Caves stated it so aptly some years back, "there is no reason why impoverished grandmothers flying from New York to Los Angeles should be the ones to subsidize well-off businessmen traveling between small towns." 191 Thus, it is not unreasonable that a regulatory bill should make provisions for a carrier to drop service which it finds unprofitable. There is evidence that that has been done already, for the most part, as previously stated. But there should be no room for even a vestige of cross-subsidization in deregulated rates. As a result, a carrier should be free to discontinue unprofitable service. If, on the other hand, a carrier is required by CAB policy to continue service which it deems unprofitable and wishes to discontinue, it is appropriate that the carrier be compensated for that service, in the manner in which local service carriers are currently compensated. The Cannon-Kennedy bill specifically provides for this. Furthermore, it allow complete abandonment of a route by a certified carrier, provided another carrier can be found to provide the service instead.192 Given that commuter carriers have managed to provide breakeven service on routes lower in density than the subsidized local service carirers service, it is likely that subsidy requirements to communities which would otherwise lose service after deregulation will be low or nonexistent (excluding the special case of very low-density routes in Alaska), provided that a commuter carrier gives the service.193 Service to such communities could be guaranteed by reform legislation, at least for a few years, so as to make deregulation more politically palatable for small communities. The Cannon-Kennedy Bill provides for such a guarantee, supported by Federal funds, for a period of 10 years after the enactment of the reform legislation. Also in connection with the commuter carriers, it will be recalled that they currently face a 30-passenger or 7,500-pound (net) capacity constraint if they are to avoid CAB regulation. To allow for better and more economical commuter service, where it is possible, the Cannon-Kennedy bill proposes an increase in this maximum size to 56 passengers or a gross takeoff weight of 40,000 pounds. This change will make commuter service more efficient and attractive to communities which do not receive trunk service.194 Antitrust Exemptions-Trade Agreements Current law allows the CAB to grant airlines certain rights to enter into agreements which would otherwise involve antitrust violations. These agreements involve such things as capacity restriction, as well as fare and schedule coordination. The CAB has generally used these powers sparingly.195 Nevertheless, such practices could undermine the functioning of the competitive markets advocated here. For example, if airlines were allowed to set up capacity agreements, they could, by controlling capacity, keep fares artifically high without necessarily colluding explicitly on fares. It is, therefore, appropriate to subject the airlines to more or less the same antitrust laws regarding collusion in restraint of trade which 191 Caves, p. 411. 192 Report on Amending The Federal Aviation Act of 1958,pp. 88-94. 193 See the discussion of the amount of cross-subsidy, above, in this section. 194 See Report on Amending the Federal Aviation Act of 1958, p. 25. 105 One recent time it has allowed them is 1974, when, because of the energy crisis, it allowed the airlines to work out flight cutback agreements. the unregulated sector of the economy faces, unless there is some dire reason to do otherwise (i.e., a national emergency requiring quick overall cutbacks in civilian air transport). The Cannon-Kennedy Bill does this for price-fixing and capacity-restriction agreements.196 Mergers ... 197 The current law exempts air carriers from Federal antitrust merger laws, and places the jurisdiction of such mergers with the CAB. The CAB is already under legal guidelines somewhat similar to, but considerably less restrictive than, those of the antitrust laws, in that the Board is directed to approve proposed mergers unless they are "not... consistent with the public interest." But the law also provides "that the Board shall not approve any... merger .. which would result in creating a monopoly or monopolies and thereby restrain competition or jeopardize another carrier not a part of the... merger.' The Board is also directed to give some consideration to Section 7 of the Clayton Antitrust Act, which forbids mergers "where the effect may be to lessen competition." 198 But it can be argued that while some of the CAB's guidelines regarding mergers are similar to antitrust provisions, they are somewhat more permissive than the antitrust laws.199 If, in fact, the forces of competition are to play a much more. important role in achieving efficient airline rates, then the merger policy should be inclined further toward promotion of competition, as it is in the unregulated sector of the economy. Thus, reform of airline merger laws, to make them basically the same as those faced by the rest of the unregulated sector, should be an integrated part of any deregulation law. Still, the airline industry has some unique characteristics; among them is the possibility of geographic interconnections which might allow the benefits of service improvements from mergers to outweigh the costs in lessened competition. As a result, it might be desired to allow an additional antitrust provision in the case of the airlines, one which allows mergers when the lessening of competition is outweighed by potential service improvements.200 Dispatch of Regulatory Proceedings In the past, the CAB has sometimes made regulatory policy simply by delaying action and ultimately ignoring petitions. The most notorious case of this is that of World Airways in 1967, when it proposed to enter a transcontinental market with a fare of $79.50, only 55 per cent of the CAB-regulated face.201 The CAB's reaction was to ignore this petition for three years and then dismiss it as stale. Under all proposed legislation, the CAB will continue to play at least a token role in petition of route entry on the part of firms. If the CAB were allowed to stall as it did in 1967, it could effectively sabotage any such deregulation. One possible solution, of course, would be to totally eliminate any regulatory test of fitness, willingness, and ability of a carrier to enter a market. But this may be impossible or inappropriate, especially during a transition period. As a result, regulatory reform 190 See Report on Amending the Federal Aviation Act of 1958, p. 82. 107 Douglas and Miller, p. 201. 198 Coleman, p. 60. 180 Ibid., p. 60. 200 The Cannon-Kennedy Bill basically does this, although it keeps jurisdiction for airline merger cases under the CAB. See Report on Amending the Federal Aviation Act of 1958, pp. 78-80. 201 See footnote 175, above should place a strict time limit on CAB rate and entry proceedings such that if the CAB does not rule within a specific amount of time, the petition is automatically granted. There is something to be said for a shorter deadline, such as six months from receipt of a written petition. Delays on entry cases could be costly not only to consumers, but also to producers, in that they impose uncertainties which make planning difficult for all carriers involved. The Cannon-Kennedy Bill provides for a six-month deadline of the sort mentioned above. Employee Protection A significant provision of the Cannon-Kennedy Bill is a program to assure that certain relatively senior airline employees will receive special government compensation if they are laid off because of serious financial problems brought on their employers by deregulation.202 Before considering this provision in more detail, it is worth considering the appropriateness of such a measure in principle. As previously stated in this chapter, there is good reason to believe that if anything, deregulation of the trunk airlines could bring about an increase in the demand for labor and capital in that industry. Furthermore, given that civil aviation is and has been for some times a rapidly-growing industry one would expect that normal industry growth could over a relatively short time compensate for the effects of any temporary, one-shot contraction which might conceivably be induced by deregulation. For these reasons, one might question the desirability of a job protection provision such as the one proposed. Nevertheless, if the program is unlikely to be an expensive one, there is much to be said for having it. Most especially, if such a provision would allay fears of airline workers about deregulation, thereby making deregulation more politically attractive to organized labor, that is good reason to include it. The employee protection program proposed in the Cannon-Kennedy Bill is not an extravagant one, and it is unlikely that it could be expensive. Basically, it provides that if a carrier suffers a loss of 15 percent or more of its traffic in a given year, within 10 years, of enactment of the regulatory reform legislation, and if this reform appears to be the cause, then certain employees of that carrier will be entitled to government compensation. To qualify for such assistance, employees would have to have worked for the relevant airline for at least 4 years, and compensation could last for no more than 3 years. It is also stipulated that total compensation to a given worker should be less per period of time than the wage previously received in the position from which the employee was laid off. Given that large-scale layoffs of the sort dealt with by this program are unlikely to occur, the cost of the program is likely to be negligible. However, according to estimates prepared by the Congressional Budget Office, the cost of the program is unlikely to be large even under the worst of scenarios.203 It estimated that with a 20 percent. contraction in work force for a large trunk airline, the total government liability would be about $30 million. For a small trunk, the equivalent number would be $9 million, and for a typical local service carrier, the liability would be only $3 million. Since a 20 percent 202 See Report on Amending the Federal Aviation Act of 1958, pp. 46-49, 113–117. 203 Ibid., p. 122. contraction would be a most severe one, and since even under the worst of circumstances we should not expect many airlines to be subject to such a contraction, it follows that this job protection program should not be expensive, especially in comparison with the potential benefits of deregulation already discussed. Overall Assessment of Proposed Legislative Reform In sum, the Cannon-Kennedy Bill covers very well all the needed reforms for interstate airline regulation. On the basis of the analysis and evidence presented here, it should be enacted as law. At the time the last version of this chapter was being written, the House Aviation Subcommittee was working on a similar deregulation bill. Although no details on it were available, reports indicated that the House bill coming would have more restrictive provisions for route entry than the Cannon-Kennedy Bill.204 Although it is impossible to be certain just what legislative provisions are needed to achieve the full benefits of deregulation, the evidence presented here suggest strongly that the entry and fare flexibility provisions of the Cannon-Kennedy Bill should be preserved. It is only guaranteed with the entry and rate flexibility, provided for at adequate levels in the Cannon-Kennedy Bill, that we can be sure that travellers and shippers will achieve the full benefits of deregulation. Similarly, any House version should also include modification of the Statement of Purpose, including the goal of low prices for travellers and shippers, to be achieved through the forces of market competition. Such a change could be important in assuring that the CAB's current drive for more competition and lower fares will not be stopped in the courts. Any House bill which does not contain at minimum these provisions regarding fare and entry flexibility, plus changes in the Statement of Purpose, will run a high risk of failing to achieve the benefits of deregulation which this chapter has argued are so important. CONCLUDING COMMENTS Economists do not often agree among themselves on policy issues. Indeed, the present chapter has pointed out a number of disagreements about the effects of current airline regulation. Where such disagreements have existed, it has been the aim of this study to reconcile them and arrive at a reasoned conclusion. But on one most important issue, there are no disagreements to reconcile: many academic economists with widely differing political views and research methodologies have analyzed the economic effects of CAB regulation over the past fifteen years, and they have all come to a common basic conclusion-that the trunk airline industry would function far more efficiently (with lower fares) than it currently does with less regulation and more competition. Seldom has the economics profession achieved the unanimity on an issue that it has on this one. Government organizations, both the executive and legislative branches, and indeed, in the Civil Aeronautics Board itself, have conducted their own studies of airline regulation, and they have arrived at by and large the same conclusions. 204 Albert R. Karr, "Scare Talk about Deregulation," Wall Street Journal 98 (May 9, 1978), p. 20. 83-944-78-11 The Senate has now passed a bill which offers much opportunity for the nation to benefit from deregulated air transport, while safeguarding it from the major hazards. The time has come for the House to pass a similar bill, and for the President to sign these reforms into law. APPENDIX CALCULATIONS OF WELFARE EFFECTS OF CAB REGULATION This appendix deals with several closely-related topics discussed in the text, all concerned with analyzing and to some extent measuring the welfare impact of CAB regulation of domestic trunk airlines. The first section deals with the issue as to whether the lower fares likely if deregulation occurs will tend to increase or decrease flight frequency and overall capacity provided on a given route. An important part of this section is concerned with analyzing Douglas and Miller's model of the effects of CAB regulation, and the predictions of this model as to what would happen to flight frequency with a lowering of fares. The second section is similarly concerned with Douglas and Miller's work, but the concern there is with their empirical estimates of airline costs, the bias which may exist in these estimates, and the im-. plications of these biases for any calculations of welfare loss from CAB regulation. The third section presents calculations for some new estimates of the impact of CAB regulation on air coach fares for a "typical" domestic trunk route. The fourth section presents a similar analysis of the effects of CAB regulation on coach service quality. The fifth section presents an estimate of the amount of cross-subsidy from coach to first class, as of 1974. FARE REGULATION, FLIGHT FREQUENCY, AND SERVICE QUALITY Since fares are set exogenously for regulated airlines, it follows that if they are to compete, they must do so in other dimensions. Perhaps the most important way in which they compete is through flight frequency and seat availability as stated in the text. This service rivalry is analyzed rigorously by Douglas and Miller. Through the use of comparative static analysis, they derive the relationship between the overall fare level, as set by the CAB, and the amount of capacity which will be provided.205 Their analysis of this issue can be summarized as follows: to simplify, they assume that airline competition goes on on a single route, for which the quantity of people wishing to fly is Q, the (regulated) fare level is P, and the total capacity provided is S (which can be interpreted to be either flights or seats; they assume plane size constant for this model). With non-collusive service quality competition, excess profits in the industry will be competed to zero. Hence, 205 Economic Regulation of Domestic Air Transport, chapter 4, and Appendix to chapter 4. |