Chapter 2

EVOLUTION OF THECOMMUTER AIRLINE INDUSTRY

Chapter 2

EVOLUTION OF THECOMMUTER AIRLINE INDUSTRY

The structure of the U.S. commercial airtransportation industry and the level of service itprovides to small communities have been influ-enced by the interplay of three principal forces.The first and by far the strongest of these influ-ences is Government policy and regulation: thishas largely been reflected in the economic rulesand route awards of the Civil Aeronautics Board(CAB) and the airworthiness and operationalcertification rules of the Federal Aviation Ad-ministration (FAA). The second influence is the

development of aviation technology: this affectsthe cost and performance characteristics of theaircraft used in the air service system. The thirdinfluence is the air transportation market: thisreflects the desire of consumers for air service,its costs, and their ability to pay for it. The pur-pose of this chapter is to outline the way inwhich these forces have evolved and are inter-acting to shapehaul air service

the future of low-density, short-in this country.

GOVERNMENT REGULATION AND INDUSTRY STRUCTURE’

The Federal Government has exercised regula-tory control over commercial aviation since thepassage of the Kelly Air Mail Act of 1925, whichauthorized the Postmaster General to contractwith air carriers and compensate them for trans-porting mail. Since almost no air routes at thattime were profitable strictly on the basis of pas-senger revenues, the authority to award mailcontracts gave the Government considerablepower to determine which routes would beserved, at what levels, and by which air carriers.This regulatory power was expanded when Con-gress enacted the Air Commerce Act of 1926.This act charged the Secretary of Commercewith the task of promoting air commerce andempowered him to issue and enforce air trafficrules, license pilots, certify the airworthiness ofaircraft, establish airways, and operate variousaids to air navigation. These responsibilities,which were primarily designed to promotegreater safety, were similar to the functions oftoday’s FAA.

The Civil Aeronautics Act of 1938 added eco-nomic authority to operational and safety au-

‘This chapter draws on the contractor report, “Federal Eco-nomic Regulation of Air Service to Small Communities: The Effecton Aircraft Development, ” prepared for OTA by Samuel E. East-man.

thority, thereby establishing the Federal Gov-ernment as the economic regulator of the airtransportation industry. This act created what isnow CAB and required every air carrier to ob-tain a certificate from CAB authorizing it toserve a specified point or route. An airline thatpossessed such a certificate was thus a cer-tificated airline. This authority gave CABjurisdiction over who could offer air passengerservice, where they could offer it (market entry),and when they could terminate service (marketexit). CAB was also charged with approving thefares charged for all routes and for all types ofservice. One of CAB’s first actions was to ex-empt nonscheduled aircraft operations fromeconomic and safety provisions of the act, there-by establishing a precedent for future regula-tions that distinguish between scheduled and un-scheduled airline services.

Trunk Airlines

At the time of the 1938 act, there were already16 operating airlines, which immediately re-ceived certificates to continue the service theywere already providing. These 16 carriers be-came the first trunk carriers; their number hassubsequently fallen to 10 through mergers and

11

72 ● Air service to Small communities

acquisitions. * In keeping with the broad andsometimes conflicting objectives of the act, CABsought both to encourage the development of airservice and, at the same time, to protect the eco-nomic stability of these trunk carriers. Since itscongressional mandate was to promote competi-tion only “to the extent necessary to assure thesound development of an air-transportation sys-tem” (sec. 102), CAB often granted differenttrunks exclusive access to newly authorizedroutes and, at least initially, refused to issue op-erating certificates to any new airlines.

World War II had a profound effect on theembryonic commercial aviation system. First ofall, it accelerated the advancement of aviationtechnology and greatly increased the number ofaircraft available. The war also accelerated theexpansion of the market by whetting the ap-petite of smaller communities throughout thecountry for air service. In response to demandsfor increased air service from chambers of com-merce, local governments, and prospective oper-ators, CAB in 1944 established a new categoryof experimental “feeder airlines.”2

Local Service Airlines

CAB recognized that this new small-commu-nity service would require subsidy, since manysmall communities could not generate enoughridership to cover costs. The trunks at that timewere just on the verge of becoming profitablewithout dependence on the revenues from air-mail contracts, and CAB was reluctant to jeop-ardize this hopeful trend toward financial self-support. 3 Instead of imposing new complexitieson their operations, therefore, it chose to createa new category of air carriers. Between 1944 and1950, CAB awarded temporary operating certifi-cates to 17 new or existing interstate carriers thatwere to become the local service airlines, and in

● These 10 carriers are: American Airlines, Eastern Airlines,Trans World Airlines, United Airlines, Braniff Airways, Continen-tal Airlines, Delta Airlines, National Airlines, Northwest Airlines,and Western Airlines.

‘D. Solar, “The Federal Interest in Local Air Service: A Study inthe Evolution of Economic Policy” (Ph. D. thesis, Columbia Uni-versity, 1963), pp. 29-30.

‘Civil Aeronautics Board Reports, vol. 6, July 1944 to May1946, p. 3

1955 these temporary certificates were made per-manent at the insistence of Congress. *

In 1955, the primary difference between thetrunk and the local service airlines was in theirroute structure. The trunks served some smallcommunities, but they concentrated on thelonger routes with higher ridership. The localservice airlines, on the other hand, were givenauthority to operate only on low-density routesserving smaller communities, or on heavierroutes only where they were required to makeintermediate stops at smaller cities. These re-quirements, imposed by CAB in awarding certif-icates, were expressly to keep the new localsfrom competing with the trunks by preventingthem from offering comparable service (an inter-mediate stop can add 30 to 45 minutes to a trip).

Local service operating losses on these low-density routes were compensated by Federalpayments under section 406 of the Federal Avia-tion Act of 1958 (“sec. 406 subsidies”). Later,during the 1960’s, as the industry prospered andCAB became more concerned with reducing sub-sidies, it tried to strengthen the locals by allow-ing them to withdraw from small communitiesand offer competitive service in more lucrativemarkets. This liberalized policy was reversedagain during the recession and “route moratori-um” of the early 1970’s.

Commuter Airlines

At about the same time that the local serviceairlines were brought into existence, a third cate-gory of commercial air service had already be-gun to take shape as so-called “fixed-base” oper-ators around the country offered various combi-nations of aircraft maintenance services, sales,rental, brokerage, on-demand air-taxi service,and flying lessons. They varied widely in sizeand financial stability, although most were smalland operated on the ragged edge of success. In1949, CAB created another experimental cate-gory-confirmed in 1952—for “noncertified ir-regular route” carriers; these regulations (re-ferred to as the part 298 exemption) stated onlythat such operators could not operate aircraft of

‘G. C. Eads, The Local Service Airline Experiment (Washing-ton, D. C.: The Brookings Institution, 1972), p. 84.

Ch. 2—Evolution of the Commuter Airline Industry . 13

more than 12,500 lb takeoff gross weight (origi-nally 10,000 lb), nor could they offer scheduledservice between certificated points. This newclass of carrier was known as scheduled air taxisor “third-level” carriers, and after 1969, as com-muter airlines.

An aircraft of 12,500 lb is about half the sizeof a DC-3, the early workhorse of the certifi-cated carriers. This weight limitation and the ex-clusion from certificated points were specifi-cally imposed to protect certificated carri-ers—primarily local service airlines—from com-petition by this new class of air carrier.5 Exemp-

tions were available, but few commuter marketswere large enough to support larger aircraft; as aresult, very few short-haul aircraft in the 20- to50-seat range were bought or flown by com-muters until 1973. Such aircraft were in use andin production overseas, however, giving foreignfirms a head start when the size limit was laterraised. CAB’s 1969 size restriction thus seems tohave contributed to the present dominance offoreign manufacturers in the domestic 20- to50-seat commuter market (see ch. 4).

‘Code of Federal Regulations, title 14, pt. 200 to end, 1971, pp.364-378.

TECHNOLOGICAL EVOLUTION

During the early sorting out of industry struc-ture and Government regulation, importantchanges were occurring in aviation technology.The conclusion of World War II made a largenumber of surplus aircraft available at relativelylow prices. The 21- to 28-seat DC-3 had enteredcommercial service in 1936, 2 years before theCivil Aeronautics Act. By the end of the war,more than 10,000 had been built, and they hadbecome by far the dominant aircraft in the fleetsof both the local service and the trunk airlines.The trunk airlines, however, were ready forlarger, faster, and longer range aircraft.

Here again World War II had already primedthe pump. Not only had it given a tremendousimpetus to the advancement of aircraft technolo-gy, but now the Nation’s aircraft manufacturers,short on military business, were ready and eagerto produce a new generation of commercialtransport aircraft: in the late 1940’s the DC-4and the Lockheed Constellation, followed quick-ly by the DC-6, the Boeing Stratocruiser, andthe Convair 240—with more to follow in the1950’s. Compared to the DC-3, these aircraft cutseat-mile operating costs by roughly a third (seefig. 1). They had greater range and essentiallydoubled both cruise speed and seating capacity.By the late 1940’s, the trunks were expandingtheir fleets and replacing their now outgrownDC-3s with this newer equipment, which was

Figure 1 .—Relative Direct Operating Costs From the

3.0

2.5

>

1.0

0.5

0

DC-3 to the DC-10(current dollars)

1930 1940 1950 1980 1970 1980Year of initial service

SOURCE: R.S. Shevell, “Selection of the Fittest: The Evolution and Future ofTransport Aircraft,” Israel Journal of Technology, Vol. 12, 1974.

7 4 ● A i r S e r v i c e t o S m a l l c o m m u n i t i e s

tailored to their evolving high-density, longerstage-length route structures.

For the local service airlines, however, theDC-3 was too big, not too small: many of thepoints they served generated too few passengersto provide break-even loads on a 21- to 28-seataircraft. Nonetheless, DC-3s were attractive tothe local service airlines. First, they had been op-erated successfully by the trunks and carriedwith them the image of those more prestigiouscarriers. Second, they were available at reason-able prices when capital was difficult to raise;removing the locals’ experimental status in 1955and making Government-guaranteed loansavailable in 1957 also helped with this problem.So, during the 1950’s, the DC-3s moved from thetrunk fleets to the local service airlines, and itwas only in the last half of that decade that thelocals started moving toward larger aircraft.

The Jet Era

The first commercial jet aircraft representedan even more important technological mile-stone. Speeds went from 300 to 350 mph to 550

mph. Seating capacity increased from 50 to 6 0seats to 125 or more. More to the point, directoperating costs per seat-mile dropped another 30percent from the most modern propeller craft(see fig. 1). Jet equipment revolutionized the op-erations of the trunks. Their greater size andspeed and higher cruising altitude boosted pro-ductivity and profitability of the trunks’ longerand more heavily traveled routes.

The acquisition of these new jet aircraft gavethe trunks a stronger economic incentive toabandon their low-density markets. As thetrunk airline fleets evolved more and more to-ward jets, it would have been natural and effi-cient for them to modify their route structure byprogressively dropping service to small commu-nities on their shorter and more lightly traveledroutes, in order to concentrate on the longer,more heavily traveled segments. The trunkswere not free to make this adjustment in theirroute structure without specific permission fromCAB, but as it happened CAB was willing to ac-commodate this shift in trunk route structure inorder to strengthen the routes and finances ofthe local service airlines.

LOCAL SERVICE SUBSIDIES AND ROUTE-STRENGTHENING

By the early 1960’s, CAB’s central concern inawarding routes shifted from protecting the fi-nancial viability of the trunks to reducing thesize of the subsidy needed to sustain the localservice airlines. The trunks by this time werefirmly established, in part because they had beenallowed to terminate service to 211 small citiesbetween 1948 and 1963 in favor of local servicecarriers (see table 1). As a result, all but one ofthe trunks became self-supporting and were ableto go off subsidy. However, the total subsidy re-quired by the local service airlines, which hadranged from $22 million to $33 million during1954-58, suddenly jumped to $55 million in 1960and almost $67 million in 1962 (see table 2). Sim-ilarly, the average subsidy per passenger, whichhad declined in the mid-1950’s, rose from about$7.60 per passenger in 1958 back to nearly$10.00 per passenger in 1961. One factor in theseincreases was the replacement of many of the

now-obsolete DC-3s with larger 35- to 60-seataircraft such as CV-240s and 440s, M-202s and404s, and F-27s. A far more important factor,however, was the large number of small commu-nities to which the locals were required to pro-vide air service.

The subsidy for each local service carrier wascomputed on the basis of both its losses on un-profitable service and its overall profitabilitycompared to the industry average. The idea thatsome of the carrier’s losses should be coveredthrough internal cross-subsidy from its profita-ble routes was implicit in the determination. Theexact formula changed from time to time in re-sponse to changing conditions, but the principlebehind the subsidy determination remained thesame: to compensate the carrier for losses abovewhat might be considered a reasonable level ofinternal cross-subsidization, given the carrier’smix of strong and weak route segments.

Ch. 2—Evolution of the Commuter Airline Industry ● 1 5

Table 1.— Points Served by Certificated Carriers: 48 Contiguous States

Trunk carriersb Local service carriersc All carriers

Points Points Points Points Points Points Points Points PointsYeara authorized suspended served authorized suspended served authorized suspended served

1948 . . . . . . . . — — 454 — — — — —1955 . . . . . . . . 376 27 349 381 18 363 –583 44 5391956 . . . . . . . . 373 23 350 380 13 367 575 35 5401957 . . . . . . . . 368 25 343 387 9 378 579 33 5461958 . . . . . . . . 361 21 340 415 14 401 581 34 5471959 . . . . . . . . 332 23 309 468 29 439 610 52 5581960 . . . . . . . . 328 13 315 497 38 459 618 51 567

1961 . . . . . . . . 309 13 296 494 28 466 601 39 5621962, . . . . . . . 302 16 286 499 22 477 599 38 5611963 . . . . . . . . 251 8 243 475 11 464 562 19 5431964 . . . . . . . . 247 8 239 468 5 463 552 13 5391965 . . . . . . . . 231 8 223 472 4 468 536 12 524

1966 . . . . . . . . 230 7 223 466 5 461 530 12 5181967 . . . . . . . . 229 5 224 466 7 459 526 12 5141968 . . . . . . . . 230 5 225 468 5 463 527 10 5171969 . . . . . . . . 228 5 223 469 4 465 526 9 5171970 . . . . . . , . 228 18 210 467 34 433 524 50 474

1971 . . . . . . . . 228 18 210 466 34 432 522 52 4701972 . . . . . . . . 222 15 207 455 32 423 508 47 4611973 . . . . . . . . 221 19 202 445 40 405 497 56 4411974 . . . . . . . . 208 16 192 432 49 383 481 64 4171975 . . . . . . . . 198 18 180 433 53 380 464 70 394

1978 ...,.... — — — — — — — — 3801980 . . . . . . . . — — — — — — — — 248aAs of December each Year.blncludes points served jointlywlth local service carrlerscincludes points served jointly with trunk carriers.

SOURCE CIVII Aeronautics Board, Offlce of Facilities and Operations

CAB’s primary response to the rising cost ofsubsidy, therefore, was to allow the locals tomodify their route structure in an attempt tostrengthen their financial performance, a policychange welcomed by the industry. Specifically,CAB allowed locals to replace trunks at somepoints, relaxed the requirement that the localsstop at every intermediate certificated point onevery flight, and became more lenient in permit-ting the locals to drop service to points that gen-erated less than 5 passengers per day on average.The latter “use it or lose it” policy alone resultedin the elimination of 108 previously subsidizedsmall communities from the local service routemap between 1956 and 1968, to be replaced bylarger points dropped by the trunks. This route-restructuring increased local service revenuesand, after a delay, improved industry profitabil-ity. It also allowed CAB to begin reducing sub-sidy payments: after peaking in 1962 and 1963 at$67 million, total subsidy payments declined to

$62 million in 1964 and had fallen to $34 millionby 1970.

By the mid-1960’s the trunk airlines hadmoved almost entirely out of low-density airservice, the few exceptions being cities that fitwell in their route structures or fed “captive”passengers into the longer and heavier traveledroutes. There is a marked similarity in thegrowth pattern of local service airlines: eco-nomic and technological forces have driven theirevolution in the same direction. For both, therehas been a strong economic incentive to move tolarger and more modern aircraft that can yieldthe most profit on the strongest routes. CABroute-strengthening and FAA equipment loanguarantees further reinforced the logic of mov-ing toward larger aircraft, and by the mid-1960’sthe locals were ready to start acquiring jets. By1970 more than a third of the local service fleetwas jets and nearly all of its piston-powered air-

16 ● Air Service to small communities

Table 2.—Section 406 Subsidy Payments to Carriers, 1954-82

Fiscal Local Domestic Grandyear Alaskan Hawaiian Helicopter Regional service International trunkline a total

1954 . . . . . . . 8,3031955 . . . . . . . 7,902

1956 . . . . . . . 7,6191957 . . . . . . . 7,7071958 . . . . . . . 8,1791959 . . . . . . . 7,3371960 . . . . . . . 8,818

1961 . . . . . . . 9,3131962 . . . . . . . 9,0581963 . . . . . . . 9,6901984 . . . . . . . 9,4111965 . . . . . . . 8,163

1966 . . . . . . . 6,5091967 . . . . . . . 5,9391968 ...., , . 5,8941969 . . . . . . . 5,4211970 . . . . . . . 4,898

1971 . . . . . . . 4,4991972 . . . . . . . 4,3941973 . . . . . . . 4,3851974 . . . . . . . 4,3391975 . . . . . . . 4,345

1976 . . . . . . . 4,3601977 . . . . . . . 4,2611978 . . . . . . . 3,8781979 . . . . . . . 3,4271980 . . . . . . . 7,993

1981 . . . . . . . 8,4091982 (estimated). . . . . . . . . .

689293291216

45168330505338520802995

1,124567—789—

——————————

—. . . . . . . . . . .

2,5742,6562,7353,7714,4194,8604,930

5,5385,7815,000”4,3003,3581,170

—.——

——————————

—. . . . . . . . . .

———.—————————————————

1,812

4,0174,3914,8405,8949,404

8,502

--- —58,40139,739

43,18948,61352,54050,01665,576

71,65680,01082,91082,56177,403

70,563b

64,223 b

55,21946,72339,726

80,43966,55464,57172,95863,720

73,03579,21377,81575,45380,844

89,568

24,29922,35824,12228,44432,70336,45051,49856,30064,83567,70065,48264,412

58,671 b

55,240 b

47,98240,51334,83055,94062,16060,20668,61957,563

64,65870,56169,09766,13263,38772,897

18,7143,757

3,8222,7731,7901,5722,2831,201

6,6326,9034,911—— ——————

—2,5663,4753,0892,4771,343

————— —— ——— —

——

—————— —

———

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,400C

a Tr u nkli neaccrua 1 9 for 1964-68 refle ct local service operations in the New England area.bRevised pursuant to order 77-12-106, Dec. 20, 1977, in accordance with provisions of sec. 120 of Public Law 95-163. For this report, fiscal years

1976-80 are considered to be the 12 months ended June 30 of these years.cIf legislative changes t. 406 are adopted, a ceiling of $28 million would be imposed.

craft had been replaced by large turboprops; this Figure 2.—Local Service Airlines Aircraft Fleet Mixtransition is illustrated in figure 2.

The transition to larger, faster aircraft had anegative effect on small communities (whoneeded good short-haul, low-density air service)because it offered local service as well as trunkoperators a much more profitable alternative—the ability to supply good long-haul, high-density service. Between 1968 and 1978 an addi-tional 125 cities were suspended or deleted fromlocal service routes, and it was becoming obvi-ous that a major gap in air service was onceagain emerging. Service to small communitieswas decreasing and something was needed to fillthe role CAB had originally assigned to the localservice airlines in 1944. This role was to pass tothe commuter airlines.

{965 1967 1989 1971 1973 1975 1977 1979

YearSOURCE: National Aeronautics and Space Administration, Small Transport

Aircraft Technology, fig. 2.

Ch. 2—Evolution of the Commuter Airline Industry . 17

COMMUTER AIRLINE GROWTH AND FLEET

Out of several thousand air-taxi operators inJanuary of 1964, only 12 offered scheduled serv-ices, all to noncertificated points. By the end of1968, there were over 200 scheduled air-taxi op-erators. This explosive early growth in what hasbecome the commuter airline industry resultedin part from the economic opportunity createdby the service gap left by the withdrawing lo-cals. Another important factor was the availa-bility of new aircraft that were small enough tobe exempt from CAB economic regulation, yetlarge enough to carry economic loads in sched-uled short-haul operations.

Market Opportunities

Regulatory and economic changes in the1960’s improved the climate for the growth ofscheduled air taxis. In 1964, FAA promulgatedFederal Aviation Regulation (FAR) part 135,which defined the operational and safety rules ofthe industry. In 1965, CAB amended its regula-tions to allow these carriers to transport mailand to provide service between certificatedpoints, often as replacements for trunk or localservice airlines. In 1964, American Airlines con-tracted for Apache Airlines to replace it in serv-ing Douglas, Ariz.; this was the first “air taxi re-placement agreement. ” In 1967, Allegheny Air-lines (now USAir) greatly expanded this conceptby contracting its unprofitable points to 12 inde-pendent commuter contractors operating underthe name “Allegheny Commuter;” this networkcontinues today. CAB officially recognized thecommuter industry in 1969, defining a com-muter air carrier as an air-taxi operator that ei-ther: 1) per forms at least five round trips perweek between two or more points and publishesflight schedules that specify the times, days ofthe week, and origins and destinations of suchflights; or 2) transports mail by air under a cur-rent contract with the U.S. Postal Service. e B yAugust 1978, 26 commuter airlines were pro-viding replacement service for certificated carri-ers at 59 points, mostly without direct financialassistance.

‘Civil Aeronautics Board, Glossary of Air TransportationTerms, 1st cd., February 1977.

The number of passengers on commuter air-lines grew at an annual rate of slightly over 13percent from 1970 to 1979, compared with a7-percent growth rate for the combined trunkand local service airlines and a 3-percent annualgrowth rate in real gross national product. Com-muter air cargo growth has averaged over 26percent annually, reflecting the growth of smallparcel shipments by Federal Express and othercarriers. ’ Only mail activity has dropped, as theU.S. Postal Service has deliberately withdrawnpatronage. These trends are shown in figure 3.Between 1970 and 1979, the number of aircraftin the commuter fleet grew by 8 percent annual-ly, from 687 to 1350 aircraft.’

There are a number of reasons for the rapidgrowth of commuter air service. First, the speedand convenience of air travel are more attractiveas incomes rise, and the rising number of busi-nesses moving to smaller communities has alsoincreased the demand for short-haul air service.The number of communities served by commut-ers, for example, has almost doubled over thepast decade. Second, the withdrawal of the localservice and trunk airlines from smaller commu-nities results in a faster growth rate for commut-er airline ridership than normal growth in thedemand for air service would imply. Third, en-try into the commuter airline business has beenrelatively easy: less capital was needed to ac-quire or lease the smaller aircraft appropriate tothis type of service, and until 1978 entry and exitwere unregulated. Fourth, integration with theprimary air transportation system has beenimproving in recent years as the trunk and localservice airlines, to whose longer routes the com-muters customarily feed passengers, have begunto share ticket counters, gate space, baggagehandling, and reservation services at reasonablecost. A fifth and perhaps more important reasonfor commuter growth, however, was the availa-bility of suitable new aircraft in the late 1960’s.

‘For further information on this subject, see OTA’S forthcomingbackground paper, The Air Cargo System.

‘Commuter Airline Association of America, 1980 Annual Re-port (Washington, D. C.: CAAA, November 1980), p. 116.

18 ● Air service to small communities

Figure 3.–Commuter Passengers, Cargo, and Mail, 1970-80

Commuter passengertraffic 1970-80

Commuter cargoactivity 1970-80

Commuter mailactivity

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980Calendar year

450

350

50

0

SOURCE: Passengers and cargo data from Commuter Airline Association of America, 1980 Annual Report, Washington, D. C., 1980; mail data from Civil AeronauticsBoard, Commuter Air Carrier Traffic Statistics, 12 Months Ending June 30, 1979, Washington, D. C., 1979.

Ch. 2—Evolution of the Commuter Airline Industry ● 1 9

Commuter Aircraft and Fleet Mix

In 1964, Pratt & Whitney of Canada, an en-gine manufacturer with a history of successfulaircraft engines, announced a new turboprop en-gine, the PT-6, which was highly suitable for air-craft in the 12,500-lb commuter category, Ayear earlier the Low-Cost Plane Design Commit-tee of the Association of Local Transport Air-lines (ALTA), the trade association of the localservice airlines, had issued a report calling for anew aircraft designed specifically for low-densi-ty air service-a so-called “DC-3 replacement.”9

The availability of an appropriate engine, alongwith the impetus of the ALTA report, contrib-uted to the development of two new twin-turboprop airplanes in the 15- to 19-seat rangethat were well suited to commercial low-densitymarkets: the Canadian DHC-6 Twin Otter,made available in 1966 and designed primarilyas a general-purpose bush airplane; and theBeech 99, first produced in 1967 for the corpo-rate and air-taxi market. By 1970, commuter op-erators had purchased 134 of these two aircraft,representing about 75 percent of the over-15-seataircraft in the commuter fleet. 10

CAB originally restricted commuter airlines toaircraft smaller than 12,500 lb gross takeoffweight— about 19 passengers—for the expresspurpose of confining their operations to servicethat would not compete with the trunk and localservice airlines. As the threat of such competi-tion passed, this limitation was changed in 1973from an aircraft size limitation to a maximumpayload limitation— either 30 seats or 7,500 lb ofcargo. At that time, however, permission to flyso-passenger aircraft was less significant than itmight appear. For one thing, there were no mod-ern aircraft available in this size range that werespecifically tailored to the economic and opera-tional requirements of the commuter market. Inaddition, FAA operating regulations requiredthe addition of a cabin attendant at 20 seats ormore, which represented an economic barrier toseating capacities only slightly above this thresh-

‘Association of Local Transport Airlines, “Recommendations ofthe Low Cost Plane Design Committee Re: The Development of anAirplane Designed to Provide Economical Short-Haul OperationsOver Low-Density Routes, ” Feb. 20, 1963.

‘“Eastman, op. cit.

old. More importantly, however, few commutermarkets in 1973 were large enough to supportlarger equipment, and internal disputes pre-vented the commuter airline industry from en-dorsing a new 30-seat aircraft. ” U.S. manufac-turers, lacking a firm commitment from thedomestic market, decided not to develop anynew commuter aircraft.

As a result, the commuter airline fleet (fig. 4)remains dominated by small aircraft—not a sur-prising circumstance, given the industry’s regu-latory history and the markets it currentlyserves. Nevertheless, the fleet is shifting towardlarger aircraft and—given the new size freedomunder the Airline Deregulation Act of 1978 andthe higher profit potential of larger aircraft onthe higher ridership routes—this shift wouldprobably be even more marked if greater num-bers of suitable aircraft were currently available.The real growth of the commuters began in the

‘ ‘Ken Cardella, president of Cochise Airlines, interview, July31, 1981.

Figure 4.—Commuter Airline Fleet by Aircraft Size

aA few airlines counted as commuters are technically very small regionals, andhave been permitted larger aircraft.

SOURCE: Data from Commuter Airline Association of America, 1980 AnnualReport.

1960’s with the advent of new small transport small communities, seems likely to be equallyaircraft suitable for short-haul service. The com- sensitive to the further evolution of small trans-mutes’ future, and the future of air service to port aircraft (see ch. 4).

●

DEREGULATION AND COMMUTER EVOLUTION

The passage of the Airline Deregulation Act inOctober 1978 formalized a number of significantchanges in Federal policy and regulations aimedat making the air transportation system more ef-ficient. These changes promise to have profoundeffect on the future of both the airline industryand air service to small communities. In manyrespects, however, the act has merely acceler-ated already existing trends in airline route andfleet development and confirmed the process ofadministrative deregulation that was already inmotion at CAB.

In the evolution of the airline industry, allclasses of air carriers have tended to acquirelarger aircraft and concentrate on their longerand higher density markets. This has usuallymeant dropping their service to small communi-ties or transferring these short-haul, low-densityroutes to the next class of airlines. As the indus-try prospered, CAB became more disposed toauthorize competitive service in high-densitymarkets, and CAB’s efforts to reduce local serv-ice subsidies in the 1960’s led to particularly lib-eral route award policies. These policies in turnhad the effect of enabling the locals to go aftermore lucrative markets and to terminate serviceto many small communities. When this policywas reversed during the “route moratorium” ofthe early 1970’s, reduced competition (in com-bination with general inflation and rising fuelcosts) led to increasing air fares and decliningairline profitability.

Congress considered but failed to pass airlinederegulation legislation in 1975. Pressure for reg-ulatory reform continued to grow, however,with an emphasis on increasing competition inorder to improve service and reduce fares. In1977, CAB began to approve fare discounts andgradually relaxed the restraints on market entryand exit. By 1978, CAB appeared to be firmlycommitted to deregulation, and in the 3 years

since passage CAB has been extremely promptas well as liberal in approving the new routesand terminations permitted by the act. The cur-rent administration has proposed dismantlingCAB 27 months early, on September 30, 1982,rather than waiting for the January 1, 1985, datemandated by the legislation.l 2

Provisions for Small Communities

The Airline Deregulation Act of 1978 is farmore explicit than its predecessor, the FederalAviation Act of 1958, in specifying the nature ofthe desired air transportation system and themeans by which this system is to be developed.Where the 1958 act called for “competition tothe extent necessary to assure the sound devel-opment” of the system, the 1978 act directs CABto promote “the availability of a variety of. . . services by air carriers” through “maximumreliance on competitive market forces . . . toprovide efficiency, innovation, and low prices.”Where the earlier act emphasized “sound eco-nomic conditions” for existing carriers, the newact calls for “the encouragement of entry into airtransportation markets by new air carriers . . .and the continued strengthening of small air car-riers so as to assure a more effective, competitiveairline industry. ” And where the 1958 act simplyinstructed CAB to “preserve the inherent advan-tages of . . . [air] transportation,” the 1978 actspecifically directs CAB to promote “a compre-hensive and convenient system of continuousscheduled airline service for small communitiesand for isolated areas, with direct Federalassistance where appropriate” (sec. 3[a]).

To accomplish this last objective, section 419of the act guarantees “essential air service”

‘2 Carole Shifrin, “Reagan Bill Would End CAB in ‘82,” Wash-ington Post, June 25, 1981, p, B1.

Ch. 2—Evolution of the Commuter Airline Industry . 21

(EAS) for at least 10 years to all eligible commu-nities (those receiving certificated service on thedate of passage, or whose authorized service hadbeen suspended—a total of 555 communities,316 of them in the 48 contiguous States). The actdirects CAB to determine the level of EAS foreach community to establish a new subsidy pro-gram (the “419 subsidy”) for payments to car-riers that provide EAS. Congress defined EASbroadly as a level that “satisfies the needs of thecommunity concerned . . . and ensures accessto the Nation’s air transportation system. ” Sub-sequent guidelines developed by CAB specifythat EAS will consist of a minimum of two well-timed round trips per day (one on weekends) toone or two hubs, with no more than two in-termediate stops, using aircraft with two enginesand two pilots, with a maximum combinedcapacity of 160 seats per day (80 outbound and80 inbound at a 50-percent load factor, or 40passengers each way).

CAB’s EAS standards are clearly near the min-imum permitted by the language of the act, andthey are viewed by many cities and states as toorestrictive to support services at any but thesmallest communities (see ch. 2). However, CABfeels that market forces will attract and supportair service when demand is above these levels,and that such service should not be subsi-dized—EAS is not a market-development pro-gram. ’3 Congressional participants in the devel-opment of the act claim that CAB is correct ininterpreting the intent of section 419 as a mini-mum guarantee.

Future Role of Commuters

Responsibility for providing EAS to smallcommunities will increasingly fall to the commu-ter airlines, particularly after the current section406 subsidies to local service carriers expire in1985. Although eligibility for section 419 subsi-

‘3 Earlier Civil Aeronautics Board and Department of Transpor-tation studies had shown that points enplaning 17 or more passen-gers per day would support commuter replacement service withoutthe need for subsidy. Civil Aeronautics Board, Bureau of DomesticAviation, A Review of the Office of Technology Assessment’s re-port entitled, “Air Service to Small Communities, ” October 1981;see also Department of Transportation, Office of TransportationRegulatory Policy, Air Service to Small Communities, March1976.

dies is not limited to commuter airlines, CAB is-sued a policy statement a month before deregu-lation indicating that the local service carriersare no longer structured or equipped to servesmall- or even some medium-size communi-ties.14 CAB has also issued several reports indi-cating that small communities generally receivemore frequent and more responsive service fromunsubsidized commuters than they had fromsubsidized locals. 15

Nevertheless, some small communities havebeen unable to attract reliable commuter re-placements, and States and regions that lack awell-developed commuter airline network maybe vulnerable to a deterioration of service tosmall communities even before the expiration ofsection 419 in 1988. Commuter airlines, for theirpart, sometimes complain that the EAS programis poorly designed, and some operators are un-willing to bid for new EAS communities whenthey become available (see ch. 4).

It should also be noted that the Airline Dereg-ulation Act did not “deregulate” the commutercarriers as it did the rest of the industry. It didjust the opposite—the commuter airlines nowoperate in a much more constrained regulatoryenvironment than they did before 1978. For ex-ample, they must now comply with more strin-gent reporting requirements and operating regu-lations; their pilots must hold “airline transportpilot” certificates, the highest level of FAA li-cense; and even their smallest aircraft must nowcomply with the stricter FAR part 135 safetyrules. In addition, although commuters can ter-minate service to nonsubsidized points on 30days’ notice, on subsidized EAS routes they maynot terminate service on less than 90 days’ noticeto the affected communities and States andCAB. CAB also has the power to require them tocontinue service (with subsidy) until a replace-ment carrier can be found. There have alreadybeen many cases in which commuters have notwanted to offer (or continue) service in particu-lar markets, even with subsidy, because the sub-sidy level was too low to provide the profit they

“Civil Aeronautics Board, Statement on Improuing Service toMedium and Small Communities, Sept. 18, 1978.

‘ ‘See Civil Aeronautics Board, Aircraft Pressurization andCommuter Airline Operations, June 1979, app. B.

22 . Air service to small communities

could make with the same aircraft in an alterna- technology aircraft in this size range will remaintive unsubsidized market. About 130 points limited until the mid-1980’s (see ch. 4), the op-have had commuter replacements; but 13 points portunity to operate larger aircraft on morehave experienced more than one turnover and 20 profitable routes could well tempt successfulpoints have a second turnover pending. commuters, in the pattern of their predecessors,

The act also allows commuters to operate to abandon their less lucrative service to smaller

larger aircraft (up to 55 seats, later increased to communities. This eventuality, and the general

60 seats) that would enable them to serve largeroutlook for service to small communities, is dis-

markets. Even though the availability of new- cussed in chapter 3.