Continental Air Lines, Inc. v. C. A. B., s. 75-1090 and 75-1195

Decision Date19 April 1977
Docket NumberNos. 75-1090 and 75-1195,s. 75-1090 and 75-1195
Citation179 U.S.App.D.C. 334,551 F.2d 1293
PartiesCONTINENTAL AIR LINES, INC., Petitioner, v. CIVIL AERONAUTICS BOARD, Respondent, Trans World Airlines, Inc., et al., Intervenors. NORTHWEST AIRLINES, INC., Petitioner, v. CIVIL AERONAUTICS BOARD, Respondent, Trans World Airlines, Inc., et al., Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

Thomas D. Finney, Jr., Washington, D.C., with whom Lee M. Hydeman and Harold E. Mesirow, Washington, D.C., were on the brief for petitioner in No. 75-1090.

Ronald D. Eastman, Washington, D.C., with whom James M. Verner, Washington, D.C., was on the brief for petitioner in No. 75-1195.

Alan R. Demby, Atty., Civil Aeronautics Bd., Washington, D.C., with whom James C. Shultz, Gen. Counsel, Jerome Nelson, Deputy Gen. Counsel and Glen M. Bendixsen, Associate Gen. Counsel, Litigation and Research, Civil Aeronautics Bd., Washington, D.C., were on the brief for respondent. Thomas J. Heye, Gen. Counsel, Civil Aeronautics Bd., at the time the record was filed also entered an appearance for respondent.

Edmund E. Harvey, Washington, D.C., was on the brief for Trans World Airlines, Inc.

Alfred V. J. Prather and J. William Doolittle, Washington, D.C., were on the brief for American Airlines, Inc.

Robert N. Duggan, Washington, D.C., entered an appearance for Eastern Air Lines, Inc.

Henry L. Hill and J. Stanley Stroud, Chicago, Ill., entered appearances for United Air Lines, Inc. in No. 75-1195.

Samuel R. Simon and Robert B. Nicholson, Attys., Dept. of Justice, Washington, D.C., entered appearances for the United States of America.

Before TAMM and LEVENTHAL, Circuit Judges, and CHRISTENSEN, * United States Senior District Judge for the District of Utah.

Opinion for the Court filed by LEVENTHAL, Circuit Judge.

LEVENTHAL, Circuit Judge:

These cases arise from the final phase, Phase 9, of the Civil Aeronautics Board's (CAB or Board) comprehensive investigation and re-evaluation of domestic air fares, the Domestic Passenger Fare Investigation (DPFI). 1 Phase 9 (Fare Structure) was mainly concerned with establishing a formula for coach fares as a function of distance. There have been no challenges to the formula adopted by the CAB. The present challenges concern the Board's determination of the proper relation (a) between coach class fares and economy class fares (petitioner, Continental Air Lines; intervening respondent Trans World Airlines), and (b) between coach and first class fares (petitioner Northwest Airlines; intervening petitioner, American Airlines).

I. BACKGROUND

Hearings were held between June 29 and September 30, 1971 before Administrative Law Judge Robert M. Johnson. ALJ Johnson issued his initial decision on April 7, 1972. He found that coach fares should be cost-related, i.e., geared to the cost structure, but also reflecting other considerations (notably value of service), rather than be cost-based, i.e. based strictly on costs. He recommended maintenance of the then existing ratios of the 3 permanent class fares economy fare at 90% of coach fare, first class fare at 130% of coach fare.

In its opinion and order of March 18, 1974, the CAB found that, to be reasonable, permanent fares, such as first class and economy, had to recover their full share of allocated costs. 2 In the case of economy class, the CAB found that the only significant difference from coach class in the service provided, and hence in the cost of providing it, was the absence of the complimentary meal provided on coach flights with meal service. 3 Hence, economy fares could not be set at more than $4 below coach.

As to first class fares, the CAB mandated that minimum first class fares be increased, over a period of 2 1/4 years, to 150-163% of coach fare, depending on distance. 4 These fares reflect the CAB's determination of the relative cost of first class service, ascertained primarily by allocating total costs by the cabin space occupied, but also including the cost of a higher level of cabin amenities. 5

These fare decisions are based on the CAB's conclusion that unless fares of the different classes reflect the cost of providing the respective services, there will be a subsidy between classes in the long run. In particular, the CAB found that allowing first class and economy fares below their proportionate costs would burden the predominate coach passenger in the long run, either in the form of higher fares or poorer service. 6

II. ECONOMY FARE DETERMINATION
A. Continental's Petition for Reconsideration and Motion to Reopen the Record

On April 29, 1974, Continental and Northwest, as well as other carriers, petitioned the CAB for reconsideration of its March order. In addition, on October 31, 1974 Continental moved to reopen the record on the economy fare to consider the allegedly increased need for a below-coach fare due to the drastic reduction of discount fares subsequent to the 1971 hearings, and to allow Continental to prove that the correctly allocated cost savings of economy vis a vis coach was greater than $4. 7 On December 27, 1974, on reconsideration, the CAB reaffirmed its March decision, making certain adjustments, such as delaying the schedule for increasing first class fares by nine months. 8 At the same time, the Board denied Continental's motion to reopen the record. It ruled that Continental's proffer of increased use of economy class, with the elimination of most discount fares, was irrelevant to the Board's determination that in order to be reasonable in the long run fares for a class of service must reflect pertinent costs for the service. It further stated that Continental had had its chance to support its proposed lower economy fare on the basis of lower costs, knowing as it did that costs are, at least, a prime factor in fare setting. 9

In support of its challenge of the Board's refusal to reopen the record, Continental asserts that it was not on notice of the CAB's intention to require permanent fares to recover their full share of cost until the decision in the U. S. Mainland-Hawaii Fares Investigation, 10 in which the Board first required economy fares to cover full costs, and which came six weeks after the ALJ's decision in the present Phase 9.

The DPFI was instituted in 1970 as a general investigation of all aspects of passenger fares. 11 In the decade since the previous comprehensive fare investigation, the 1960 General Passenger Fare Investigation, 12 there had been great growth in the airline industry, the introduction of jet aircraft, and the imminence of the introduction of wide-bodied jets. In the DPFI the CAB set out to determine fare policy, balancing the interest of consumers, the air carriers, and the national interests in developing air transport and defense. One of the parties to the investigation, the Department of Transportation (DOT), urged the Board to adopt fares based entirely on the cost of the service (including a fair return), based on its economic theory of the airline industry. 13 Although Continental presented data on cost savings in economy class to support its 85% of coach fare proposal, it did not claim that the 85% was justified "based strictly on cost." 14 It advocated a "cost related" rather than a "cost based" approach. Continental justified the 15% lower economy fare on grounds of: the public interest in a low fare service, the effect of economy fare in generating new air traffic, value of service, and increasing management flexibility. The Board rejected this position, adopting the position that permanent fares should be cost based. Continental had full opportunity to make the best case possible for its position and cannot now claim unfair surprise because the Board adopted a competing one. 15

In its motion to reopen the record, Continental sought the opportunity to prove that the "fully allocated" cost difference between economy and coach justified a rate difference in excess of the 10% recommended by the ALJ. 16 The request to reopen the record to prove a greater economy/coach cost difference was based on Continental's argument of unfair surprise in the Board's insistence on cost-based fares, which we have rejected. 17 In addition, Continental claims that changed circumstances between 1971 and 1974, primarily the elimination of discount fares, led to a great increase in the use of and "need" for the economy fare at 85-90% of coach, rather than the $4 difference on meal flights established by the Board. 18 Of course, it is unfortunate when the Board must rely on a three year old record. Yet that record is supplemented by official notice, as appropriate, of schedules, fares, traffic, and revenue data. In the nature of things, a rulemaking completely reevaluating the domestic fare structure takes time. In the absence of a compelling showing of unfair surprise or changed circumstances, there is no reason to mandate further delay and reopening of the record. The Board is correct in saying that Continental's contentions of changed circumstances are "of no decisional significance" 19 in light of its policy determination of the need for permanent fares to return their full share of costs in the long run.

B. Record Support for the Board's Theory

We turn now to the record support for the premise underlying the Board's Phase 9 structure determinations, that all permanent fares should be proportionate to the cost allocated to each type of service. The record material appears in Phase 5, which contains both evidence submitted by the Department of Transportation, and its acceptance in the conclusion of the Board, to the effect that in the long run there are roughly constant returns to scale in the airline industry, i.e., that an increase in size of operations does not produce a reduction in unit costs, 20 and that hence there is no cost saving by permitting below-average cost fares to generate additional air...

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