were set sufficiently above costs on transcontinental runs to make service rivalry using newly-developed nonstop propeller aircraft viable from a carrier point of view. Thus, the DC-7 was developed by Douglas and bought by several transcontinental airlines during the 1950's, despite the fact that its seat-mile costs were higher than those of a DC-6B, and despite the fact that the DC-7 was rendered obsolete by jets within only five years or so of its introduction. Gellman showed that without the high transcontinental fares resulting from CAB regulation, the DC-7 would never have been developed, for its benefits were far outweighed by its costs from a social viewpoint.

It is possible to tell other, less-striking stores about the impact of CAB regulation on air transport technological development, but they are more ambiguous in the sense that it is more difficult to determine whether an unregulated market would have generated similar technological outcomes.148 The story of the DC-7, in any event, gives a good indication of what can happen to technological progress in a regulated environment.

GOALS AND ACHIEVEMENTS OF TRUNK AIRLINE REGULATION—

AN EVALUATION

At this point, it is appropriate to review the goals of the Civil Aeronautics Act of 1938, along with the practical goals which the CAB has inferred from them, and to attempt to evaluate the extent to which CAB policies have been successful in achieving these goals. Rather than requote the goals stated in the 1938 Act, we simply list the goals in it, or distill from the discussion of the first section of this chapter.

ECONOMIC EFFICIENCY

Although economic efficiency may not be at the top of the 1938 Act's priorities, it is there, in its prescription for "economical, efficient service by air carriers at reasonable charges." The previous section presents considerable evidence that the goals of economic efficiency in trunk airline service would best be promoted by loosening or eliminating the present regulation of the CAB. If that has been a high-priority goal, it has nevertheless not been achieved. Airlines may be efficiently operated given their regulatory constraints, but, as we have shown, these constraints have imposed social inefficiencies on the market.

CROSS-SUBSIDIZATION

The 1938 Act calls for "the encouagement and development of an air transportation system properly adapted to the present and future needs of the foreign and domestic commerce of the United States, of the Postal Service, and of the National Defense." 149 As previously stated, the CAB has interpreted this and other portions of the Act as implying that it should attempt to provide a complete, nationwide airline system with a minimum of direct subsidy. Hence, a system of

149 Jordan discusses product improvements in chapter 3 of Airline Regulation in America. As to whether the inter- or intrastate carriers moved faster on this count, he concludes that the interstate carriers tend to introduce innovations somewhat faster. But the resutls were rather ambiguous.

149 Sec. 102. 72 Stat. 740. 49 USCA 1030.

price discrimination designed to cross-subsidize uneconomic routes with revenues from economic ones has developed. Given the uproar which often occurs with the abandonment of any transportation service, be it ever so uneconomic, and given that no Congress likes to spend more on subsidies than it must, this is not an unreasonable interpretation of the law on the part of the CAB.

In the 1930's, when the vast majority of airline routes were not economically viable, it is possible to see some rationale for attempting to minimize direct subsidies through a discriminatory pricing scheme. But things have changed since the 1930's; the trunk air carriers have been off direct subsidies for nearly twenty-five years. Local service airlines have come into existence with direct subsidy support, with the specific purpose of serving small communities, and a third level of carriers, commuters, have come in to serve routes which even the local service carriers find unprofitable with subsidies. It is difficult to see the point of using profits from one route to support losses on another.

The overwhelming amount of evidence indicates that, except for the cross subsidy from first class to coach, the CAB has managed to achieve very little cross-subsidies anyway: the potential profits on high-density routes tend to be competed away through service competition, leaving little to support the low-density routes; trunk carriers have as a result tended to abandon low-density routes. That this is the case was first documented in the early 1960's by Caves.150

There is additional evidence supporting the hypothesis that crosssubsidies are basically nonexistent among the trunk carriers: they have no incentive to provide them. If an airline operates some routes at a profit and some at a loss, any rational manager will attempt to abandon (or convert to a profitable basis) the unprofitable route. The CAB has been quite liberal in allowing carriers to abandon unprofitable routes, and even if a carrier is forced to serve a given community, it has great flexibility in its ability to cut down service to a bare bones level 151 It is unclear why any airline should claim (as some have done) to be throwing away stockholders' money operating unprofitable service which it does not have to provide.

On close examination, routes which trunk carriers claim "unprofitable" (but which they do not petition to abandon) are less unprofitable than they might seem. A recent example of this is provided by evidence presented to the Kennedy Subcommittee by United Airlines, documenting alleged cross-subsidies.152 At first glance, fully one-half of the 372 city pair routes served by United appeared to be unprofitable. But that analysis was based on "fully-distributed" costs, allocating in portions of such items as the cost of mowing the headquarters lawn into the costs of every route. On the basis of incremental (avoidable) costs, only 58 of the routes were unprofitable. (If an airline has some equipment available which would otherwise be unused, it is quite reasonable that it should use it for marginal services as long as these services cover more than avoidable costs.) Of these, four routes were flown to reposition aircraft, 17 were flown because they generated traffic which

150 See discussion under "CAB Policies in Administering the Civil Aeronautics Act of 1938."

151 See Coleman, pp. 87-103. See also U.S. Department of Transportation. Comments on the Answer of the Association of Local Transport Airlines to the Report "Air Service to Small Communities," processed, Washington, July 19, 1976.

152 Kennedy Report, p. 67.

was profitable once it flowed into the network, and eight were on routes below 60 miles in length (so one could question the need for trunk service there). So only the remaining 29 routes might be abandoned and cause any potential loss to communities in the event of deregulation. These routes accounted for only .5 per cent of United's revenue passenger-miles, and the total loss was only $5.5 million, or .3 per cent of United's total revenues.

Thus, the evidence of United provides little or no evidence of crosssubsidization. Indeed, the only study showing significant cross-subsidization in recent years was one commissioned by the Air Transport Association (1975). It found that with deregulation, there would be 372 city pairs in the U.S. which would lose service, and that service would be cut back sharply for nearly all remaining city pairs.153

This study has numerous problems. First, like United's initial submission to the Kennedy Subcommittee, the ATA report takes no account of the fact that some of the 372 routes do not have service even with regulation; a good portion of the routes are profitable for their feeder value; a number are used to reposition aircraft; and a number of the routes are under 60 miles in length.154 Also, the ATA's statistical approach appears to bias its results toward unprofitability of a given route: there are all of ten city-pair routes within California and Texas, which it finds would lose service without CAB regulation, but which, in fact, receive service from non-CAB-regulated, non-subsidized intrastate carriers.155 These carriers earn substantial profits, as previously stated. This is straightforward, direct evidence contradicting the conclusions of the report. Finally, the ATA study's result that many currently profitable routes would sustain great service cutbacks in the event of deregulation stems from a bizarre and unrealistic assumption of the study: that with deregulation, all service would be taken over by a single monopolist, who would hold fares at their current levels and then cut back service until total industry profits were maximized, resulting in an 83 per cent load factor. 156 This is implausible because CAB regulation now is concerned exclusively with fares and entry of firms, and not with service quality. Yet the ATA study implies that with deregulation of fares and entry, the airlines will keep fares the same, while at the same time in some mysterious way colluding perfectly to reduce service competition and quality. There is, in fact, nothing connected with deregulation of fares and firm entry which will make it easier for the airlines to coordinate service quality (so as to maximize joint profits) than it is for them to do so

now.

When all things are considered, the ATA study represents an interesting (if imperfect) exercise to determine what would happen if all trunk air service in the US were taken over by a monopolist, with complete and total barriers to entry. But it has absolutely nothing to do with what would happen with deregulation (and hence more open entry of firms) of American air transport.

When all is said and done, how much damage is likely to be sustained by various communities from loss or air service stemming from

153 Air Transport Association, Consequences of Deregulation of the Scheduled Air Transport Industry (processed, Air Transport Association, Washington, April 1975). 154 Kennedy Report, p. 67.

155 Consequences of Deregulation of the Scheduled Air Transport Industry, Exhibit B. 150 Ibid., figure 4.

was profitable once it flowed into the network, and eight were on routes below 60 miles in length (so one could question the need for trunk service there). So only the remaining 29 routes might be abandoned and cause any potential loss to communities in the event of deregulation. These routes accounted for only .5 per cent of United's revenue passenger-miles, and the total loss was only $5.5 million, or .3 per cent of United's total revenues.

Thus, the evidence of United provides little or no evidence of crosssubsidization. Indeed, the only study showing significant cross-subsidization in recent years was one commissioned by the Air Transport Association (1975). It found that with deregulation, there would be 372 city pairs in the U.S. which would lose service, and that service would be cut back sharply for nearly all remaining city pairs.153

This study has numerous problems. First, like United's initial submission to the Kennedy Subcommittee, the ATA report takes no account of the fact that some of the 372 routes do not have service even with regulation; a good portion of the routes are profitable for their feeder value; a number are used to reposition aircraft; and a number of the routes are under 60 miles in length.154 Also, the ATA's statistical approach appears to bias its results toward unprofitability of a given route: there are all of ten city-pair routes within California and Texas, which it finds would lose service without CAB regulation, but which, in fact, receive service from non-CAB-regulated, non-subsidized intrastate carriers.155 These carriers earn substantial profits, as previously stated. This is straightforward, direct evidence contradicting the conclusions of the report. Finally, the ATA study's result that many currently profitable routes would sustain great service cutbacks in the event of deregulation stems from a bizarre and unrealistic assumption of the study: that with deregulation, all service would be taken over by a single monopolist, who would hold fares at their current levels and then cut back service until total industry profits were maximized, resulting in an 83 per cent load factor. 156 This is implausible because CAB regulation now is concerned exclusively with fares and entry of firms, and not with service quality. Yet the ATA study implies that with deregulation of fares and entry, the airlines will keep fares the same, while at the same time in some mysterious way colluding perfectly to reduce service competition and quality. There is, in fact, nothing connected with deregulation of fares and firm entry which will make it easier for the airlines to coordinate service quality (so as to maximize joint profits) than it is for them to do so

now.

When all things are considered, the ATA study represents an interesting (if imperfect) exercise to determine what would happen if all trunk air service in the US were taken over by a monopolist, with complete and total barriers to entry. But it has absolutely nothing to do with what would happen with deregulation (and hence more open entry of firms) of American air transport.

When all is said and done, how much damage is likely to be sustained by various communities from loss or air service stemming from

153 Air Transport Association, Consequences of Deregulation of the Scheduled Air Transport Industry (processed, Air Transport Association, Washington, April 1975). 154 Kennedy Report, p. 67.

15 Consequences of Deregulation of the Scheduled Air Transport Industry, Exhibit B. 150 Ibid., figure 4.