trastate carriers have made considerable use of "satellite" airports, providing service to and from more points in a metropolitan area than generally occurs on interstate routes, and making for a higher level of passenger convenience. It is thus not obvious that intrastate passengers have inferior service compared to interstate coach passengers. Causes of lower intrastate fares How do the intrastate carriers achieve these lower fares? It is certainly not by accepting lower profits than the CAB-certificated carriers. Once start-up costs were covered, intrastate carriers have consistently enjoyed profits as great or greater than those of CAB-certificated carriers. Thus, in 1972 through 1974, Air California earned a return on over 24 percent after taxes on its equity investment.58 Over the same period, PSA earned 4 to 6 percent after taxes which, although it may seem low, it is not out of line with earnings of CAB-certificated carriers in the same years.59 And Southwest Airlines, now that heavy startup costs have been covered, is also profitable, having earned a return on investment of 12.6 percent in 1974.60 61 How, then do the intrastate carriers achieve profits in combination with fares substantially lower than those charged by the CAB-certificated carriers? The answer lies in a number of considerations, but most importantly in two: the seating capacity of the aircraft, and the load factor. Thus, in the case of the Boeing 727-200 (one of the most widelyused aircraft ever built) PSA puts 158 seats in each aircraft, compared with 120-133 seats in trunk aircraft. Does this mean that the passenger enjoys less space on intrastate aircraft? In the case of coach passengers, any space improvements provided by interstate carriers on short-haul routes are minimal, for the six-abreast seating with 34inch 62 pitch used by PSA is common among the trunk and local-service carriers on short hauls. The difference in seating capacity would seem to be accounted for by two things: first class service on trunk carriers (but not PSA), and galley space (but, as we have already noted, meal service to coach passengers on trunk routes is rather rare for the short hauls of relevance here). Air California and Southwest Airlines (in Texas) get similarly larger numbers of seats into their Boeing 737's.63 As regards load factors, all three intrastate carriers have consistently achieved higher load factors than have the interstate carriers. Thus, over the early 1970's, Air California achieved an average load factor of 70 percent; PSA achieved a load factor of 60 percent or more on all its high-density routes, which in turn account for over twothirds of its traffic. And, after its initial start-up period, Southwest Airlines achieved a load factor of 58 percent in 1974, and 62 percent in the first three quarters of 1975. The trunk carriers, on the other hand, have consistently achieved lower load factors of 52.1 percent in Coleman, p. 75. so Ibid., p. 75. Simat, Helliesen, and Eichner, vol. I. p. 8. Pitch is the distance from a given spot on one seat to the same spot on the seat in front or behind it. Air California puts seats into a 737-200 (Hearings of Subcommittee on Administrative Practices and Procedures, vol. I, p. 450), and Southwest puts 110 seats in the same aircraft (ibid., vol. II, p. 1243). On the other hand, United and Western's 737's seat only 95. See Simat. Helllesen, and Eichner, p. II-75. 1972, 51.9 percent in 1973, 55.7 percent in 1974, and 54.8 percent in 1975.64 It might be argued that the lower load factor provided by CABregulated carriers does produce a superior quality by making it easier to get a reservation at the preferred time.65 If such benefits occurred, however, they accrued exclusively to the privileged ten per cent of interstate passengers who flew first class. In 1974 and 1975 alike, the coach load factor was nearly 59 percent, roughly the same as that achieved by PSA and Southwest.66 Evidence from the intrastate markets, then, strongly supports the contention that interstate trunk fares are being set "artificially" high by the Civil Aeronautics Board, and that the potential excess profits from these high fares are being competed away through service quality and flight frequency competition. COST-BASED TRUNK FARES VERSUS ACTUAL INTRASTATE FARES The preceding analysis makes an assumption which some might regard to be unacceptable-that less restrictive regulation would have the same effects throughout the United States as it has had on equivalent routes in California and Texas. It must be asked whether operating and traffic conditions (i.e., weather, seasonality or traffic, congestion, etc.) on most interstate routes somehow make achievement of fares as low as those cited impossible. All these issues were investigated in a Report by the Subcommittee on Administrative Practices and Procedure of the Senate Judiciary Committee in 1975, and it concluded that none of these factors could account for a significant difference in fares. Nevertheless, it would be desirable to know whether the trunk carriers could, if they adopted certain operating procedures of the intrastate airlines, such as seating density, achieve the same fares as the intrastate carriers, operating in a less regulated environment. In earlier studies (Keeler, 1971, 1972), the present author has considered these questions.67 The model was based on cost and operating characteristics of efficient aircraft with all coach configurations, indirect (non-flight) costs of low cost interstate trunk lines, and a 60 percent load factor. Essentially the same model is presented in section 3 of the appendix to this chapter. For hauls under 900 miles, seating configurations were assumed the same as for the intrastate carriers, with galley space for beverages and snacks, but not regular meals. For hauls over 900 miles, galley space adequate for full meal service was assumed.68 (The implications for our results of allowing full galley space on shorter hauls will be considered later). 4 Intrastate load factors come from Simat, et al., pp. 4, 8; interstate load factors come from U.S. Civil Aeronautics Board, Air Carrier Operating Statistics, December 1973 and December 1975. This matter is discussed at length later in this section, under the discussion of Douglas and Miller's schedule delay model. 66 See U.S. Civil Aeronautics Board, Air Carrier Operating Statistics (December 1975) for interstate load factors; PSA and Southwest load factors are mentioned above. A full discussion of the impact of CAB regulation on coach service quality is presented below in this section. 67 Resource Allocation in Intercity Passenger Transportation (1971), chapter 3, and "Airline Regulation and Market Performance." Bell Journal, Autumn 1972. 68 For hauls over 900 miles, use of DC8-61 aircraft was assumed. Capacity was assumed to be 251 passengers, which does include galley space adequate for meal service. See Keeler (1972), pp. 406, 416. Because the California intrastate carriers had managed to achieve a load factor of over 60 percent up into the mid-1960's, it was assumed that loosened regulatory policies on the top of 30 routes in the United States would enable achievement of similar load factor elsewhere. Therefore, a 60 percent load factor was assumed for these calculations. To the extent that a higher load factor were achieved, either lower fares or higher carrier profits would be feasible. One test of the accuracy of the results of the procedure is its ability to predict California Intrastate fares, despite the fact that it is based on trunk costs. It, in fact, came quite close to predicting California fares. For the Los Angeles-San Francisco route, the estimated fare is $13.87 compared with an actual 1968 fare of $13.50. For the Los Angeles-San Diego route, the estimated fare is $6.50, compared with an actual fare of $6.35.69 In each case, the model comes within 3 percent of predicting actual fares. For short hauls then, the model might give some indication as to what would be feasible elsewhere with more relaxed regulatory policies. Unfortunately, there are no unregulated long-haul markets with which to compare results. But, in April 1967, World Airways, a supplemental charter carrier, did attempt to enter the transcontinental market. In an application to the CAB, it proposed jet service between California and the East Coast with a fare of $79.50. This compared with estimated cost-based fares of $79.20 on the New York-Los Angeles route, and $82.08 on the New York-San Francisco route. Thus, for three perhaps special cases, the model does a reasonably good job of predicting unregulated fares. On the unregulated routes, fares exceed predicted unregulated ones by margins ranging from 20 percent on the shortest hauls (such as New York-Boston) to over 90 percent in other cases, such as New York-Miami. Thus, CAB-regulated trunk fares exceeded estimates of feasible unregulated fares by 20 to 90 percent. In connection with the previously mentioned investigation of the Senate Subcommittee on Administration Practices and Procedure, the results of this study were updated to the third quarter of 1974."1 The results of this updating, again for the 30 top-density routes in the United States plus Los Angeles-San Diego, are shown in Table 4. For the 1974 updating, there are three intrastate markets on which to test the calibration of the model: Los Angeles-San Diego, Los Angeles-San Francisco, and Dallas-Houston. This time, actual intrastate fares are below predicted "unregulated" fares by about 13 percent between Los Angeles and San Francisco and they are above hypothetical "unregulated" fares by less than 5 percent between Los Angeles and San Diego. Between Dallas and Houston, the model would seem to be further off the mark; actual fares are above predicted "unregulated" ones by 23.8 percent. But the fare used in the Table is the "peak" fare, valid between 7 a.m. and 7 p.m. In the case of this route, the offpeak fare of $13.88 is far less restricted than any other discount fare: it may be used after 7 p.m. on weekdays and anytime on weekends, and it is 25.7 percent below the estimated "unregulated" fare. A large fraction of passengers uses this latter fare, as well. 69 "Airline Regulation and Market Performance," p. 417. 70 Ibid. 71 T. Keeler, prepared statement, Hearings, U.S. Senate Subcommittee on Administrative Practices and Procedures, vol. II, pp. 1302-1305. Source: Fares come from Official Airline 1 (Oct. 1, 1974); California intrastate off-peak fares come from PSA flight schedule, Oct. 18, 1974; for derivation of other figures, see text. Overall, this model might still be expected to give rough predictions as to fares in the absence of CAB regulation. An unweighted average of the three intrastate markups would indicate that the model has underpredicted intrastate fares by no more than 6 percent (ignoring off-peak fares in Texas for the time being). If data to calculate a weighted average were available, it would most certainly indicate a lower average markup yet, given that the Los Angeles-San Francisco route is far larger than any of the others. As regards interstate routes, it is interesting to note that the range of "markups" was not so broad by 1974 as it was in 1968; in 1974, it was 30 to 56 percent, rather than 20 to 90 percent. Furthermore, in 1974 the lower markups were on the longer hauls-just the opposite of what was true in 1968. Overall, the situation had perhaps improved somewhat on a number of longhaul routes, and the improvement is largely attributable to the results of the DPFI, which included an effort to adjust the fare taper (i.e., decline in per-mile fare with distance) so it matched the taper of costs.72 But the evidence still indicates that fares were higher as of 1974 than they would have been without CAB regulation. An objection which can be made to all the comparisons made so far is that they are based on unrestricted, regular fares. In many cases, interstate travelers pay fares considerably below regular, unrestricted fares, because of discounts of various sorts. Thus, several studies have used realized revenues per passenger on a route as a measure of CAB fares, rather than actual fares, in comparison with intrastate fares.73 However, it is a mistake to compare revenue yields for CAB-regulated fares with regular fares for intrastate flights. The reason is simple: discount fares generally impose travel restrictions: the trip must be made at inconvenient hours, with round-trip restrictions, or with some advance reservation restriction. Thus, a discount fare ticket is a different product from a regular fare ticket, as any businessman will testify. In evaluating the impact of regulation, it is obviously important to standardize for product quality, to the extent possible, and therefore, if regular fares are used for intrastate routes, they should be used for interstate routes as well. In any event, discount fares are available in intrastate routes, as well as interstate ones, and it is worth comparing the discount fares available on the two types of routes (it would be a mistake to compare revenue yields on the two route types, because product quality mixes differ). This comparison gives further information on the relative fare levels in the two markets. Table 4 lists the lowest available discount fare on each route. The only criterion for inclusion is that the fare must not discriminate against any person on the basis of age or occupation, and it must be for a regularly scheduled flight with advance reservations accepted. One would expect off-peak discount fares to be lower than the unregulated fares hypothesized here because the cost model assumes utilization rates consistent mainly with daytime-only operation. The marginal cost of off-peak operation should be considerably lower. The results in Table 4 indicate that this is true: in the three intrastate markets, the average discount fare is only 70 percent of the estimated peak or regular fare (again, unweighted averages are used because of lack of intrastate passenger-mile data). On the other hand, in the interstate. markets, the unweighted average discount fare is 20 percent higher than the estimated unregulated fare. This implies that, controlling for length of haul, the average discount or off-peak fare in interstate markets was over 70 percent greater than an equivalent discount fare on intrastate routes (1.2 divided by .7 1.714). = A recent study, done by the General Accounting Office to evaluate, extend, and update through 1974 the earlier study by the present writer (Keeler, 1972), confirms the results reported here." For the years 1969-74, it finds existing fares which exceed efficient ones by similar margins, and its extends the analysis to all trunk airline routes in the United States. Overall, it finds that CAB regulatory policies over the 1969-74 period cost travellers between $1.4 billion and $1.8 billion annually. And it is worth noting that all GAO fare comparisons are based on revenue yields, rather than published fares. Overall, then, it appears that CAB regulation, as of 1969-74, continued to extract a toll in higher coach air fares than would have existed in its absence. These studies include those of Douglas and Miller and Pustay, among others. 7 Comptroller General of the United States. Report to Congress: Lower Airline Costs Per Passenger Are Possible in the United States and Could Result in Lower Fares (Washington, U.S. General Accounting Office, 1977). |