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Aviation History
1963
1963 - 0212.PDF
202 FLIGHJ International. 7 Februar. 1963 On January 21 at Paris Orly, Gen Puget, president and general manager of Sud Aviation, handed over the first Caravelle 6 for the Yugoslav airline JAT to Cen Simovie, president and general manager. The order, signed in January 1962, calls for three Caravelle 6s AIR COMMERCE . . . THE AMERICAN-EASTERN MERGER IN a brief filed with the CAB, American Airlines have explained why they consider that the proposed merger with Eastern Air Lines is in the public interest, contrary to the CAB Examiner's recom mendation, and why it will meet the objectives set forth by President Kennedy in his April 1962 Transportation Message to Congress. The President declared that an efficient and dynamic transport system is vital to American economic growth, productivity and progress, and he warned against merely accepting the status quo if remedies for the serious problems facing transport demanded change. In their brief, American Airlines discuss four specific points favouring the merger, and refute the CAB Examiner's fear of the combined airlines' size on the grounds that Congress has specifically exempted the industry from anti-trust laws in order to make public service the decisive factor in airline mergers. The four points:— (1) While the sheltered smaller carriers have been prosperous, 1962 results for the industry as a whole are frightening. Without a 3 per cent fare increase on February 1,1962, which bolstered annual revenues by approximately $60m, 1962 results would have been worse than the $34m net loss registered in 1961, despite traffic growth of almost 8 per cent for the year. Fares cannot be raised 3 per cent every year, yet other operating costs continue to rise faster than the traffic growth rate. In its General Passenger Fare Investigation, the CAB determined that the airlines needed a 10.5 per cent return on their investment (before interest payments) to sustain an airtransport system capable of meeting present and future public service and defence needs. During the three years 1960-62, industry earnings fell below that level by more than 1800m. In addition, interest charges on airline debt are now running at the rate of $70m per year, and large amounts of principal must soon be repaid to the lenders, even though the transition to jets is not yet complete. Excessive multiple competition over domestic airline routes has continually forced load factors down over the past decade. Despite traffic growth of 144 per cent over the ten years ending in 1961, load factors fell 10.9 percentage points to 56.3 per cent, the lowest industry average since 1939. This decline has continued in 1962 to about 54 per cent. There is no prospect of an improvement in load factors, even though aircraft deliveries will be relatively smaller in 1963 than in recent years. Average aircraft utilization—the number of hours flown—has dropped below six hours daily, according to the Examiner's report. If this figure should merely return to the 1956-57 level of slightly under eight hours, industry seat-mile capacity would increase by one-third without the addition of a single new aircraft. Opponents of the merger claim that lower load factors are not the result of increased route duplication. Yet the Examiner who now opposes the American-Eastern merger said, in a 1959 decision in another case, that when the CAB authorized increased competition in 1955-57 it "expected and anticipated decreased load factors to result and thought that end desirable." In 1954 more than half the major domestic air routes were monopolies and competition among more than two carriers was rare, but by 1958 there was competition in 87 per cent of the top 400 markets and there were three or more carriers in about 30 per cent of these markets. The chief of the CAB's planning office observed in December 1962 that: "The addition of more than two competitors usually passes the point of diminishing returns where the costs oi excess competition rise much more rapidly ..." (2) With respect to public service benefits obtainable through this merger: American and Eastern will save more than $54m in annual operating costs and more than $100m in capital costs. These savings are possible because (a) the two airlines now serve 30 stations in common, accounting for 65 per cent of their total business, (b) American's traffic is heaviest in summer and fall, while Eastern's is heaviest in winter and spring, so that equipment can be shifted to meet seasonal needs, (c) the two airlines now compete with one another in markets where there is excess capacity, which can be reduced. These savings will assist the merged airline in preventing fare increases and, hopefully, may lead to fare reduc tions. Besides these broad public benefits, the merger would improve service in two specific ways. Electra aircraft would be used to modernize the very popular shuttle service in the Boston-New York, New York-Washington, and Boston-Washington markets, while Eastern's older Constellation equipment will be retired. In addition, one-carrier service will be offered for the first time to 104 cities with a combined population of over 60m people. New through flights will be offered in 32 markets, 19 of which are not now authorized to any single carrier. (3) The instinctive fear of corporate size is something inherited from the 19th century, and thoughtful people are becoming con cerned about the damage to the nation that may result from this emotional prejudice. The realities of the airline world should keep the merger from being rejected on the grounds that the merged carrier would be large. "Competitive balance" in the industry does not mean that all carriers should be the same size but rather, again according to the CAB's planning office chief, that all should have equal opportunity for profit. In five previous airline mergers, the merged airlines have always carried a smaller share of total industry traffic than did their separate components before merger—including United after its merger with Capital made it the world's largest airline. Some of United's competitors claimed before that merger that they would be unable to compete with the new "giant," but they actually enjoyed unpre cedented prosperity during the year following the merger. A tabulation shows that if the merger with Eastern is approved, most other airlines will have about the same size relative to American as they did in 1951. Possible future diversion of traffic by American from smaller competitors would be insignificant and would not even approach the diversion caused by the United-Capital merger. In the southern transcontinental area, American would regain from Delta and National a mere fraction of the traffic which they gained through their route awards in June 1961. (4) The Federal Aviation Act, which is the industry's basic regulatory statute, is unique in requiring the CAB to approve mergers unless they are found contrary to the public interest or they
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