A New Takeoff for International Air Transport

This article is the outgrowth of a series of meetings held at the Council on Foreign Relations, designed to bring together a variety of persons from government, the aviation industry, the traveling public, and the economics and legal professions, to address the problems of international civil aviation. The article reflects many of the ideas developed and suggestions made in the course of those meetings, but responsibility for the conclusions is solely that of the author, and not that of the Council or the members of the discussion group.

Civil aviation-especially international civil aviation-is in deep trouble. Everybody knows this, and everybody who has thought about it has some favorite explanation: excessive expansion and premature conversion to the jumbo jet; the decline in the value of the dollar relative to European currencies; the energy crisis and the high cost of fuel; the worldwide economic slump; excessive growth of charter services; the rigid mechanisms for international rate-making; excessive (or inadequate) subsidies; too much competition, in terms of price or services; arrogant or complacent airline management; discrimination by governments against foreign carriers, especially those of the United States; violation of the basic rules governing international civil aviation; excessive adherence to those rules, and so on. The difference between aviation and, say, textiles, shipping, or nonferrous metals is that aviation directly engages the prestige, the fascination, and the "national interest" of almost all the countries of the world. International aviation is thus not just another problem in a changing international economic system, though it is that; international civil aviation is a serious problem in international relations, affecting the way governments view one another, the way individual citizens view their own and foreign countries, and in a variety of direct and indirect connections the security arrangements by which we live.

Therefore, it is surely time to reexamine the overall structure of international agreements that governs the airlines of the world. Is this structure, created in the context of postwar reconstruction, still adequate, or is a major overhaul now required? The thesis of this article is that developments in the past decade have undermined the postwar agreements, to the point where their most basic features now need to be drastically revised.

II

The importance of aviation to the reconstruction of a peaceful world was recognized by the allied powers while World War II was still in progress. As early as October 1943 the British government held a Dominion and Empire conference on civil aviation, and in September of 1944 the United States invited all members of the United Nations to participate in an international conference on civil aviation. That conference convened in Chicago in November 1944-about halfway between the Bretton Woods Conference on monetary and related problems and the San Francisco Conference that would write the U.N. Charter.1

The Chicago Conference, like Bretton Woods and San Francisco, created an institution, the International Civil Aviation Organization. ICAO-which shortly became a specialized agency of the United Nations-has functioned quietly and well on technical matters connected with aviation-safety, navigation, air-worthiness standards, and the like-and more recently has addressed such problems as noise, accident compensation, and hijacking. But it proved impossible for the 54 countries represented at Chicago (the Soviet Union was invited but did not attend) to agree on an economic regime to govern the world's civil air transport system, and so ICAO never became an economic regulatory institution like the International Monetary Fund or the General Agreement on Tariffs and Trade.

Then, in the spring of 1945, 31 scheduled airlines-many represented by persons who had been observers or delegates at Chicago-assembled in Havana to organize the International Air Transport Association (IATA). Their principal purpose was to tackle one of the problems that Chicago had failed to deal with-that of fare and rate structure.

In the following winter, aviation officials from the United States and Great Britain met at Bermuda to give their blessings to IATA and to work out a solution for the other problems that had been left unresolved at Chicago-routes and capacity. Thus, by the beginning of 1946, the postwar system to govern international civil aviation had emerged, based partly on some general principles affirmed at Chicago, partly on airline cooperation within IATA, and partly on a series of bilateral intergovernmental agreements modeled on the agreement between the United States and Great Britain reached at Bermuda in February 1946.

The Bermuda plan was essentially as follows: (1) The parties exchanged rights to designate one or more airlines to operate scheduled services over stated routes between the two countries. Usually the route exchange also included the right to make intermediate stops, and to continue beyond the terminal to specified points in third countries. (2) The parties agreed to recognize each other's documentation of aircraft and crews, to obey each other's health, customs, immigration, and similar regulations, and to settle disputes by consultation and arbitration. (3) Capacity would be subjected to the so-called "Bermuda principles," the effect of which was to leave decisions on the number of flights and the equipment needed up to the management of each airline, subject to deliberately vague guidelines and minimal review by governments. In theory there could be "ex post facto consultations," but since the facts always changed for next year, the understanding and practice were that capacity would be essentially unregulated. (4) In contrast, fares would be strictly controlled, in the first instance through IATA, with a complicated backup control mechanism should IATA fail to agree.

Having reached agreement along these lines with Great Britain, the United States insisted on making precisely the same agreement with all other countries (except of course for the routes)-eventually over 50 substantially identical bilateral air transport agreements. Essentially, the Bermuda principles paralleled the approach to airline regulation within the United States, where routes and rates are also controlled but capacity is not, and where within these confines competition between carriers is encouraged. Beyond this the Bermuda arrangement was in many ways similar to the other international arrangements designed by the United States for a war-torn world. It reflected American optimism that the world economy, and with it international travel by air, would grow and keep growing; it reflected American devotion to most-favored-nation treatment; and it reflected America's confidence in the judgment of business managers.

It is hard to tell in retrospect how much real consensus there was on these matters, and how much the postwar aviation settlement simply reflected the economic and political realities of the time-a war-ravaged world in which only the United States had money, airplanes, and large numbers of potential travelers. But as it becomes clearer that a fundamental reappraisal is needed, it seems worthwhile to set forth the basic assumptions concerning international aviation, as developed under American leadership just after the war:

-International transportation by air would be offered predominantly by major international airlines, performing scheduled services on the basis of individual ticketing.

-Among the Europeans, each country would have one major international airline, though some countries, such as the Scandinavians, might pool their resources, and others, such as Germany, Italy and Spain, might be delayed in mounting major international operations. It would not matter whether airlines were owned by the governments, as in many European countries, by private shareholders, as in the United States, or by a combination of state and private ownership, as in Holland or Switzerland. Airlines would not be multinational corporations, however, in terms of ownership or organization, but would be owned by the state or citizens of the state whose flag they flew.

-The right to conduct airline services would be negotiated in bilateral-not regional or multilateral-agreements. Nearly always each country would obtain the right to designate a carrier to operate over the routes specified, so that at least two airlines (one from each country) would connect each pair of points.

-Fares were seen as more interdependent than routes, and the basic control mechanism, IATA, would function on a global basis. Since it was feared that the American carriers, geared to high volume, low markup and efficient operations, would seek to establish lower fares than the Europeans (and others) could keep up with, rate-making in IATA was based on unanimity, subject to governmental approval and the residual governmental powers provided for in the Bermuda agreements.

-At the outset, air transport was a luxury service, based on "first class" travel and up. Gradually tourist and later economy class became the basic services offered. It was always assumed that while airlines could compete in advertising and in the quality of their ground and cabin services, there would be no competition among carriers with respect to the level of services offered, except if one airline had an airplane that the others did not yet have. Lunch, dinner, drinks, movies, luggage allowance, travel agents' commission, width and pitch of seats-all were standardized and, it was believed, had to remain that way. In other words, airlines as a group could compete with steamships, stay-at-home vacations, and other uses for the leisure dollar; airlines could compete with one another for the other end of the line, one advertising Rome, another Paris or Israel or Ireland. While airlines were also expected to compete with one another for traffic over the same route, the firm assumption was that prices on that route would be completely uniform and service very nearly so.

Though not all of these assumptions were recorded in formal documents, each of them was understood and accepted by all members of the international aviation community. There were also some other elements of the original understanding, not universally shared and seldom articulated, that must be mentioned for a balanced perception of the international air transport system, as it was created and as it has evolved over the past three decades.

-The bulk of travelers across the Atlantic and also across the Pacific, to Asia, and to Central and South America, would be citizens or residents of the United States-something on the order of two-thirds across the North Atlantic. Gradually, the foreign carriers would achieve parity in terms of passengers carried, but if the market continued to expand, everyone would be content. While the laissez-faire approach of Bermuda was not to everyone's liking, none of the Europeans (or others) would make a serious effort to change the regime insofar as it touched the United States, as long as they could look forward to an increasing share in a rising market.

-The vast majority of aircraft-today something like 85 percent of airliners-and a comparable proportion of navigation equipment, ground controls, and the like, would be of American manufacture. The United States helped this assumption along-by technical assistance of various kinds, by domination of the technical committees of ICAO, and by low-interest loans from the Export-Import Bank. But it seems likely that even without such overt intervention, the United States aerospace industry, spurred by a large domestic market and ambitious defense establishment, would have dominated the field. Accordingly, even as balance-of-payments concerns began to occupy the United States in the 1960s, suggestions that tourist travel by Americans should be curtailed in some way were warded off by pointing out that the net effect of any savings in foreign exchange might be more than offset by the decline in the market for American commercial aircraft.

-The most elusive assumption, recollected in different ways by different participants, was the national security aspect of the civil aviation system. Certainly the postwar system grew up with the fresh memory of thousands of American and Canadian troops and tons of critical supplies airlifted to Europe, and later to the Pacific. The Berlin blockade in 1948 focused renewed attention on the potential for aviation to keep beleaguered areas in contact with the outside world, and the "fall" of Czechoslovakia in the same year made some people in Western Europe and the United States realize that the need might again arise to move troops and supplies over long distances in a short time. The airplane made possible a compromise between maintaining massive American troop strength in Europe and relying excessively on nuclear deterrence, and the civilian airplane that could be chartered or requisitioned in an emergency made it possible to reduce the number of military transports held in unproductive reserve. How much these considerations affected the specifics of civil aviation policy is difficult to determine: at least they contributed to an essentially universal assumption that a large civil aviation industry was desirable, and that the United States should play a dominant role in the industry. Until quite recently, of course, the question did not arise whether the United States was prepared to undertake direct expenditures to preserve that dominance.

III

Had one looked back at the Bermuda settlement in, say, 1965 (as indeed committees of Congress did from time to time) one would have had to be pleased with its results-not in every detail but in overall effect. European (and other) airlines had been enabled to catch up with the airlines of the United States, but not really at the latter's expense. The lack of capacity controls had enabled the view of the American carriers and government to prevail over the skepticism of the Europeans. Bigger and better aircraft were continually coming on stream and there was a general downward pressure on fares (compared to other prices) as the purchasers of the new planes sought-for the most part successfully-to fill them.

Ten years later, in the context of economic stress, the Bermuda compromise looks very different. The first assumption to be shattered was that the scheduled carriers assembled in IATA could control fares indefinitely. In the spring of 1963 there was a showdown at high noon with the U.S. government, when IATA, backed by the European governments, increased fares (or rather reduced the round-trip discount) at a time that the Civil Aeronautics Board thought fares should remain level. IATA stood firm and won that fight, but at heavy cost. For the CAB's response-though never so stated explicitly-was to give a big boost to a new class of airlines which had not been thought about at all in the original understandings-the non-scheduled or supplemental carriers. First the Board, with the support of the Congress, granted permanent certificates to many supplementals, enabling them to receive financing for purchase of jet aircraft; second, it permitted so-called "split-charters" whereby groups as small as 40 were allowed to charter part of an airplane; and third, from 1966 on the Board permitted so-called "inclusive tour charters," whereby tour operators (i.e., travel wholesalers) could market vacation travel to the public at bargain prices, without requiring that the passengers belong to any club or pre-existing group. Supplemental transportation attracted millions of travelers from the United States to Europe, especially from the West Coast. The CAB, using the vocabulary (not to say concepts) that it had developed in domestic regulation, tried to fashion various distinctions between scheduled and charter services-such as requirements for affinity groups, requirements for ground services and multiple stops in package tours, and advance booking and down-payment conditions, all designed to encourage "creation" of new markets but to discourage "diversion" from the scheduled carriers. After a while the Board realized that the public didn't care two cents for any of the distinctions, and did not consider it to be cheating to work out a deal to fly at the same fare as one's neighbor. But as long as the overall market was continuing its straight-line growth, only sporadic enforcement was undertaken, accompanied by frequent tinkering with the rules. By the time the growth began to level off-just as the wide-bodied jets arrived-the market had been changed, probably irreversibly. A side effect was that while the share of international traffic carried by scheduled U.S.-flag carriers kept declining, the overall share of traffic carried by U.S.-flag carriers began to rise again, because the supplementals were predominantly American.

Among the European countries, several considered the idea of limiting or controlling charters-which were nowhere provided for in the postwar agreements-but as long as all the European countries were not united, only those countries that could count on a separate and distinct market, such as Israel, were able to avoid the charter problem. Another basic assumption of the international air transport system had been shattered: much of the tourist market, it turned out, was not a point-to-point market at all, but rather region-to-region. If one wanted to tour Europe in a rented car, for instance, or with a Eurailpass or by hitchhiking, it did not matter very much whether one flew to Paris or Brussels or Amsterdam. And within limits, it did not matter very much whether one flew on Friday the 31st or Thursday the 30th, or returned from the first gateway or from another one.

The response of the major airlines was interesting. After arguing unsuccessfully to the CAB that air travel was all one big market and that therefore expanded charter authority would be largely diversionary, the scheduled international carriers took the opposite approach in their own pricing policy. From a basic two-class fare structure, they developed in the late sixties and early seventies a schedule of fares so complicated that hardly anyone-carriers, travel agents or government regulators-could keep up with it. Excursion fares, shoulder and peak and directional fares, "group inclusive tours" (which were neither inclusive nor tours), and various fares calling for advance booking or payment proliferated, again with "cheating" almost universal and not perceived as wrong, and with virtually no relation between the fare paid and the cost of providing the service. The objective was to treat different demand elasticities differently, on the theory that the businessman who had to travel on short notice would be prepared to pay more than the employee with a fixed holiday schedule, who in turn might make a down payment or otherwise commit himself several months in advance. The result, often, was a reduction in yield per passenger not made up by a corresponding increase in the number of passengers carried.

In a sense one could say that price competition had come to international aviation, and particular countries and airlines became increasingly sensitive to the prospects of attraction or "diversion" of the potential tourist as the result of any given new fare proposal. But under IATA rules it was not possible for any single carrier or group of carriers to experiment with promotional fares, to see whether they created new traffic or simply diluted the yield from the same passenger who would have traveled anyway. IATA rules provided that if one carrier could offer a special fare all could, and unless all would do it none could. By the early 1970s, the basic economy fare on which the system in theory rests was paid by less than 20 percent of travelers across the Atlantic, not even counting the widespread rebates to travel agents that became ever more widespread as the ratio of fixed to variable costs of air services kept rising. Ironically, just as IATA finally decided to invite the supplemental carriers to join the club, Pan American became the largest international charter carrier; TWA was close behind, and many of the major European airlines either took up chartering themselves or developed subsidiaries to do so.

As load factors (i.e., the ratio of passengers to available seats) fell on scheduled services, profits declined and then disappeared altogether. The advent of the jumbo jets increased capacity, while traffic failed to increase at anything like the rates that had been predicted and assumed within the industry at the time the decision was made to move to the new generation of larger aircraft.

All these trends were most acute in the critical North Atlantic routes, which account for over a third of international air traffic, but which provide, for almost all the major airlines of the world, the "make or break" margins of profit and success. What has happened historically on the North Atlantic route can be seen in greater detail through a table of the principal operating statistics, lumping all the carriers together.

NORTH ATLANTIC SCHEDULED PASSENGER SERVICE

IATA CARRIERS*

A B C D

Operating

Available Scheduled Profit

Passengers Seats Load Factor (Loss)

(000,000) (000,000) (A in %) ($000,000)

B

1960 1.8 2.7 64.2 n/a

1961 1.9 3.7 51.7

1962 2.3 4.4 51.6

1963 2.4 4.9 49.1

1964 3.1 5.3 57.5

1965 3.6 6.4 57.1

1966 4.2 7.1 58.8

1967 5.0 8.7 57.5

1968 5.3 9.9 53.3 70

1969 6.0 11.0 54.3 63

1970 7.2 13.0 55.3 2

1971 7.5 14.9 50.4 (99)

1972 9.5 15.9 59.6 (27)

1973 10.0 17.4 57.8 (130)

1974 9.3 16.0 58.2 (300) est.

* Compiled from IATA reports. North Atlantic traffic is defined as passengers carried in both directions between the United States and Canada on one side and Europe and beyond on the other side. It does not include traffic originating in or destined for Mexico and the Caribbean. Non-IATA scheduled carriers would add approximately 1-1.5 percent to the passenger totals.

In the face of the trends that were evident from 1970 on, one might have supposed that the airlines would move to curtail their services drastically and comprehensively. But no major airline was prepared on its own to do this, lest its competitors capture a greater share of the traffic. From time to time in the early 1970s carriers made efforts to fashion joint capacity restraint agreements. But these agreements-e.g., New York-London, New York-Rome, and United States-Switzerland-were ad hoc, short-term, and without any consistent formula. The CAB gave its approval, but with a bad conscience and in the expressed hope that overcapacity was a temporary phenomenon that would soon pass. The prevailing doctrine in Washington remained Bermuda-i.e., no predetermination and no interference by governments in matters of capacity.

Thus, even before October 1973 the basic Bermuda structure was under severe stress, and international aviation was a sick industry. The rise in oil prices of late 1973 simply dramatized and made far more acute the underlying situation. Pan American World Airways, long the pioneer and pacesetter in routes and equipment, lost over $80 million in 1974, its sixth straight year of massive financial reverses, and was forced into increasingly complex and burdensome credit arrangements which by their size alone lose their character as secured transactions. But Pan American was not alone. TWA also lost heavily in its international operations (roughly $46 million in 1974), Japan Air Lines, Alitalia and Air France incurred losses in the $80-$100 million range, and British Airways, Sabena, KLM, and Olympic, among others, also lost large sums, as did a number of the supplemental airlines. While a few carriers, such as Swissair and SAS, showed profits, in general the international airline industry showed an operating loss of about three percent before interest and taxes, on the basis of revenues of about $30 billion. From the traveler's point of view, fares, which had gone down overall between 1960 and 1970, rose in the early 1970s almost as fast as the consumer price index-in 1974 up to 30 percent on some routes. The American traveler saw, to his surprise, that Pan American had withdrawn from Paris and much of the Mediterranean, TWA from Frankfurt and the Pacific. Foreign airlines were making similar retreats-giving up, for example, hard-won routes to the American West Coast. As not only the United States but most of the non-communist world experienced for the first time the combination of inflation and recession, shortages and unemployment, an industry geared largely to the discretionary consumer seemed to be facing a situation quite different from that which its founding fathers in the 1940s had in mind.

IV

The key elements of the Bermuda settlement, as we have seen, were that rates would be controlled but capacity would be essentially unrestrained. Three decades later, it may well be that the reverse solution is appropriate. The suggestion here is that the United States should now take the lead in turning Bermuda on its head. With rates no longer subject to effective control, the United States should announce its readiness to negotiate restraints on capacity. Initially, the new American policy should focus on the North Atlantic routes, which lie at the heart of the present crisis, but the new principles should be suitable for extension to other areas to the degree necessary.

To a generation brought up on Bermuda, advocacy of capacity controls may come as something of a shock. Through thick and thin for more than 25 years, the United States opposed every form of prior restraint on capacity in air services, and avoided even ex post facto discussions of capacity as much as it could. But in the last five years the United States has ended convertibility of the dollar, abandoned support for fixed exchange rates, accepted trade preferences for developing countries, and seems about to embrace a general policy in favor of commodity agreements. Measured against these departures from the mid-century ideology, a shift in attitude on predetermination of airline capacity seems less than cataclysmic.

For the United States, administration of capacity restraints on air transport would be a new experience, and it is difficult to be precise about how the task should be carried out. The objectives, however, can be stated (though perhaps not achieved) fairly easily. The aim, shared by every industrial country and many developing countries as well, should be to preserve a stable system of scheduled international airline services, making efficient use of available equipment and fuel, at prices within the reach of tourists as well as travelers on business, and as far as possible free of subsidy.

Lest this formulation be thought of as too bland to be meaningful, it is important to note what it does not say. It does not, for instance, call for service by U.S.-flag carriers to as many places as were thought necessary in the system's formative years, when only U.S.-flag carriers had the resources necessary to provide a global transport network. It does not call for "double tracking" by U.S.-flag carriers, as was thought necessary in the 1950s as a protection against monopoly or a "chosen instrument" philosophy. And it does not even, as Bermuda assumed, require service by U.S.-flag carriers to every country whose airline flies to the United States. In short, the goal is a system of rational allocation of resources, in which each country has the opportunity to mount an airline commensurate with its strength and attractiveness to travelers. By this measure America remains a leader-indeed the leader-though not to the same degree as 25 years ago.

How, then, might a regime of capacity controls be organized? Suppose, for the sake of presentation, a bilateral negotiation, say between the United States and Great Britain, as at Bermuda. The two countries might agree to set target load factors at 65 percent (compared to current load factors over the North Atlantic at about 50-55 percent). They would then make a consumption estimate-say 600 passengers per day in each direction, or 18,000 per month. Leaving out for the moment the role of supplemental transportation, the number of seats to be offered at 65 percent load factor would be 27,700 per month in each direction. The two countries would then negotiate the share of these 27,700 seats to be offered by the carriers of each, based in principle on the performance of each country's carriers over a base period-say the preceding three years. The airlines would still compete with one another, because nothing would prevent the one with better service, or a more efficient sales force, or more effective advertising, from achieving higher load factors than the others. Indeed, nothing would prevent the airlines all together from carrying more than 18,000 passengers. But if all the carriers experienced load factors substantially in excess of the targets over a representative period, the consumption estimate would be revised and more flights would be permitted. Conversely, if the target load factors were not achieved, the consumption estimate and the number of flights (or seats) would be reduced. If, over time, one of the carriers significantly outperformed the others, the allocation formula could be changed, but this adjustment would not need to be made as often or with as much precision as the adjustment of capacity to demand. As long as the load factor target is not too high, the traveling public should rarely be inconvenienced. Meanwhile, the specter of empty jumbo jets crossing the ocean back and forth could be eliminated. In the long run, the savings in use of fuel and equipment would be passed back to the public in the form of lower fares and reduced subsidies.

The example chosen may be too easy, because the route between the United States and Britain remains heavily enough traveled to support large-scale services and probably to permit "tuning" of capacity even with jumbo jets. For service between North America and the European continent, it would probably be sounder to take a regional approach. One might, for example, arrange a capacity conference among the United States, Canada, Holland, Belgium, Germany and the Scandinavian countries, or among the North Americans and Spain, France and Italy, or variations on this theme. The basic technique would be the same, though the allocation problem would be somewhat more difficult. It would not be necessary to keep the same formula route for route, nor would it be necessary to maintain bilateral parity in all cases. For example, KLM and SAS have regularly carried far larger shares of traffic between the United States and Europe than has Pan American on routes to the Netherlands or Scandinavia; thus the allocation to KLM and SAS over those routes could exceed that to Pan American-but not by as large a margin as the recent record would suggest. In return for a smaller percentage share, KLM would have the prospect of a profitable run, not plagued by excess capacity. Alternatively, pooled or combined operations might be authorized as a compromise between wasteful duplication and insufficient service.

The first step in implementation of such an approach, probably, would be a general conference among aviation authorities in Europe, Canada and the United States, looking to agreement on the division into regions or conferences, and looking to agreement on a universal load-factor target subject to a stated margin for negotiation region by region-say plus or minus 10 percent. One region might well be used as an experiment, in expectation that the others would follow as one learned from the experiment. Ultimately, one can envision a permanent umbrella group to provide statistical and administrative support to such agreements-not quite a world CAB but something more than IATA as we know it today.

An important factor not yet discussed in our schematic illustration is the role of the nonscheduled or supplemental carriers. It is clear that the public wants the opportunity to fly at reduced fares for vacation purposes, and is prepared to pay in advance, fly with a group, and commit itself to dates and places (and often ground facilities) selected by a tour promoter. It is also clear that in large measure charter or other bulk transportation competes directly with conventional scheduled service for the same potential passengers. Thus, either the two forms of transportation must be separated-e.g., scheduled carriers only New York-Madrid, supplemental carriers only New York-Malaga-or allocation of the expected market must be made between them. To illustrate the latter suggestion, suppose the same 18,000 consumption estimate between New York and London as in the first example, but suppose further, an estimate that 15 percent of potential travelers would choose bulk transportation. Then the consumption estimate for the scheduled carriers would be 85 percent of 18,000 or 15,300, and the number of seats to be allocated at a 65 percent load factor would be 23,540. For the supplemental carriers, carrying predominantly large groups of passengers, the target load factor would be set, say, at 90 percent, and 3,000 seats would be allocated to them to satisfy a consumption estimate of 2,700.

A still different approach would be to classify routes as sheltered or not sheltered depending upon load factors achieved by scheduled carriers. If scheduled services by two or more carriers achieved the target load factors-or perhaps exceeded the target by a given figure-all restraints on supplemental transportation might be lifted; if target load factors were not achieved, limits could be placed on supplemental transportation. Of course, as in all commodity agreements-for that is really what is being proposed-each of the numbers, including the ratio between scheduled and supplemental transportation, would be a blend of scientific forecasting and political negotiation.

The mention of commodity agreements brings to mind at once the question of prices, and the fear that a restricted market could lead to unfair price management. Whether or not that would be likely to occur in the highly price-elastic air-travel market, it is clearly not acceptable as a political matter in the United States and elsewhere to attempt to control both supply and price at the same time. The trade-off, therefore-completing the reversal of the Bermuda settlement-should be relaxation of the rigid control of fares, tied to the experiment to control capacity. We have seen that capacity control could be based on some kind of target load factors. Actual load factors are, of course, related to the prices charged. One way to address the question of fares-though by no means the only way-might be to provide that if actual load factors in a given period exceeded the targets by more than x percent, more capacity would be permitted, but if the target load factors were not met, further reductions in capacity could be considered so long as prices did not rise by more than y. Expressly or by implication, there would be a target price range. But a target and a range, with freedom to vary the extras-meals, movies, baggage allowance, etc., as well as "special fares"-are quite different from the absolute uniformity forced (though often not enforced) under the present system.

Furthermore, detaching fares from the rigid Bermuda/IATA system would afford an opportunity to subject many elements of the price structure to a market test for the first time ever. Inflight movies, for example, were a big success when TWA introduced them, and were quickly copied by most of the other carriers, until the system imposed an arbitrary price for them. How much are they really worth, in terms of added revenues less costs? What about the relation of first class to economy, or the number of seats (and their width and kneeroom) in a given plane? What about the appeal on international runs of no-frill or "brown bag" or no reservations services? What about the difference in fare-reflecting a cost differential from the early piston days-between flights to one city and another? What is the real margin in terms of customer preference between bulk and individually ticketed fares? What is the real value of the retailer's (travel agent's) services-presently measured in terms of fixed commissions? And so on. It is not suggested that these questions be raised all at once. The point is that air transportation may well be more like department stores and less like telephone or electric companies than was imagined when the present model was built. It is worth trying to find out, and the promise of survival for the national representatives in the system through capacity controls and related devices may make it possible to do so.

V

The purpose here has not been to draw a blueprint for the future of the world's air transport system, but rather to call attention to the fact that the first major attempt to control an international industry is in deep trouble, and is in need of some imaginative leadership. There is no reason to believe that the assumptions of the 1940s remain more valid in aviation than they do in trade, monetary affairs, foreign aid or arms control. On the other side there is every reason to believe that civil aviation is as much a subject and object of international relations as it was in the early postwar period.

But what about the national interest, so often cited in discussions of international aviation-national defense, foreign relations, general prestige? No doubt a healthy civil aviation system is in some way a reserve asset for the defense establishment. A sick system, however, probably costs more to sustain than could be justified in terms of direct benefits to the military. Landing fields, navigation aids, and trained maintenance crews are far more widespread than they were three decades ago, and as we have had occasion to see recently, foreign bases under whatever auspices tend not to be usable when most needed.

But while defense and the need to ferry troops and supplies across the waters are peculiarly a concern of the United States, a prosperous air transport system is an almost universal goal. Every airline, in a quite direct sense, is a bearer of its country's prestige, and the guess here is that no country-including the United States-is prepared to strike its airline's colors. Thus the national interest, defined in terms of international movement of persons and goods, and in terms of prestige and reputation, is on this issue likely to be perceived quite similarly in nearly every country. Attitudes may differ on the relation of competition to control, of scheduled traffic to charters, or on principles of rate-making: practically everybody, one may expect, would be pleased to be shown a way to avoid having to choose between massive subsidies and massive retrenchment of air services.

For reasons of history, geography, law, and volume of business, it turns out that only the United States is in a position to initiate a movement to revise the regime of international air transport. For its part, the United States ought to welcome the opportunity to demonstrate in a highly visible area-much more comprehensible to the public than special drawing rights or non-tariff barriers-that it can lead even where it no longer dominates.

In welcoming the delegates to the Chicago Conference 31 years ago, President Roosevelt called on them "to write a new chapter in the fundamental law of the air." A similar call might well go out again.

Footnote