Category AVIATION &ТНЕ ROLE OF GOVERNMENT

n Chapter 3 we saw that government regula – 1 tion of public utilities in the United States is grounded primarily on the concept of eco­nomic necessity, supported by legal authority. Since 1887, the railroads had been considered to be monopolistic, quasi-public corporations, although privately owned and operated. This meant that the public interest (the right of the public to equal access to travel opportunity and to non-discriminatory passenger fares and freight rates) and the governmental interest (in having a reliable interstate transportation system) had to be protected by federal law. The administration of this function was performed by the Interstate Commerce Commission, the agency whose rules and regulations largely controlled how the rail­roads operated, who could operate them, where they could operate, and how much they could charge. It also mandated safety regulations.

We also saw how the early airmail routes operated by the Post Office generally followed the railroad lines laid down across the country, with air fields in or near the settlements and towns created during the westward expansion of the emerging nation. The early airlines were largely controlled by the Post Office through air­mail subsidies, and the airmail routes awarded by the Post Office gradually evolved into passenger
and freight routes operated by established, inde­pendent airline companies. The government viewed the airlines in the same light as the rail­roads and, in turn, regulated them in a similar manner.

We know that the first federal regulation of aviation occurred with the passage of the Air Commerce Act of 1926, with a modest mandate from Congress to promote air commerce. Begin­ning with the licensing of airmen and aircraft and the creation of navigational aids and other mostly safety-oriented rules, government regula­tion expanded in lockstep with the expansion of the commercial aviation industry itself. The government assumed control of airline labor relations and air traffic control and, with the pas­sage of the Civil Aeronautics Act of 1938, the government began deciding who could enter the airline business, as well as where they could fly and how much they could charge. Approval of mergers and rate and route regulation were per­formed mainly by the Civil Aeronautics Board, with safety regulation ultimately residing with the Federal Aviation Administration.

Historically, the government’s interest in regulating transportation has also extended to insuring that the various modes of trans­port (water, overland, railroad, air) remain
individually viable by limiting or forbidding interlocking relationships between them, thus insuring competition. When the United States took over the former French construction of the Panama Canal under the Panama Canal Act of 1912, for example, the railroads were precluded from having any ownership interest in compet­ing water carrier companies that would operate through the canal. The fear was that the railroads would compromise the promise of the Panama Canal and doom its success by cutthroat compe­tition amongst the coastwise trade carriers, thus preserving their transcontinental railroad monop­olies. Likewise, when the airlines came along the railroads were forbidden from owning any inter­est in those fledging airline companies so as to insure that airline passenger and freight markets were unfettered and free to develop on their own and in their own way.

Before launching into the historical develop­ments that precipitated the dismantling of federal economic regulation under the Airline Deregula­tion Act, let us take a look at the economic nature of transportation in general.

1 The Economic Nature of Transportation

Unlike most consumer services, transportation provides an intermediate product—only a means to an end. In air transportation specifically, hardly anyone flies in the airline system just to go for an airplane ride. The reason people fly is to accomplish another goal, whether it is for a business purpose or a personal one.

This characteristic of the transportation industry likens it to a commodity, for example, wheat or petroleum. Wheat is not purchased because anyone wants a bushel of wheat, but rather to create something else, perhaps a cake or a loaf of bread. Oil has no use except to facili­tate a secondary purpose, like the lubrication of machines or as a means of propulsion.

There are no unique characteristics within a class of commodity; one bushel of wheat is like any other. One quart of oil is indistinguishable, and worth no more, than any other quart of oil. Economic theory teaches that the price of a com­modity will seek the lowest possible level based on supply and demand. If the supply of a com­modity is adequate to the demand, unit profit on any given quantity of a commodity will be very small and the price will be low.

If an airline seat is like a bushel of wheat, its price will be valued like any other airline seat absent some distinguishing characteristic, assum­ing an adequate supply of airline seats. Govern­ment economic regulation of the airline industry effectively thwarted this economic truth by con­trolling the supply and the price of airline seats. The cost of air transportation was, therefore, very high causing the system to be mainly used for business travel. By the 1960s, economists and others began to ask “Why?”

he steam engine, first fitted to a wagon in 1804, evolved into a primitive railroad loco­motive to pull the first railroad carriages in 1830. (See Figure 3-1.) The first chartered railroad, the Baltimore & Ohio Railroad, operated from Baltimore to Ellicott’s Mills, a distance of just 13 miles. Short-haul railroads like this began springing up all over the East Coast of the United States about this time. The noisy, dirty, and gener­ally terrifying apparition of an early steam loco­motive, spitting steam and hot coal cinders in its wake and upon the few discomfited passen­gers who may have been loaded in the open cars behind it, rudely intruded on the sedate horse and buggy countryside. Yet few questioned its future. It was, after all, the most significant transportation advance in the history of the world, even at its maximum speed of 16 miles per hour, and even though it had the worrisome tendency of setting fire to the countryside through which it passed.

Like most inventions, the locomotive was gradually improved through the contributions of many people until it worked smoothly and readily achieved its designed purpose. This was advanced technology. The various small lines began meeting up, forming interchange points and exchanging the relatively small amount of freight traffic available. Passenger service was tentative, and the destinations sparse. These early
rail lines were constructed to meet local needs, and there was no overall plan for lines to serve the nation or any particular geographic region.

Railroads were considered, legally and prac­tically, to be monopolistic enterprises. The large capital investment required to begin operations virtually guaranteed little competition. Land had to be purchased, then the land had to be made level—requiring fills or bridges to connect over low places, valleys, and rivers, and causing cuts or tunnels to be dug to eliminate hills and mountains. Once that was done, the roadbed, consisting of ballast, ties, and finally the rails themselves, had to be laid. This process was required in one form or another for every linear foot of road. Even as the road was laid, and large sums of money spent, the question was unanswered: How should and would the government consider this new industry?

This was a time of forging new relation­ships all around, relationships that, once defined, would extend into the as-yet-unimagined air age of the future.

• What was the responsibility of a railroad to passengers and shippers?

• Was there any responsibility to communities served?

• Where was the higher allegiance—to stock­holders or to the public?

Prior to the construction of the great trans­continental road that linked the West Coast of the United States with the Midwest, government had generally refrained from intervening in the affairs of the infant railroad industry. There was no federal governmental interest in railroad regu­lation since, in the early 19th century, federal issues like the “public interest” or “interstate commerce” had yet to be framed. Local govern­ments treated the small railroads as any other business. When it would later come, federal gov­ernment intervention would be characterized as either “positive” or “negative.” Positive interven­tion could be described as government action that is designed to support or benefit the railroad, such as favorable tax treatment, subsidies, land grants, and the like. Negative intervention takes the form of restrictive legislation, the curbing of pre-existing rights enjoyed by the railroads, and the forcing of certain behavior deemed to be in the public interest, such as prohibiting arbitrary or unequal treatment of shippers.

The sheer magnitude of the proposed trans­continental railroad construction dictated that the government’s participation would be required.

No corporation, group of corporations, bank, or group of banks was big enough to make it hap­pen. Only the government was big enough, and only the government had the money and other resources necessary (including the land), and the sovereignty necessary to assuage the conflicts, partisanship, separate interests, and legal ques­tions guaranteed to arise in the vast undertaking.

The western land over which most of the transcontinental railroad would run was com­posed of acquisitions by the government beginning in 1803. Known as the “Louisiana Pur­chase” (see Figure 3-2), this vast tract consisted of over 800,000 square miles that extended from the Gulf of Mexico to the Canadian border and from the Mississippi River to the Rocky Moun­tains. The land area of the United States was doubled. Fifteen new states, in whole or in part, would come from this tract.

In three years between 1845 and 1848, the land area of the United States would be enlarged again by a third, as the State of Texas was annexed in 1845, the Oregon Territory was negotiated with England in 1846, and the great southwestern territory was ceded by Mexico to

the United States in 1848. The United States now extended all the way across the continent, from sea to shining sea.

The passage by the Congress in 1862 of the Pacific Railroad Act became the first of govern­ment’s involvements in the world of modern transportation. The law provided for the creation of two private corporations, the Union Pacific (building from the East) and the Central Pacific (building from the West), whose charters were to build a railroad and a telegraph line’ between the Missouri River and Sacramento, California. The government would issue its bonds, bearing interest at the rate of 6 percent, to the railroads

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for sale to the public. The improvements and the land on which they were placed would stand as security for the government’s obligation to pay the interest on the bonds and to pay the face amount of the bonds when due. The government was not subsidizing the construction; rather, it was loaning its credit in order to raise the con­struction funds.

The government would, however, grant to the railroads the right of way (200 feet on each side) for the roadbed, and it would also deed land adjacent to the right of way in square miles amounting to 6,400 acres per mile. This was land expected to be used to entice settlers from the East who would create and work farms and ranches. The land would be used to build towns and to provide for industry, all of which in turn would provide passenger and freight traffic for the railroads and insure westward expansion and

population of the Great Plains and points west. This was truly a win-win situation, even for the government, since the value of the remainder of the land that the government owned would be greatly enhanced by the efforts of the railroad companies and those who would follow them. The interests of the government would also be served by facilitating a viable railroad system to serve the nation and to advance the national economy and the public welfare.

The line began in the East on the Missouri River, at Omaha, Nebraska, and made its way west to Promontory Summit, Utah, where in 1869, the line of road that began in Sacramento, California, was joined. Along the way it laid down settlements which were to become the cities of the future, with names like Cheyenne, Laramie, North Platte, and Elko, names which 50 years later would also figure prominently in the annals of early flight as the first cross­country air mail service struggled to create yet another, but altogether different, fledgling trans­portation system. This transcontinental railroad is shown in Figure 3-3. With air transport, the government, once again, would take the lead and then step out of the way, leaving the captains of industry to their own devices in making the system run.

But turmoil lay ahead. It has been said that the years between 1860 and 1868 laid the foundation for the uprooting of the society of America. The Civil War, beginning in 1861, tore the country apart for four years, and the so-called Reconstruction era that followed effec­tively rendered the South a land occupied by a foreign power for many years. Centuries-old traditions in both the North and the South were eradicated or radically altered. Politics and social life changed.

The impact of available and relatively fast railroad transportation on the stability of the population compounded the problem. People began to move and to follow the railroads as they connected sections of the country and both coasts, and as the heartland was settled. People could more readily live and work anywhere in the country, leaving behind their pasts, their established social networks, and sometimes their principles and mores. Political power was for sale in the legislatures of the states and in Con­gress as graft and corruption became prevalent.

The new opportunities afforded to corpo­rations led to a time of unbridled capitalism at the hands of rapacious men of industry like the Vanderbilts, the Goulds, and the Carnegies. The power of corporations, like the Pullman Com­pany, Standard Oil, and United States Steel, joined with the new political structure to create a vast gulf between owners, known as the “rob­ber barons,” and workers. Labor was set against management in an epic struggle that would poi­son labor relations in the railroad industry for generations to come and that would be carried over to the airlines. The government’s initial assistance, as positive legislation, would soon turn to regulation of the restrictive kind with the passage of the first comprehensive national legis­lation regulating transportation.

Not content to leave the issue to be exclusively determined by the lawyers, at the invitation of the Smithsonian Institution in 1914, Curtiss entered into a contract with the Smithsonian to rebuild and fly the Langley Aerodrome for the consideration of $2,000. The Smithsonian was seeking to rehabilitate the reputation of Lang­ley by demonstrating that the Aerodrome was, indeed, flyable and that the problem with the December 8, 1903 flight attempt was the defec­tive launch mechanism, not the airplane. Curtiss was only too happy to accommodate the Smith­sonian, since he too wanted to prove that the Aerodrome could have flown before the Wrights’ machine.

The disassembled Aerodrome arrived in Hammondsport at the Curtiss facilities in crates loaded into a railroad boxcar. On arrival, it was clear that modifications would have to be made to the Langley machine. The 1903 Manly engine had been in storage for 10 years and would develop only two-thirds of its original power. The carburetor had to be changed. Curtiss pro­vided it with magneto ignition instead of the original dry cell batteries. The airplane had no wheels, no skids, and no floats. Curtiss added pontoons to the Aerodrome, which required addi­tional support and bracing. The floats added about 340 pounds of weight and added drag. The central stiffening keel was removed. The origi­nal propellers were used but one wing had to be rebuilt, as well as replacing several broken ribs in other wings. The wings had to be recovered with cloth and varnished. The Aerodrome did not have ailerons or wing warping; control was limited to the dihedral of the wings, the vertical tail rudder, and the shifting of the pilot’s weight in order to maintain lateral balance. No changes were made to the system of balance. Curtiss stated that not a single change had been made to the Aerodrome that could have improved its fly­ing qualities.

The reassembled machine was taken down to Lake Keuka where it was successfully made airborne for several short hops in the late spring of 1914. This proved to the satisfaction of Cur­tiss and the Smithsonian that the Aerodrome was, and always had been, flyable, and but for the defective launch mechanism on the Lang­ley barge, it would have been the first pow­ered, controlled flight in history. The Aerodrome was then fitted with a larger and more power­ful engine and, during September and October

1914, it was able to lift off the water for flights of up to 3,000 feet.

■ The Jenny

While aircraft development had been seriously stagnated in the United States by the Wright patent litigation, somehow Curtiss kept driv­ing forward. He visited the factory of Thomas Sopwith in England in 1913, and was impressed by the progress shown in the development of the tractor designs Sopwith was producing. The – Model J, a 90-horsepower tractor, was launched on May 10, 1914, followed by the Model N, also with a 90-horsepower tractor engine. These were supplied to the British and American armies and navies as trainer aircraft during 1914. In

1915, Curtiss produced the aircraft that was to be known as the “Jenny,” and which combined the best aspects of the “J” and “N” models.

World War I had begun in the summer of 1914, and the demand for aircraft and engines spiraled upward. Although the Jenny was too slow, too underpowered, and lacked the perfor­mance capabilities required of fighter aircraft in World War I, it fit well as a trainer both in England and the United States. Rapid improve­ments in design and increased horsepower in the Jenny made it the trainer of choice for the war. The Jenny first used the Curtiss OX 90-horse­power engines, but later in the war the 150-horse­power Hispano-Suiza engine, built by the Wright Company, was installed.

Thousands of Jennys were produced dur­ing the war, and afterward were used by both the Post Office in the airmail service (before being replaced by the De Havilland DH-4) and by the Army for training. The private sector was flooded with Jennys, which made for bargain prices for barn-stormers, banner-towers, and flight schools and made the Jenny a household word in an era when hardly anyone flew. A newly designed Jenny was placed on the market in 1920 as the “Oriole,” and flew in the competitive market for almost twenty years.

Before 1930, the airplane industry was a very scrambled lot. The main aircraft manufacturers were Curtiss, Martin, Consolidated, Douglas, Boeing, and Vought. These comprised the list of military contractors, but these companies were also being drawn into the commercial field due to the sudden expansion of participants in the fledgling air transport business. The main engine producers were Pratt & Whitney and Wright Aeronautical, the latter of which merged with Curtiss Aeronautical to become Curtiss-Wright in 1929. The air transport companies, according to Fred Rentschler, numbered as many as one hundred.9 Most of these operators did not have CAM routes and flew one or two airplanes from any place to practically anywhere else hauling what passengers or cargo there was. These companies, operated mainly by aviation enthusiasts, had little realistic hope of ever developing a successful business. Yet they were eager to bid on any government-offered route or proposal, irrespective of their chances of operating success.

To qualify for government airmail contracts, bidders had to establish some reasonable degree of soundness in financial and operating responsibility, which by itself quickly had the effect of separating out the contestants. Among the relatively sound new business entities were Colonial Air Transport, Boeing Air Transport, Transcontinental Air Transport, Western Air Express, National Air Transport, and Pacific Air Transport. But under its competitive bidding requirements, the Post Office had made CAM awards to marginal companies who were operating at a loss and engaging in marginal operational practices, using obsolete, cheaper airplanes and engines. Clear cases of fraudulent billing practices to the government were commonplace.

The larger companies were better capitalized, could afford newer and more modern equipment, and generally observed better operating practices. These attributes translated into greater reliability and safer air transport. In the late 1920s the broad aircraft industry came under the control of a few large companies that combined the primary air industry sectors: airmail carriers, airplane manufacturers, and engine manufacturers. Three groups, in particular, formed the core of the vertical holding companies that were to figure prominently in the future of the airline industry. These groups were:

1. United Aircraft & Transport Corporation

2. North American Aviation (NAA)

3. Aviation Corporation of America (AVCO)

s the world approached the end of the third decade of the 20th century, the United States had overcome its disadvantaged position of being the last in the world of aviation to gradu­ally becoming the first. The advances made in engine development during the 1920s by Pratt & Whitney with the Wasp and Hornet radials and by Curtiss-Wright (formerly Wright Aeronautical) with the Cyclone radial established those compa­nies as the industry leaders. Airframe manufac­turers during the 1930s had also gone through a “monoplane revolution,” which had completely transformed the design and manufacture of com­mercial aircraft from the biplanes of earlier years.

The 1930s had proved to be a turbulent period, dominated by the economic “Great Depression.” The promise of airline development springing from government-subsidized airmail had been sacrificed on the altar of politics when the Roosevelt Administration took office, and the airlines were having an exceedingly hard time making ends meet under the rate cuts mandated by the Black-McKellar Airmail Act of 1934.

The state of the art in airplane design and manufacture had evolved in the United States during this time, and it was represented first by the Boeing 247 and then by the Douglas aircraft
(DC-1 and DC-2) that evolved into the DC-3 design. Yet, in 1938 there was not much market for airline transports. That year only 42 civilian aircraft were built of any type designed to carry five or more passengers.

The military forces were a little better off in airplane numbers, but many were obsolete, and several hundred of the Navy’s aircraft were biplanes. Japan had been building militarily both in its air arm and its navy since the 1920s. Begin­ning in the middle of the decade, Germany began designing and then producing superior military air­craft. America was in a lethargic phase, separated from Asia and Europe by two great oceans and not vulnerable to air attack, but trouble was brewing.

About the time the Civil Aeronautics Act was passed, with war clouds on the horizon, Congress authorized funds for upgrading the Navy, but mostly for ships, not carrier planes. The Army received little funding, and none for bomber aircraft.

S War Beyond the Great Oceans

Japan was on the march in Asia in the late 1930s. It had militarily occupied Korea, Manchuria, and parts of China and appeared to have designs
on Southeast Asia and the Philippines for their rubber resources. In Europe, after concluding a non-aggression pact with the Soviet Union, Hit­ler invaded Poland to start World War II in Sep­tember 1939. Japan, Germany, and Italy aligned to form the “Axis Powers.” Britain and France declared war on Germany. In 1940, Germany overran most of Europe north of the Alps, includ­ing France, the Low Countries, and Norway. The Soviet Union invaded Finland. Italy controlled Sicily, several other Mediterranean Islands and, along with Germany, several countries in North Africa. Italy attacked Greece, but had to be backed up by Germany in 1941, which also took Yugoslavia and then Albania. Germany invaded Russia in 1941 for oil resources in the Southern Russia and Caucasus region and for “Lebens – raum” in the Ukraine.

Great Britain stood alone as the last democ­racy against Fascist aggression in Europe. Many people believed an accommodation with Hitler was unavoidable, including some senior Brit­ish Ministers in government. Appeasement and avoidance of war characterized the policies of Prime Minister Neville Chamberlain and Foreign Secretary Lord Halifax. When the Chamber­lain government fell in May 1940, Sir Winston Churchill, whose mother was an American, became Prime Minister and he set an entirely dif­ferent tone.

Three days after taking office, with expecta­tions of an imminent German invasion of Eng­land, he expressed his resolve against Hitler in a speech to the House of Commons, saying “I have nothing to offer but blood, toil, tears, and sweat.” On June 4, 1940 he gave his famous “We shall fight them on the beaches” speech in the House of Commons, adding “we shall fight on the land­ing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender.” As the aerial war over England progressed between the Royal Air Force and the Luftwaffe during the summer of 1940, which was a prelude to Hitler’s plan to invade the island nation (Operation Sea Lion), he gave his third stirring speech, a tribute to the RAF and its brave pilots, saying: “Never in the field of human con­flict was so much owed by so many to so few.”

In spite of all this, sentiment in the United States was mostly isolationist. After all, the peo­ples of Europe had been engaged in mutual com­bat from time immemorial, and the carnage of World War I was still fresh in the minds of most adult citizens. Neutrality Acts were passed by Congress to prevent the United States from “tak­ing sides” in the growing hostilities worldwide. These Acts prohibited American vessels from transporting passengers or articles to the bel­ligerents. There were even those who held up the recent industrial advances and full employ­ment of the German nation as something to be admired. Charles Lindbergh was a prominent and active isolationist, frequently taking the stump to caution against “foreign entanglements.” In the 1940 election, Roosevelt had promised Ameri­ca’s mothers that he “would not send American boys to fight in any foreign wars.”

Yet, England and the United States were historically closely bound together—by lan­guage, by culture, and by common law. A secret correspondence had begun in September 1939 between Roosevelt and Churchill, even though Chamberlain was then still Prime Minister, cen­tering on details of the coming war that had been precipitated by the German invasion of Poland only days earlier. There was a kind of kindred spirit between Roosevelt and Churchill—both had in their earlier years been identified with their countries’ navies, Roosevelt as Assistant Secretary of the Navy in the Wilson Administra­tion and Churchill as First Lord of the Admiralty before and during the First World War, a posi­tion he again held in the run up to World War II. This personal correspondence provided a “back door” channel between the two countries that served to allow the United States an inside look at the dire situation England would find itself in after the fall of France the next year. And it gave

Churchill a direct line to the United States to plead for help.

The Royal Navy was fighting for its life against German U-boats, which were sinking prodigious amounts of tonnage, and the new battleships Bismarck and Tirpitz were prowling the North Atlantic sea lanes. In the summer of 1940 the aerial “Battle of Britain” was a touch and go affair with daily bombing raids on Lon­don and other English cities and on Royal Air Force airbases. Although the Office of Home Defense had developed a primitive form of radar that enabled the RAF to anticipate the approach of Fuftwaffe planes, the resulting daily aerial dogfights were depleting the fighter capabil­ity of the RAF, and new aircraft production in England could not keep up with the losses being sustained. The same situation existed with naval transport vessels and warships. The HMS Hood, pride of the Royal Navy, was sunk in May 1941 by the Bismarck.

There was little doubt that Roosevelt believed that the future of Western Civilization depended on preserving the British nation and defeating Nazi and Japanese aggression. Roos­evelt’s public persona reflected the isolationist sentiment of the country, and he was legally bound by the law of the land, which required strict neutrality. But the 1937 Neutrality Act contained a loophole that allowed the president to authorize the sale of materiel to belligerents in Europe as long as they paid for the goods in cash and arranged for their transport, which provided a little daylight to the Roosevelt Administration to quietly begin to help England.

The FAA enhances the safe operation of aviation by controlling, through certification, who may legally function in civil aviation, and by certifica­tion of certain equipment used in domestic civil aviation. Certification by the FAA applies to eight major categories:

1. Airmen

2. Aircraft

3. Air Carriers

4. Air Navigation Facilities

5. Air Agencies

8. Airports

7. Designees (representatives of the

Administrator)

8, Unmanned Aircraft Systems

Airmen

Certification is required of pilots, flight engi­neers, navigators, air traffic controllers, aircraft dispatchers, mechanics, repairmen, and para­chute riggers. Certification of airmen includes procedures not only for the written and oral testing of applicants, but also the requirement of practical demonstrations of required levels of proficiency.

Minimum physical and mental health stan­dards are applied through periodic medical exam­inations of airmen. The FAA issues separate medical certificates to airmen through its net­work of Aviation Medical Examiners. The amor­phous standard that airmen possess “good moral character” has been consistently required of all certificate holders since passage of the Air Com­merce Act of 1926.

Aircraft

The FAA issues three types of certificates appli­cable to aircraft and their components—Type, Production, and Airworthiness. The aircraft com­ponents that must be certified include aircraft engines, propellers, and appliances. Every civil aircraft manufactured in the United States is sub­ject to this inspection and certification regimen beginning with the design of the aircraft. A Type Certificate is issued to the aircraft manufacturer after flight and static testing confirms that the design conforms to the standards adopted by the FAA and published in the FARs. The issu­ance of a Production Type Certificate follows on the manufacturer meeting all FAA standards designed to assure that all aircraft produced pur­suant to the Type Certificate will faithfully con­form to the approved design of the aircraft. This certificate is a sort of quality assurance require­ment based on the manufacturer’s production and inspection methods at its plant. The final require­ment imposed by the FAA is the Airworthiness Certificate, which is awarded to each and every aircraft that comes off the assembly line and is required before the aircraft can be delivered to a purchaser. This certificate is valid only for a period of twelve months.

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.