The Major Economic Effects of the Civil Aeronautics Act of 1938, as Amended in 1940

The major economic effects of the Act came in three areas: routes, mergers, and rates. The air­lines were exempted from the operation of the antitrust legislation of the United States (Sher­man and Clayton Acts) and the CAB took over this function, which included mergers.

The CAB decided which carriers would serve which routes, and they did this by granting cer­tificates of “public convenience and necessity” to the existing 16 trunk carriers then operating, which thereafter became known as the “grandfa­ther clause,” and those 16 airlines continued to serve the same routes that they had served before the Act was passed. No additional certificates of “public convenience and necessity” would be granted for any trunk line operations for the next 40 years, although “feeder” routes would be established by the CAB later and authority granted for some 21 feeder service providers to operate over those routes. These supplemen­tary carriers would supply the trunk lines with passengers, but could not compete with them. The CAB thus controlled entry into the market.

The CAB assumed one of its functions was to preserve the market that existed when the Act was passed. It assured, therefore, that no carrier could leave the system or abandon any route without its approval. In the few cases where airlines would face financial difficulties that pre­vented their continuing to operate in the system, the CAB simply ordered the failing carrier to be merged with a healthy one. It thus controlled exit from the market.

The CAB set rates that the airlines could charge for all services, including passenger fares. Since the CAB determined which routes would be flown by which carriers, and also determined how much the airlines could charge for that car­riage, there was no competition, as that word is normally understood, between carriers. There was a philosophical departure from the punitive aspects of the 1934 Act to one of insuring that rates were sufficiently adequate to insure sur­vivability. Rates were set to provide sufficient income so as to prevent the failure of a reason­ably well-run operation, but not high enough to render any excess profits. It was basically a cost – plus fare. The government assumption and intent was that airlines were henceforth public utilities.

By the time the 1940 Amendment to the Civil Aeronautics Act was passed, it was becom­ing clear that developing stability and strength in the American air carrier system was a pru­dent course. World War II had already begun in Europe, and Japan was on a rampage in the Far East. The world was on edge, and the role that the American airline system would have thrust upon it very shortly could not, at this point, even be imagined.

Endnote

1. 298 U. S. 388, 55 S. Ct. 241, 79 L. Ed 446 (1935).