to regulation. T h e Civil Aeronautics Act, therefore, gave the Authority power to fix domestic passenger and express rates and to fix maximum and minimum rates for passenger and express traffic in overseas

25

air transportation. 26 In spite of the fact that

24

Ibid., pp. 6 2 - 6 4 .

28

T h e Civil A e r o n a u t i c s A c t distinguished b e t w e e n

interstate, overseas, and f o r e i g n a i r

transportation as f o l l o w s : ' I n t e r s t a t e air t r a n s p o r t a t i o n , " " o v e r s e a s air t r a n s p o r t a t i o n , "

and

" f o r e i g n air t r a n s p o r t a t i o n " respectively, mean the carriage by a i r c r a f t of persons or property as a c o m m o n carrier f o r compensation or hire or the carriage of mail by aircraft, in c o m m e r c e

FOREIGN MAIL RATES the Act placed the foreign services on the same footing with the domestic services, it did not, in the matter of passenger and express traffic to foreign countries, grant authority to fix rates. The carriers within the country had to compete with other carriers whose rates were regulated by the same Authority. Our carriers in the foreign services had to compete, however, with foreign carriers that may not be subject to any government regulation. If the rates of our carriers were subjected to regulation at a time when foreign carriers serving the same territories were not, it might place our own carriers at a disadvantage in competing with the carriers of foreign countries. Congress did not subject these rates to any regulation but ordered the Authority to investigate and to report on the advisability of subjecting them to regulation in the future. 27 between respectively—(a) a place in any State of the United States, or the District of Colombia and a place in any other State of the United States or the District of Columbia; or between places in the tame State* of the United States through the air space over any place outside thereof; or between places in the same Territory or possession (except the Philippine Islands) of the United States or the District of Columbia; (b) a place in any State of the United States, or the District of Columbia, and any place in a Territory or possession of the United States, or between a place in a Territory or a possession of the United States, and a place in any other Territory or possession of the United States; (c) a place in the United States and any place outside thereof, whether such commerce moves wholly by aircraft or partly by aircraft and partly by other forms of transportation. Civil Aeronautics Act, Public No. 706, 75th Congress, 3rd Session, Section 2 1 . " I b i d . , Section 1002D.

,T

Ibid., Section 404(c).

Chapter

Nine

Conclusion HIS STUDY

shows that the government's policy w i t h respect to com-

petition in commercial aviation falls into t w o phases. T h e first phase lasted f r o m 1925 to 1938. D u r i n g these years Congress tried to force competition on the industry by requiring that contracts for carrying the mail should be let through public bidding and by refusing, with one minor exception in 1935, to restrict in any way the right to establish n e w air services. In the second phase, beginning in 1938, Congress has tried to preserve competition w h e n competition is in the public interest and to prohibit it w h e n such is not the case. T h e policy of forcing competition did not w o r k satisfactorily d u r i n g the first phase. T h e Post Office Department did not succeed in getting m a n y bids on the mail contracts for the most important routes. O n those for the less important routes, for w h i c h several bids were submitted, the rates were often so l o w that the Interstate C o m m e r c e C o m m i s s i o n soon had to increase them by more than one hundred per cent to enable the carriers to operate. Moreover, the attempt to force competition on the industry created several difficult problems. It interfered w i t h the Postmaster General's efforts to coordinate the air routes in 1930 and it enabled the carriers, through the exercise of their unrestricted right to establish air services, to reduce each other's traffic by organizing off-line services. T h e resulting losses contributed, in some instances, materially to the carriers' financial difficulties. D u r i n g the first phase, particularly f r o m 1930 to 1934, there w a s a sharp difference of opinion between Congress and the Postmaster General concerning the desirability of preserving competition, in its unrestricted f o r m , in the industry. T h e Postmaster General, convinced through close contact w i t h the industry that competition was not w o r k i n g satisfactorily, asked Congress to grant h i m authority to let mail contracts without public bidd i n g when, in his opinion, conditions warranted d o i n g so. W h e n Congress failed to grant h i m that authority, and it became apparent that letting contracts through public bidding w o u l d interfere w i t h the coordination of the

CONCLUSION

hi

air routes, the Postmaster General first resorted to extensions, and then to negotiated bidding, in awarding contracts for the transcontinental air mail routes. These contracts were cancelled in 1934 on the charge that the negotiation of the bids constituted a conspiracy to eliminate competition. When, presently, temporary contracts were let through public bidding, they attracted no more bids, on the whole, than the Postmaster General had obtained through the negotiated bidding. The temporary contracts were subsequendy made permanent. At the same time that Congress was forcing competition on the industry it had to adopt measures to relieve the carriers' capital of the risks to which that competition subjected it. Toward that end Congress, in 1928, established the route certificate system. With the same purpose Congress extended the mail contracts indefinitely in 1934. Both these measures were clearly departures from competition, for under them the compensation of the carriers was fixed, not by the rates which they accepted in the bids, but by rates set through regulation. The restriction on the establishment of offline services by mail carriers also was a step away from unrestricted competition. Yet these departures did not eliminate the chief difficulties. They did not solve the problem of inadequate bidding for mail contracts, and, not subjecting the air services to the test of public convenience, they failed to prevent carriers from establishing competing services where the amount of traffic was capable of supporting only one service. During the second phase, which began with the passage of the Civil Aeronautics Act in 1938, the policy toward competition was more elastic than during the first. While Congress requires the Civil Aeronautics Authority, the agency which administers the Act, to permit competing services when they are in the public interest, it gives the Authority power to prohibit them when they are not. Moreover, even though Congress directs the Authority to regard competition which promotes a sound air transportation system as being in the public interest, it nevertheless leaves it to the Authority to determine when and under what conditions competition will so promote air transportation. The policy of the Authority, as indicated by its decisions in the two cases in which competition was a major issue, has been to preserve competition where conditions will at all permit it. In the first case, to prevent Pan American Airways from using up all American landing rights in England and France, it limited that company's operations there to two schedules weekly. Through this action the Authority kept itself in a position to

112

CONCLUSION

authorize competing services to those countries in the future should public interest demand i t In the second case, where the issue was whether public interest required that additional traffic should be carried by expanding the facilities of Pan American Airways, with its monopoly in the Atlantic service, or by permitting American Export A i r Lines to establish a competing service, the Authority decided in favor of the competing service. In its decision the Authority placed dominant emphasis on the unlimited traffic possibilities over the Atlantic, which were sufficient to support more than one carrier, and declared that the fact that the additional traffic might be carried more economically by expanding the facilities of the existing carrier was not the controlling factor. F r o m this declaration of policy it is not unreasonable to conclude that the progress of competition in our foreign air services will depend on traffic possibilities there. A l t h o u g h the Authority's decision was rendered in cases involving foreign air services, the policy toward competition that was laid down there applies to domestic services as well, since the Civil Aeronautics Act placed them on the same footing with the foreign services. Attention must, however, be called to a statement in the Authority's decision to the effect that competition is more important in foreign air services than in the domestic. W h i l e the Authority can protect the public against unreasonable charges for passenger and express traffic in the domestic services, it cannot do the same for the public in the foreign services—not having the power under the Civil Aeronautics Act to set passenger and express rates in foreign air transportation. F r o m this it may be inferred that the Authority will be more restrictive in its policy toward competition in the domestic services. O n the other hand, the Authority declared in the same decision that regulated monopoly is no substitute for competition. Competition fosters research and experimentation and brings about r e f i n e m e n t s in service which are not likely to be obtained otherwise. T h i s s t a t e m e n t is g e n e r a l . It makes no distinction between the domestic and foreign services. Competition in general gives advantages w h i c h regulated m o n o p o l y cannot afford. F r o m this one may infer that the policy t o w a r d c o m p e t i t i o n laid d o w n in the foreign services will apply equally to the domestic. O n the whole, however, it will be safer to a w a i t the A u t h o r i t y ' s decision in cases i n v o l v i n g domestic services before formulating definite conclusions as to its policy toward competition in those services.

CONCLUSION

113

With rcspcct to mail rates the study shows that, with the exception o£ the period immediately after 1925, when the air mail was self-sustaining, the government's policy toward the regulation of mail rates has had two objectives. One was to compensate the carriers for carrying the mail. T h e other was to adjust the compensation for carrying the mail so as to offset the deficits on non-mail traffic. However, this offsetting policy was at first subjected to two types of restrictions—one in the form of maxima on the mail rates which the regulating authority might fix, and the other in the f o r m of restrictions against taking into account certain factors in fixing mail rates. T h u s the A i r Mail Act of 1930 set a maximum of $ 1 ^ 5 per airplane mile. T h e m a x i m u m under the Air Mail Act of 1934 was $.33% per airplane mile for mail loads of 300 pounds or less, with an absolute maxim u m of $40 per airplane mile irrespective of the size of the mail load. In addition to setting the rate maxima, Congress prohibited the Interstate Commerce Commission from taking into account losses on non-mail schedules and on off-line services in fixing mail rates when the revenue f r o m their operations failed to cover operating expenses. It also prevented the Commission from allowing compensation for weight credit mail. Where the carriers' costs exceeded $.33 H per airplane mile the rate maxima prevented the Commission from increasing rates to meet the carriers' costs. T h e restrictions against taking into account losses incurred on non-mail schedules and off-line services made it necessary for the Commission to allocate costs and revenues between them and the mail services—procedures which were expensive, and which complicated unduly the rate-making procedure. A l l restrictions on the regulating authority's power to fix rates, including the rate maxima, were removed in the Civil Aeronautics Authority Act in 1938. Through that Act Congress has given the Civil Aeronautics Authority power to adjust the compensation for carrying the mail to offset fully the deficits on non-mail traffic by ordering the Authority not only to make the mail rates fair and reasonable, but to adjust them so that the revenue from the air mail would, together with the revenue from the non-mail traffic, enable the carriers to provide the services which their certificates of convenience authorized. T h i s gives the Authority sufficient leeway to adjust the compensation for carrying the mail. A s long as passenger and express traffic must be carried at a loss, the Authority can adjust the compensation for the mail to make up for it. But as technical progress

II4

CONCLUSION

lowers operating costs and non-mail traffic can assume a larger proportion of the carriers' costs, the Authority will be able to reduce mail rates and make each type of traffic self-sustaining. The present policies with respect to competition and regulation of rates constitute a definite improvement over those which preceded them. The policy toward competition protects carriers against dilution of their traffic through the indiscriminate establishment of competing services when traffic is not sufficient to support more than one carrier. It also protects the government against having to grant assistance to overcome losses which that dilution created. On the other hand, the present policy can preserve the benefits of competition when traffic is heavy enough to make competition feasible. The same may be said about the policy of rate regulation. On the one hand, it assures the carriers of sufficient total revenue to carry on operations; while on the other, it protects the government against continuing subsidized assistance on non-mail traffic when it is no longer necessary, since the Authority can reduce the compensation for carrying the mail as soon as passengers and express traffic can assume a larger part of the carriers' total costs.

Bibliography LAWS

1. Air Mail Act of 1925, Public N o . 331, U.S. Statutes at Large, 69th Congress, 1925-1927, Vol. 44, Part 2, pp. 692-693. 2. Air Commerce Act of 1926, Public 254, U.S. Statutes at Large, 69th Congress, 1925-1927, Vol. 44, Part 2, pp. 568-576. 3. Foreign Air Mail Act of 1928, May 17, Public No. 410, U.S. Statutes at Large, 70th Congress, 1927-1929, Vol. 45, Part 1, p. 594. 4. Foreign Air Mail Act of 1929, March 2, U.S. Statutes at Large, 70th Congress, 1927-1929, Vol. 45, Part 1, pp. 1449-1450. 5. Air Mail Act of 1930, Public N o . 178, U.S. Statutes at Large, 71st Congress, 1929-1931, Vol. 46, Part i, p. 259. 6. Air Mail Act of 1934, Public N o . 308, U.S. Statutes at Large, 1933-1934, PP- 933-9397. Air Mail Act, 1935, Public No. 270, U.S. Statutes at Large, Vol. 49, Part i, 74th Congress, 1935-1936. 8. Civil Aeronautics Act, 1938, Public No. 706, 75th Congress, 3rd Session. CONGRESSIONAL HEARINGS

1. House Document No. 141, Statutory Maximum Air Mail Rates, 75th Congress. 2. Hearing on H . R. 4732, Before Subcommittee of the Committee on the Post Office and Post Roads, 75th Congress, ist Session. 3. Hearings on H . R. 8390 and 9841 before the House Committee on the Post Office and Post Roads, 72nd Congress, First Session, March 1, 2, 3, and 23, 1932. 4. Hearings on S. 2516, S. 2584, Before the Committee on the Post Office and Post Roads, U.S. Senate, 75th Congress, ist Session. 5. Hearings on S. 3659, April 6 and 7, 1938, Before Subcommittee of the Committee on Interstate Commerce of the United States Senate, 75th Congress, 3rd Session. 6. Hearings on S. 2 and S. 1760, Before a Subcommittee of the Committee

II6

BIBLIOGRAPHY on Interstate Commerce, 75th Congress, First Session, April 3, to 12, 1

937-

7. Hearings on H . R . 5234 and H . R . 4652, March 30, 31, and April 1 - 2 , 6-7, and 8,1937, Before the Committee on Interstate and Foreign Commerce, 75th Congress, ist Session. 8. Hearings on S. 2420, and S. 2454, and Hearings Before Subcommittee of the Committee on Post Offices and Post Roads, 74th Congress, ist Session, April 10, 17, 24, 1935. T o Amend Air Mail Act of 1934. 9. Hearings on H . R. 9500—1930 Air Mail Art. 10. Hearings Before Subcommittee of the House Committee of Appropriations, 1936. 1 1 . Investigation of Air Mail Contracts, Hearings before a Special Committee on Investigation of Air Mail and Ocean Mail Contracts, U.S. Senate, 73rd Congress, Second Session, Pursuant to Sen. Res. 349 (72nd Congress), Parts I V , V , VI, VII, and VIII. 12. Merchants' Aircraft, Hearings on S. 5078, Before the Committee on Commerce, U.S. Senate, 71st Congress, 3rd Session. 13. Hearings on H . R. 9738, Before Committee on Interstate and Foreign Commerce, House of Representatives, 75th Congress, 3rd Session. 14. Hearings on H . R. 1447, Before Committee on Interstate and Foreign Commerce, 71st Congress, 3rd Session. 15. Hearings on H . R. 5738, Before the Committee on Interstate and Foreign Commerce, House of Representatives, 75th Congress, 3rd Session, March 10, 1 1 , 22, 23, 25, 29, 30 and April 1, 1938. DECISIONS OF INTERSTATE COMMERCE COMMISSION

1. Air Mail Docket No. 1, Interstate Commerce Commission Reports, Vol. 206, December 1934-March 1935. 2. Air Mail Docket No. 3, Interstate Commerce Commission Reports, Vol. 214, January-March 1936. 3. Air Mail Docket No. 1, Interstate Commerce Commission Reports, Vol. 216, March-July 1936. 4. Air Mail Docket N o . 18, Interstate Commerce Commission Reports, Vol. 220, January-April 1937. 5. Air Mail Docket No. 10, Interstate Commerce Commission Reports, Vol. 220, January-April 1937. 6. Air Mail Docket Nos. 9 and 24, Interstate Commerce Commission Reports, Vol. 222, April-July, 1937.

BIBLIOGRAPHY

117

7. Air Mail Docket No. 13, Interstate Commerce Vol. 226, January-March 1938. 8. Air Mail Docket No. 4, Interstate Commerce Vol. 226, January-March 1938. 9. Air Mail Docket No. 23, Interstate Commerce Vol. 227, March-July 1938. 10. Air Mail Docket No. 17, Interstate Commerce Vol. 231, November 1938-March 1939. 11. Air Mail Docket No. 31, Interstate Commerce Vol. 225, September 1937-January 1938.

Commission Reports, Commission Reports, Commission Reports, Commission Reports, Commission Reports,

DECISIONS OF T H E CIVIL AERONAUTICS BOARD

1. Decision of Civil Aeronautics Board on Pan American-Grace Airways' Application for a Certificate of Convenience and Necessity, Civil Aeronautics Board, Docket No. 3&-401 (E)-i, Orders Serial No. 589. 2. Decision of Civil Aeronautics Board on Pan American Airways, Inc., Application for a Certificate of Convenience and Necessity, Civil Aeronautics Board, Docket No. 14-401 (E)-i, Orders Serial No. 592. 3. Decision of Civil Aeronautics Board on American Export Airlines' Application for a Certificate of Convenience, Civil Aeronautics Board, Docket Nos. 238 and 319, Orders Serial No. 581. 4. Decision of Civil Aeronautics Board on Application of Pan American Airways of Delaware for a Certificate of Convenience and Necessity, Civil Aeronautics Board, Docket No. 163, Orders Serial No. 55. 5. Decision of Civil Aeronautics Board on Pan American Airways Company of Delaware Application for a Certificate of Convenience and Necessity, Civil Aeronautics Board, Docket No. 7-401 (E)-i, Orders Serial No. 205. 6. Decision of Civil Aeronautics Board on Pan American Airways of Nevada Application for a Certificate of Convenience and Necessity, Civil Aeronautics Board, Docket Nos. 6-401 (E)-2 and 305. 7. Decision of Civil Aeronautics Board on Pan American Airways of Nevada Application for a Certificate of Convenience and Necessity, Civil Aeronautics Board, Docket No. 6-401 (E)-i, Orders Serial No. 78. 8. Transpacific Rate Case, Civil Aeronautics Board, Docket No. 6-4O6(A)-I, Serial N o . 1 7 1 .

9. Bermuda Rate Case, Civil Aeronautics 37-4O6(A)-I, Orders Serial Number 407.

Board,

Docket

No.

n8

BIBLIOGRAPHY

io. Transatlantic Rate Case, Civil Aeronautics Board, Docket No. 202, Orders Serial Number 80. ANNUAL REPORTS

1. Bureau of Air Commerce 1927-1937. 2. Post Office Department 1918-1938. 3. Civil Aeronautics Authority 1939. MISCELLANEOUS

1. David, P. Economics of Air Mail Transportation. The Blakiston Company, 1941. 2. Report of the Federal Aviation Commission, Senate Document No. 15, 75th Congress, ist Session. 3. Air Commerce Bulletin, February 15, 1939, September 15, 1939. 4. Journal of Land and Public Utility Economics, November 1930, pp. 359-371, Federal Regulation of Airplane Common Carriers. 5. South American Journal of Economics, 1936, Vol. 4. 6. Pan American Airways, Fortune, April 1931, pp. 79-91, 159-160, 164172. 7. Air Transport Services, Agreement Between the United States of America and France, Executive Agreement Series No. 153. 8. Transadantic Air Transport Services, Text of Permits granted by the United States of America, The United Kingdom, Canada, and Ireland. 9. Air Mail Contracts, Senate Document 70, 72nd Congress, ist Session.

Index Accidents: fear of, as deterrent to air transportation, 4 f. "Additional operating expenses:" interpretation, 71 Affiliation costs, see Costs, affiliation Air Commerce, Bureau of, 10 Air Commerce Act (1926), 10, 76 Air mail, see Mail contracts; Mail rates Air Mail Act ( 1 9 2 ; ) , 1 1 , 14, 22, 590, 76 Air Mail Act (1926), 590 Air Mail Act (1928), 16, 59 Air Mail Act (1930), 23, 27», 28, 31, 32, 39», 41, 43. 60. 62 Air Mail Act (1934), 13, 18-19, 20 > 4°. 4 1 » 52, 55», 63, 64, 67, 82, 108; provisions, 50; defects, 56 Air Mail Act (1935). 19. 4°. 4 ' . 55. 70-73. 108; defects, 56 Air Mail Act, Foreign, see Foreign Air Mail Act (1928) Air2 9mail conferences, 17, 39-40; of 1930, 27Air routes: coordination of, 22-44; defects in organization of, 24-26; lengths of, 24, 25, 43; see also mail routes Air transportation, domestic: government's role in establishing schedules, 4-12 Air transportation, foreign: obstacles to early development of, 76», 76-98; definition of term, 108» Airways, Contribution of, 4-8; construction and maintenance, 8-9; establishment of commercial, 10-11 American Airlines, $3, 54», 55 American Airways, 29», 30, 32, 33a, 34, 35, 37». 38, 39, 43. 44 American Export Airlines: applies for certificate for service to England, France, and Italy, 94; application rejected without prejudice, 98; receives temporary certificate for service to Lisbon, 98 Army, mail carried by, 40 Assets of air carriers, 30, 34 Austin, Senator, 39» Beacons, 5 Bidding: competitive, 14, 15, 18, 19, 22, 23, 39, 3 1 , 40, 41, 45-46, 82, i i o - i i ; nego-

tiated, 3 2 , 3311, 3 5 , 3 6 , 42, 43, IIO-II;

limited, 46; effect of investments on, 46, 49. 5 1 ! spreads between bids on mail contracts, 47-49; uneconomic, 49; unfair, 5 1 ; rates affecting, 62; see alio Mail contracts, domestic Black Committee on Investigation of Air Mail and Ocean Mail Contracts, 27(1, 39» Boeing Airplane Co., 52» Boeing Air Transport Company, 25», 52» Braniff Airways, 54» Brown, Walter F., Postmaster General, 23-42 Capital, durable, 15, 16, 23 Capital, invested, see Investment Central Airlines, 56 Certificates, route, see Route certificates Certificates of convenience and necessity, 12, 13, 20, 57, 58, 83-98; under grandfather clause, 84-8;; proof of citizenship required, 85-86; proof of operation during grandfather period required, 86; specification of intermediate points required, 86-87; terminal points to be specified for foreign . service, 87; for South American service, 8890; for transpacific service, 90-91; for new services, 91; foreign schedule limitation under, 92, 93-94; for transatlantic service, 92-98 Chance Vought Corp., 52» China, landing rights in, 78-79 China National Aviation Corporation, 79 Citizenship, corporate; proof of required to obtain ccrtificatc of convenience, 85-86 Civil Aeronautics Act (1938), 2, 3, 1 1 , 18, 20 . 57-58. 83-88, i n ; rate fixing under, 74-75; purpose of, 83; authorizes existing carriers to continue for 120 days after effective date, 88; differs from Motor Carrier Act (1935), 95-96; effect of on competition, 95-96; interpretation of in Pan American-American Export dispute, 96-97; permits the granting of applications in whole or in part, 98; rate regulation under, 108-9, 1 1 3 - 1 4 ; see also Certificates of convenience and necessity; Grandfather clause

120

INDEX

Civil Aeronautics Authority, 2, 3 , 20; creation o f , 1 0 ; rules on limitation of number of foreign landings, 94; rules on effect of Civil Aeronautics Act on competition, 96-97; rules not to include return on a fixed investment base in fixing mail rates, 1 0 1 Coast-to-coast transportation, see Transcontinental routes Colonial Western Air, 38 Commerce, Department of: divided jurisdiction over air transportation, 82 Committee Investigating Air Mail and Ocean Mail Contracts, see Black Committee Compensation to air mail carriers, 27n, 3 9 « ; see also Mail rates Competition in commercial aviation, 1 ; subsidized, 22, 2 3 , 27n, 29, 30, 3 1 , 3 7 « ; unsuitability of, 29-30, 4 m ; between carriers protected, 50; uneconomic, 54, 55, 74; judged on merits in each case, 58; an issue in transatlantic service dispute, 95-97; under Civil Aeronautics Act, 95-97; more important in foreign service than in domestic, 96; regulated monopoly not a substitute for, 96-97; governmental policy toward, n o ; Civil Aeronautics Authority policy toward, m - 1 2 ; benefits of governmental policy toward, 1 1 4 Competitive bidding, see Bidding, competitive Comptroller General, see McCarl Congress, opinion on monopoly, 1 ; aid to commercial aviation, 1 3 , 1 4 ; institutes route certificates, 1 6 ; reduces appropriation for air mail, 1 7 Contracts, see Mail contracts Coordination of air routes, 26-44 Corporate citizenship, see Citizenship, corporate Costs, allocation, 64-66, 1 0 7 ; affiliation, 1045; direct and indirect, 1 0 5 ; joint, 107 Costs, developmental, 102-4; propriety of inclusion of certain costs as, 103-4; determination of rate of amortization, 104; inclusion of an issue in transatlantic rate case, 107 Delta Air, 29n, 3 3 0 , 37n Developmental costs, see Costs, developmental Developmental period: definition of, 1 0 2 - 3 ; duration of in transpacific service an issue, 102-3 Dollars-per-pound, 59, 62

Domestic mail contracts, see Mail contracts, domestic Dual system of contracts and rates, 60, 63 Equities of carriers in air routes, 27-28, 3 9 Express rates, 7 4 ; methods of determining, 64-65; regulation of, 108-9 Express service, 64-65, 7 1 , 7 2 Express traffic, 1 3 - 1 4 , 1 9 - 2 0 ; regulation o f , 74 Extension of air mail routes, see mail routes, extension of Fines, see Penalties Foreign Air Mail Act ( 1 9 2 8 ) , 76, 82, 100 Foreign mail contracts, see Mail contracts, Foreign Grandfather clause, 1 , 58; origin of phrase, 83-84 Hamilton Standard Propeller Co., 5 2 « Hong Kong, landing rights in, 79 Imperial Airways service, 79 Income of aviation industry, 1 3 ; from passenger and express traffic, 1 3 , 1 4 ; from nonmail sources, how estimated, 105-6 Intermediate points, specification required, 8688; right to operate between those on different routes, 87-88; see also Terminal points Interstate air transportation, definition of term, 108») Interstate Commerce Commission: function in fixing mail rates, 18, 20, 4 m , 6 3 - 7 3 ; approval needed for off-line services, 19; authority limited, 7 3 , 74; divided jurisdiction over air transportation, 82; quoted on regulated monopoly not a substitute for competition, 96-97 Investment, 1 3 , 1 8 ; subjected to undue risks by competition, 1 ; security of, 1 3 - 2 1 , 29; return on, 1 0 0 - 1 0 1 ; see also Bidding Joint bidding, see Bidding, negotiated Kelly, Representative, 23 Kinetic energy of planes, 5 Landing rights: in China, 78-79; in Hong K o n g , 79; in N e w Zealand, 79-80; in Bermuda, 80; privately negotiated, 92-93; governmentally negotiated, 93; reciprocal, 93

INDEX Lisbon: temporary certificate granted American Air Lines for service to, 98 McCarl, Comptroller General, 3 2 , 36, 37 Mail contracts: undependable for private owners of airways, 9 Mail contracts, domestic, 1 3 - 1 6 , 22-23, 2 7 - 3 1 ; cancellation of, 18, 39, 40, 4 1 ; Black Committee hearings on, 2 7 « , 3 2 - 4 0 ; reletting of, 45-58; carriers' obligation under, 460; rate adjustments in, 50, 5 2 ; Air Mail Act ( 1 9 2 8 ) effects, 82; indefinite extension of, h i ; see also Route certificates Mail contracts, foreign, 7 7 - 7 8 , 82, 100 Mail rates: regulation of, 1 , 2, 3 , 2 0 - 2 1 , 59-70; determination of, 1 3 - 2 0 , 4 m ; reductions in, 1 7 , 18, 20 Mail rates: foreign, regulation of, 99-109 Mail routes, 14, 1 6 ; extension of, 1 7 , 23, 24, 1 7 . 3 1 . 3 2 . 3 7 . 39. 40. 43-44 Mail subsidy, 62-63, 66 Manufacturing, separation from transport operations, 41 n Maritime Commission: proposal to put foreign service under jurisdiction of, 83 Mergers: of parallel routes prohibited, 50; permitted under careful regulation, 57 Monopoly, in commercial aviation, 1, 96-97 Motor Carrier Act ( 1 9 3 s ) : cited by Pan American in dispute over transadantic service, 95 National Air Transport Company, 25/j, 52n Negotiated bidding, see Bidding, negotiated Negotiation of contracts, 2 3 , 24, 27, 28, 3 1 , 3 2 . 3 7 . 39». 42. 43 Neutrality Act ( 1 9 3 9 ) : effect of, on transatlantic service, 97-98 N e w Y o r k - B e r m u d a service: initiated, 80; terminal points, 91 N e w Zealand service, 79-80 Night navigation, 5, 3 5 , 36, 40 Non-mail operations: legal provisions for losses in rate fixing, 5 5 ; schedules, 55-56, 73 North American Aviation, 5 2 « Northwest Air-Lines, 540 Northwest Airways, 3 1 Off-line operations, 19, 54-55, 67, 7 2 - 7 3 ; restriction on, 1 1 1 Ohio Transport Company, 3 6 « Operating deficits, removed by government action, 9 Overseas air transportation, 74; definition of term, io8n

m

Pacific Air Transport, Inc., 5 2 » Pacific Seaboard Air Lines, 5411 Pan American Airways Company of Delaware: operates transatlantic service, 8 1 ; applies for certificate for Bermuda route, 9 1 ; applies for certificate for service between United States and England and between United States and France, 92; affiliates, 1045; petitions Authority to fix mail rates between N e w York and European terminals, 106-8 Pan American Airways of Nevada: acquires interest in China National Aviation Corp., 79; operates transpacific service, 8 1 ; applies for transpacific service certificate, 909 1 ; petitions Civil Aeronautics Authority to fix San Francisco-Hong Kong mail rates, 100; wishes to include developmental costs in cost of operation, 1 0 2 ; operating unit of Pan American Airways Co. of Delaware, 104-5 Pan American Airways of N e w Y o r k : operates South American service, 8 1 ; operates between points on different routes, 87-88; applies for certificate for service along eastern coast of South America, 88-90 Pan American Airways System: corporate structure of, 8 1 ; subsidiaries, 81 Pan American—Grace Airways, 8 1 ; applies for certificate for service along western coast of South America, 88-90 Passenger rates, 74; lowered, 55; regulation of, 108-9 Passenger service, 57, 64, 65, 69 Passenger traffic, 1 3 - 1 4 , 19-20, 65; regulation of, 74 Penalties: for attempt to prevent bidding, 5 0 ; for interference with bidding, 56 Pennsylvania Airlines, 54n, 56, 57 Percentage of revenue form of compensation, 63» Pittsburgh Airways, 3 6 » Pittsburgh Aviation Industries, 34 Postmaster General: belief in restriction of competition, 1 ; authority over mail contracts, 1 1 , 1 2 , 1 7 , 18, 20, 2 2 , 2 3 , 3 1 , 39 n Post Office Department, 1 2 , 14, 1 5 , 1 6 , 1 7 , 20, 2 5 « , 40; divided jurisdiction over air transportation, 82 Pound-mile basis, 64, 65 Pratt Cc Whitney Aircraft Co., 52/j President, power of removing administrator of Civil Aeronautics Authority, 1 0

122

INDEX

Public bidding, tee Bidding, competitive Public interest: definition of, 91 Radio beams: invention of, 5; extension affecting plane capacity, 8 Rate formula, 60-61, 67 Rates, see Express rates; Mail rates; Passenger rates; Transatlantic rate case; Transpacific rate case Regulation of rates, tee Mail rates Revenue, tee Income Robertson Aircraft Corporation, 35, 38, 42, 44 Route certificates, 14, 15-18, 59, 60, 63, 82; tee also Certificates of convenience and necessity Routes, air, see Air routes; Mail route Schedules: government's role in establishing, 4-12; passenger, 67, 71-72; express, 67, 7172; additional mail, 68; weight-credit, 6970; non-mail, 71, 73 Schedules, foreign: limitation on number of, 92. 93-94 Safeway Fast Air Express, 33», 35, 42, 44 Sikorsky Aviation Corp., 52« South American services: 77-78; terminal and intermediate points, 89-90 Southwest Fast Air Express, 29», 32, 330 Space-distance bases of compensation, 63 Space method of compensation, 62-63 Speed, advantage of air over other transportation, 14, 24 Standard Air Lines, 33« State, Department of: negotiates landing rights, 93 Stearman Aircraft Co., 52» Stock transfers, 34, 35, 44 Subsidies, see Mail subsidies Subsidized competition, see Competition, subsidized

Terminal points: specification of, required for foreign service certificates, 87; on different routes, 87-88 Time, see Speed Traffic, see Express traffic; Passenger Traffic Transatlantic rate case, 106-8 Transadantic service, 79; New York—Bermuda route, 91; dispute arises between American Export and Pan American, 94-98; legality of under Neutrality Act (1939), 97-98; compensation based on number of schedules per week, 108 Transcontinental Air Transport, 29«, 30, 3 1 , 33» 34. 35 Transcontinental and Western Air, 19, 30a, 34. 35. 36. 37. 42. 54 Transcontinental routes, 26-44; Northern, 2 ; , 26/1, 30n, 33», 37, 42; Middle, 26, 27, 29, 32, 33". 34. 35. 36. 42; Southern, 26, 27, 29. 32, 33". 34. 35. 37. 42, 44; north-south connections, 37-39, 43-44 Transpacific rate case, 100-106 Transpacific service, 78-79 United Aircraft and Transport Corporation, 25n, 52« United Air Lines, 19, 300, 42, 540 United Avigation Corporation, 35, 36, 37, 39 U. S. Airways, 36n, 39 United States mail: definition of, 106 Varney Air Lines, 521» Weather, 5, 68, 80, 91 Weddell-Williams, 29«, 33», 370 Weight credit basis of compensation, 63, 6869. 7°. 7i> 73 Western Air Express, 29», 30, 32, 33, 34, 35, 38, 39. 42 Winnipeg decision on extension of air mail routes, 32, 37