system provides a flexible method of adapting the service provided to each city to the type of service which best meets the requirements of the public convenience and necessity. It provides a flexibility which takes advantage of the characteristics of jets, turbo-prop and commuter aircraft in the role for which they are best suited. 4. Certification of Commuter Carriers.-There is an important role for commuter carriers to play in our air transport system. They already provide service in many markets adapted to their type of operations. In addition, they should undoubtedly be authorized to operate in some markets requiring subsidy support-both in markets where subsidy supported service is now provided by locals and in markets where there is now no subsidy supported service. We believe that the authority for subsidy supported service can best be provided under a simplified form of certification. It is noteworthy that the Presidents of Air New England and Air Midwest in their testimony both emphasized the desirability of certification. The carriers receiving these certificates should be permitted to engage concurrently in non-subsidized operations not covered by their certificates. While the certification process might well be streamlined to make it less burdensome, it does perform an essential function. It gives all the interested parties an opportunity to be heard in the light of the particular factual situation involved. This is particularly important for the cities. Airline service is a matter of importance to them, and they are entitled to an opportunity to have their views fully considered. 5. Adequate Compensation To Provide An Incentive For Good Service.— The locals have been criticized at times for terminating service at some of the small cities they served. There are a number of explanations for these terminations, and in all cases they were fully justified. It is not the purpose here, however, to explain at length the various reasons. We just wish to make two comments: First, whatever the reason for these terminations, the remedy is not the abandonment of other cities. Thus, there is no justification here for the CAB proposal to withdraw subsidy support from many additional cities. Second, the basic reason for locals terminating service at small cities where subsidy support is required is because the subsidy provided by the CAB is so meager that it does not provide adequate incentive for continuing the service. Chairman Robson himself testified that there is "a very limited incentive for a carrier to provide good service to small, unprofitable points". The CAB is to be commended for its careful husbandry of Government funds. Nevertheless, there is a point beyond which frugality becomes counterproductive. The local service carriers over the years have not achieved any significant earnings from their subsidy eligible services. In many years, they have sustained substantial losses, as shown in the table below. The natural result has been a disincentive for the carriers to continue to serve small cities. The situation has been ameliorated in recent years as the class subsidy rate applicable to local service carriers has been refined and improved. In its present form, the class rate provides strong incentives for the carriers to operate economically and efficiently, and thus to hold down subsidy costs. At the same time some of its major inequities have been eliminated or reduced. The major remaining problems include the recapture of part of the earnings from subsidy ineligible services to cross subsidize service to small communities (which the 7 See Attachment 3. CAB deems to be required by existing law), the disallowance of substantial expenses which are properly incurred by the carriers in the economical and efficient management of their business, and an overhanging threat of reduction or elimination of subsidy by arbitrary CAB action. This threat is exemplified in the Board's complete elimination of subsidy for Allegheny when Allegheny is continuing to serve many small cities which require subsidized service. This threat is a serious inhibiting factor which deters the carriers from making the necessary investment and long-range plans that would provide the optimum in air service for small cities. The fear of this threat cannot be removed without a Congressional mandate to the Board. If there is no basis for the fear, it would cost nothing, of course, for the Congress to remove it. If there is in fact a basis for the fear, that is all the more reason for Congress to remove it. The correction of the problems with the current subsidy rates noted above (e.g., elimination of the recapture of earnings from subsidy ineligible activities to offset subsidy otherwise payable, and allowance of all proper expenses) would result in a moderate initial "bulge" in subsidy costs. Thereafter, subsidy costs should resume their downward trend in terms of constant dollars. These costs are modest indeed in comparison with other Government subsidy programs, and in relation to the value and importance of the services received. It should be kept in mind that the primary beneficiaries of the subsidy are the cities which receive the service. Local service subsidy is not substantial and has been declining. As shown in the table below, local service subsidies are a small part of annual transportation subsidies paid by the Federal Government. Amtrak-$1,500,000,000. Thus, the local service carriers receive but a fraction of the other transportation subsidies. We would note particularly the desirability of continuing a "class" subsidy rate for the local service carriers and for having a class rate for other subsidized carriers whenever it is feasible to do so. The class rate is less difficult to administer and contains strong built-in incentives to operate efficiently and thus reduce subsidy costs. We believe the Congress should require the use of class rates wherever practicable. 1 As derived from the rebuttal testimony and exhibits of CAB Bureau of Operating Rights in Air Midwest Certificate Proceeding (docket 28262). 1 BOR-R-1. Report of Comptroller General "How Much Subsidy Will Amtrak Need", April 21, 1976, in establishing Con Rail, Congress authorized operating subsidy and in addition provided initial capitalization of $2.1 billion. ATTACHMENT 2 ANALYSIS OF CITIES SERVED BY LOCAL SERVICE CARRIERS WITH POPULATIONS BELOW 100,000 IN 1966 AND 19761 ATTACHMENT 2-Continued ANALYSIS OF CITIES SERVED BY LOCAL SERVICE CARRIERS WITH POPULATIONS BELOW 100,000 IN 1966 AND 1976 1 ATTACHMENT 2-Continued ANALYSIS OF CITIES SERVED BY LOCAL SERVICE CARRIERS WITH POPULATIONS BELOW 100,000 IN 1966 AND 1976 1 3 Suspension was authorized in 1976 but the local service carrier continued to serve the community through the end of 1976 and into 1977 until the replacement carrier was ready to commence service. • Points. Average departures based on 81 days. Cortez was temporarily suspended and served by a commuter between Apr. 21, 1976 and Nov. 1, 1976, at which time service was reinstated by the Local Service Carrier. ATTACHMENT 3 REVIEW OF TERMINATIONS OF SMALL CITY SERVICE FROM 1962 to 1976 For the entire period of the air service program for small cities it has been the intent of Congress to provide these communities with maximum quality service at the lowest possible subsidy cost. |