American Airlines, Inc. v. CAB

• Decision Date: 29 March 1974
• Docket Number: 72-1743,72-1744.,No. 72-1741,72-1741
• Citation: 495 F.2d 1010
• Parties: AMERICAN AIRLINES, INC., et al., Petitioners, v. CIVIL AERONAUTICS BOARD, Respondent, Texas International Airlines, Inc., et al., Intervenors. UNITED AIR LINES, INC., Petitioner, v. CIVIL AERONAUTICS BOARD, Respondent, Texas International Airlines, Inc., et al., Intervenors. TRANS WORLD AIRLINES, INC., Petitioner, v. CIVIL AERONAUTICS BOARD, Respondent, Frontier Airlines, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

495 F.2d 1010 (1974)

AMERICAN AIRLINES, INC., et al., Petitioners, v. CIVIL AERONAUTICS BOARD, Respondent, Texas International Airlines, Inc., et al., Intervenors.

UNITED AIR LINES, INC., Petitioner, v. CIVIL AERONAUTICS BOARD, Respondent, Texas International Airlines, Inc., et al., Intervenors.

TRANS WORLD AIRLINES, INC., Petitioner, v. CIVIL AERONAUTICS BOARD, Respondent, Frontier Airlines, Inc., et al., Intervenors.

Nos. 72-1741, 72-1743, 72-1744.

United States Court of Appeals, District of Columbia Circuit.

Decided March 29, 1974.

COPYRIGHT MATERIAL OMITTED

J. William Doolittle, Washington, D. C., with whom Alfred V. J. Prather, Washington, D. C., was on the brief, for petitioners in No. 72-1741.

Henry L. Hill, Chicago, Ill., with whom H. Templeton Brown, Chicago, Ill., was on the brief, for petitioner in No. 72-1743.

Edmund E. Harvey, Washington, D. C., for petitioner in No. 72-1744.

Glen M. Bendixsen, Atty., Civil Aeronautics Bd., for respondent. R. Tenney Johnson, Gen. Counsel, Civil Aeronautics Bd., O. D. Ozment, Deputy Gen. Counsel, Warren L. Sharfman, Associate Gen. Counsel, Litigation and Research, at the time the brief was filed, Robert L. Toomey, Asst. Associate Gen. Counsel, Litigation and Research, Ivars V. Mellups and Alan R. Demby, Attys., Civil Aeronautics Bd., and Howard E. Shapiro, Atty., Dept. of Justice, were on the brief for respondent.

William C. Burt, Washington, D. C., for intervenors Frontier Airlines, Inc., Hughes Airwest, Piedmont Aviation, Inc., and Texas International Airlines, Inc.

Richard P. Taylor, Washington, D. C., was on the brief for intervenors Brown County, Wisconsin and The Green Bay Chamber of Commerce in Nos. 72-1743 and 72-1744.

George B. Schwahn was on the brief for intervenor State of Wisconsin in Nos. 72-1743 and 72-1744. George F. Sieker, Madison, Wis., also entered an appearance for intervenor State of Wisconsin.

Raymond J. Rasenberger and James L. Devall, Washington, D. C., entered appearances for intervenors North Central Airlines, Inc. and Ozark Air Lines, Inc.

Before WRIGHT, ROBINSON and MacKINNON, Circuit Judges.

J. SKELLY WRIGHT, Circuit Judge:

Petitioners challenge two orders¹ of the Civil Aeronautics Board entered in Phase 4 of the Board's Domestic Passenger Fare Investigation.

The Investigation is a comprehensive and continuing examination of fare levels, fare structures, and fare-setting methodology throughout the airline industry.² Phase 4 deals with the fares charged passengers traveling to their destinations by means of two or more different airlines. Typically, but not invariably, such "interline" journeys involve a long segment flown by a "trunkline" carrier — i.e., a national airline such as petitioners — and a short segment flown by a local service carrier operating only in a regional market. (Representatives of the local service carriers, and of their passengers, have intervened here in support of the Board's orders.) The customary fare for an interline flight has been the sum of the fares charged to local passengers for each of the flight's two or more segments. In some markets, however, this "sum-of-the-locals" fare was supplanted by agreement between the participating carriers to levy a "joint fare" — a single price for the interline flight which is less than the sum-of-the-locals. These agreements traditionally divided joint fare revenues between participating carriers by the "rate pro-rate" method, whereby the ratio of the carriers' revenue shares equaled the ratio of the local fares charged to non-interline passengers for each segment of the flight.

In Phase 4 the Board set out for the first time to determine on a nationwide basis which interline routes should have joint fares, what these fares should be, and how joint fare revenue should be divided. By the instant orders, the Board has decided (1) that every interline route should have a joint fare of no more than the sum-of-the-locals minus $4 per terminal connection involved,³ and (2) that joint fare revenues should be divided on a "cost pro-rate" basis, whereby a carrier's percentage share would equal that carrier's percentage share of the total costs incurred in providing the interline flight.⁴ All petitioners join in contesting these two decisions on a variety of grounds.

For the reasons set out below, we affirm both of the Board's decisions. In so doing, however, we take note that Phase 4 continues and that our affirmance extends only to the actions presently before us. Though the new joint fare ceilings — $4 below the sum-of-the-locals — are now in effect, the Board has stated its intention to reconsider joint fare levels after the conclusion of Phase 9 of the Fare Investigation;⁵ today we of course imply no view on the legal or factual issues which may confront the Board at that time. Also, the Board has stayed implementation of the cost prorate method of dividing joint fare revenues until Phase 9 develops more sophisticated cost data with which to construct a divisions formula.⁶ While we affirm here the Board's completed decision to adopt the principle of dividing revenues according to relative costs, we venture no opinion on the separate legal and empirical problems which may be raised by measurement of those costs and actual application of the principle.⁷

I. THE PROCEEDINGS BELOW

Regulation of joint fares and joint fare divisions operates within very simple statutory guidelines. Section 404(a) of the Federal Aviation Act (49 U.S.C. § 1301 et seq. (1970)) creates in "every air carrier" a duty to "establish, observe, and enforce just and reasonable individual and joint rates, fares, and charges, * * * and, in case of such joint rates, fares, and charges, to establish just, reasonable, and equitable divisions thereof as between air carriers * * * which shall not unduly prefer or prejudice any of such participating air carriers." 49 U.S.C. § 1374(a). Section 404(b) prohibits carriers from subjecting "any particular person, port, locality, or description of traffic in air transportation to any unjust discrimination or any undue or unreasonable prejudice or disadvantage in any respect whatsoever." 49 U.S.C. § 1374(b).

At its own initiative, the Board "shall determine and prescribe the lawful rate, fare, or charge (or the maximum or minimum, or the maximum and minimum thereof)" if "after notice and hearing" it is "of the opinion that any individual or joint rate, fare, or charge * * * is or will be unjust or unreasonable, or unjustly discriminatory, or unduly preferential, or unduly prejudicial * * *." Section 1002(d) of the Act, 49 U.S.C. § 1482(d). In evaluating and prescribing fares, the Board must "take into consideration" certain factors listed in the Act's "Rule of rate making," Section 1002(e), 49 U.S.C. § 1482(e). Finally, if it is "of the opinion that the divisions of joint rates, fares, or charges * * * are or will be unjust, unreasonable, inequitable, or unduly preferential or prejudicial * * *, the Board shall prescribe the just, reasonable, and equitable divisions thereof * * *." Section 1002(h) of the Act, 49 U.S.C. § 1482(h).

In its first 35 years, however, the Board used its powers to prescribe fares and revenue divisions for interline routes very sparingly.⁸ These matters were left largely to the discretion of the airlines. As a consequence of this hands-off policy, the availability of joint fares was quite limited and, where such fares existed, the revenues were almost always divided by the rate pro-rate method. These consequences were resented by the local service airlines and by passengers forced to rely on these airlines to begin or terminate their journeys at out-of-the-way airports served infrequently or not at all by the trunk airlines.

The availability of joint fares depended largely on whether the interline route in question was also served by frequent single-carrier flights. Single-carrier service over a segmented route is typically priced well below the sum-of-the-locals fare; indeed, such service is often priced identically with that carrier's non-stop flights over the route. When single-carrier competition was absent, carriers participating on an interline route usually charged a sum-of-the-locals fare; only where single-carrier competition had developed did the interline carriers establish joint fares substantially below the sum-of-the-locals. Many interline passengers thought this pattern capricious.

In their turn, the local service airlines disliked the traditional rate pro-rate method of dividing joint fare revenues. It is an axiom of airline economics — now under examination in Phase 9 of the Fare Investigation — that fares do not accurately mirror airline costs. Permile costs tend to decrease or "taper" as the non-stop length of a flight increases, for take-offs and terminal servicing are extraordinarily costly. But present per-mile fares do not fully reflect this tapering: To allow and encourage short distance travelers to use the airlines, fares for short flights are often set below cost, while fares on long flights are set to generate high profits. For the trunk carriers, having flights of various lengths, the long hauls "internally subsidize" the short hauls. The local service carriers, by contrast, specialize in short flights and often operate at an overall deficit. The federal government covers these deficits through a "mail subsidy," authorized under Section 406(b) of the Act, 49 U.S.C. § 1376(b), by paying for the mail carrying services of local service carriers at rates well above the costs of such services to the carriers. Because, on most interline flights, a trunkline carrier flies the long segment and a local service carrier the short segment, the rate pro-rate method of dividing revenue awarded the trunk carrier more revenue relative to costs than it did the local service carrier. The local service carriers thought this practice unreasonable. It enlarged their overall deficits, and thus their mail...