The Kennedy Subcommittee's Civil Aeronautics Board Practices and Procedures

Abstract

* A major document in the current debate over deregulation of the U.S. domestic airlines is this report of the Subcommittee on Administrative Practice and Procedure of the Committee on the Judiciary, U.S. Senate.1 Stephen G. Breyer served as special counsel to the subcommittee during the preparation of the report and the hearings that preceded it. The report does not break much new ground in its technical analysis of regulated competition in the airline industry. However, it provides a clear and sophisticated synthesis of recent economic analyses of the industry and develops new evidence on the Civil Aeronautics Board's procedures and operations. The committee's recommendations strongly support relaxed controls over entry and pricing in domestic air transportation, as well as calling for reform of some shocking procedures of the Board. During the last two decades a number of economists have studied the effect of regulation on the structure and performance of the air transport industry. Their findings display a remarkable consensus. The industry's intrinsic structural characteristics include only moderate barriers to entry and levels of product differentiation, so that an unregulated airline industry would display something close to competitive performance although seller concentration would be high in individual city-pair markets. The actual industry, as regulated since 1938, has been afflicted with blockaded entry and rigid prices that are often set high enough above minimum attainable marginal costs that extensive nonprice is induced (principally expanded flight schedules leading to low load factors). This nonprice competition elevates costs substantially over their minimum attainable level, as does the rigidity of the route structures imposed on carriers by the Board's certification procedures. The airlines have not earned more than a normal rate of return on their investment, over the long run, but they have incurred costs significantly higher than the minimum attainable. The report's analysis of the effect of the Board's policies follows the lead of several scholars2 in drawing heavily on a comparison between largely unregulated airlines competing in the intrastate markets of California and Texas and the regulated interstate industry. The report provides (pp. 40-53) a careful analysis of the factors that might explain the markedly lower fares found in these intrastate markets-30 to 50 percent below interstate city-pair markets of com-