Category AVIATION &ТНЕ ROLE OF GOVERNMENT

Since early in their history airlines had been considered by government to be, to some degree, instruments of national policy. Airlines were used:

9 To carry the mail

9 To facilitate commerce between the cities and states

• To establish a fast and efficient passenger transportation system

• To function in the national defense system in times of emergency

9 To carry the flag internationally

To carry out these functions, the airlines had to be financially stable, they had to be depend­able in the long run and reliable at all times. Government regulation of the airlines facil­itated these ends well, and they were among the primary reasons that the federal government began controlling entry, rate, and route allocation in 1938 under the Civil Aeronautics Act. The nascent airline business was a fragile concept at the time and it was by no means certain that unlimited competition would not bring down the whole endeavor. Widespread public acceptance of air travel had not yet occurred. Deficiencies in equipment, weather forecasting, and air traf­fic control contributed to well-publicized airline crashes; flying was still an adventure. The air­lines needed to be stabilized, protected against absolute competition, and developed into an acceptable and safe form of transportation in order to accomplish these government goals.

Thus, for nearly 40 years, entry into the airline business had been controlled by the Civil Aeronautics Board. Under this system no major new entrants had ever been permitted, although the CAB did authorize a limited number local service providers for a subsidized service on less dense routes and to provide feeder lines for the trunk carriers. The number of trunk lines had decreased from 16 in 1938 to 10 in 1978. That year the 5 largest airlines accounted for two – thirds of all domestic revenue and the exclusive 10 trunk carriers accounted for 90% of all air traffic. There were 8 regional service carriers and 10 supplemental carriers.

Under the CAB system routes were sup­posed to be awarded among the existing carriers based on the perceived needs of the communities and cities requiring service, and on the equitable allocation of routes to the existing airlines desir­ing and capable of delivering such service. In fact, the performance of the CAB fails to indicate that it fulfilled even this task, as confirmed by Senate hearings in 1974 and 1975, as the CAB enforced a de facto moratorium on new route awards after 1969, effectively stagnating the system.1 Fares and rates were established mainly as a function of the airlines’ cost of doing busi­ness, which cost was set using an assumption of a 55% load factor for all airlines. This produced a system not particularly designed or administered to be cost efficient, but it was stable. Not one airline in 40 years had been allowed to go into bankruptcy.

Competition in the airline industry had been regulated, but competition had not been elimi­nated. The more efficient the airline, the better its operating ratio and the more money there was at the bottom-line. Northwest was the most efficient airline with a breakeven load factor of 43%. This compared with United, whose breakeven load factor was 59%. The average of all airlines’ load factors at the time was between 50% and 55%.

The effect of airline economic regulation was to create both a financial ceiling and floor for the companies, guaranteeing that neither prof­its nor losses were excessive. While the support of the CAB limiting airline loss was comfort­ing to management, the ceiling limiting innova­tion and profit was frustrating, particularly to the types of men who rose to run the airlines. The technological advance in aircraft and engine design kept airlines busy trying to stay ahead of one another in order to have the most appealing fleet available for the limited passenger market, most of which were business travelers.

Aesthetics and quality of service were high on the list of concerns, since these were two of the few discretionary operating decisions avail­able to management. Marketing schemes were also highly competitive, the effort being lim­ited to the best way to sell essentially the same product that every other airline sold. Each new innovation thought up by an airline, no matter how minor, was pushed as the reason to fly that airline. For instance, the introduction in 1965 of in-flight movies by TWA was highly advertised; it resulted in six to eight more passengers per flight. Delta had a piano in its upstairs bar on the domestic 747, accessible from below by a circu­lar staircase. Southwest dressed its stewardesses in hot pants. National Airlines fielded a sugges­tive advertising program, with TV clips featuring stewardesses inviting passengers to “fly me” to

Miami. Their 727s featured a painted likeness of a beautiful stewardess on the side of the plane with “Fly Me” painted just to the side. Airline management continually strove to bring some quality of uniqueness to their commodity-like operations.

Until the 1960s and early 1970s, leader­ship of the major airlines had remained mostly in the hands of the young men who took over in 1934 after the Black investigation of the so-called “spoils conference” scandal. There was a same­ness about those early airline leaders since they had all been tempered by the same conditions affecting airline growth and essentially all had been both pilots and CEOs. Newcomers like Rob­ert Crandall at American and Richard Ferris at United were natural competitors and often went head to head on issues like market share, com­puter reservation system development, and travel agent loyalty. While these new leaders brought a new entrepreneurial spirit to the airline business, they did so in different ways. Crandall preferred to compete within the established regulatory framework, while Ferris, who came from the hotel industry, was open-minded about deregula­tion. For the most part, however, airline manage­ment was firmly opposed to airline deregulation.

As the railroads spread out from the East, they connected with other lines, north and south, and created interchange points between them. For the first time, goods began to be moved from origins far distant from their destinations. Markets that at one time had been local now became regional and even national. Manufacturing, meatpacking, farming, and the cattle business were becoming interdependent, and America was beginning to depend on transportation—the railroads—as the lifeblood of its commerce.

The railroads wielded vast economic power. Like government, they possessed the power of eminent domain. They set passenger fares as they wished. Freight rates varied according to the whim of the railroads, and were often discrimina­tory and unevenly applied.

Farmers, in particular, were at the mercy of the railroads in marketing their produce. Grain ele­vators were necessary as storage facilities for farm­ers, and these often were owned by the railroads.

Various states, in response to petitions from its citizens, enacted laws designed to curb the excesses of the railroads. But the railroads ran from state to state, and generally considered them­selves immune from attempts at local regulation. These laws, therefore, were uniformly ineffective and were ignored or legally challenged by the rail­roads. It was not until shippers as a group began to assert influence on a national level that the Con­gress did eventually begin to address the problem.

In the United States, governmental authority to regulate lawful enterprises must be based on con­stitutional principles. In 1887, although these prin­ciples were not well defined, it was clear that the national government in Washington had express Constitutional authority to regulate commerce between the states. So it was that Congress that year debated the first regulation of transportation.

Historically, governmental regulation has been grounded on two primary concepts:

1. Economic necessity

2, Legal authority

The concept of economic necessity pre­sumes (1) that there are certain businesses that are necessary in the public interest (e. g., trans­portation companies, gas companies, electric companies, etc.); (2) that these types of compa­nies should be required to serve all of the public without discrimination; and (3) that these compa­nies should be stable and be able to make a rea­sonable, but not too large, profit. To assure that these conditions exist, the government has under­taken to regulate them. This regulation controls entry into the business (which controls competi­tion, expertise, and financial stability), the rates that are charged the public, and to some extent the manner in which the business is operated.

In the United States, most businesses are run under the principles of private enterprise. While businesses that are considered necessary in the public interest are mostly privately owned, they are considered to be “quasi-public,” that is, oper­ated in the public interest. From 1887, when the regulation of transportation began, the federal government considered interstate transportation to be a quasi-public undertaking, thus a legiti­mate object of regulation.

The second basis of regulation is legal. The legal basis of regulation is founded in the U. S. Constitution and the laws that are enacted by Congress. With regard to transportation, the com­merce clause of the Constitution is most often invoked to authorize regulation of companies conducting business among the states (interstate commerce). The commerce clause is based, in part, on the realization that the people of the vari­ous states must be guaranteed equal access to a necessary service. It is also recognized that, in matters between the states, the presumed impar­tiality of the federal government should make it, and not the states, the arbiter of the law.

Once enacted pursuant these constitutional principles, regulation is implemented through either the common law or statutory law.

• Common law is the law that has resulted from judicial decisions derived from litigated cases between individual parties. This law is con­tained in written opinions of judges and is referred to as “judge-made” law. The common law that existed in England before the American Revolution was applied in the American colo­nies, and after independence was won and the United States Constitution was adopted, Eng­lish common law continued to serve as legal precedent in the new United States.

• Statutory law is the law that Congress or the state legislatures have enacted by vote of elected representatives in those bodies. On the federal level, this law is codified in the United States Code, a sequentially numbered series of volumes that contain all current federal statutory law. The United States Code is kept updated by means of supplements published on a regular basis. Some statutes provide for the creation of federal agencies, like the Fed­eral Aviation Administration or the Interstate Commerce Commission, to administer the mandates set down in the statute. Such agen­cies are given rulemaking authority, which means they may conduct public hearings and make rules having the force of law to govern the manner in which the affected business or activity is conducted, like the Federal Avia­tion Regulations, for example.

In 1919, the largest flying boats constructed by Curtiss, the NC-1 through the NC-4 (see Figure 8-11) were launched. In May, three of these, the NC-1, NC-3, and the NC-4, set out to make the first-ever transatlantic flight from Long Island to Lisbon, Portugal. The NC-1 and the NC-3 were forced down prior to reaching the Azores, but the NC-4, after 23 days en route, finally arrived in Lisbon—the first aircraft to cross the Atlantic Ocean.

Although Curtiss did not produce more of the flying boats, the design advances he made were replicated or became the starting point for

all future improvements on aircraft hull design. Boeing became the leading flying boat exponent in the United States, along with Martin and Sikor­sky, and produced the beautiful Clipper Ships of Pan American Airways fame. See Chapter 15.

America’s First Black Aviator and the Curtiss Connection

As a notable and related fact from newly discov­ered evidence,9 it appears that the first licensed African-American pilot, Emory Malick,10 received flight instruction from Curtiss at North Island in San Diego. Malick grew up in central Pennsylvania, where he built and flew his own gliders over the Susquehanna River. At some point (the evidence is still sketchy) he began flying powered aircraft and wound up at the Curtiss School, receiving his pilot’s license on March 12, 1912 from the Federation Aeronau – tique Internationale, number 105. Very little is currently known about his later life in aviation. It is likely that research in the near future may alter the course of history concerning black aviators in the United States.

з Postlude to the Wrights and Curtiss

The innovations, designs, and experimentation of Glenn Curtiss and the Aerial Experiment Asso­ciation provide a study in contrast with those of the Wright brothers. The legacies of both groups continue to be studied and debated, but it is true that both were necessary to the development of aviation in the United States and in the world. It is ironic that the methods of the Wright broth­ers actually tended to inhibit flight when it was

they who had initiated successful, controlled, and powered flight, while the methods of Curtiss tended to expand the concept and application of flight even though he was not first to suceeed. In spite of the combination of brilliance and dedica­tion, on the one hand, and striving and enmity, on the other, that existed in the early world of aero­nautics, the resolution of the differences between the two camps and their allies would be forth­coming, as we shall see in Chapter 9. [6] [7]

4. The Wrights’ commercial venture, like many to come, could only be deemed a failure. Orville Wright sold his interest in the company on August 26, 1915 for $250,000, one-fourth of its initial capitalization.

5. Wright Co. v. Herring-Curtiss Co. et ah, 177 F. 257 (W. D.N. Y. 1910).

6. See remarks in Appendix 2 by Dr. A. G. Bell on February 13, 1913, to the Board of Regents of the Smithsonian Institution regarding Curtiss’ contributions to flight safety using floatplanes.

7. Wright Co. v. Herring-Curtiss Co. et al., 204 F 597 (W. D.N. Y. 1913).

8. Please see Appendix 3 for a discussion of the specific details of the Curtiss revisions to the Langley Aerodrome in 1914 and the flights made at Hammondsport that year. Note that this is a Smithsonian report from the year 1942 that had the approval of Orville Wright, and it is likely part of the reconciliation made between Orville Wright and the Smithsonian in order to allow the Wright machine to be taken to the Smithsonian for exhibition.

9. This reported information was first discovered by a white family member in 2004 in a family album. It was reported in Air & Space Magazine in the March 2011 issue.

10. 1881-1958.

Fred Rentschler had early on formed a working relationship with Chance Vought in negotiating with U. S. Navy personnel. They had cooperated in marrying the Wasp engine with the Vought-built original Corsair for use on early Navy carriers. William Boe­ing and Rentschler had combined to create the most effective aircraft of the time, the

Boeing 40 В with the Wasp engine for Boeing Air Transport. These three men represented the three sectors mentioned, namely engine manufacture, aircraft manufacture, and airmail carrier. Led by Rentschler and Boeing, these three formed United Aircraft & Transport Cor­poration. Soon they added Hamilton Propeller to the group.

The company was set up with Pratt & Whitney owning 50 percent of the stock and the rest being divided among Boeing Aircraft, Boeing Air Transport, the Vought Corporation, and Hamilton Propeller. United then added Standard Propeller, Sikorsky, and Stearman Aircraft Company.

United next embarked on acquiring air transport companies, including Pacific Air Transport, which operated from Seattle to San Francisco and Los Angeles, Varney Air Lines, operating from Salt Lake City to Seattle, and National Air Transport (through a proxy fight), which held the eastern leg of the transcontinental route from New York to Chicago, as well as the line from Chicago to Dallas/Ft. Worth. Upon the acquisition of NAT, United operated the entire transcontinental airmail route, and soon decided to break it out into a wholly owned carrier subsidiary called United Air Lines.

North American Aviation

North American Aviation (NAA) was the brainchild of Clement Keys, a vice president of the Curtiss Aeroplane and Motor Company during World War I. He gained control of that company during the early 1920s and began acquiring an assortment of additional companies, including National Air Transport, which was later to be absorbed by United. Next, he lined up and bought out several airmail routes operat­ing between the Northeast and Florida (which would ultimately form the basis for Eastern Air Lines), while continuing to fly the mails on the midwestern routes. Before the great Wall Street crash of 1929, he merged the Curtiss holdings with Wright Aeronautical Corporation, creating Curtiss-Wright, completing the triad acquisi­tion of companies capable of airplane building, engine manufacture, and air carriage. Gen­eral Motors would gain controlling interest in NAA for a time in the early 1930s. At this time, NAA’s holdings included Eastern Air Transport, Transcontinental Air Transport, and a substantial interest in Douglas Aircraft.

Ш Aviation Corporation

Aviation Corporation was the work of Averell Harriman and Robert Lehman, New York financiers. Robert Lehman was of the Wall Street banking house of Lehman Brothers. Harriman was to later serve in key government posts, including lend-lease administrator, ambassador to the Soviet Union, Secretary of Commerce, and was to be a confidant of presidents. Together they salvaged the Fairchild Aircraft Company in 1929 through a stock sale before the finan­cial crash in October of that year. The new company proceeded to acquire 5 airmail carri­ers, themselves holders of 11 airmail routes; they bought all sorts of aviation properties, including aircraft and engine plants, and even some air­ports. The air carriers were combined to form American Airways.

Harriman and Lehman did not remain in the aviation business very long, losing out in a proxy fight to E. L. Cord in the early 1930s. Harriman then began his government service, while Lehman returned to Wall Street. But Lehman would be heard from again, this time at TWA with Yellow Cab magnate John Hertz.

On September 2, 1940, the United States and Great Britain sealed an agreement that transferred 50 U. S. destroyer-type warships to England in return for land rights on several British possessions, including Newfoundland, the Baha­mas, Jamaica, and other Caribbean islands. This was the first move toward extending the defenses of the United States and at the same time laying the groundwork for a ferry system for the future transport of war materiel to Europe and Africa. On April 9, 1941 the Danish Ambassador (who had relocated to Washington after the Nazi take­over of Denmark in 1940) signed an agreement allowing the United States to build airfields and associated facilities, as well as placing personnel on the island of Greenland (Greenland had been a colony of Denmark since the early 18th century).

The Lend Lease Act

American public opinion was gradually changing from predominately isolationist to one of limited involvement, “as long as we don’t have to go to war.” On March 11, 1941 Congress passed the Lend Lease Act, which empowered the presi­dent “on behalf of any country whose defense the president deems vital to the defense of the United States, to sell, transfer title to, exchange, lease, lend, or otherwise dispose of, to any such government any defense article. . . not expressly prohibited.” This Act allowed the United States to legally provide war materiel to England, China, Russia, and to 35 other nations. Roosevelt had earlier announced that the United States, although not involved in the war, was to become the “arsenal of democracy.” The industrial capac­ity of the United States was about to be tapped, and a mighty force it would prove to be.

There are two types of certificates issued by the federal government to air carriers in the United States. Air Carrier Operating Certificates are issued by the FAA under Part 121 of the FARs to carriers operating aircraft for hire with 10 or more seats. The compliance requirements of Part 121 are numerous, but the two major areas addressed are the training of flight crews and aircraft maintenance programs. Air Carrier Fit­ness Certificates, also referred to as Certificates of Public Convenience and Necessity, are issued by DOT, not the FAA, and establish that the car­rier has shown that it has the financial capacity and management expertise to carry on a sched­uled airline operation. These are required only of carriers operating aircraft with 61 or more seats. While some Fitness Certificates authorize only cargo operations, the majority of such certificates apply to both passenger and cargo operations.

Charter Operations

As we saw in Chapter 18, the market for cheaper air travel had been recognized since shortly after World War II, when charter operators began to fly using war surplus DC-3s. Charter operators were definitely second class citizens in the airline world and in the view of the CAB. They not only got no respect from the scheduled airline world but they were hindered at every turn by regula­tions designed to insulate from competition the trunk air carriers who had been accepted into the system by the CAB in 1938.

Charterers could not sell individual tickets, nor could they fly published schedules. They were essentially relegated to selling the entire aircraft capacity to large, established groups by advance sales. The CAB monitored these opera­tions carefully; ever watchful lest charter opera­tions encroach on the CAB-controlled scheduled airlines’ established routes. But the charter opera­tors showed that a profit could be made with low fares, sometimes as much as 50 percent lower than CAB-mandated fares, so long as the aircraft flew filled with passengers.

The CAB then allowed the trunk lines for the first time to include a cheaper class of airfare in the same aircraft with standard fares; these were the first “coach fares” and this was the cre­ation of separate seating and amenities for sec­ond class passengers on the same flight. Still, the CAB retained its stranglehold on the economics of commercial aviation.

Intrastate Air Carrier Operations and Scholarly Publications

One of the first economic studies to question the advisability of the airline system run by the CAB was published in 1962.2 The conclusion of this study was that there was nothing inher­ently monopolistic about the airline business and there was no need for any government limita­tion or control over entry into it or exit from it. Shortly thereafter, in 1965, a Yale law student by the name of Michael Levine wrote a law review article about the largely unregulated intra­state airline business in California. In comparing the intrastate airline fares with those mandated by the CAB, he concluded that CAB policies “fostered unnecessarily high fares, encouraged uneconomic practices, and limited the variety of service available to the public.” He found that intrastate fares were about half as high as interstate airline fares, yet the intrastate carriers were making a profit and they were flying more passengers.

In 1970, Alfred Kahn, a professor of eco­nomics at Cornell University, produced a two – volume work, The Economics of Regulation, which basically postulated that the heavy hand of government regulation was inimical to the public interest, and that competition would natu­rally produce the best product for the best price for the public.

By 1971, a new intrastate carrier, Southwest Airlines, answering not to the CAB but only to the Texas Public Service Commission, began ser­vice between the three largest cities in the very large state of Texas, setting its fares far below those mandated by the CAB. It, too, proved suc­cessful charging lower fares and flying with full airplanes.

The conclusion was becoming inescapable that government regulation of air carriers was largely preventing low-fare air travel and restrict­ing travel.