How the Government Drove the Small Airlines Out of Business
Rosen, Corey
How Government Drove the Small Airlines Out of Business by Corey Rosen In the Smithsonian’s National Air and Space Museum, there hangs a 30-seat DC-3 -the venerable mainstay of commercial...
...Because the government wanted to sell its surplus equipment, it created a program to meet the demand...
...These low-cost flights had been shunned by the scheduled carriers as unprofitable-for them, air travel was a luxury item only...
...And the CAB continues to give the supplementals plenty of trouble...
...Rules for determining regularity were exceptionally complex: one carrier testified that his operations were temporarily suspended because he submitted his proposed tariffs in the wrong kind of binder...
...The CAB had determined that there were too many carriers in the market...
...Until recently, an aggressive, abrasive, Californian named Richard Neumann was trying to assemble an entire fleet of these planes and fly them coast-to-coast...
...If carriers stayed within the regulations they could not make money, so their operating rights were revoked for financial insufficiency (the Board feared that economically weak carriers would cut corners on safety, although the non-skeds had an exceptional safety record during this period...
...The hearings lasted several years, however, and the uncertainty of the carriers’ status during this time made it extremely difficult for them to attract credit...
...In a very short Period of time, this resulted in 142 airline companies, the majority of them very small...
...As part of their contract obligation, airlines had to pledge to commit a certain number of their planes to the military in case of an emergency...
...In contrast to the carnage among the non-skeds, as they’re called, no major airline has ever gone out of business, although some have merged...
...At the same time, the Board was conducting a lengthy investigation into the entire question of non-scheduled carriers, with an eye towards granting formal certificates of operating authority to at least some of them...
...Men like Richard Neumann are a vital national resource...
...A second reason in favor of either proposal is that it should not lay the Board open to criticism for stamping out, without due process, these carriers which they have permitfed to come into being...
...Their main attractions were low price and a willingness to explore new markets...
...have been found guilty of violating campaign finance laws...
...By 1972, however, when it was in the midst of purchasing a 747, the CAB revoked Universal’s transatlantic rights...
...The military contracts with commercial carriers for a number of its air transport needs...
...One Set of regulations allowed affinity-group charters only-to charter an airplane, a group had to be an organization of some sort, thus restricting the benefits of charter travelto a tiny fraction of the flying public...
...As a result, Universal went out of business...
...He would have charged $119 each way for the 14-hour trip, and his passengers would have had to bring their own food...
...Richard Neumann’s California Air Charter was one of the casualties of the “willful violator” approach...
...The federal government makes a great show of supporting the American free-enterprise spirit generally and small business in particular...
...One cannot even imagine the CAB allowing major carriers to go out of business because it was unable to decide what to do about a pending case...
...While supplementals have been put out of business after violating CAB regulations once or twice, scheduled carriers have been found to have engaged in massive rebates and kickbacks on tickets in the North Atlantic market...
...Apparently this plan was put into effect, for by 1953 the Senate Small Business Committee had concluded that the entire non-sked industry was on the verge of being wiped out by the CAB...
...Even the few that are certified have a hard time competing against the scheduled carriers, whose size and advertising make them seem more reliable to potential customerseven though they are no safer and no cheaper...
...Only a small number of carriers received the contracts...
...If the carriers found ways to evade the regulations, they had their rights revoked for “willful violations...
...Daly would have used the old nonsked approach-nearly full planes (the low fares would assure that), less busy airports, and, innovatively, Ticketron outlets for sales...
...These people were the owners of the so-called nonscheduled airlines-mostly small companies that flew a variety of low-cost operations outside the scheduled air transport system...
...Neumann will take enormous risks in terms of finances, reputation, and ego...
...Aside from the question of why ’the CAB should concern itself with making sure every existing airline can make a profit, this case reveals a disturbing situation: the CAB approved Universal’s purchase of the debt-ridden American Flyers-a purchase whose sole purpose was the acquisition of transatlantic rights-at the same time it was deciding to restrict the number of carriers in that area...
...A Slow Death What in fact happened was a slow rather than a quick death...
...and have been sued for overbooking passengers...
...In the Korean airlift, for instance, one non-sked charged 1.17 cents per ton mile, while the scheduled carriers charged between 1.6 and 1.75 cents...
...Plenty of Trouble The sixties, then, were trying times for the supplementals...
...Michael Levine, a former CAB staffer who is now Luce Professor of Law at the University of Southern California and the California Institute of Technology, told the Small Business Committee last October, “The Board was attempting to create conditions, in my opinion that made [the non-skeds] operations economically non-viable, in the hopes that they would go away...
...it needed, it still cornered a good share of the transatlantic market...
...He is nothingif not determined that he can make ~~ ~ Corey Rosen is an aide to Senator James A bourezk...
...Universal Airlines was another supplemental that suffered a fate that could not have been allowed to strike a large corporation...
...Until 1960 this was done on a competitive-bid basis...
...Never a Threat All this strict regulation stands in sharp contrast to the CAB’S attitude towards scheduled carriers...
...He was one of a large group of true entrepreneurs, men and women who took tremendous financial risks to develop small, innovative businesses...
...The term GGnon-scheduled” was replaced by GGsupplemental...
...Non-skeds were restricted at one point, for instance, to ten trips per month between any two points on an irregular basis...
...American Flyers’ transatlantic authority was, under the rule being developed, an almost certain casualty...
...Universal had very limited operating rights and found that it was unable to make money...
...The plan is widely regarded as very practical...
...In carrying freight to Alaska, which was very costly, the non-skeds averaged 23 cents per ton mile, compared to Pan Am’s 89 cents...
...The airline industry is an especially egregious case of the gbvernment’s harassing entrepreneurs and acting precisely counter to the innovative spirit it says it’s trying to promote...
...Later, the Board allowed other charters, too, but only if the carrier made three stops and charged 110 per cent of the scheduled fare-a deal that is hard to imagine anyone wanting...
...Daly’s World Airways, for instance, had a long-standing application to fly a scheduled coast-to-coast service for less than one half the scheduled rate...
...As a result, many of the non-skeds, unable to buy new equipment because they had no capital, simply folded...
...United States Overseas Airlines started freight service to Okinawa at one third to one half of Pan Am’s cost...
...Largely due to CAB regulations, there are now only six, and none of the survivorsnow called supplementals-are small businesses...
...The CAB had no authority to regulate the flights, but it saw the Air Europe approach as a way of avoiding U. S. regulationswhich, of course, it was...
...The company could not even sue the CAB, since the CAB had taken no official action...
...As the non-skeds expanded this service, however, their flights became more and more regular, and the major airlines and the CAB became increasingly concerned...
...Non-skeds and supplementals have frequently been forced to shut down by the CAB if they were found to be financially shaky, yet when major carriers are on the verge of bankruptcy, as some have been recently, the CAB and the government scratch their heads to find ways to save them...
...By 1959 Board regulations and rulings-as well as poor management and a lack of market in some caseshad reduced the number Of non-skeds to about 25...
...The CAB, however, after refusing to hear the matter for years, dismissed it as stale, saying that the law did not permit it to grant scheduled authority to supplementals...
...The loss at government hands of the entrepreneurs who run small businesses is a tragedy for this country...
...How Government Drove the Small Airlines Out of Business by Corey Rosen In the Smithsonian’s National Air and Space Museum, there hangs a 30-seat DC-3 -the venerable mainstay of commercial aviation in America for decades...
...Zuckert, now a Washington lawyer, has vigorously denied any effort on his behalf to influence the decisions, and the committee staff could neither confirm nor repudiate them...
...Small businesses are apparently expendable...
...Accordingly, termination of such carriers’ letters of registration would appear a fair and natural conclusion...
...The seventies have brought liberalized charter rules (still restrictive by European standards), but the CAB has limited the number of carriers it allows to fly those charters...
...Neumann was sure that thousands of people would gladly bear the inconveniences to save $83-he was saying, in fact, that he already had names of enough interested people to fill six months of flights...
...While delays in CAB approval caused Universal to lose much of the summer tourist business...
...There is a Small Business Administration and corresponding committees in Congress...
...The owners of the airlines that f&kd during this time are bitter about the choice of carriers for military business...
...This spring, when the major airlines, partly in response to the plans of pepple like Neumann, started extra-low “super-saver” coast-to-coast prices on a one-year experimental basis, Neumann cut his proposed fare to $80 one-way and changed his proposed carriers to jets...
...At the end of World War I1 many returning veterans were interested in continuing to fly...
...The non-skeds expanded their lowcost concept into major markets with irregularly , scheduled coach flights...
...Not only has the CAB put supplementals out of business by the dozens, it has also ignored some seemingly well-qualified applicants and set up obstacles so difficult that many would-be carriers are discouraged from even thinking about applying...
...Many small airline company owners would like to operate as supplementals, but they see no chance of their applications being approved and they cannot afford to waste the hundreds of thousands of dollars that filing an application would cost...
...have recently been indicted for price-fixing...
...One of the most bizarre cases ever involved Air Europe, which in 1973 planned to fly from Tijuana to Luxembourg for 33 to 55 per cent less than scheduled rates...
...If there were free entry into the airline industry, I suspect he would be one of the first in line...
...A recent ruling by a federal appeals court concluded that the CAB was wrong and directed the Board to hear the case...
...One report even suggested boarding the planes with federal air marshals...
...Generally, they charged one half to two thirds the scheduled carriers’ fares...
...Neumann tried again in the sixties, but the CAB would not allow him a certificate, because he was a past violator...
...These companies were given the status of non-scheduled carriers, meaning they could perform any irregularly scheduled air transport functions...
...A secret Board memorandum in the late 1940s detailed a plan to eradicate the non-skeds under the cover of legitimate regulation: “Either procedure [certification hearings or denying lett’ers of registration] has the advantage of affording means for ultimately terminating the operations of this group of carriers...
...The CAB interpreted the new law as restricting supplement& to charter service only, and in sixties it issued extraordinarily rest~ctive rules for operating those charters...
...They point out that one carriery Southern Air Transport, was owned by the CIA and that four others were represented by a law firm whose senior partner, Eugene Zuckert, had been an Assistant Secretary of the Air Force in the early fifties and became Secretary of the Air Force around the time the contracts were awarded...
...Since the flights would cross the U.S., the Federal Aviation Authority approved those safety aspects of the operation that concerned the U.S...
...Scheduled carriers have been guilty of substantial violations of the law, but the thought of revoking their operating rights has been unthinkable to the CAB...
...The Civil Aeronautics Board has harrassed him and other small airline operators for years, and despite some signals from Jimmy Carter and others that things might change, past experience does not bode well for them...
...Investors naturally shied away from businesses whose right to exist could be taken away at any moment...
...Neumann’s problems with the CAB go back to the 1950s...
...Among the supplementals, the few carriers receiving military contracts profited significantly, but those left out collapsed...
...Former CAB commissioner General Joseph Adams testified that when it found a violation, the Board was prone simply to put the carrier out of business, rather than issue a cease and desist order...
...The committee strongly denounced the Board, and called on it to create a place for the non-skeds...
...The only other source of revenue for the supplementals during the sixties was military business...
...The Board issued a series of Catch-22 regulations that made it impossible for all but a few carriers to remain in business...
...His is an entrepreneurial spirit we cannot afford to destroy.a...
...The competition for the contracts was severe, and some carriers lost money performing them...
...often it is actively hostile to entrepreneurs and concentrates on protecting huge, stultified corporations to small busine$ great disadvantage...
...money on cut-rate airline service...
...Still, he’s not optimistic about his chances...
...Lacking authority, the CAB resorted to leaking reports to the press that it would find a way to stop the operation...
...After World War 11, there were 142 such airlines...
...The best known is World Airways, whose flamboyant president, Ed Daly, is best remembered for his role in the Vietnam evacuation...
...It is not surprising, however, that non-skeds have been largely or solely responsible for the development of such low-cost innovations as domestic and international charters, all-cargo flights, and economy fares (in the early fifties, the major carriers considered flying a strictly first-class affair...
...All of the proper arrangements had been made with Mexico and Luxembourg...
...It could not get the CAB to expand its authority, so in 1971 it purchased, with CAB approval, a fading supplemental, American Flyers, which had the transatlantic rights Universal wanted...
...American supplementals are not the only small carriers that have suffered...
...With all this uncertainty, many travel agents and passengers who had flocked to the low rates decided not to risk being skyjacked by the federal government...
...After 1960, however, the Department of Defense and the CAB began a new policy that replaced competitive bids with long-run, minimumrate contracts...
...Air Europe never took off...
...During the late fifties and early sixties there were a series Of court cases and finally a comprehensive federal statute on the subject of non-scheduled carriers...
...But the fact is that the government neither encourages small businqs ‘nor even leaves it alone...
...large businesses, no matter how well or poorly managed, are apparently not...
...Regular flights on scheduled jets make the trip in less than six hours, cost $206 (economy fare), and provide free meals...
...The major airlines are also flying charter trips on their own, so they dominate the supplementals’ turf as well as their own...
...Although they flew less than five per cent of the total passenger miles, the non-skeds proved to be a dynamic force in the industry...
...Yet they have never been threatened with an alteration of their operating rights...
Vol. 9 • June 1977 • No. 4
