Robert Poole is a systems engineer with a California “think-tank.” His previous work at a large aerospace firm brought him in contact with FAA and CAB regulations. He holds both a B.S. and an M.S. in engineering from MIT. This article is slightly condensed and reprinted by permission from its earlier presentation in the September, ¹969, issue of REASON magazine, 42 Euston Road, Brighton, Massachusetts, 02¹35.
A private business whose sales volume had increased 15-20 per cent annually for seven years (and showed many signs of continuing to do so) would probably view its future with eager anticipation. In the government-controlled, privately “owned” cartel known as commercial aviation, however, the expected growth in air travel is viewed, in part, in horror. For as the volume of air traffic rises, a monumental crisis appears imminent, a crisis that threatens the complete paralysis of air transportation. What is the source of this seeming paradox? How can it be that the same industry that will be flying, fueling, and servicing the huge 747, is unable to solve seemingly simple problems of supply and demand? The answer is not at all a difficult one to arrive at, provided one views the problem in its full scope.
“Commercial aviation” consists of three distinct parts: the airports, the airways linking airports, and the airlines. Although there are 10,000 airports in the U. S., many of them privately owned, all 525 of those large enough to handle scheduled airline service are owned by city governments (except Dulles and Washington National which belong to the Federal government). Municipal airport financing comes primarily from three sources: municipal bonds (for basic equipment and taxiways), airline investment (for terminal buildings), and Federal tax money (for control towers, landing aids, and runways).
During the last ten years the pace of airport expansion has lagged far behind the growth in air traffic, because (1) local governments have little political incentive (or expertise) to accurately forecast passenger demand, (2) Congress has let the annual appropriation for airport aid gradually decrease, despite constantly increasing requests for such aid, and (3) local taxpayers are becoming increasingly hostile to large-scale bond issues, especially for things which do not directly benefit them. Hourly capacity restrictions have already been imposed by the Federal government at major East Coast airports, because of the increasing congestion at terminals and on runways. When the 365-passenger 747 and the 300-passenger airbuses go into service in the next few years, only a handful of airports will have terminal facilities or access roads adequate for such large concentrations of people.
Radio Navigation Stations
The airways consist of a number of paths in the sky, defined by ground-based radio navigation stations (navaids). The Federal Aviation Administration (FAA) owns and operates the navaids and polices the airways. Anywhere above 3,500 feet and in the vicinity of airports, all aircraft must fly under FAA control. Although modern electronics and computer technology make nearly-automatic air traff¹c control technologically feasible, the FAA still relies on the early 1950′s method of using navaids only as references, with all control and decision-making in the hands of a (human) FAA air traffic controller. Because of limited funding by Congress, there aren’t enough controllers, their salaries are low, and their training is poor. Combined with the high volume of air traffic, these conditions make today’s controller extremely overworked, in many cases literally a nervous wreck. Another consequence and cause, perhaps, of the controller shortage is the fact that these men are “daily forced to compromise with safety procedures” in order to handle their workload.
The FAA’s operations are financed out of general Federal tax receipts (the tax on airline tickets goes into general revenue, while the tax on aviation gasoline goes into the highway trust fund!) Thus, as long as there aren’t many crashes, Congress is content to appropriate meager sums for the FAA.² The taxpayers, 60 per cent of whom have never flown at all, justifiably feel little desire to be taxed even further to provide airways for the mere 15 per cent who fly commercial airlines.
Finally, the airlines themselves present an interesting picture. Though nominally private companies, the airlines in fact are controlled by the Civil Aeronautics Board (CAB) in every essential aspect of their business. The routes between cities are divided up among the airlines as a huge cartel, originated and enforced by the CAB, thus making free entry into the market illegal. Likewise, it is nearly impossible for an airline to leave a particular market (by dropping a city from its schedule) — the “public necessity and convenience” must be served, apparently regardless of losses. The prices charged customers for a particular route are fixed by CAB in order to prevent “destructive” price competition. Price increases are permitted to the airlines only as a group, and price decreases, while allowed on an individual basis, must still be run through the mill of CAB.
If companies in the steel industry tried to set up such an arrangement, they would be prosecuted by the Antitrust Division of the Justice Department. Indeed, the contradiction between the CAB’s philosophy and the antitrust laws was illustrated last summer, when the CAB had to grant the airlines temporary immunity from antitrust action so that they could meet together to discuss coordinating their schedules, so as to relieve rush-hour airport congestion.
As if this were not enough, 13 local service airlines, which were formed after World War II with surplus aircraft and “temporary” subsidies, continue to receive on the order of $50 million per year in subsidy payments out of general tax revenues. Thus, taxpayers are forced to pay huge direct subsidies, in addition to the countless indirect subsidies they provide in the form of “free” airways, weather reports, landing aids, and mail contracts.
Victims of Intervention
The net result of these government activities is that at least three distinct groups of people are being victimized. First, the vast majority of taxpayers who do not use the airlines are being unjustly taxed so that those who do fly can have air travel at less than its true cost. Second, the most competent, aggressive airline owners (and potential airline owners) are being prevented from engaging in competition with the less competent companies, with the result that neither the more competent companies nor their stockholders can benefit as fully as they could and should. Third, the people who do fly are getting less efficient and less safe air service than, in the absence of government interference, they might; less efficient because of the lack of competition, and less safe because of the antiquated, under-funded, congested airport and airways system.
The question which should be obvious by now is: How, in “capitalist” America, did such a horrendous tangle of vested interests and government control ever come to pass? The standard “conservative” mythology holds that all of America’s economic troubles began with FDR’s New Deal. The sad fact of the matter is that government interference with and subsidy to American aviation have a long “nonpartisan” history.
History of a Crisis
Throughout the history of American aviation the general rule has been that each expansion of government control was preceded by requests for such regulation from one or another group of people involved in aviation. At each step of the way, of course, the proponents did not foresee or advocate any further government involvement — they merely wished to blindly promote their own short-range special interest.
Federal involvement began in 1915 when President Wilson selected a number of aviation enthusiasts to form the National Advisory Committee on Aeronautics (NACA) to “study… the problems of flight, with a view of their practical solution.” The impetus for setting up NACA was World War I, but as with many government agencies, NACA emerged in 1919 as a permanent entity, and became a vigorous advocate of government control of aviation.
Former wartime aircraft producer, Howard Coffin, strongly supported NACA’s position. During the war Coffin had been picked to head the government’s Aircraft Production Board, which passed out over $1 billion in aircraft contracts to his own company and those of his fellow auto producers.³ Coffin and his friends ignored the advice of many aircraft designers and mass-produced the Liberty aircraft engine along automotive lines, which made it a poor aircraft power plant. They also produced 10,500 DH-4 aircraft, only a few of which ever reached Europe. The remaining planes were subsequently sold as war surplus for 2 per cent of their cost and the resulting postwar glut of cheap aircraft greatly depressed the market for new designs. The DH-4 with Liberty engines won the nickname of “flaming coff¹n” in the postwar years.
In 1918, at the urging of NACA, the Post Office inaugurated airmail service. Using the “coffins,” post office service was risky at best. By 1925, 31 of the first 40 airmail pilots had been killed in crashes. Somehow, during the same six-year period, the safety record of many of the fledgling commercial operators was much better. In 1925 a government investigating board recommended that the Post Off¹ce let airmail contracts to private companies, rather than flying the mail themselves; Congress agreed, and passed the Kelly Airmail Act. One of the results was the formation of three “conglomerate” aviation companies — United Aircraft and Transport, North American (under GM control), and AVCO — which proceeded to win most of the longer airmail routes.
During these years NACA continued to propose bills calling for Federal regulations. These bills received support from such diverse sources as state and local bar associations, the American Legion, Presidents Wilson and Harding, and Secretary of Commerce, Herbert Hoover. In addition, a number of airline owners (and would-be owners) asked Congress for regulations and subsidy; regulation to win public confidence and subsidy to keep them in business regardless of the market or their ability. One of the most common appeals was that the U. S. must not fall behind Europe, where governments were setting up airlines and subsidizing their operations.
“Strengthening Private Enterprise” — by Act of Government
The outgrowth of this lobbying was the Air Commerce Act of 1926, which firmly asserted the government’s authority over aviation, giving it authority to “foster air commerce,” provide airways and navaids, conduct research and design, issue licenses and aircraft certificates, and investigate accidents. Both President Coolidge and Secretary Hoover had worked for the passage of this act, considering it only as a means of “strengthening private enterprise.” As Professor Donald Whitnah points out, “in 1926 rate-fixing and the awarding of exclusive operating franchises to airlines were hardly conceivable to the majority of the framers of the legislation.” 4
By 1930, however, the government had already begun to flex its newly authorized muscle. Hoover’s Postmaster General, Walter F. Brown, decided that there was too much “chaos” and competition in aviation and decided to “foster air commerce” by forcing mergers and consolidation, using airmail contracts as his “persuader.” Previously, of course, these contracts had been let to the lowest bidder. Brown proposed a new law allowing him to select contractors “by negotiation” (on the basis of cooperation with his master plan), and to pay them on the basis of the size of their aircraft, rather than the amount of mail they carried. Congress approved the latter idea but refused to allow Brown full discretion in selecting contractors. Nonetheless, Brown proceeded on his own, at first attempting to persuade various airlines to merge. When that failed, he “arbitrarily selected those companies he believed most suitable,” 5 and awarded them the routes. Lines which didn’t cooperate had their contracts (and thereby their route authority) canceled.
When the Democrats came to power in 1932, Senator Hugo Black conducted a sweeping investigation of airmail contracting and exposed the entire shameful situation to public view. In the uproar which followed, Roosevelt ordered all mail contracts canceled and called upon the Army to resume carrying the mail. The Army responded, but it was unprepared and poorly equipped; in the first week 12 pilots died and 6 more were seriously injured. The Army’s mail service this time lasted only a few months (at an average cost per mile of $2.21 vs. 54¢ for the airlines!) In the Airmail Act of 1934, competitive bidding was restored, but as a result of the previous scandals, aircraft manufacturers were forced to sell their airline operations. Thus, with one blow, the government destroyed the three largest aviation companies in the country.
The Civil Aeronautics Act
A further consequence of the airmail scandals was the Civil Aeronautics Act of 1938, sponsored by Senator Pat McCarran. Beginning in 1934, Senator McCarran began a legislative campaign for economic regulation of scheduled air carriers. In 1935 a Federal study group recommended treating air transport as a public utility, with subsidies and fare regulation. Meanwhile, with the resumption of competitive bidding for airmail contracts, and with the Depression rolling along, many airlines lost money, and began looking to Washington for help. The newly-formed Air Transport Association began lobbying for Federal regulation and subsidy, in effect threatening that if the airlines didn’t have more money available, they couldn’t guarantee safe operation.
The resulting Civil Aeronautics Act “gave the airlines almost all they desired.”6 It provided blank-check subsidy, eliminated competitive bidding on airmail contracts (substituting “need” as the criterion), and protected against competition the routes of existing airlines.
In addition to these provisions, the act set up an independent agency known as the Civil Aeronautics Authority to carry out the regulation of the industry. Two years later the agency was split in two, with the Civil Aeronautics Board (CAB) performing economic regulation and the Civil Aeronautics Administration (CAA) responsible for safety and air traffic control. Except for the CAA being renamed the FAA in 1958 and becoming a part of the Transportation Department in 1966, the government’s regulatory structures have remained essentially as they were in 1940.
The Non-Skeds
There is one further incident in the history of aviation that deserves mention, because it illustrates the nature of the effects of the CAB on competition. At the close of World War II a number of entrepreneurs purchased surplus transport planes in order to start new airlines. Since the established airlines had monopolies on the most profitable routes, the newcomers were legally forbidden to compete with them — as scheduled carriers. But the CAB exempted non-scheduled cargo and coach service from the “certification” (monopoly-granting) procedures, as well as from subsidy. Thus, the newcomers, with their own money, began non-scheduled cargo and coach flights, the latter service an unheard-of innovation in the industry.
The scheduled lines, “free-enterprisers” all, attacked the concept of coach flights as “economically unsound” and implored the CAB to put the non-skeds out of business. But coach service proved to be so popular with customers that the scheduled lines soon began to offer it themselves, undercutting their own arguments. Even so, the CAB began putting pressure on the non-skeds, who then asked Congress for an investigation to determine the full extent of Federal subsidies received by the “ins.” The scheduled airlines, through their lobbying group, the Air Transport Association (ATA), conducted a massive campaign against the non-skeds, charging that they “were making no public contribution and constituted a drain and diversion of needed revenue from the scheduled carriers.”7 Eventually, this type of propaganda was successful; the CAB adopted regulations which put most of the non-skeds out of business.
Suggested Solutions, Their Flaws
That a crisis in aviation is impending is widely acknowledged; aviation and aerospace publications have been rife with analyses and recommendations for several years. Now newspapers and newsmagazines are beginning to pick up the story, alerted by growing flight delays, air controller slow-downs, and hopelessly congested airports. And so there is no dearth of proposed solutions. In evaluating these proposals, however, it is vital to keep one point clearly in mind: the essential nature of the problem is not technological or political, but economic. As with any other case of government intervention, the normal relationships between supply and demand have been grossly distorted with the result that on the one hand massive needs (electronic “area navigation,” larger and more modern airports) are being ignored, while on the other hand the present consumers of airline service are not paying anything like the full costs of the service they are getting. For this reason, any solution that deals with only politics or technological improvements is actually dealing with effects, rather than causes.
The government’s short-term approach will be some variation of the “user tax” plan developed by the Administration. Under this plan, additional taxes will be levied on tickets, a new tax levied on airfreight, and fuel for private planes taxed. About half of the money raised by these taxes (i.., $5 billion over 10 years) will be earmarked exclusively for airports and airways improvements, with the remainder going into “general revenue.” According to Transportation Dept. projections, some $14 billion is needed for airport and airways modernization over the next ten years — thus, the remaining $9 billion would have to come from Congress and/or local communities.
The only real merit of the user-tax proposal is that it gives token recognition to the fact that the users are not currently paying the full costs of the service they are receiving. But it does this in so minimal a way as to be almost worthless. It still leaves all essential funding decisions to be made politically, with the result that millions of taxpayers will still be forced to pay most of the costs, for the benefit of a few. Since the plan doesn’t identify the principle of full-cost pricing vs. indirect subsidies, it is easy for vested interests to attack it as costing them more than they are accustomed to. (The Air Transport Association and the Aircraft Owners and Pilot’s Association have already done just that). In addition, the proposal makes the error of assuming that simply providing more money is the answer to all the problems, without ever questioning whether the government’s bureaucracies might themselves be part of the problem.
A proposal which does raise this question was made in December, 1968, by Glen A. Gilbert, aviation consultant and one of the originators of the existing Air Traff¹c Control (ATC) system.8 After many years of experience in aviation, both in government and industry, Mr. Gilbert has concluded that the FAA’s structure and policies are not conducive to continuing progress in developing and implementing advanced-technology systems. He proposes that the FAA get out of the airways business altogether, in favor of a COMSAT-type corporation financed directly by the users, based on the actual costs of the services provided. This idea, predictably, has received little publicity outside of aviation circles. It is certain to be opposed by the same organizations and interests that opposed the user-charge taxes.
Probably the most popularized approach of 1969 is to call for a “total systems approach” to the entire airport/airways/airline/ ground transportation problem. It is difficult to argue with this approach, per se, since all it really says is that a complex problem is not likely to be solved by piecemeal solutions considered in isolation from the total system. Yet, what most proponents of this approach end up calling for is merely more of the same — more “Federal spending” and more government regulations. A genuine systems approach must look beyond conventionally perceived boundaries of the problem, and determine to what extent the established order (the FAA, the CAB, and the special-interest groups) may be the cause of the problem.
Political control of airports, airways, and airlines prevents the normal market mechanism from operating. It is impossible to determine the true demand for air navigation service, since the users, the airlines and general aviation, do not pay for it. Airport construction lags traff¹c growth by a decade — because taxpayers and traffic are very different people. Hundreds of short-haul transport aircraft crowd airports and airways, aircraft whose average passenger load is too small to be profitable and whose owners would be long since bankrupt, but for 22 years of subsidy at public expense.
The Proper Solution
If the present system is collapsing, and increased government intervention does not attack the core of the problem, what then is the answer? The basic economic problem cannot be solved by legislative fiat — if supply and demand are distorted by arbitrary regulations, they cannot be forced back to normal, since “normal” means what supply and demand would be free of force. What the government must do is to get out of the way and let the market mechanism take over. Since men are volitional beings, it is impossible to spell out in advance exactly how, free, they would solve these (or any other) problems. Nonetheless, it is possible to set forth the principles that apply in this case and draw some logical conclusions from them.
The first principle is that everything which is of value to someone has a market value, which the objective forces of the free market can and do (and should) determine. Any violation of this principle (by subsidy, “free” services, coercive barriers to entry and exit, or enforced price-fixing) distorts the market process and unjustly benefits some by the coerced sacrifice of others. The second principle is that the proper role of government in a capitalist society is to protect rights, in this case, property rights. It is impossible for men to peaceably conduct business unless there is a set of objective ground-rules which define what constitutes particular types of property, how such rights are originally acquired, and how the right is to be legally protected. By misunderstanding this crucial principle, modern legal theory has applied the ancient tribal concept of “public ownership” to such uniquely twentieth-century property as radio and TV frequencies and air routes.
Under capitalism, airports would be private businesses, operated for profit, deriving revenues directly from customers (airlines, individual airplane owners, passengers, concessionaires, etc.)
Such an airport would be free to float bonds and to sell stock (as does Madison Square Garden) in order to raise capital. In order to remain profitable, the airport’s management would have a strong incentive to plan for the future, developing the same type of forecasting expertise possessed by aircraft manufacturers and airlines.
The airport management would be free to make whatever contracts it could with the various airlines which would compete for terminal space and landing privileges. In the interest of attracting the largest number of passengers, the airport company would seek the most competent airlines in terms of quality and quantity of service. At the same time, by means of those individual contracts, the airport company could control arrival and departure times to prevent rush-hour congestion of runways. To assure customers of convenient access to the airport, it would be in the company’s interest to cooperate with local high-speed transit companies in planning and building airport access links.
It is quite likely that airline customers using such airports would pay more for their trip than they do now. Without the power of “eminent domain,” the airport company would have to acquire land at full value, rather than by condemnation and coercion; in addition it would have to bear full legal liability for accidents and noise, like any other business. And, of course, without access to tax money, it would be unable to force the local citizenry to make up any operating losses. On the other hand, the customers, while paying their way, would enjoy the benefits of well-planned, low-congestion terminals, rational scheduling, on-time operation, a wider choice of services, and probably greater safety due to the airport’s full-liability status.
Under Private Ownership
As far as air traffic control is concerned, the basic concept of an ATC “utility” has already been presented. The only flaw in the existing proposals is the automatic assumption of a nonprofit or quasi-governmental status for such a company. If AT&T can provide high-quality telephone service at low rates, while making a healthy profit, why couldn’t the same be true of an ATC company? (Interestingly, the existing ATC system was begun by a private company formed by the airlines back in the thirties. When the Federal government took over control of the skies, it inherited a functioning system, including en-route navaids and control towers.)
The largest single benefit of a privately-owned ATC system is that sufficient funding and motivation would be available to implement up-to-date electronic navigation techniques. Much of today’s air traffic congestion results from the FAA’s requirement that airlines fly exclusively over the limited number of straight-line paths linking VOR ground stations (navaids). For nearly 15 years, onboard computers and pictorial displays have been available, which, when installed in an aircraft, permit the pilot to define a new path, not restricted to the old station-to-station ones.
This technique, known as area navigation, has the potential of increasing the amount of navigable airspace by orders of magnitude, as well as substantially reducing air traffic controller workload (since the pilot does most of his own controlling). After years of lethargy and indifference, the FAA last summer finally began allowing limited experimental usage of area navigation, but only under the threat of total saturation of the existing airways.
With airports privately run, and airways privately defined, what would be the position of airline companies with regard to free access to specific airspace? The crucial question here is the proper definition of the property rights to an air route. Because two aircraft cannot fly over the same airway in the same place, at the same time, and because the number of airways, though large, is ultimately limited, it is clear that individual airways constitute a class of property and ought to be protected as such.
Allocation of Routes
The other important issue concerns which airlines would serve which cities. The advocates of government control claim that under laissez-faire every airline would attempt to serve every city, with the result that all (or most) would go bankrupt. When challenged on the absurdity of this assumption, they usually give as an alternative their fear that the airlines would form a huge cartel, dividing up the markets among them, and fixing the prices. This is, of course, precisely what the CAB presently forces them to do.
As pointed out earlier, it is impossible to predict exactly what would happen in a free market for air service. But because of the competition for the limited airport space, the number of airlines, or more precisely, the number of planes, serving a particular city-port would probably be limited (though in many cases, more than at present). The important point to remember is that the market, rather than politicians, would be allocating the routes and the difference that would make could mean significant improvements in service. (In the early fifties Eastern Airlines asked the CAB for permission to link Florida and California — a market not then served. For a number of years the CAB held hearings, hearing mountains of inconclusive testimony from various city governments and airlines; eventually the route was awarded to National Airlines on the basis of its “need” for it. Thus, Eastern, with three times as many planes, was completely frozen out. Examples such as this dot the history of the CAB.) The CAB’s policies prevent greater service on many profitable routes, and force excess service on many marginally-profitable or loss-producing routes. In the free market, the quantity and quality of service to or from any city would bear a direct relationship to the demand for service, as reflected in the prices people were willing to pay.
Thus, unrestricted competition, far from causing chaos, would promote orderly, harmonious growth in air service, with everyone paying his own way. It is certainly possible that some cartel-type agreements would be attempted — this is a possibility in any free market. But as in any other market, neither technology nor competition stands still; no price can be fixed at a highly profitable level for very long (except by the government) without attracting competition. The unrestricted operation of supply and demand provide real-time feedback of information to both consumers (via prices) and producers (via profits) about the state of the market. When liberated from the distortion of government intervention, the market mechanism will provide whatever air services people—as individuals, rather than as special-interest groups — are willing to pay for.
Steps Toward Freedom and Order
If the Administration became convinced that government was the cause of the aviation crisis, there are three specific steps it could take, by way of decontrolling. The highest priority should be given to selling the FAA’s air traff¹c control system to the highest bidder (the proceeds to be distributed as income tax refunds). The new owners, after a transition period in which to raise capital, could get on with a crash program to implement electronic area navigation. As soon as the changeover was complete, they would begin charging all users for their services.
Once area navigation was operational, and the air congestion crisis over, the government’s next step would be to cancel the Federal Aid to Airports (FAAP) program. This would leave municipalities with the alternatives of greatly increasing local taxes (very unlikely) or selling the airports to private companies. Those cities which did neither would probably soon find their obsolescing airport competing with newly-built or newly-acquired privately owned and operated airports. (Howard Hughes was recently acquiring land for an SST-port in Nevada until stopped by the CAB, and design firms have designed a number of offshore airport concepts, suitable for such cities as Los Angeles, New York, Chicago, and Cleveland.)
The government’s third step would be to abolish the CAB. Not a single one of the CAB’s functions is justifiable in a free society; none is without harmful economic consequences. Abolishing the CAB would immediately end millions of dollars of subsidies to smaller airlines, probably causing a number of mergers and acquisitions. At the same time, with the elimination of route “certificates,” all air routes would be opened to competition. The airlines would be free to negotiate with all airport owners (private and government) and much new service would be made available in short order (and could be easily accommodated via area navigation). At the same time, the government would be obliged to promulgate an air route property law, precisely defining the means of establishing and enforcing usage priority for individual airways.
These steps, to be sure, would be vociferously opposed by the multitude of vested interests and their lobbyists, which have proliferated in response to government’s policies. It will take men of integrity, in business and in government, to stand up to these men and answer their pleadings of “need” and “public interest” with reason and economics. Such men of integrity are essential if we are to escape the stagnation which is the end result of government control.
—FOOTNOTES—
1 F. Lee Bailey, attorney for the Professional Air Traffic Controllers Organization, in Aviation Week, June 30, 1969, p. 28.
² A graph on p. 53 of the May, 1969, issue of Space/ Aeronautics illustrates the direct relationship between air crashes and Congressional appropriations for FAA facilities and equipment.
3 Kelly, Charles J., Jr, The Sky’s the Limit—The History of the Airlines (New York: Coward-McCann, 1963), pp. 25-29.
4 Whitnah, Donald R., Safer Skyways —Federal Control of Aviation, 1926-1966 (Ames, Iowa: Iowa State University Press, 1966), p. 27.
5 Kelly, op. p. 75.
6 Ibid, p. 102.
7 Ibid, p. 180.
8 “Gilbert Offers ATC ‘Master Plan’,” American Aviation, December 23, 1968, pp. 28-37.
