Category AVIATION &ТНЕ ROLE OF GOVERNMENT

ИА recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you’ve lost your trousers—you’re in the airline business, w

Sir Adam Thomson

|l| s the airline industry approached the end of

t I the millennium, during the first half of the 1990s, there was no consensus that deregulation was an overall success. Economic deregulation was clearly a boon for mass transit; air fares had plummeted as predicted. But the industry was in disarray. Between 1990 and 1993, airlines in the United States had lost an amount of money equal to all the money that had ever been made in aviation in this country since the first commercial flight. If this was what deregulation had wrought, then deregulation was obviously a tragic mistake.

Deregulation had clearly exposed the sen­sitive nature of the U. S. airline industry. This sensitivity results primarily from fluctuating eco­nomic conditions, often driven by geopolitical factors that affect fuel prices and travel demand. While deregulation gave air travel to the masses, it did so at the expense of the airlines’ flexibility
and any financial cushion in the industry. Com­petition had shaved profit margins so razor thin that almost any economic hiccup translated into severe problems for air transportation. The industry has high fixed costs (the cost of labor, aircraft, and facilities) that cannot be reduced quickly during these adverse economic times. Since fuel and labor costs account for over 50 percent of all airlines’ expenses, spikes in the cost of fuel are particularly debilitating to the airlines.

The last decade of the 20th century was quite representative of the plight of the airlines: boom or bust. Jet fuel prices doubled in just four months in 1990 due to the invasion of Kuwait by Iraq. Eastern Airlines had been liquidated, fol­lowed by Pan American. Thus deregulation had taken out the venerable airline of Eddie Ricken – backer and as well as the “Chosen Instrument” of America. The remaining legacy airlines took on crushing debt trying to stay in business. The economic downturn produced huge losses for the airlines until 1995. The state of the airline indus­try was so fragile that a presidential commission was established to look into ways to ensure the survival of the industry. There was talk of nation­alizing the airlines.

9 Southwest Airlines

Only Southwest Airlines seemed to understand what was going on. While the major airlines were trying without much success to stop the bleeding, Southwest was raking in record profits; it was also expanding. USAir had acquired PSA in California, and then began to cut back service on the north-south corridor. Southwest came in to fill the void, but at offbeat airports like Oakland and Burbank, and at seemingly ever decreasing fares. Then Southwest entered San Jose to chal­lenge American Airlines. When told that South­west was coming in, American did not even wait for the discount carrier to arrive; it withdrew, anticipating the losses to come in a one-on-one contest with Southwest.

«If the Wright brothers were alive today Wilbur would have to fire Orville to reduce costs. 99

Herb Kelleher, Southwest Airlines, USA Today, 8 June 1994

Southwest was also headed east, for the first time in its history. Now Southwest would be in Baltimore (BWI), next to the seat of power in the District of Columbia. Southwest then was the eighth largest airline in the United States (United was first, followed by American, Delta, Northwest, Continental, and USAir), but it was different in at least one highly signifi­cant way: it had point-to-point routes (the 100 city-pairs most frequently traveled), and did not waste time getting in and out of large hub terminals.

The overall result of these changes in the legacy carriers’ structure is to make them look more like the low-cost carriers with which they have com­peted under deregulation. Not only are the legacy carriers structured more like the LCCs, they are beginning to adopt their operating practices as well. The lower fare structure of the new legacy airlines removes a major advantage previously held by the low-cost carriers. At the same time, the low-cost carriers are beginning to look more like the legacy carriers, causing a convergence between the two groups as they pursue the airline traveler dollar under a maturing deregulated air transportation sys­tem. The third group that makes up what comprises the majority of the domestic air transport system, the regional carriers, have also gone through a transformation as these changes roll downhill.

While the DOT classifies airlines as “majors” (20), “nationals” (33), or “regionals” (31) based strictly on revenues, this classification is not help­ful in differentiating between the actual functions of the various groups. For instance, American Eagle is classified as a “major” airline due to its revenue, but its operations conform to what a regional or feeder airline does. A more practi­cal classifying of airlines would separate them into legacy (or network or incumbent) airlines, low-cost carriers (LCCs), and regional airlines. By now, we know that the legacy airlines are the surviving car­riers that operated during the period of CAB regu­lation; the LCCs are the “no frills” airlines that are either new entrant airlines (since 1978) or airlines that operated wholly intrastate during the CAB period; and regional airlines are those airlines that now operate as feeder airlines, mainly to the legacy carriers. Legacy carriers and LCCs are sometimes referred to as “mainline” carriers. A fourth group of carriers, not discussed here, are “commuters” (61), which operate aircraft of 60 or fewer seats or have a maximum payload of 18,000 pounds or less.

XI The New Legacy Airlines

As a result of the bankruptcies and mergers of the legacy carriers beginning in 2002, this group of airlines has emerged as viable contenders with the LCCs. The new legacy airlines are United, Delta, US Airways (before the pending merger with American), and American Airlines. Dur­ing the first decade of the 21st century, these airlines (representing also the absorbed Conti­nental, Northwest, TWA, and America West) contracted their networks, route miles, number of employees, and number of aircraft, while focus­ing on down-sizing, cost-cutting, and improving productivity.

They began to emphasize Internet ticket pur­chasing and distribution and web check-in. These newly oriented carriers began to mimic other LCC practices by eliminating or reducing ser­vices and amenities that had come to be standard as the legacy brand, such as meals, soft drinks, snacks, and pillows.

By 2008, these airlines began to levy fees, in addition to the base airline fare, for services and amenities that had always been complimentary to their passengers. These add-on fees include, depending on the airline, ticket change fee, ticket cancellation fee, booking fee for phone or in per­son, seat selection fee, unaccompanied minor fee, pet in cabin fee, fees for checked bags, oversized bags, and overweight bags, early boarding fee, seat selection upgrade fee, wireless Internet fee, blanket and pillow sets fee, inflight entertainment fee, and inflight food and beverage charges. See Figure 35-23 for a depiction of select fees and the locations where offered for purchase. See

Tables 35-3 and 35-4 for a listing of airlines and airlines’ imposed fees for optional services.

The legacy carriers have, however, main­tained business and first class services, which render much higher yields than standard. The legacy carriers also have the advantage of flying more profitable international routes as a result of global deregulation and Open Skies agreements.

The Fourth Amendment to the United States Constitution also had its genesis in the Brit­ish occupation of the American colonies. The

Amendment provides, in relevant part, that the people have a right “to be secure in their persons, houses, papers, and effects, against unreason­able searches and seizures. . and that such right “shall not be violated and no Warrants shall issue, but upon probable cause. .

Since the adoption of the Bill of Rights in 1791, a large body of law has grown up around the interpretation in various fact situations of what “unreasonable” means, and what “probable cause” means, including opinions of the United States Supreme Court and lower federal and state courts. By prior law, property taken by the police to be used in evidence is not admissible in a criminal proceeding against the accused if the seized evidence has been taken in contravention of the Fourth Amendment or the cases interpret­ing it. A number of exceptions to the require­ment of having a warrant to search have been articulated by the courts (for example, no warrant is necessary to search a person who commits a crime in the presence of an officer of the law, or a person who is under arrest). Similar types of exceptions have been articulated to the question of the sufficiency of the facts necessary to secure a warrant, where a warrant is required before a search of premises can be lawfully made. If the facts supporting the warrant are not legally suf­ficient, then the warrant is unlawful and anything seized is inadmissible in a criminal proceeding.

The question arises, then, whether drones may be used in law enforcement to fly over a person’s property to view what is on the prop­erty, for instance, as a basis to secure a warrant to enter the property in order to seize evidence to be used in a criminal proceeding. There have been two cases that bear on this question.

In Summers of California v. Ciralo, 487 U. S. 207 (1986), the Supreme Court had before it a case where the police had received an anony­mous tip that the accused was growing marijuana in his back yard. The back yard was enclosed by a high fence that precluded viewing what was in the back yard from ground level. A police offi­cer in an airplane flew over the property from a

1,0 foot altitude while in navigable airspace and was able to clearly identify the marijuana from the air. A search warrant was obtained and executed the next day, seizing the marijuana plants on the private property.

Prior law had established that a police offi­cer may look and see whatever is in plain view, and he may use this as a basis to either seize unlawful contraband or as a basis for a lawful search warrant. The court held that since the marijuana was in plain sight, using the naked eye, from a place in the navigable airspace (the NAS, which is in the public domain), the accused had no reasonable right of privacy. The view by the naked eye of the backyard was reasonable (as the same would be from a high truck or double decker bus from the street). Other specific legal analyses of the case are not permissible here, but suffice it to say that the court held that the over flight of the accused’s back yard and the viewing of it from 1,000 feet in the NAS, was a legitimate basis for the search warrant.

In the second case, Florida v. Riley, 488 U. S. 445 (1989), a similar situation was before the Supreme Court. The accused had a green­house on his private property, the contents of which could not be viewed from any ground level public place. Relying on an anonymous tip that marijuana was being grown on the prop­erty, a county sheriff using a helicopter circled twice over the subject’s property at 400 feet. Through openings in the roof of the greenhouse, the officer could see with the naked eye growing plants that he identified as marijuana. A search warrant was obtained and the premises were searched, and the marijuana plants were seized as evidence.

The court held, along the lines of Ciralo above, that helicopter flights at 400 feet above people’s property are routine, and that what is viewable from that position in the NAS is not protected under the Fourth Amendment, in spite of FAA regulations limiting low flight for fixed – wing aircraft in the navigable airspace. The FAA limitation is based on safety considerations, not

privacy expectations, and does not necessarily apply to helicopters.

Both of these cases rely on the police being where they were legally allowed to be, on the “plain view” doctrine that allows police to see what is there to be seen using the naked eye, whether through a window or otherwise, and that they were using normal and routinely used aerial vehicles from which the sightings were made. The use of drones, however, is not normal or routine in many venues, and drones frequently use specialized imaging and sophisticated tech­nologies, like infrared and thermal applications, to view the ground. There will no doubt be many other distinctions that will be argued under Fourth Amendment principles as UAVs become more prevalent and are increasingly used by the government. At this point, it is still safe to say that the incorporation of UAV technology in the NAS, as projected by the recent statutory law and by the plans of the FAA, will result in many legal contests between citizens and the government.

Endnotes

1. P. L. 108-176.

2. Atlanta, Boston, Charlotte, Chicago, Cleveland, DC Metro, Denver, Detroit, Houston, Las Vegas Valley, Memphis, Minneapolis-St. Paul, New York/Philadelphia, Northern California, North Texas, Orlando, Phoenix, Seattle, South­ern California, South Florida, Tampa.

3. Multilateration is a means of navigation using the mea­surement of the difference in distance between two or more stations at known locations that broadcast signals, enabling the determination of a “fix.”

4. Portland, OR; Anchorage; Kansas City, MO; New Orleans; Pittsburgh; San Francisco; Cincinnati; Cleveland; and Andrews Air Force Base.

5. In 2009, 50 percent synthetic fuel blends were created from a process known as Fischer-Tropsch synthesis. In 2011, a biofuel known as Hydroprocessed Esters and Fatty Acids (HEFA) can be mixed up to 50 percent with standard kerosene.

6. As a result of the Freedom of Information suits filed against the DOT, the FAA released information in April 2012 disclosing the identities of holders of Certificates of Authorization (COAs) and Special Airworthiness Certificates in the Experimental Category (SAC-EC).

From the basic idea and structure set forth in the Treaty of Rome, the European Union has created itself and its actual structure and composition through a painful process of evolution. The origi­nal idea of union from such a diverse population and separate systems of government, with its violent history, was bound to be difficult. Yet, it is said that “nobody would have deliberately designed a government as complex and as redun­dant as the EU.4”

By 1986, the EC had grown to 12 member states.5

The European Union came into existence with the Treaty of Maastricht, signed in 1992. By 1995, the addition of Austria, Sweden, and Fin­land brought the number of countries in the EU to 15. In 2004, 10 more countries were admitted.6 By 2007, the total membership had risen to 27 with the addition of Bulgaria and Romania.

Along the way came the European Central Bank, which is the central bank for the countries that have adopted the Euro, the EU’s common cur­rency. It controls monetary policy for that currency and its subscribing countries. It has inherited a central and very important role as certain Member States of the EU have demonstrated financial insta­bility and weakness that threatens the very existence of the EU. This instability pits the more “indus­trious” Member States against those that might be termed “profligate” by some, the most glaring extremes of which are Germany (the world’s fourth largest national economy) and Greece.

Although the purposes of the community are increased economic stability, expansion of eco­nomic activities, securing an improved standard of living, and the creation of a genuine, barrier – free internal market, the nature of the culture and the people of the various countries in the Union are playing a divisive role as the EU attempts to accomplish its original goals. The result appears to be that some of the more industrious and effi­cient countries are being called upon to “bailout” other Member States that have accumulated sig­nificant debt and that do not have the financial strength to continue to operate their govern­ments, given their obligations. As of 2013, the EU is in crisis.

From a technical perspective, atmospheres have no “end”; they just get progressively thinner. During the 1950s, it was generally known in the scientific community that, beyond some altitude, the physics of flight changed drastically. The principles for flight in the atmosphere, or the sci­ence of aeronautics, were fairly well understood. The principles for flight without an atmosphere, or the science of astronautics, were less under­stood. Some believed that these two disciplines needed some definition as to their separation.

There is no “bright line” that determines where outer space begins. NASA accords astro­naut status to any individual who travels above 80 kilometers (50 miles). Yet atmospheric drag becomes evident on reentry at 75 miles above the earth’s surface.

The venerable Federation Aeronautique Internationale,8 which was founded in 1905, has ever since that time been accepted worldwide as the arbiter of aeronautical records. Through this private organization, the physicist Theodore von Karman in 1957 proposed a formula for the cal­culation of a boundary that would establish the beginning of space. One of the characteristics of aeronautical flight is the concept of lift, which is a function of speed through the atmosphere, among other things. The thinner the atmosphere, the faster the airplane must fly in order to gain the lift necessary to remain aloft. Karman pro­posed an altitude of approximately (the exact altitude depends on certain variables) 100 kilo­meters (62.1 miles) as the separation point based on his calculations that a space vehicle would have to travel faster than the speed necessary to obtain orbital velocity in order to maintain aero­nautical lift. In other words, aerodynamic lift becomes less than centrifugal force.

This became the internationally accepted boundary to space, and it is known as the “Kar­man line.” The Federation Aeronautique Inter­nationale is now the recognized keeper of all records that are established in astronautics.

The Commercial Space Act resolved the con­fusion. It also specifically approved the development and use of commercial reusable launch vehicles (RLVs) for launch and landing within the United States. In addition, the fledg­ling commercial space launch effort received a significant boost by the law directing NASA to use commercial launch services “when required in the course of its activities” and to “plan mis­sions to accommodate U. S. commercial provid­ers.” The statute prohibited the government from using any missile that was formerly used by the Department of Defense for national defense pur­poses as a space transportation vehicle, which effectively took the government out of the sat­ellite launch business. The statute did provide for seven exceptions to be used in the case of national defense overrides.

The Commercial Space Launch Amendments Act of 2004 (CSLAA)

This legislation was passed by Congress in December 2004. The law is “designed to promote the development of the emerging commercial human space flight industry” and creates the struc­ture for the regulation of private space activities. It also frees the fledgling industry from the patch­work of regulations that had been applied to it.

Its overriding premise is that the federal government should not “over regulate” this new industry for fear that, in so doing, it will stifle the innovation necessary to make the concept succeed. Those now in the forefront of experi­mentation are compared to the early pioneers in aeronautical flight at the beginning of the last century. These current pioneers need a regulatory environment that will allow them room to experi­ment and take chances as they develop the space concepts of the future.

The government has decided that regulation will not be the enemy of innovation. Remember­ing the early days of aviation presented earlier in this book, we saw that the first regulation of aviation by the federal government occurred in 1926, some 23 years after the Wright brothers’ first flight. As with the development of law after the first Sputnik orbited earth, it was clear that law must follow, not lead, technology. Just as government oversight of aviation safety gradu­ally developed as aviation itself developed, so too will government oversight of the commercial space industry evolve.

According to statements made by FAA rep­resentatives to Congress, the government is plac­ing its oversight emphasis on the protection of the public, not the participants. Given the experience of the industry regarding the failure rate of expend­able launch vehicles, which is about 10 percent of all attempts, it is recognized that space launches are a relatively dangerous activity. FAA efforts are directed, therefore, not to the over-protection of those who voluntarily place themselves in harm’s way as a part of the industry itself, but to the bystanders of the process, the public. In this regard the oversight process employed by the FAA has been successful. There have been no deaths or seri­ous injuries, nor any significant property losses, as a result of FAA-monitored commercial launch activity.

It may be expected, however, that once com­mercial launch activity is removed from federal launch sites, with their isolated locations and ranges, and with their strict safety regulations and controls, there may be greater likelihood of harm to the general public. The regulatory regi­men of CSLAA provides for launch operators to maintain an under-layer of liability insurance, but also requires the federal government to indem­nify or reimburse operators for losses to third parties in excess of that insurance up to the sum of $1.5 billion. The removal of this financial risk is important to private investment.

Ш U. S. Airlines (Part 121) 1982-Present

he NTSB wishes to make clear to all users of si the following list of accidents that the infor­mation it contains cannot, by itself, be used to compare the safety either of operators or of air­craft types. Airlines that have operated the great­est numbers of flights and flight hours could be expected to have suffered the greatest number of
fatal-to-passenger accidents (assuming that such accidents are random events, and not the result of some systematic deficiency). Similarly, the most used aircraft types would tend to be involved in such accidents more than lesser used types. The NTSB also cautions the user to bear in mind when attempting to compare today’s airline sys­tem to prior years that airline activity (and hence exposure to risk) has risen by almost 100% from the first year depicted to the last.

[1] In 1900, there were 8,000 automobiles registered in the United States. By 1920, there were 8 million automobiles registered. Wall Street Journal 5/17/03.

Endnote

Endnote

[4] http://www. nasm. si. edu/collections/artifact. cfm7id =A19180001000

[5] September 21, 1908—A record for distance and duration that brought a $1,000 prize from the Aero Club de France.

2. October 7, 1908—The first flight with a female passenger, Mrs. Hart O. Berg.

3. October 10, 1908—A record for distance and duration with a passenger.

4. November 18, 1908—An altitude record of 90 meters, earning a prize of 1,000 French francs from the Aero Club de Saitte.

Endnotes

[7] Shulman, Unlocking the Sky: Glenn Hammond Curtiss and the Race to Invent the Airplane, Harper and Collins, 1903.

2. Dayton History Books Online http://www. daytonhistory books. com/the_wright_brothers_18html.

3. Dayton History Books, ibid.

[8] An account of Pratt & Whitney Aircraft Company, 1925-1950, Frederick B. Rentschler, 1950, Pratt & Whitney Archives, East Hartford, CT.

Endnote

[10] The Post Office, which would continue to award contracts, designate routes, and estab­lish schedules;

Endnotes

[12] Barnum, John, What Prompted Airline Deregulation 20 Years Ago, http://library. findlaw. com/1988/ Sep/l/129304.html.

2. Caves, Richard E., Air transport and its regulators: an industry study, Harvard University Press, 1962.

3. Martha Derthick & Paul J. Quirk, The Politics of Deregula­tion 241 (1985).

[13] Immediate automatic market entry in certain cases.

2. Shifted the burden of proof in route author­ity cases from the requirement to show that public necessity and convenience (PNC) was required (in order to secure the route) to one requiring opponents to show that the new award/entry would be inconsistent with PNC.

3. Allowed carriers to obtain authority to fly unused routes of other carriers.

4. Established a range of fares within which carriers could immediately select fares on their own without CAB approval.

5. Established notice procedures to facilitate abandonment of unprofitable routes.

6. Provided a 10-year Essential Air Service Program to ensure air service to small communities.

7. Provided employee protective measures for workers dislocated by changes in the air­lines’ procedures.

Endnotes

[15] 459 U. S. 1145, 103 S. Ct. 784, 74 L. Ed. 992 (1983).

2. 14 C. F.R. 255; Regulation ER-1385, 49 Fed. Reg. 32540 (Aug. 14, 1984), aff’d United Airlines v. CAB, 766 F. 2d 1107 (7th Cir. 1985).

3. See Bankruptcy Code, 11 U. S.C § 1113, et. seq. Under this amendment to the Bankruptcy Code, the debtor in bankruptcy may petition the Bankruptcy Court to void or modify union contracts and impose lower pay scales or more reasonable work rules. The Court must find (after presentation of evidence) that wage and benefit cuts or changes to work rules are necessary for the debtor (airline) to successfully emerge from bankruptcy and that these changes are equitable and not arbitrary. This was not the case when Lorenzo unilaterally canceled the Continental labor agreements.

[16] Gandt, Robert, Skygods, p. 289.

Endnote

[18] The airport gives up the opportunity to make any profit in its operations since any sur­pluses are credited to the airlines.

2. The airport gives up the right to make auton­omous decisions over capital expenditure programs because of provisions in the agree­ments, called “majority-in-interest” (Mil) clauses.

Endnotes

1. Public Law 84-159.

2. 42 U. S.C. section 7401, et seq.

3. California, Massachusetts, and Texas.

4. Aircraft must be built to meet noise certification standards established by ICAO, found in Annex 16, Environmental Protection, V. 1. The first generation of jet aircraft (707, DC-8) preceded the Annex 16 standards. These are Stage

[20] aircraft. Chapter 2 of the Annex applied to aircraft built before 1977, and these are referred to as Stage 2 aircraft. Chapter 3 of the Annex covered the latest production air­craft, and are referred to by the FAA as Stage 3.

[21] It must be developed and implemented at the same time that the present radar-based sys­tem is running full tilt.

[22] It proposes technology that has yet to be perfected.

[23] It requires significant financial invest­ment in new ground-based equipment by government and new onboard equipment by flying users of the new system, estimated to be in excess of $40 billion.

[24] Airlines are reluctant to invest in the required onboard equipage until the FAA can demonstrate with some confidence when the government-funded technologies will be available for use in the new system.

[25] It requires training in the use of new equip­ment and in procedures by government, mili­tary, and civilian users of the new system.

Endnotes

[27] A large-caliber muzzle-loading gun able to fire heavy projectiles.

2. Refer to Chapter 8 for a review of the impact of Scientific American on the early aviation community.

3. Refer to Chapters 6 and 7 for a review of the Smithson­ian’s impact on the early work in aeronautics by Samuel Langley and the Wright brothers, and to Appendices 1 and 2 for comments by Dr. Alexander Graham Bell at the Smithsonian in 1913 about their experiments.

4. On July 17, 1969, the day after the launch of Apollo 11 for the moon landing, the Times issued a “correction” to its 1920 mocking editorial of Goddard’s 1919 treatise. It concluded: “The Times regrets the error.”

5. Refer to Chapter 13 for a discussion of the Guggenheim family and their contributions to early aviation and research in the United States.

6. Roswell would become famous as the site of the alleged alien space ship crash in 1947.

The Airline Deregulation Act initiated two primary changes in the status quo ante in the airline indus­try that were to have profound effects in labor relations. First, the practical effects of competition from new entrant, nonunion carriers were largely
beyond the negotiating parameters practiced by the incumbent carriers and their unions; that is, concessions in wages and rules to match the start­ups would have been rejected out of hand by the unions as being too severe. This provided the start­ups with the advantage of being able to provide essentially the same service as the major airlines at greatly reduced rates and fares, and still make a profit. Second, the effects of economic pressures from outside the airline industry, such as recession, fuel prices, and interest rates, could no longer be assuaged or compensated for by the CAB. The air­lines and their unions, in other words, were going to have to leam to deal with each other in the real world where profit margins, or the lack thereof, were going to drive the relationship.

The overall economic climate that prevailed after the passage of ADA was first seen as a lim­ited decline that turned into a recession by 1980, followed by a deeper sustained recession into the early years of the 1980s. Interest rates soared to 20 percent and inflation went into double digits. The OPEC fuel embargo caused fuel prices to rise from $.40 in 1978 to $1.15 in 1980. The airlines’ bottom line was hit hard. There was no safety net to prevent bankruptcy, as Braniff faltered and then fell. Management practices, at Braniff for instance, which completely mis­apprehended the effects of deregulation, com­pounded the problem. Between 1979 and 1984, the airlines as an industry lost $4 billion. Other airlines followed Braniff into insolvency, includ­ing Air Florida, Air New England, and Laker.

Between 1979 and the end of 1984, 47 air­lines filed under the Bankruptcy Act.

The takeover tactics of Lorenzo, and the cre­ation of subsidiary airlines of incumbent carriers, like New York Air as a nonunion carrier owned by unionized Texas International, constituted wake-up calls to union leadership. Incursions by startups caused a general reassessment by both management of incumbent carriers and their unions. The apparent willingness, even eager­ness, of pilots to work for these new carriers without the benefits of union representation was proven by the large number of applicants for the relatively few available positions.

As we saw in Chapter 24, deregulation also created apparent inconsistencies in the applica­tion of the Railway Labor Act, with UPS being subject to the National Labor Relations Act and FedEx being governed by the Railway Labor Act, even though they now perform the same functions.

f you were a traveler in the year 2000, 22 years after the airlines were deregulated, you would have been unable to fly nonstop between Springfield, Illinois and Washington, D. C. No airline in the country offered this service. Instead, you would be required to go through either Chicago or St. Louis. Your airfare would be about the same, $470 in that year, whether you went through O’Hare using United Airlines or through St. Louis using American. But say that for personal reasons you wanted to drive to your first stop of Chicago or St. Louis, and then take the same flight from that airport on to Washington. Your airfare from either Chi­cago or St. Louis to Washington would then be about $1,200, between two to three times as much, even though the distance to Washington is shorter by 178 miles through Chicago and by 86 miles through St. Louis. The reason is summed up in three words: Lack of Competition.

United competes with American for the Springfield traffic to Washington. Springfield passengers had a choice of almost equal pro­portions, in distance, convenience, and service. And the price is about the same for our Spring­field traveler whether he goes through Chicago or St. Louis. At Chicago, however, United has little competition for the Chicago to Washington
traffic. United has what is known as a “fortress hub” in Chicago. The same situation exists in St. Louis with American. The fares are, therefore, much higher, even though the distance traveled is less.

■ A Look Back at the Arguments for Deregulation

It is clear that many of the arguments made in support of deregulation were theoretical only; there was no practical or empirical basis in the airline industry for them. Airline markets since deregulation have not performed as expected. What happened?

First, predictions made before deregulation did not foresee the evolution of the hub and spoke system, a system that was adopted by every incumbent carrier. Point-to-point service as a primary marketing or operations strategy was maintained by only one major carrier, Southwest Airlines. The hub and spoke system has created major barriers to entry for the startup airlines.

Second, expectations that a simplified fare structure would be adopted, based on the assumption that startups with low operating costs would prevent the development or prolifera­tion of complex fare structures, were not borne

out. The computer reservation systems of the incumbent airlines, coupled with the captured market produced by the hub and spoke system, allowed the proliferation of yield management principles first introduced by American Airlines in the 1970s. The application of these principles had a significant impact on rate structures. The widening of the gap between the price of unre­stricted full-fare tickets (purchased by the time- constrained or business passenger) and the price of the restricted low fares (purchased by the price-constrained, leisure class of passenger) has been due in large part to the workings of comput­erized yield management.

Third, it was predicted that there would be no “economies of scale” in a deregulated airline market. This expectation assumed that incumbent carriers would be unable to bring their size, their experience, their computer reservations systems, their borrowing power, their ownership of slots and gates, or the benefits of the unanticipated hub and spoke systems to create an advantage over smaller, startup airlines. The contrary, in fact, had been assumed, that the incumbent airlines would have difficulty in competing with the more effi­cient low-cost carriers that would emerge after deregulation. The lack of economies of scale argument had focused on the cost side of the equation, not on the revenue side. Experience has shown that there truly are few economies of scale on the cost side (e. g., costs of operation are not reduced because of economies of scale), but there are substantial economies of scale on the revenue side (e. g., the enhancement of revenues) due to the factors enumerated above. As a result, most of the startups that came into the market imme­diately after deregulation, not possessing these attributes, have vanished. With the exception of Southwest, most of the major airlines in opera­tion after deregulation were the very same large airlines that existed before deregulation. More recently, certain low-cost carriers like JetBlue and AirTran have shown staying power utilizing the business model pioneered by Southwest Airlines.

The fact that the incumbent airlines were able to survive, and to expand, in spite of the lower costs of the smaller and more efficient startups, leads to the conclusion that there are economies of scale. Further, competitive responses of the incumbents to the entry of the startups in competing markets suggest the exis­tence of anticompetitive practices by the incum­bent lines, again possible because of the size and presence of the incumbent carriers. This leads to the next argument made for deregulation.

Fourth, it was said that airline markets were “contestable,” that is, in a market where there are only relatively few participants to vie for and share the available market, low-cost car­riers with low fares would necessarily cause the competing carriers to lower their fares. In actual practice, the market contestability theory has not proven out in the airline industry. Free entry into the market has been depressed by slot and gate scarcity. There has been an inequality of management acumen and operating experi­ence. Costs associated with the beginning of operations are substantial, and they normally are not recovered in the short run. Predatory practices by the incumbent airlines are routine, resulting in fares being lowered on the incum­bent airlines to match those charged by startups. These practices include increasing capacity on the routes flown by the new entrant and by the inauguration of new routes to compete with the new entrant. Marketing strategies, such as fre­quent flyer programs that grant advantages to the large, incumbent airlines, have also proven to be effective.

Deregulation was supposed to foster com­petition. Competition is what gives to the con­sumer the best possible deal in price and quality. Until recently, competition has been primarily the result of new airlines entering the market, as well as established airlines entering new mar­kets. Freedom to compete since the industry was deregulated, however, has not been uniform, and competition has been stifled in many ways. We will now take a further look at how the promise of deregulation has been compromised.

Each airport is operated under a master plan, the primary purpose of which is to provide safe and efficient air carrier service and to enhance airport capacity. Capital improvements include construc­tion of new facilities or renovations of existing facilities. Sources of funding include:

• Airport Revenue Bonds

• The Airport Improvement Program (AIP)

• Airport user charges

• Passenger Facility Charges (PFCs)

• State and local funding programs

Airport Revenue Bonds

Bonds are the primary means of financing airport capital development projects. Bonds are debt instruments (like I. O.U. s) issued by the airport

owner to raise the money necessary for new construction or renovations. These bonds are tax-exempt and are known as General Airport Revenue Bonds (GARBs). Some GARBs have maturity dates of 30 years or more and since 1982 they have comprised more than 95 percent of all airport debt.

A secondary source of revenue is derived from bonds known as Special Facility Bonds. These bonds are secured directly by the owner of the facility, such as a fixed base operation or aircraft maintenance facility, and the owner of the facility is usually responsible for paying off the principal amount of the bond and all interest charges.