record. The facts remain-the California experience was unsafe when compared to scheduled certificated airlines.

Senator CANNON. Didn't the California PUC have safety regulations that had to be met?

Mr. KELLY. Senator. I will reach this point in the development of this in 1965, but I will say that the FAA safety regulations prevailed. I will comment on that, too, in deep recognition of your concern about this.

Senator CANNON. All right.

Mr. KELLY. A more realistic approach would have been to recognize the fact that the majority of the intrastate carriers were simply the intrastate portions of aircraft operating flights transcontinentally by the supplemental air carriers. At that time they were called "irregular carriers." In Attachment H I have a narrative. If you look at the appendixes to these, you will see what was happening by name in the intrastate operation of California; such carriers as Pacific Air Lines, California Central Airlines, Robin Airways, California Skycoach, Pacific Southwest Airlines, California Arrow, Channel Airways, Western Air Lines of California-I certainly make an exception to that, too, in this list-California Pacific Airlines, California Coastal Airlines, Paradise Airlines, Futura Airlines, Blatz Airlines, Mercer Enterprises, and California Time Airlines.

The chart on that exhibit Appendix A indicates the survivability of that list of carriers.

I submit, the safety record during the California intrastate experiment must necessarily include the other operations of the same aircraft owned by the supplemental air carriers. The safety record of the supplemental air carriers was also abominable when compared to that of the federally-regulated scheduled air transport system.

The safety record of those supplemental air carriers is compiled from 1949 forward. If you will, turn to attachment I, the last attachment of my testimony. No data is available prior to 1949, but my recollection is that the safety record was even worse in the early years of its existence than it was after 1949. That is, prior to 1938 or prior to 1945 to 1949.

You will see the ratio is about five times safer in the trunk operation than it was in the supplementals. They just didn't stand up for comparison. Many of you remember those days.

I think we must always keep in mind the fact that those who live on the fringes of the business will always have a tendency to cut corners. Western makes no compromise with safety.

Two: Reduced dependability: During the period of open entry and exit within the State of California, 87 percent of the air carriers failed, 14 out of 16 in a period of less than 20 years. Passengers were stranded with worthless tickets in their hands. Western obtained exemption authority from the CAB to rescue some of them. This experience was also quite typical of the irregular air carrier period when the scheduled domestic trunklines were often being requested to provide service to return those stranded passengers to their homes. My testimony regarding the result of free entry and exit will cover the California experience.

Many people unfamiliar with the period of entry and exit in California between 1946 and 1965, point with pride to the service as an example of what could happen under a deregulated domestic air transportation system. I am not among them, because I am familiar with this history.

Western Airlines has been a major carrier in the intrastate markets of the state of California for most of the last 49 years. Its operations, however, during the years preceding the Civil Aeronautics Act were sporadic. This, of course, is typical of a nonregulated utility. I will show you, in subsequent parts of this testimony, the only consistent factor about intrastate air transportation during the unregulated 20 years within the State of California was its total lack of consistency.

In the Los Angeles-San Francisco Market, Western did not operate during the years 1926 and 1927, operated from 1928 through 1930, did not operate in 1931 through 1943, and has been serving that market from 1944 through today. Western's Los Angeles-San Diego operations have been conducted since September 1929.

Thus, Western was in operation in the three major markets where California intrastate air carrier services were conducted for the entire period, 1946-1965. During that entire period, I was employed in a responsible position as an officer of Western Airlines and, therefore, have an intimate knowledge of that service.

I believe that the result of that period of free entry and exit in the State of California will be repeated almost precisely if the U.S. domestic air transportation system were to be deregulated. It's a capsule study.

The conditions of operation would be very similar. For example, during that period of 20 years, the intrastate operators came and went with the vagaries of the business, while the federally certificated interstate air carriers performed some service in some of the markets within the State. This is similar to a deregulated domestic system overflown by the operations of U.S. international air carriers. International authorities would remain as a private-regulated preserve of the international carrier which would extend some services over the most profitable of the major domestic sectors as an adjunct to their international operations; similar to Pan Am's operation.

I have attached as attachment H to this testimony just a frame of reference, and I will summarize it for you. It's a complete and detailed analysis of the actual experience which occurred in those years of unregulated California intrastate air transportation. The end result of that 20-year period was:

One: There emerged one powerful monopoly California intrastate air carrier which had been successful in eliminating all of its intra competitors-just intrastate operation-and operated services only between airports located in the State's three largest cities; San Diego, Los Angeles, and San Francisco.

Two: Fourteen air carriers attempted to enter various markets within the State and failed. Most of these carriers lasted only a few months before exiting;

Three: The periods of entry of the majority of the 14 exited carriers is directly relatable to the availability of cheap used military or commercial aircraft, no interstate responsibilities and lowpaid, nonunion help;

Four: A great many of the intrastate entrants were controlled by, or affiliated with, irregular air carriers which operated interstate, nonscheduled service:

Five: Some of the operations of those California intrastate carriers affiliated with the supplemental air carriers were conducted not as a matter of public need but rather because of the availability of an airplane at a given time, at the irregular air carrier's western air terminus, generally at Burbank or Oakland. The supplemental air carrier simply determined to increase the utilization of its aircraft by operating the short hops within the State of California at whatever time of day they had aircraft available. When a change of schedule for its transcontinental operations caused the ground time at the western terminus to be reduced or eliminated, the supplemental air carrier simply closed down the business of the intrastate affiliate.

The scheduled intrastate flights, therefore, operated at the whim of the irregular air carrier; and

Six: The safety record in the State of California was almost six times worse than the trunkline safety record. Safety was naturally buried in the myriad of corporate veils that characterized the supplemental air carrier era. Suffice to say the supplementals sustained a safety factor over seven times worse than that of the federally certificated industry. I referred you to attachment I.

Some academic proponents of deregulation claim that the atrocious safety record of the California intrastate air carriers caused by only two crashes, which wiped out those two airlines, is statistically deficient because of the low generation of revenue passenger mileage within California, but the safety record is inexorably tied to that of the parent companies, the supplementals and irregulars. The record of both the California intrastate and the supplementals was deplorable. It is common knowledge that horrible safety records also characterized the other period of no regulation just prior to the enactment of the Civil Aeronautics Act in 1938-that period of the middle 1930's.

To say that the Federal Aviation Administration controls safety and that economic deregulation would not affect safety is a nonsequitur. Safety regulation has always been in effect. The importance of the empirical data is that it proves that safety is deeply affected by economic expediency where economy, rather than safety, becomes the dominant theme.

Operations in California between 1946 and 1965 confirmed what every knowledgeable person in the airline business has come to realize: That unregulated or excessive competition in air transportation tends to create a monopoly. The reason is that under extreme competitive conditions, carriers lower their seating density by putting fewer seats in each aircraft; they do not increase their seating. Carriers also overschedule; that is, offer excess capacity, that increases fuel costs.

The inevitable consequence of the operation of excessive capacity is lower, not higher, load factors. Carriers will reduce fares in an attempt to increase load factors and will thereby reduce their revenues. The final result is ever increasingly losses for all competitors, until the financially strongest carrier is able to eliminate all of its competitors.

In conclusion, today we have the world's finest air transportation system providing safe, dependable service, at the world's most economical prices. Please note the order of those three factors: First is safety; second is dependable; and third is economical.

All available data prove beyond a reasonable doubt that deregulation: (1) Compromises safety to dangerous levels; and (2) Destroys dependability.

We do not believe any change in legislation is necessary. All that is needed is the responsible administration of the current law.

Senator CANNON. You are not suggesting that some of these events could occur since the 1958 act, are you?

Mr. KELLY. No, I am not. They took place prior to that, in the 1949 to 1965 time period.

Senator CANNON. Does Mr. O'Grady have a statement to make? Oh, you just want to submit that for the record?

Mr. O'GRADY. Yes, Senator.

Senator CANNON. You made some very good points.

Of course, we all know in the past airline fares have been a bargain. They have been remarkably immune from general price increases until the 1970's. A lot of that was brought about by technological improvements, a steady stream of new and more efficient and less costly to operate airplanes.

That situation has been reversed.

It seems to me the real issue is that fares now are higher than they might be in a more competitive industry, and fares are higher than they need to be and are denying millions of Americans the opportunity to enjoy air transportation and millions of dollars of new revenues to the airlines.

I go back again to the example that I used with respect to my ITC bill.

As you know, all of the air carriers had to be dragged kicking and screaming to that kind of result. Yet once it was put into effect it did prove there are new markets out there that had not been tapped, and because of this kind of a low fare package it generated tremendous additional traveling public. I don't think any of the carriers would dispute that, would they?

Mr. KELLY. I think that is a fair statement.

Senator CANNON. Getting back to the California example, you correctly pointed out that the carriers did have a very poor safety record but I don't think in the regulated atmosphere that we have now and would continue to have under the FAA, we would have any compromise of safety at all.

Do you think that safety could be compromised under present day regulations at this time?

Mr. KELLY. With all great respect and due regard to the FAA— they do a remarkably good job-but the real safety philosophy of

the air transportation business has to be inculcated in the operator himself.

There are so many times that shortcuts can be made. As economical pressures start to bear down on two airlines-let's say of limited financial resources-even though the FAA watches and controls them very carefully, monitors them, they can't be an enforcement burr for 2.500 airplanes flying today.

So the solenoid that has to be changed or the ball bearing that was on the squawk sheet, they say let's wait until tomorrow to do this.

The philosophy of the scheduled airplanes today is so deeply ingrained in this safety philosophy that I think you have a different approach to it.

In Alaska, for example, the fixed base nonscheduled operators are all under FAA regulation, very careful regulation.

If Senator Stevens was here today, I spent a lot of time in Alaska with him. When that pilot needs that fare and takes off into a marginal weather condition or his plane may be mechanically marginal and maybe the FAA would tell him it is supposed to be grounded and he knows he has to meet the peril the following day, that is when your accidents take place.

There is a large human element to be expounded and matched up with the fine FAA regulations.

Senator CANNON. You very carefully excluded PSA from your testimony. The bulk of your testimony was directed to the period prior to the present PSA as we know it.

PSA told us here what they could do with better equipment utilization, higher load factors, more productive labor agreements and less frills.

They have been able to accomplish reductions of 35 to 50 percent in the fare area and they are still making a profit, and they have a good safety record.

Would you care to comment on that?

Mr. KELLY. Yes, I would.

Senator CANNON. Incidentally, their aircraft utilization is lower than yours.

Mr. KELLY. I saw their figures. I was here when they testified. They are doing a highly specialized job. They are doing a very effective job. For example, the utilization of crews. They have one crew base. We have five. Deadheading pilots and ferrying pilots into position for a large operation such as a scheduled air transportation system really highlights the difference.

The continued example of PSA as compared to the air transportation industry is full of fallacies in the responsibility we have to running an interstate operation.

For example, I sat at Los Angeles airports and watched the passenger agents. They do an effective job and probably get more effort and productivity out of those people than we do. But they are not responsible for air mail, freight, waiting for Delta or Continental to come in on interline connections. They run a shuttle type of service and do a very good job.

I want to make that clear.