efficients were increase by 47.7 per cent. This yields the following indirect cost equation: where TCP is total indirect trip cost per passenger, D is trip distance, and S is the average number of intermediate stops per trip. At a 60 per cent load factor, this implies an indirect cost per passenger of $21.14 with the values of D and S described above. TABLE A1. Direct operating costs, 727-200, 1972 Expense Class Cash expenses (flying operations and maintenance)'_ Total cost per block-hour---- Cost per block-hour $708 412 .-- 1, 120 1 From U.S. Civil Aeronautics Board "Aircraft Operating Cost and Performance Statistics" (1972–73); figure pertains to all operations of Domestic Trunk Carriers, Boeing 727-200. This figure comes from T. Keeler, prepared statement, Kennedy Hearings, Table 3. This table, however, was misprinted by the U.S. Government Printing Office. The indirect capital cost (ground support capital) for a 727-200 should have been $44 per block-hour. (The line containing direct operating costs was incorrectly omitted from Table 3 of my prepared statement.) From Table A1, we note that the total direct operating cost for a Boeing 727-200 is $1,120 per hour. To convert this to the cost for a trip of the sort described, we use Douglas and Miller's equation relating length of hop and travel time for a 727-200: 225 T=22.1(1+S) +.12D On the basis of this, a trip of the dimensions described above should take 125.5 minutes, or 2,092 hours in block time. Total cost is then $2,343 per plane trip with a 153-seat, all-coach configuration (including full galley space), and a 60 per cent load factor; this generates a direct cost of $25.52 per passenger trip. Total cost (and hence our estimated efficient fare) is then $46.70 per trip, or 5.88 cents per passenger-mile. This compares with an actual 1974 coach revenue yield of 6.94 cents per passenger-mile.226 Thus, if regulated fares are calculated on the basis of revenue yield, the extra fare incurred from regulation is about one cent per passenger-mile, implying a markup of 18.2 per cent. This means that passengers who are currently traveling by coach on trunk routes paid extra fares totaling about $1.1 billion.227 But use of revenue yields per mile for regulated routes in the present case will clearly yield a downward-biased estimate of the fare costs of regulation. The reason is simple: the cost model from Keeler (1972) predicts the unrestricted, peak-period fare on unregulated routes. The 225 Economic Regulation of Domestic Air Transport, p. 21. 227 ($.0694-.0588)X(103.8 billion passenger-miles)~$1.1 billion. Coach passenger-mile figures are from ibid., p. 6. intrastate routes also have discount fares, and other recent work of this writer has shown that controlling for distance, the discount and off-peak fares on the top three intrastate routes in the country are in fact only sixty per cent of the average discount fare on interstate routes (see text section V-B). Thus, if revenue yield is used as a fare estimate on the interstate routes, the same should be done for intrastate routes. Inasmuch as the cost model used here predicts regular, daytime fares on the unregulated routes, it is obvious that the same sort of fare should be used for comparison on the interstate ones. Furthermore, after all the concern shown here about normalizing for service quality, it is clearly inconsistent to compare interstate revenue yields with intrastate fares, because much of the interstate revenue stems from restricted discount fares, which offer a service quality distinctly inferior to that of the normal, peak-period fare. It may well be that more such discount fares are available on interstate routes, but just the same, it is important to compare the regular intrastate fare with the equivalent regular interstate fare to get an alternative (and perhaps upper-bound) estimate of the impact of regulation on fares. On a typical route of 795 miles, the CAB fare structure in 1974 would generate a regular coach fare yield of about 8.5 cents per mile.228 On this basis, excess fares paid coach passengers from regulation were $2.7 billion. [$.085-.0588) ×103.8 billion passengers~$2.7 billion]. IMPACT OF REGULATORY POLICIES ON SERVICE QUALITY Let us now recapitulate our assumptions about the changes in fares and service quality in coach service before and after deregulation: before deregulation, we assume a route of 400 passengers as described in the text. Overall, 1974 coach passenger-miles were 88.3 per cent of the total,229 so we assume 353 of the 400 traveled in coach. Now, in 1974, the overall load factor in coach and first class was 55.7 per cent, corresponding to 58.9 per cent in coach, and 39.7 per cent in first-class. With a plane capacity of 137, this implies that each plane carries 76.3 passengers per flight, and hence with a route density of 400 passengers per day, a total of 5.24 flights per day in both directions combined. To analyze the effects of regulatory policy on interstate coach passengers, we assume that for them in 1974 the average plane size was 115 passengers, and that if the coach compartment is full on a given flight, they will wait till the next one rather than book first-class. Thus, the effective plane size is 115 seats, the number of passengers in coach is 67.7 per flight, and the flight frequency is 5.25 planes daily in both directions combined. We assume that with deregulation, each plane will seat 153 passengers, and that fares will be set to yield a normal profit at a 60 per cent load factor; so after deregulation, each flight will contain 91.8 passengers (153 X.6). But that does not tell us enough to determine the flight frequency. The lower fares from deregulation will induce extra traffic. It has already has argued that the Brown-Watkins DeVany demand elasticity estimates for coach service have taken into account the change in service quality which will occur when a fare changes, 228 For example, the regular Atlanta-New York fare in 1974 was $64.80 for 755 miles, or 8.6 cents per mile. On the other hand, the Boston-Chicago fare was $71.30, or 8.3 cents per mile. 1974 fares are from the Official Airline Guide (Oct. 1, 1974). 220 USCAB, Air Carrier Traffic Statistics (December 1975), p. 6. in order to keep profits at a normal level. Thus, to determine the impact of deregulation on route density, we use the average of the DeVany and Brown-Watkins demand elasticities. The average value of their estimates is -1.19.230 To get a conservative estimate of the service costs of CAB regulation, we shall assume that the relevant price change occurring from deregulation is from the average revenue yield under regulation to the regular fare under deregulation, so that the one-way fare per mile will decline from 6.94 cents before deregulation to 5.88 cents after. Applying the demand elasticity of -1.19 to this, we find that total coach passengers on the route increase from 353 to 484. For the sake of conservatism, we shall assume that first-class passengers moving to coach are included in this figure, or that they do not fly as a result of lack of first-class service. Thus, after deregulation, total flights are 484/91.8-5.27, and the load factor, to repeat, is sixty per cent. No claim is made here of perfect accuracy in any of these figures. They are obviously assumptions, and the only claim for them is that they are in many ways more plausible and logically consistent than those of Douglas and Miller. We now have estimates of all the needed parameters to feed pre- and post-deregulation data into Douglas and Miller's estimated delay function, and come up with estimates of total schedule delay per passenger both before and after deregulation. The frequency delay function is stated quite clearly by Douglas and Miller; it is D=92F-456 where DF is frequency delay time in minutes per passenger, and F is flight frequency, measured in flights in both directions per day.231 The stochastic delay function is nowhere explicitly stated, but with some effort, it is possible to infer it from what is written in the book. 232 It is D.-14.3 N,5275 (S,-N,)-1.79 (1790/F) (4) where D, is stochastic delay per passenger in minutes, S, is average plane seating capacity, N is the average number of seats per flight, and F is flight frequency, as before. Table A2 states the assumptions made regarding each of the parameters of the delay function, and also summarizes the results regarding stochastic delay. The results are surprising: they indicate that overall schedule delay actually goes down after deregulation, from 98 to 84 minutes per passenger-trip. This would seem like a paradoxical conclusion, because the load factor has gone up as a result of deregulation. However, a careful look at the stochastic delay function indicates that it is the absolute size of the difference between number of passengers per seating capacity that determines stochastic delay, and not the ratio. And this size difference clearly increases after deregulation. Furthermore, demand elasticity appears to be great enough to keep flight frequency more or less unchanged. At a $5 per hour value of schedule delay time, the value of service improvements to coach passenger would be about $130 million.233 230 DeVany's estimate is -1.07; Brown and Watkins' estimate is -1.3. See Douglas and Miller (1974), p. 37. 231 Ibid., p. 83. 282 Ibid., pp. 82-108, passim. 233 There were approximately 131 million coach trips on domestic trunk carriers in this country in 1974 and savings from above are 12 minutes, or $1.00 per trip. USCAB, December, 1975, op. cit., p. 6 TABLE A2.-THE LIKELY EFFECTS OF DEREGULATION ON FARES AND SERVICE QUALITY, 1974 Obviously, the roughness of the assumptions behind these calcula-. tions makes the observed difference far too low to be of any significance. We can conclude, however, that on the average, regulation has had little effect on average schedule delay. (It may have some effect on such things as seat size and meal service; but in the case of mealservice, our cost model is based on domestic trunk data, and makes a more than adequate allowance for passenger meals, one which increases linearly with length of haul.) All calculations so far have been based on the assumption that the appropriate coach fare on interstate routes should be represented by average revenue yield per passenger. Suppose we now base our calculations on the assumption that actual fare yields are more accurate. Under these circumstances, the observed price cut from deregulation will be substantially greater than implied by previous figures, as shown under heading B in Table A2. It will be 30.8 per cent, from 8.5 cents to 5.88 cents per mile on the typical route. This implies a more dramatic increase in passengers as a result of deregulation (to 550 per day) and an increase in flight frequency to 5.99 flights per day. Average schedule delay per passeger would drop from 98 minutes with regulation to 76.7 without. The details of the assumptions and calculations are again shown in Table A2. At a $5 per hour time value, this would imply a total of $230 million worth of service quality improvement for coach passengers as a result of deregulation.234 FIRST-CLASS LOSSES It is instructive to make an estimate of the first-class loss per passenger-mile carried, using the cost model developed earlier. It is possible to revise the cost model in the Appendix to get a rough estimate of the first-class costs by noting the following facts: a first-class seat takes up 1.68 times as much space as a coach seat (they are four 234 Based on the same figures as footnote 233, but with a time saving of 21 minutes per passenger with deregulation. abreast, whereas coach is six abreast in a typical airliner, and firstclass seats tend to be 38 inches in pitch, compared with 36 in coach). Furthermore, the first-class load factor in 1974 was only 39.7 per cent. Taking account of these facts, the indirect cost equation (2) of this Appendix, should be revised to read as follows: $.259 TCP=2 397 (1+S) (1.68)+ $.00333D (1.68) +$.0203 where S is the average number of stops in an average trip (found to be 1.35) and D is the average trip length, found to be 795 miles in the Appendix for 1974. Thus, the first-class indirect cost per trip is $28.83 per trip. Since practically all direct costs are dependent on airliner capacity offered, the direct cost of first-class is simply the coach cost per seat-trip times 1.68, divided by .397. The direct first-class cost per trip is thus ($15.31) x (1.68)/(.397)=$64.79. (The cost per coach seattrip is $25.52×.6, from p. 15 of the Appendix, given our assumption of a 60 per cent load factor). The total cost of a 795-mile first-class trip is therefore $28.83+$64.79 $93.62, or 11.8 cents per mile. On the other hand, the first-class revenue yield was only 9.49 cents per mile in 1974.235 Calculated from USCAB, Air Carrier Financial Statistics (Fourth Quarter, 1975), p. & and USCAB Air Carrier Trafio Statistios (December, 1975), p. 6. |