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Aviation History
1963
1963 - 1338.PDF
162 FLIGHT International, I August 1963 AIR COMMERCE . . . PAA VERSUS TWA MUCH of the energies of TWA and Pan American are dissipated in competing with each other, declares Mr Charles Tillinghast, president of TWA, in a letter to the Civil Aeronautics Board. In this letter he asks the CAB to rationalize the routes of the two air lines. From the sketchy reports of the letter so far available it appears that the proposed rationalization is along the lines of the CAB staff study E-18301 published just over a year ago (Flight International, June 21, 1962, page 962-963). The CAB's Trans atlantic Route Renewal Case was resumed last Tuesday week, July 30. The TWA proposals appear to correspond with those of the CAB staff study in two important respects, namely that TWA shall give up London and Frankfurt while Pan American shall relin quish Paris and Rome. Unlike the CAB study, however, TWA want exclusive rights to South African routes at present operated by PAA. Commenting on the TWA proposals, a Pan American spokesman said that the TWA plan would be "most undesirable, for many important reasons, and utterly immoral and unjust." Now that the proposed Pan American-TWA merger is off, the ARE BEA's 20 per cent UK fare increases justified, or should the corporation have been making profits on a two-thirds load factor? As these questions have been discussed in these pages the question of competition has arisen. Mr Stephen Wheatcroft, BEA's economic adviser, has warned (issue of May 30) against the economic consequences of competition. Here is a further contribution. MR WHEATCROFT's article on airline competition in the United States (Flight International, May 30) will be of interest to the Air Transport Licensing Board when it comes to consider licensing a third competing airline on some of the UK domestic routes in a few years' time. The present position in Britain, however, is that two-airline competition of any kind is confined to summer Saturdays on Channel Island routes. Gill and Bates' principal conclusion (see "BEA and Britain," May 9) was that the benefits of competition are nearly all achieved when two airlines operate on a route: and that the disadvantages arise when three or more are licensed. In 1949 they took a view of the development of multiple competition which Mr Wheatcroft's figures for 1952 seem to indicate was unnecessarily gloomy. By then, we learn, 11 per cent of the routes supported three or more carriers, but still a return on capital of 15 per cent was achieved. The "malaise" was excessive profits; at that time the Civil Aeronautics Board considered that a reasonable rate of return was only 8 per cent. Thus in the early 1950s the Board saw an "excessive" level of profits as a reason to license a large volume of additional competition. Before these changes had shaken down, the industry was overtaken by the 1957-58 recession; and the recovery in 1959 was not complete. Nevertheless, in that year the "big four" achieved a return of 8.9 per cent. The fall to the 1961 figure of 1 per cent noted by Mr Wheatcroft took place three to five years after the additional competition had been licensed. Thus, the final fall coin cided with an acknowledged period of "over-jetting" which is just coming to an end. Some observers, including American investors, believe that the US domestic airlines are now entering a new era of profitability, the unprofitability of some companies being a quite normal occurrence in a free enterprise economy. It should be mentioned that in its decision in the "General Passenger Fare Investigation" (November 1960) the Board increased its target rate of return to 10£ per cent for the trunk operators. Professor Richard Caves, however, in his new work Air Transport and its Regulators, dismisses by detailed argument the airlines' contentions that their rate of return on capital should exceed the 7.6 per cent average achieved by all other US corporations. As Mr Wheatcroft acknowledges in his review of Professor Caves' book (Journal of the Royal Aeronautical Society, May 1963), his own views on the dangers of competition are not shared by aU economists. Professor Caves suggests that the time has come for the regulation of US domestic air transport to be substantially relaxed, particularly in respect of trunk operators. He considers CAB is likely to give attention to the point made in the White House "Statement on International Air Transport Policy" (Flight International, May 9, page 664). This said that the policy of direct point-to-point US competition in the light of foreign competition undoubtedly raised "a number of difficult questions." TWA wants to resolve them the CAB way, but evidently not PAA. Israel Says Yes to Caledonian Israel has allowed Caledonian to operate pilgrim flights to the Holy Land after August 1, enabling the independent to continue with its booked programme for August and September (Flight International, June 27, page 1006). Air Madagascar DC-3 Crash A DC-3 of Air Madagascar is reported to have crashed shortly after take-off from Faranfangana on July 15 while operating the Fort Dauphin-Tananarive service. Four French crew members and one passenger are reported dead. British United Pilot Redundancies British United Airways, who as reported last week have given notice to 53 of their pilots, say that 17 have obtained employment outside the company and that the remainder are being offered employment as cabin stewards. At present BUA employs only stewardesses. The pilots' notice expires on August 1. that the national goals achieved by regulation are not sufficiently important to justify the penalties paid. He finds that the structure of the American industry would not be substantially different in a free market situation; and that the Civil Aeronautics Board has acted frequently to safeguard carriers' profitability. The impressive analytical approach of the study and its conflict with other author ities, including Mr Wheatcroft, makes the reader wonder if the CAB, standing somewhere between the two extreme views, may have been about right most of the time. An interesting example of the Board's approach during the '50s is provided by the history of three carrier competition on the New York-San Francisco route; there is no evidence here of reckless addition of extra carriers. In the Denver service case (1955) the Board denied American's application for non-stop authority New York to San Francisco, which was already held by TWA and United, though other com pulsory stops between Chicago and San Francisco were annulled. By 1959, however, in the "New York - San Francisco Non-stop Case" the Board found, by a three-two majority, that the market had grown, and that TWA and United had been operating coach class services at peak load factors of 80 per cent. This led it to the conclusion, amongst others, that members of the public were being denied bookings at the timings they wanted; and thus there was a need for "vigorous competitive service." The compulsory stop at Chicago was therefore deleted from American's licence. Careful calculations were made to assess the economic effects on the various carriers though, as always, the activating consideration was "the public convenience and necessity." A matter which demands urgent study in Britain is the effect of competition on cost levels. Has competition for trooping and tour contracts kept cost levels down on the independent companies? What impact would it have on BEA's domestic network costs? The corporation told the 1958 Select Committee that "towns such as Leeds, Hull, Newcastle and Dundee ... all come forward ... but every time we look into them we find it merely means that we should lose more money." If cost levels could be dramatic ally reduced, this unhappy situation might be ended, apart from making it possible to operate at lower load factors, and thus reduce the number of attempted bookings that are frustrated. Professor Caves mentions two airlines where conscious manage rial effort reduced costs dramatically. Under the leadership of the new chairman, Mr Donald W. Nyrop, a former chairman of the board, Northwest Airlines reduced costs from 33.5 cents per ctm. in 1953 to 24.6 cents in November 1958. One of the local service airlines shaved the cost of its DC-3 operations from $1-25 to $0.96 per aircraft mile, when the industry average was $1.10. It may be relevant to compare BEA's cost performance ww that of US domestic carriers, as shown on a basis of average stage length in the table on page 163, There seems little doubt that BEA'S DOMESTIC COMPETITION By A. J. LUCKING
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