COMPTROLLER GENERAL OF THE UNITED STATES, Hon. WARREN G. MAGNUSON, Chairman, Committee on Interstate and Foreign Commerce, United States Senate. DEAR MR. CHAIRMAN: Reference is made to our letter dated April 27, 1955, containing comments and recommendations with respect to S. 308, S. 1119, and other bills proposing to amend the Civil Aeronautics Act of 1938. In that letter we expressed our wholehearted agreement with the contractual concept covering the payment of subsidy, as contemplated in both S. 308 and S. 1119, primarily for the reason that it provides a positive separation between rates and subsidies, and leaves the matter of compensation for the carriage of mail, passengers and cargo within the Board's ratemaking functions where it rightfully belongs. Furthermore, we expressed the view that, in the event such provision is adopted by the Congress, the element of subsidy thereafter would be regarded in terms of amounts instead of rates as a matter of financial support for the purpose of maintaining an industry in the national interest and, hence, there no longer would exist the necessity for having the consideration of such amounts being brought within the Board's realm of a quasi-legislative judicial proceeding. Since the reasons underlying our support of such a concept were set out in detail in our report of April 27, they need not be repeated here. For reasons stated therein, we also expressed agreement with that portion of the amendment dated March 23, 1955, amending S. 1119, which provides for the creation of a Subsidy Administrator to be appointed by the President and to be administratively responsible to the Chairman of the Civil Aeronautics Board. We recently received an informal request from your committee counsel to submit a draft containing a few pertinent elements which, in our opinion, should be embodied in the legislation as the bases for the contracts contemplated by the law. Accordingly, we suggest the following substitute for those portions of S. 308 and S. 1119 entitled "Subsidy Payments for Essential Air Transportation," which propose to authorize the Civil Aeronautics Board to enter into such contracts with the subsidized air carriers, retaining, of course, the amendment creating the office of Subsidy Administrator. However, it is suggested that the latter, instead of amending section 201 of the act, be used as an introduction to the subsidy section of S. 308, beginning with subsection (e) at the bottom of page 17 through paragraph (2) on page 19 of S. 308, as follows: "SUBSIDY PAYMENTS FOR ESSENTIAL AIR TRANSPORTATION "(e) (1) There shall be a Subsidy Administrator who shall be appointed by the President, by and with the advice and consent of the Senate, and who shall receive a salary of $per annum. The Subsidy Administrator shall be administratively responsible to the Chairman of the Board. "(2) The Subsidy Administrator shall be provided the necessary staff to enable him to perform the duties prescribed in this Act. In addition thereto, he shall have access to all information and material presently available at the Board and, to the extent practicable, he shall have access to the Board's legal counsel, air transportation specialists, accountants and auditors, together with the further authority to engage consultants whenever deemed in the public interest for the purpose of developing special studies relative to subsidy carrier operations in particular and air transportation subsidy problems in general. There also shall be made available to the Subsidy Administrator copies of all reports furnished to the Board, including special and routine investigations: Provided, That such additional investigations may be instituted at any time found necessary to meet his particular requirements. "(3) The Subsidy Administrator, in conformity with the general policies of the Board, is empowered, upon petition of any air carrier, in the interest of encouraging the development of an air transport system properly adapted to the present and future needs of the foreign and domestic commerce of the United States, of the postal service, and of the national defense, to make an offer or offers on behalf of the United States to such air carrier to make payment in such amounts as are necessary to enable such air carrier, under honest, economical, and efficient management, properly to perform the air transportation authorized by any certificate or certificates of public convenience and necessity held by such carrier. Such offer may be accepted by the air carrier concerned by agreement, in the form and manner specified by the Subsidy Administrator in the offer, (A) to continue to furnish the air transportation to which the offer relates for the term thereof, and (B) when so directed to repay to the United States any sum which may be found due and owing the United States pursuant to paragraph (13) of this subsection. Such acceptance when filed with the Subsidy Administrator together with the offer to which it relates, shall constitute a binding contract between such carrier and the United States for the term specified in the offer, not less than three nor more than seven years. Payments under this subsection shall be made out of funds appropriated to the Board for this purpose. Each petition filed under this subsection shall state in detail the amount of payments the petitioner needs in order to effect the purpose of this subsection, and the petitioner shall have the burden of proving such need. "(4) Such contract shall provide that the amount awarded shall not exceed a sum estimated to be necessary to enable such carrier, under honest, economical, and efficient management properly to perform the air transportation authorized by any certificate or certificates of public convenience and necessity held by such carrier; and such amount shall be predicated upon the fair and reasonable cost of operations incident to the type of service performed, based upon a comprehensive review of all items of income and allowable expenses submitted by the applicant and verified by appropriate audit. "(5) Such contract shall clearly indicate that the payments awarded thereunder are designed for the purpose of promoting the Nation's air transportation system as set forth in the declaration of policy of this act, and not necessarily for compensation covering any particular segment of the service. In consonance with such policy, it shall be the duty of the Subsidy Administrator to determine the level of assistance to each carrier applicant, to administrater the subsidy program and to develop all means available to reduce subsidy requirements by scrutinizing at all times the financial condition and operations of such carriers toward the end of assisting them as quickly as possible to attain self-sufficiency. The carrier shall at all times keep the Subsidy Administrator fully apprised of any and all of its proposed major changes in its financial structure, equipment, and activities which would have an effect either directly or indirectly upon its subsidy requirements. "(6) The present economic regulations of the Board, including any subsequent amendments thereto, together with the Board's uniform system of accounts issued thereunder, shall be complied with to the extent of their effect upon subsidized carriers. "(7) The Subsidy Administrator shall prescribe the policy with respect to the elements of the investment base, used and useful in the air transportation industry under honest, economical, and efficient management allowable for computing the rate of return. "(8) In computing subsidy requirements of an air carrier, profits from the sale of its capital assets used and useful in the air transportation industry shall be considered to reduce the subsidy support. Likewise, net income, whether in equity or otherwise, from investments of any kind, including notes, debentures, long-term advances or stock in subsidiaries. affiliates, associates of whatever classification in excess of a rate determined by the Subsidy Administrator on the original cost of investment shall be considered as other revenue and applied in the reduction of the total subsidy need. "(9) If, in the event of a change in operations pursuant to a Board order which results in a decrease in a carrier's anticipated net income, the Subsidy Administrator shall find, after consultation with the Board, that the subsidy provided in this subsection is in any respect inadequate as a result of such extension, he shall grant whatever additional subsidy he determins to be necessary for that purpose, and the contract may be amended accordingly : Provided, That in the event such a change in operations shall increase the carrier's net income there likewise shall be an appropriate reduction in the original contract amount. "(10) In the consideration of allowable expenses to subsidized carriers, the salaries for personal services paid to a director, officer, or employee by said carrier, its affiliates, subsidiary, or associates, must be approved by the Subsidiary Administrator, and in no case shall such salary exceed the sum of $25,000. The term 'salary' shall include wages and allowances of compensation in any form for personal services. "(11) The Subsidy Administrator shall establish, maintain, and promulgate to the subsidized air carriers all items of expense which may not be allowed for subsidy payment purposes. It also shall be his duty to formulate whatever standards are deemed necessary respecting the various types of activities and "related expenses incurred by such carriers under honest, economical, and efficient management which properly may be allowed in considering their subsidy needs. "(12) The amount of such subsidy shall be determined on an annual basis, shall encompass the overall need of the carrier in its air-transportation activities and shall be paid in periodic installments: Provided, That such carrier has performed services during the period originally forecast. "No such subsidy shall be paid until the carrier has furnished satisfactory evidence of its intention to follow a clear and concise capitalization and depreciation policy, including residual values of aircraft equipment and other major property items used and useful in the air-transportation industry as prescribed by the Subsidy Administrator and/or the Board. "(13) At the end of each year during the term of the contract period, the Subsidy Administrator shall compute the amount, if any, which is due to the United States from the air carrier concerned in the following manner: The total poyments received by the carrier under the terms of the contract shall be added to all other revenues accruing to the carrier during the term of the contract. From this sum there shall be deducted all allowable charges and expenses under the contract, including taxes, properly allocable to the performance of the transportation contracted for, including the amount found necessary to assure the carrier a fair return under honest, economical, and efficient management as determined by the Subsidy Administrator, and the remainder shall be the amount due from the carrier, but in no case shall such amount exceed the total amount of payments made under the contract. Any such repayment by an air carrier shall be made to the Treasurer of the United States, and shall be credited to appropriations made available for the purpose of this subsection. "(14) It shall be the duty of the Subsidy Administrator to impose such additional special contract provisions which, in his judgment, will lead to a final stabilization of the subsidized carriers and adequately protect the interests of the United States. “(15) Any dispute concerning a question of fact arising under this contract which is not disposed of by agreement shall be decided by the Subsidy Administrator, who shall reduce his decision to writing and mail or otherwise furnish a copy thereof to the carrier. Within 30 days from the date of receipt of such copy, the carrier may appeal by mailing or otherwise furnishing to the Subsidy Administrator a written appeal addressed to the Civil Aeronautics Board, and the decision of the Board shall be conclusive: Provided, That if no such appeal is taken the decision of the Subsidy Administrator shall be final and conclusive. In connection with any appeal proceeding under this clause, the carrier shall be afforded an opportunity to be heard and to offer evidence in support of its appeal: Provided, further, That parties to such appeal proceeding shall be limited to the carrier and/or its representative and the Subsidy Administrator. "(16) During the pendency of proceedings to determine the amount of payment to any air carrier under this subsection, the Subsidy Administrator is authorized to make an advance, out of funds appropriated for the purpose of this subsection, to such carrier upon a showing that the need for such an advance is essential and urgent." It will be noted from the above that payments are not limited to those carriers holding a certificate authorizing the transportation of mail in air transportation, as proposed in S. 308 and S. 1119. The reasons substantiating our recommendation for such omission were set forth in our letter of April 27, wherein we suggested that the provisions of S. 308 be amended so as not to require that a carrier hold a mail certificate to become eligible for subsidy payments. We added, however, that it should be made clear that the mere issuance of any type of certificate does not carry with it a bona fide right to a claim for subsidy. Furthermore, we suggested that by issuing a certificate of public convenience and necessity without regard to what types of traffic are authorized by such certificate the Civil Aeronautics Board would have ample power to control carriers eligible for subsidies. In the aforementioned substitute amendment we also have omitted the phrase "without regard to capital gains or capital losses," appearing in both S. 308 and S. 1119. In our previous report we suggested that a capital gain, measured in terms of sound accounting principles, should be regarded as "other revenue" and, conversely, capital losses, when computed upon a reasonable basis, likewise should be regarded as an allowable item in the determination of elements to be underwritten by the Government. Also, in our suggested substitute there has been eliminated the phrase "one-half of the remainder, without recomputation of income taxes, shall be the amount due from the carrier * * *," for the reasons stated in our previous report. In this connection, we remain of the opinion that a carrier requiring Federal aid should not be permitted to retain any portion in excess of an amount enabling it to operate under honest, efficient, and economical management, particularly in view of the fact that such aid guarantees such carrier a fair return on its investment. In our opinion, by giving effect to the foregoing suggestions which, of course, are not all-inclusive-since it is assumed that the Administrator will incorporate such special conditions as may from time to time be required-the carriers should be in a position to receive a sufficient amount of financial support and, at the same time, the Government will be protected against the possibility of unwarranted expenditures under the subsidy program. We appreciate the opportunity of furnishing these additional comments and recommendations, and you may be assured that we stand ready to render any further assistance deemed desirable by your committee. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. INTERSTATE COMMERCE COMMISSION, February 15, 1955. Hon. WARREN G. MAGNUSON, Chairman, Committee on Interstate and Foreign Commerce, United States Senate, Washington, D. C. DEAR CHAIRMAN MAGNUSON: Your letter of January 13, 1955, requesting comments on a bill, S. 308, introduced by Senator Bricker, to amend the Civil Aeronautics Act of 1938, as amended, and for other purposes, has been referred to our Committee on Legislation and Rules. After careful consideration by that committee, I am authorized to submit the following comments in its behalf: This bill pertains to a subject which has little connection with the duties of the Interstate Commerce Commission, and we are therefore not in a position to express a helpful opinion as to whether its enactment would be desirable. Editorially, however, we wish to call your attention to a printing error on page 38, line 23, of the bill. It would appear that the heading of the section should read "Civil Penalties," instead of "Civic Penalties." Respectfully submitted. RICHARD F. MITCHELL, Chairman, KENNETH H. TUGGLE, Committee on Legislation and Rules. Hon. WARREN G. MAGNUSON, CANAL ZONE GOVERNMENT, BALBOA HEIGHTS, CANAL ZONE, OFFICE OF THE GOVERNOR, Washington, D. C., April 22, 1955. Chairman, Committee on Interstate and Foreign Commerce, United States Senate, Washington, D. C. DEAR SENATOR MAGNUSON: Reference is made to your request for a report on the bill, S. 308, to amend the Civil Aeronautics Act of 1938, as amended,and for other purposes. The following comment is offered on behalf of the Governor of the Canal Zone. Application of the Civil Aeronautics Act of 1938, as amended, is extended geographically to the Canal Zone under the definitions of "possessions of the United States" and "United States" that are contained, respectively, in paragraphs (29) and (32) of section 1 of said act, as amended. However, paragraph (29) qualifies the application of the act to the Canal Zone by the language "*** but nothing herein shall impair or affect the jurisdiction which has heretofore been, or may hereafter be, granted to the President in respect of air navigation in the Canal Zone ***.” The amendments to section 1 of the act that would be made by S. 308 (see particularly sec. 12 of the bill) would not affect geographic application of the act to the Canal Zone, nor the qualification of that application referred to above. Therefore, no objection is seen to the provisions of S. 308 in this respect. It is not considered within our competence to comment upon the numerous amendments involving technical aspects of regulation of air transportation that would be made by the subject bill. The Bureau of the Budget has advised that there is no objection to the submission of this report to your committee. Sincerely yours, W. M. WHITMAN, Assistant to the Governor. Senator MONRONEY. We are very deeply appreciative of the witnesses appearing before us. The first witness that we have scheduled today is Mr. Hardy Maclay and Mr. Stanley Weiss, of North American Airlines. STATEMENTS OF HARDY MACLAY AND WILLIAM BURT, ON BEHALF OF NORTH AMERICAN AIRLINES Senator MONRONEY. Would you state your name and the title you hold and your company. Mr. MACLAY. I am Hardy K. Maclay, a director of North American Aircoach System, Inc., and counsel for the group known as the North American Airlines group. I am appearing with Mr. William Burt, who is also a counsel for the North American Airlines group. Mr. Weiss is here this morning, but the testimony is going to be given by me, so Mr. Weiss is sitting back in the room. Senator MONRONEY. It will be given by yourself with the help of Mr. William Burt, who is co-counsel for the airlines? Mr. MACLAY. Yes, sir. Senator MONRONEY. You may proceed in your own way, Mr. Maclay. Mr. MACLAY. I want to thank the committee and you, Mr. Chairman, for giving us an opportunity to state our views with respect to the pending legislation concerning the Civil Aeronautics Act. As you say, the act has not been looked at by the Congress since its enactment for any substantial purpose. The act originally created grandfather carriers back in 1938, sixteen of them. It also provided for Government help in the form of mail pay, part of which is mail subsidy, to support these carriers and get them started and to make this industry grow as fast as possible. The act also provided for the filing of certificate applications by new carriers, and in section 401 of the act it is stated that new carriers will be granted certificates if they make a showing of public need. The act also directed that this industry be carried on under a system in which there would be competition to best develop the industry. That is, whatever competition might be found to be in the best interests of expanding and making this industry grow was the amount of competition that was to be provided in the industry. Since 1938, as a matter of fact, no new carriers have been admitted into this industry in the major field of operations. That is the trunkline passenger market. It is probably because of this administration of the act for the past 17 years that there is proposed here an amendment to Senate bill 1119 the purpose of which is to reaffirm what I believe was the original congressional intent, and certainly to clarify that intent that it was contemplated by the act that there should be considerably more liberal right of entry of new operators into this industry. The testimony which I give this morning Senator MONRONEY. For the purpose of the record is that the socalled Magnuson amendment? |