a 40 percent discount from regular coach fares at night (applying to all coach seats). These fares apply to all of Continental's routes.171 Similary, Western is implementing an across-the-board reduction of 35 percent in coach and first class during the day, with a 48 percent dicount for night coach, on its Miami-Los Angeles route. These fares will be matched by Western's competitor on the route, National.172 In order to expedite further airline fare-change proposals, the CAB has now proposed a greatly-simplified set of administrative procedures, which would allow fare decreases of up to 50 percent per year, and increases of up to 5 percent per year, by existing carriers on a given route, without going through the delays of a fare-change procedure. These procedural changes will be made without new legislation.173 It is worth noting that the fare reductions being implemented by Continental and Western are of the order of magnitude suggested previously in this chapter as being consistent with "deregulated" markets. If these trends continue and the low fares spread to other markets, one might argue that no legislative reform is needed to achieve the full benefits of deregulation. However, there are several reasons why legislation is needed to assure that consumers get the full benefits of deregulation in trunk airlines, and that these policies continue over time. First, while a strong case can be made that the policies currently being pursued are indeed legal, they do represent a sharp change from previous policies, and present changes could be challenged in courts on the grounds that the new policies are not consistent with the laws as they were interpreted between 1938 and the mid1970's. Although this is potentially to some degree a problem with fare. reductions, it could be even more of a problem with regard to proposals for entry by new carriers. Thus, several carriers with no existing certified interstate trunk routes have proposed to enter a number of trunk routes at fares considerably lower than existing ones. 174 The CAB has not yet ruled on those cases, and it is not clear what decision will be made. However, given that the CAB has not allowed totally new carriers to enter trunk routes in the past, a strong precedent exists to deny entry to such routes. As will be argued below, the entry of new firms on to trunk routes could play a critical role in getting fares. down to "competitive" levels. To assure that some new carriers will have an opportunity to enter the trunk airline market without court challenge, legislative reform is highly desirable. A second reason for legislative reform is that the make-up of the CAB could easily change, and appointees more sympathetic to higher fares could easily regain control. Without legislative reform, there is little guarantee against a return to the fare levels of 1974 and earlier once the tenures of certain existing members have expired. 171 Ibid., p. 64. 172 Ibid., p. 64. 17 Airline Regulation Has a Long Way to Go." Business Week (May 8, 1978), p. 43. 174 One of the most important of these pending cases is that of Midway Airlines and Southwest Airlines which wish to provide short-to-medium-haul service between Chiengo and various midwestern cities, at fares 12-64 percent below existing regular coach fares. See U.S. Senate, Committee on Commerce, Science, and Transportation. Report on Amending the Federal Aviation Act of 1958 (Washington, U.S. Government Printing Office, February 6, 1975), pp. 103-105. In short, there are some very good reasons why legislative reform is needed to buttress and expand the policies already being pursued by the CAB. Alternatives for legislative reform will be considered below. NATIONALIZATION What has been said of "better" regulation is likely to apply all the more to nationalization. Here again, political considerations are likely to outweigh the needs of the market in the operation of the enterprise, and it is not likely to be as responsive to the needs of shippers and travelers as competing private firms. Furthermore, there is no evidence that the nationalized airlines in other countries are in any way superior to the privately-owned, regulated ones in this country in terms of efficiency or in terms of the fares they charge. To the contrary, evidence collected by M. Straszheim would indicate that foreign nationalized carriers have been historically more costly to operate than privately-owned American ones. Thus, in the late 1950's, the operating deficits of many Western European carriers accounted for a large part of national output, ranging from 0.6 per cent in Great Britain to an astounding 3.0 per cent in the Netherlands.175 COMPLETE AND IMMEDIATE DEREGULATION On the basis of the arguments made in previous sections, there is much to be said for complete and immediate deregulation of trunk airlines: there is little about the industry which would seem to require the regulation of fares and firm entry or route authority, and the benefits would seem to be great from the viewpoint of the public. There are, however, several major disadvantages to complete and immediate deregulation. The first and most important relates to issues of equity. It was stated in Section II that while airline investors, suppliers, and workers should, overall, be expected to benefit from dereguÎation, nevertheless there are likely to be some short-run losers, mostly specifically less efficient firms, or firms on routes with demand which is unresponsive to price. If deregulation is immediate, the changes could be painful or disruptive, and the political feasibility of deregulation would be jeopardized. Second, to the extent that politically undesirable consequences of regulation occur (such as loss of service to some small communities) it is appropriate that the change occur in an "orderly" manner (i.e., that government authorities should have time to allow for subsidized service where it is needed). To achieve "orderly" change, gradual deregulation is preferred. Third, as pointed out by the Kennedy Committee report, managers in the industry must have time to adapt to conditions of deregulation.176 For this reason, it is not clear that the benefits would come immediately even if deregulation were complete and immediate. It takes time for new firms to enter markets, or for existing ones to enter new markets: planes must often be built or reconfigured; route plans must be made, and profit calculations done. In this context, it is worth noting that the full benefits of unregulated markets in California, most specifically from PSA, did not come 175 See Mahlon Straszheim. The International Airline Industry (Washington, The Brookings Institution, 1970). p. 27. 178 Kennedy Report, p. 74. until 1959, over ten years after it first entered the market for air transportation (when it instituted service with modern aircraft). As a result, it is not clear that immediate deregulation has too much of an advantage over gradual deregulation in terms of when the benefits would make themselves felt, while gradual deregulation has several advantages over immediate deregulation as enumerated above. PARTIAL AND/OR GRADUAL DEREGULATION VIA LEGISLATIVE REFORM This is the sort of deregulation which has the most appeal from several viewpoints, and it is the sort of deregulation called for by the most popular of the current legislative proposals.177 The markets in California and Texas are not now and never have been totally deregulated. Even in California before 1965 the California Public Utilities Commission had some control over air fares. Our experience with intrastate airlines has all been in an environment of partial deregulation. Many combinations of partial or gradual deregulation policies could be instituted. We consider only the alternatives that have been seriously proposed, or those which have particular appeal in terms of their ability to achieve efficient results without adverse consequences. Price Deregulation without Entry Deregulation One possibility for partial deregulation is to deregulate rates without deregulating firm entry on a given route. This is likely to have serious adverse effects in the form of higher fares on some routes: without entry (or threat of it), existing carriers would probably be able to coordinate their rates at high levels, for most routes are highly concentrated, making coordination all too easy. This form of "deregulation" could easily produce market performance worse than the existing setup. Deregulation of Selected Routes Another possibility is deregulation of rates and of firm entry on a few routes on an experimental basis, with expansion to other routes if the experiment is a success. This approach is flawed on several counts. First, there is the possibility that whatever route or routes may be selected might not be representative of all routes, so the results of the experiment might be misleading. Besides, we already have the results of some "experiments" in the form of the intrastate routes. Another problem is that the deregulated route could be an object of capacity-dumping or predatory pricing on the part of airlines on regulated routes. It is not clear what evidence there is, theoretical or empirical, to support this possibility: predatory pricing and similar behavior are not generally rational, and there is little evidence of it frequently occuring in the unregulated sectors of the U.S. economy.178 177 Numerous bills for deregulation were introduced in the 94th Congress, but the process of compromise has sharply narrowed those Introduced in the 95th. More specifically, in April 1978, the Senate passed the Cannon Kennedy Bill, largely a compromise between separate bills introduced by each Senator in the 94th Congress. The provisions of this Bill will be discussed in some detail in this section. As the last revision of this chapter was being written. The House Aviation Subcommittee was still working on a similar bill proposing airline deregulation. Because none of the details of what was to come out of the House were available as of this writing. I shall not comment on it. Rather, emphasis will be placed on the components of the Cannon-Kennedy Bill which should definitely be carried over into the House bill. 17 F. M. Scherer (op cit., pp. 273-278) surveys all the major cases of alleged predatory pricing up to the year 1968, and finds no persuasive evidence that it actually occurred. See also Roland Koller. "The Myth of Predatory Pricing: An Empirical Study," Antitrust Law Review (Summer, 1971). Furthermore, there is little evidence that the certificated carriers participating in the California and Texas markets have engaged in extensive capacity-dumping or predatory pricing against the intrastate carriers in those routes.179 There are, however, other potential objections to this form of partial or gradual deregulation. By this route, deregulation in all markets might be delayed interminably by hearings to determine if experiments were "successful" and by appeals of whatever results the hearings achieved. This could slow the process of deregulation to a standstill. Deregulation of High-Density Routes Yet another possibility for partial deregulation would be to deregulate only those routes (probably high-density ones) where low concentration and competition would appear most likely. This approach has much to say for it. High-density routes are inded those which can "support" the most firms, and perhaps the most successful of the intrastate routes have been high-density ones. However, there is evidence that deregulating these routes alone could deprive many passengers of the full benefits of deregulation. There is, in fact, substantial evidence that unregulated medium- and low-density routes can support excellent service at fares no higher than those now charged. This evidence comes from some intrastate routes, such as the HoustonHarlingen route in Texas and the Fresno-Los Angeles and FresnoSan Francisco routes in California, and from the many commuter routes which are totally unregulated by the CAB. How does this come about? In a number of cases the carriers serving these looselyregulated low-density routes have a monopoly or near monopoly on the routes served. There are two basic reasons for this good market performance in the face of an apparent monopoly. The first stems from the fact that if prices exceed costs by too much (or if service levels deviate from optimal ones too much), new firms will enter. The second reason is that most lower-density routes tend to be relatively short in haul,180 and as a result there is substantial surface competition (buses and especially private autos on low-density routes). If the fare from Fresno to Los Angeles is too high, most travelers, business or pleasure, will not hesitate to drive. As a result of this surface competition, most low-density routes which appear to be monopolies are not monopolies at all. All this evidence suggests that there is no reason to deny those traveling on low- to mediumdensity trunk routes the benefits of deregulation. (We are talking here only about those routes which are, in fact, economically viable. The problem of subsidizing service on unprofitable routes is discussed below.) Gradual Deregulation of All Routes A final possible form of gradual and partial deregulation is to allow fares to change and firms to enter in all markets, but to expand their abilities to do so only gradually. This is, in fact, the approach 179 It has, of course, been the intrastate carriers who were the main price cutters in these markets, and they had no outside capacity to dump, or profits from elsewhere to cross-subsidize predatory prices in the intrastate markets. 180 The reason for this stems from the logical route structure of the U.S. and most other nations. For example, instead of flying on a nonstop flight from Bangor, Maine to Monterey, Calif., a passenger will, in all likelihood, take a short-haul low-density flight from Bangor to Boston, a long-haul, higher-density flight from Boston to San Francisco, and another short-haul low-density flight on to Monterey. taken by more or less all recent proposals for regulatory reform in the airline industry.181 The idea behind this is to allow fare change and firm entry to occur gradually, so as to minimize financial and service "disruptions" during a "transition period" between the existing system and a system conferring all the benefits of the intrastate systems mentioned above. The full benefits of deregulation, however, would occur only after a period of some years (say, four to ten years, by most current proposals). As previously stated, freedom to achieve both firm entry into a market, and fare change are important from the viewpoint of the goals developed in this chapter, and it is appropriate to examine in some detail the alternatives in the case of each. Firm Entry Currently an airline may not serve a route without a certificate from the CAB indicating that public convenience and necessity requires its services on that route. To achieve entry onto a new route, a firm, whether it be a carrier already certificated for scheduled service on other routes, or a firm not currently providing scheduled service must prove to the CAB that public convenience and necessity require its addition to that route. As previously stated, the CAB has not allowed the entry of any entirely new truck carrier since the 1938 Act was passed, although it has granted numerous route expansions by existing carriers. To assure that after fare deregulation, entry on to various routes is sufficient to get fares down to a more "competitive" level, there are several steps which can be taken. One possible step involves a change in the Statement of Purpose (discussed earlier in this chapter) to require that in pursuit of its goal of "efficiency, innovation, and low prices" in air transportation, the Board should rely the forces of "actual and potential competition.' The Cannon-Kennedy Bill in fact does this.182 This change is a most important one, for it would give the CAB a clear legislative mandate to pursue more permissive policies as regards fare flexibility and firm entry. The desirability of such a mandate has been discussed above. But a change in the Statement of Purpose alone is not likely to be adequate over the long term. There is no guarantee that future members of the CAB will be as well disposed toward fare flexibility and route entry as the current ones. Furthermore, their attempts to implement a more liberal entry and pricing policy would be made much easier with more specific entry provisions. For these reasons, if the nation is to be assured of getting the full benefits of deregulation, it is necessary that reform law should clearly spell out and guarantee the rights of firms to enter new markets. In this connection, however, some questions arise. What firms should be allowed to enter what markets, at what times? If deregulation is indeed to be gradual but eventually total, answers to these questions must be spelled out. 181 See footnote 177, above. 182 The above quotes are from the text of S. 2493, See Hearings on Amending the Federal Aviation Act of 1958, op. cit, p. 6. |