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DOMESTIC PASSENGER FARE INVESTIGATION UNDER AVIATION LAWS.

In January 1970, the Civil Aviation Board announced a major new investigation into the subject of domestic rate making, known as the Domestic Passenger Fare Investigation. The Board decided at the outset not to limit itself, as the General Passenger Fare Investigation a decade earlier had done, to rate of return, but to look also at load factors and rate structure. The Board began to inquire into these subjects, it seemed apparent that other questions were relevant, including accounting, design of aircraft, and the whole question of whether incentive pricing i.e. "excursion fares", group discounts, discover America etc. - should be encouraged, discouraged or forbidden.

In recognition of the fact that under the procedures used in the 1960 General Passenger Fare Investigation the record was inevitably overtaken by events, the Civil Aviation Board in 1970 decided to break up the investigation into 9 different phases, each with a separate examiner, whose decision would be reviewed by the Civil Aviation Board as it was ready. Thereafter the Civil Aviation Board issued tentative findings and conclusions, subject to revision as the related phases were concluded. The separate phases dealt with depreciation; accounting treatment of leased aircraft; treatment of federal income taxes deferred in line with federal investment incentives; joint fares; discount fares; standard seating configurations for fare purposes; load factor standards; fare level; rate of return and fare structure. The several decisions began to come out in the spring of 1971, and continued in tentative, modified, and final form until March 1974.

RATE OF RETURN


The Civil Aviation Board retained the basic philosophy of the 1960 decision: There would be a single rate of return for the entire industry, rather than separate targets for the big four and the intermediate seven. The rate of return would be based on cost of capital, rather than on operating expenses. The Board established an "optimum capital structure" consisting of 45% debt and 55% equity and found a 6.2% cost of debt and 16.75% cost of equity. These figures resulted in a determination of fair rate of return at 12%.


FARE LEVEL

The majority of the Civil Aviation Board members found that the present fare level was unjust and unreasonable because it was clearly insufficient to meet the air carrier needs for revenue sufficient to provide the cost of performing adequate and efficient service under honest, economical and efficient management. Accordingly, the Civil Aviation Board concluded that there should be a 12% fashion is over October 1970 average yield in order to provide the 12% rate of return prescribed at an interim load factor of 52.5%, based on an estimated elasticity factor of - 7. The Civil Aviation Board said, "reductions in normal fares can only lead to a reduced passenger- mile yield, and, unless traffic expands substantially, to reductions in carrier earnings".


FARE STRUCTURE

The Civil Aviation Board accepted the view that normal fare Air Traffic was relatively inelastic. In its fare structure, the Board drew the inference that all fares should be cost related. Value of service pricing was rejected, and the Board announced that it would seek to root all forms of "cross subsidization".


The major issue in the proceeding involved the evaluation of the coach fare structure, coach service being the predominant mode of domestic air transportation. To some extent the fare structure was explicable on historical grounds: It still retained a bias inherited from the age of piston aircraft when the cost taper was much less than it was then. And the structure had generally been defended on the ground that short hall fares cannot be increased to the level of costs whereas long haul traffic would bear fares in excess of costs and that it was reasonable in the interest of maintaining an overall Air Transportation system to set fares so as to achieve a cross subsidization of short haul services by long haul fares.

The fare structure should be more closely aligned to the cost structure than it then was, and, indeed, that the long term goal should be the creation of a fare structure which was entirely cost based as it was consistent with those in other phases of this proceeding. A fare structure based on the cost of providing adequate and efficient service should, in the long run, equalise the opportunities of all carriers to achieve reasonable returns on their investment. As a result of their decision, short haul fares would be slightly increased and long haul fares would be modestly reduced. The increased which would be realised in the short haul markets would encourage carriers to furnish adequate short-haul service, while at the same time reduction of yields in long haul markets should reduce the incentives to provide excessively long haul service, or to engage in uneconomical forms of competition.


The Civil Aviation Board considered that the arguments advanced in favour of cross subsidization and found that they are essentially unsupported birthday record, that short haul fares could be moderately increased without endangering the nationwide air transportation network, that because of the multicarrier structure of the industry, the cross subsidization tool could never work efficiently in any event.

Turning to the relationship between coach fares and those for other classes of service, was that these relationships should be based upon cost differences. The Board finds that the first class fares today do not bear their fair share of total costs. The cost of providing first class service range up to 163% of coach service costs, the first class fares are generally no higher than 130% of coach fares. It was plain that, in the interests of revenue maximization, the coach passenger had been subsidizing the first class passenger.

The Civil Aviation Board found that economic affairs were presently underpriced in relation to coach fares and, in the case of first class fares, burden the coach passenger. Since the only material difference in the two classes of service was the provision of free meals on some coach flights, we had determined that economic service fares may reflect only the difference in meal costs on those flights in which free meals are served to coach passengers. Carriers were of course, free to institute lower cost types of service at commensurate fare reductions.

The Civil Aviation Board said that carriers be given freedom to fix individual fares within a range of plus or minus 15% of cost related features sound reasonable herein.

Navin Kumar Jaggi

Sayesha Suri

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