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1976/08/24 - Economic Policy Board
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1976/08/24 - Economic Policy Board
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James M. Cannon Files (Ford Administration)
James Cannon's Meetings Files
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The original documents are located in Box 60, folder "1976/08/24 - Economic Policy Board"
of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 60 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
EPB MEETING
Tuesday, August 24, 1976
8:30 a.m.
REVISED
August 19, 1976
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
Proposed Agenda
Monday, August 23, 1976
No EPB Executive Committee Meeting
Tuesday, August 24, 1976 PRINCIPALS ONLY
1. Policy Initiatives to Deal with Structural
Malkiel
and Induced Unemployment
2. Tax Reform Bill
Treasury
Wednesday, August 24, 1976 EPB/ERC
1. International Aviation Policy Statement
DOT
2. Natural Gas Curtailments
FPC
3. Lease #40 (Baltimore Canyon)
Interior
4. Construction Permits Policy
NRC
Thursday, August 26, 1976
No EPB Executive Committee Meeting
Friday, August 27, 1976
No EPB Executive Commiteee Meeting
EYES ONLY
8-12-76
MINUTES OF THE
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
Attendees: Greenspan, Dixon, Zarb, Gorog, Vetter, Mitchell,
Kobelinski, Moskow, Paarlberg, McGurk, Porter,
Arena, Leach, Spaulding, Lilley, Perritt
1. Report of Task Forces to Improve Government Regulation
The Executive Committee reviewed a report from Paul
MacAvoy on the Task Forces to Improve Government Regula-
tion. The Task Forces working on OSHA and FEA regulations
are both within a week of their original schedule. The
Export Control Administration Task Force circulated a
progress report last week which contains the first draft of
a final report and recommendations for management changes
in the interagency review process. Discussion focused on
whether two additional Task Forces -- one on EPA and one
on Higher Education -- should be formed and on the
preliminary work plans for the proposed Task Forces. There
was general consensus from Executive Committee members that
the additional Task Forces should be established and that
work should go forward in refining the preliminary work
plans.
Decision
The Executive Committee agreed that Secretary Simon and
Mr. Seidman should review the proposed Task Forces and
preliminary work plans before final approval is given for
the establishment of the EPA and Higher Education Task
Forces.
EYES ONLY
RBP
THE WHITE HOUSE
WASHINGTON
August 10, 1976
MEMORANDUM FOR
THE EXECUTIVE COMMITTEE
ECONOMIC POLICY BOARD
FROM:
WILLIAM F. GOROG
WFE,
SUBJECT:
Update of Selected Economic Statistics
1.
Money Stock Measures
M1 (%Change) M₂
Change in June from:
March
1976
6.8
9.9
December 1975
5.6
10.8
June
1975
4.2
9.0
2.
Total Industrial Production (Real terms, seasonally adj.)
(Index: 1967 = 100)
Index
% Change
June
1976
129.9
+0.3
May
1976
129.5
+0.7
April
1976
128.6
+0.4
March
1976
128.1
+0.6
February
1976
127.3
+1.3
( June 1975 - June 1976)
+11.6
3.
Retail Sales (Current dollars, seasonally adj.)
Total:
$ Billions
% Change
July
1976
53.21
-1.4
June
1976
53.99
+2.7
May
1976
52.56
-2.1
April
1976
53.69
+0.7
March
1976
53.34
+1.4
(July 1975 - July 1976)
+8
-2-
4.
Housing Starts and Building Permits (Seasonally adj.)
Starts (annual rates) :
Millions of Units
% Change
June
1976
1,492,000
+4.3
May
1976
1,430,000
+4.6
April
1976
1,367,000
-3.5
March
1976
1,417,000
-8.4
(June 1975 - June 1976)
+38.1
Permits (annual rates) :
June
1976
1,122,000
-3.0
May
1976
1,158,000
+7.0
April
1976
1,082,000
-4.6
March
1976
1,134,000
-
(June 1975 - June 1976)
+19.6
5.
Employment and Unemployment (Seasonally adj.)
Civilian Labor Force (CLF) :
Millions of Persons - 16 yrs.+
July
1976
95.33
June
1976
94.64
May
1976
94.55
April
1976
94.44
March
1976
93.72
March
1975
91.88
December
1974
91.64
Employment:
July
1976
87.91
June
1976
87.50
May
1976
87.70
April
1976
87.40
March
1976
86.69
March
1975 (low)
84.11
December
1974
85.05
Unemployment:
Millions of Persons
% of CLF
July
1976
7.43
7.8
June
1976
7.14
7.5
May
1976
6.86
7.3
April
1976
7.04
7.5
March
1976
7.03
7.5
May
1975 (peak)
8.25
8.9
December
1974
6.58
7.2
-3-
Unemployment:
(% of Group)
Heads of Households:
July
1976
-
5.4
June
1976
-
5.1
May
1976
-
4.8
April
1976
-
4.8
March
1976
-
5.0
December
1975
-
5.7
May
1975
-
6.1
December
1974
4.6
6.
Manufacturers' Shipments and Orders (current dollars, seasonally adj.)
Total Shipments:
$ Billions
% Change
June
1976
94.03
-0.5
May
1976
94.51
+0.7
April
1976
93.84
+0.8
March
1976
93.05
+2.3
February 1976
90.91
+1.8
Total Inventories:
June
1976
150.78
+1.1
May
1976
149.17
+0.7
April
1976
148.12
-
March
1976
148.15
+0.6
February 1976
147.32
+0.2
Total New Orders:
June
1976
95.50
-0.6
May
1976
96.05
+2.0
April
1976
94.14
+0.8
March
1976
93.39
+3.5
February 1976
90.20
+2.4
7.
Consumer Price Index
All Items - 12 mos. previous to:
% Change
June
1976 (+0.5% for month)
+5.9
May
1976 (+0.6% for month)
+6.2
April
1976
(+0.4% for month)
+6.1
March
1976
(+0.2% for month)
+6.1
February
1976
(+0.1% for month)
+6.3
January 1976
+6.8
December 1975
+7.0
September 1975
+7.8
June
1975
+9.3
March
1975
+10.3
December 1974
+12.2
-4-
8.
Wholesale Price Index
All Commodities - 12 mos. previous to:
% Change
June
1976 (+0.4 for month)
+5.4
May
1976 (+0.3 for month)
+5.0
April
1976 (+0.8 for month)
+5.3
March
1976 (+0.2 for month)
+5.5
September 1975
+6.3
June
1975
+11.6
March
1975
+12.5
9.
Gross National Product (constant 1972 dollars)
Change from previous Quarter:
% Change
Second Quarter 1976
+4.4
First Quarter
1976
+9.2
Fourth Quarter 1975
+3.3
Third Quarter
1975
+11.4
Second Quarter 1975
+5.6
First Quarter 1975
-9.9
10.
Real Spendable Earnings
12 Months previous to:
% Change
June
1976
-0.4
May
1976
+0.5
April
1976
+4.3
March
1976
+4.5
December
1975
+3.8
September 1975
+1.6
June
1975
+0.2
March
1975
-4.6
11.
Personal Income (current dollars, seasonally adj.)
Annual Rate:
$ Billions
% Change
June
1976
1,368.9
+0.4
May
1976
1,362.9
+0.8
April
1976
1,352.5
+0.8
March
1976
1,341.9
+0.8
February
1976
1,331.4
+0.8
January
1976
1,320.8
+1.0
December
1975
1,308.2
+13.3
December
1974
1,153.3
I
-5-
12. Composite Index of Leading Indicators
Change from previous month:
% Change
June
1976
+0.3
May
1976
+0.7
April
1976
+0.5
March
1976
+1.0
February 1976
+0.7
January 1976
+1.2
THE WHITE HOUSE
WASHINGTON
August 13, 1976
MEMORANDUM FOR THE ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
FROM:
ROGER B. PORTER
RRP
SUBJECT:
International Aviation Policy Statement
A memorandum from Secretary Coleman and draft International
Aviation Policy Statement, received by our office today, are
attached. This issue is tentatively scheduled for EPB Execu-
tive Committee consideration the week of August 23.
Attachment
OF
COMMITMENT
INFORMATION
THE SECRETARY OF TRANSPORTATION
WASHINGTON, D.C. 20590
UNITED
AMERICA
STATES
of
MEMORANDUM FOR:
L. William Seidman
Assistant to the President
for Economic Affairs
SUBJECT:
International Aviation Policy Statement
Secretary Kissinger, Secretary Simon, Secretary Richardson, Deputy
Secretary Clements, and General Scowcroft join me in recommending
that the President approve and issue the enclosed new Statement of
International Aviation Policy. Your assistance in completing the process
of coordination and presenting this Statement to the President for approval
is appreciated.
An earlier version of this Statement was considered by the Economic
Policy Board last February. The Statement now has been revised to
incorporate changes recommended by several members of the EPB and
to make improvements in both substance and presentation that I considered
necessary. In addition, William Gorog's staff also worked with us in
the revision. While the Statement accommodates the views of the Executive
agencies that are most involved on a daily basis with international aviation,
it is, for reasons discussed below, a significantly more focused and cohesive
policy statement than the compromise version the EPB last saw.
I recommend that the enclosed Statement be circulated to the members of
the EPB and that a meeting be scheduled, as soon as is convenient, to
consider the Statement before it is transmitted to the President for
approval.
At the EPB meeting in February there were two basic issues raised about
the Statement: (1) Is it necessary to issue a Statement at this time? and
(2) Is the policy articulated in the Statement appropriate and well presented?
In response to the first question, this Statement should be issued as soon
as possible for the following reasons:
The most recent International Aviation Policy Statement,
approved by President Nixon in 1970, is no longer a useful
policy document and the absence of a new statement is
2
construed by other governments as lack of direction on
our part. This is a perception we must avoid. U.S.
goals in international aviation differ substantially from
those of most other nations. These nations must know
that we continue to be firm in our preference for the
play of competitive forces in, rather than government
control of, the international aviation marketplace.
It is widely known that the United States has been reviewing
its international aviation policy for nearly a year and a
half, but that differences among the various Executive
agencies involved has prevented issuance of a new state-
ment. Spokesmen from within and without the government
have publicly called for new and relevant policy guidance.
Failure to issue a Statement now would subject the
Administration to criticism for being unable to resolve
interdepartmental disagreement and to continuing charges
of ineffective leadership in international aviation.
Two recent, and most important, events in international
aviation have underscored the pressing need for clear
and forward-looking U.S. policy. One is the renunciation
by the United Kingdom of our primary bilateral agreement,
which compels us to undertake a comprehensive reassess-
ment of our present system. Release of a new statement
prior to the start of negotiations on September 9 would
clarify our objectives for the British and provide the State
Department with the negotiating strength it needs.
The second event is the opinion of the CAB in the Trans-
atlantic Proceeding. Along with other agencies, DOT has
advised the President to return most of the decision to the
Board. If he does so, the most useful direction he could
provide the Board's review would be this Policy Statement.
Underlying these points is the simple fact that the 1970 Policy Statement
is badly out of date and provides inadequate guidance on the most important
issues confronting us today and in the foreseeable future. It has been
overtaken by fundamentally changed circumstances that have given rise to
problems that were either nonexistent or considered negligible in 1970:
an irrational route system, severe excess capacity, a noncompensatory
and discriminatory fare structure, chronic U.S. carrier unprofitability,
an ambiguous relationship between scheduled and charter services,
3
questions as to the viability of the Bermuda principles, the difficulty of
expanding gateway and other new services while maintaining economic
existing services. To be credible, U.S. policy must not only reflect
awareness of these problems but provide consistent and unambiguous
direction for dealing with them. Our foreign partners in international
aviation must know that our continued emphasis on free market policies
is based not simply on attachment to traditional postures, but on current
and well-reasoned convictions that these policies best serve the interests
of U.S. consumers and carriers, and those of other nations as well.
Credibility also requires acceptance on our part of the differing views
and policies of other nations. The United States cannot dominate the
world aviation community, but it can endeavor to lead--with policies that
reconcile the interests of the aviation consumer and the profit-oriented
carrier, the interests of the privately-owned, competitive aviation
companies we favor and the government-controlled and subsidized carriers
found elsewhere. The present version of the Policy Statement contains
such policies, the most important of which are highlighted in an executive
summary which is also enclosed.
William T. Coleman, Jr.
Attachments
SUMMARY OF POLICY STATEMENT
Four fundamental concerns are addressed throughout the Statement:
The public interest in obtaining low cost, readily available air
transportation - both scheduled and charter-type services.
The industry's need to achieve a financially viable international
aviation system, and the need for private enterprise U.S. carriers
to enjoy fair and equal competitive opportunity in foreign markets.
The need to reform regulatory policies that inhibit realization
of these goals including the need for sufficient flexibility in
the system to meet changing market conditions.
Recognition of the role that foreign carriers play in the inter-
national system.
The Statement is much more explicit than the 1970 Statement was, and
comes to grips with resolving the major issues of the day insofar as
they affect the consumer and the industry. The key points made are:
Routes
In exchanging air transport rights, the Bermuda principles have
benefited U.S. consumers and flag carriers generally. In
forthcoming negotiations we will seek to preserve the flexibility
and reciprocity that underlie the Bermuda principles, recogniz-
ing that there may be opportunities for improvement that could
be incorporated in a new bilateral agreement. We anticipate
that a new agreement will represent for the future of aviation
what the Bermuda Agreement has represented for the past
25 years.
The basic consideration in determining whether a U.S. carrier
should be authorized to schedule service on a new or an existing
route is the commercial viability of the route and its impact on
the international route system after taking into account the likely
impact of foreign carrier competition and liberalized charter
rules.
- 2 -
The policy endorses a movement away from head-to-head competi-
tion between U.S. carriers in city-pair markets, and supports
improved services in present coterminals and expansion into new
cities, if it can be supported economically.
The U.S. seeks an improved competitive posture for U.S. carriers
vis-a-vis foreign carriers and elimination of discriminatory
practices.
Role of Scheduled and Charter Services
Government has the responsibility to assure that essential levels
of scheduled service can be economically maintained with minimum
restraint on charter services.
The policy endorses liberalized charter rules, such as the One-stop
Travel Charter and the Advanced Booking Charter, together with
part charter authority on scheduled flights to improve service avail-
ability and operating efficiency.
The U.S. advocates acceptance of charter groups which are organized
pursuant to the rules of the originating country.
Supplemental carriers should be eligible to obtain scheduled certifi-
cates, while scheduled carriers should have unrestricted charter
authority within the areas they provide scheduled services.
The U.S. will insist that U.S. scheduled and supplemental carriers
be treated alike with regard to charter services.
Excess Capacity
The Statement recognizes the structural differences between interna-
tional and domestic markets which affect the ability of carriers to
adjust capacity to demand.
It makes explicit the U.S. view that capacity levels should be set
individually by carriers, although because of the importance of
economically viable operations, we would support temporary carrier
agreements under certain carefully prescribed conditions.
- 3 -
The preservation of the underlying competitive concept in our air
service agreements is vital because predetermined capacity for
market share reasons introduces artificial restraints unrelated to
carrier efficiency or traffic demand.
The U.S. will attach a high priority to reducing excess capacity
provided by foreign carriers in violation of our air services agree-
ments.
Fares and Rates
We favor more price/quality options for travelers and shippers set
at the lowest levels which will permit an efficient carrier to earn a
reasonable return on investment.
The Statement endorses a simplification of the tariff structure with
several specific guidelines on an acceptable structure.
While continuing to accept LATA as the principal vehicle for
intercarrier negotiation of scheduled tariffs, it supports reforms
within IATA and greater flexibility for rate setting by individual
carriers.
The CAB should identify the costs it will apply in determining
whether to approve fare agreements or individual tariff filings.
Charter rates should be subject to the same cost-related criteria
as fares for scheduled services.
Rather than having IATA involved in the establishment of commission
levels, we recommend that each carrier establish its commission
structure independently.
DRAFT
STATEMENT OF INTERNATIONAL
AIR TRANSPORTATION POLICY
OF THE UNITED STATES
July 26, 1976
FORD is LIBRARY GERALD
1
STATEMENT OF INTERNATIONAL
AIR TRANSPORTATION POLICY
OF THE UNITED STATES
TABLE OF CONTENTS
Page
I.
Introduction
1
Overview
1
Structure of International Air Service
1
Principal Objectives
3
II.
Public Service Considerations
5
Goals
5
Policy
5
U.S. Flag International Route System
5
Extent of Route System
6
Emphasis on Major Trunk Routes
7
Relationship to Domestic System
8
Competition
9
Relative Roles of Scheduled & Charter
Passenger Operations
10
Charter Services
11
Regulations
11
Landing Rights
12
Authority for Charter Services
12
Expansion of Supplemental Carriers
13
Cargo Services
13
Route Authority
14
Service Considerations
15
Split Charters
15
FORD & GERALD LIBRARY
ii
Page
III.
Viability of the U.S. International Air
Transportation System
16
Goals
16
Policy
16
Capacity
16
Excess Capacity
17
Market Share
18
Sixth Freedom Capacity
19
Cooperative Agreements
19
Fares and Rates
19
Role of IATA
20
Role of CAB
20
Passenger Fares
21
Charter Rates
22
Cargo Rates
22
Mail Rates
24
Tariff Integrity
24
Role, Compensation & Regulation of Middlemen
24
Government Procurements
25
The International Competitive Environment
26
IV.
Safety, Environmental and Other Considerations
28
Goals
28
Policy
28
International Organizations
28
Certification and Operation of Aircraft
29
Safety
29
Availability, Allocation, and
Cost of Fuel
29
Environmental Objectives and Their
Impact
29
Security Objectives and Their Impact
30
LIBRARY GERALD R. FORD
I. INTRODUCTION
Overview
The decade of the 1970's has been characterized by grow-
ing recognition of the extent to which the nations of
the world are economically interdependent. International
aviation is no exception. The airlines of many countries
now provide safe, fast, and efficient international air
service; Americans benefit from these services as they
do from our own. Historically, the United States has
had a leadership role in the development of international
air transportation. Continued effective participation
in international aviation is important to the national
interest.
Consistent with the longstanding economic policy of the
United States that privately owned and managed companies
provide the most efficient and consumer responsive services,
the private sector will continue to have the responsibility
for operating the United States' international air transporta-
tion system consistent with the policies set forth below.
We look forward to an era in which private American
air carriers can compete effectively in the international
economic environment without the need for Government subsidy
and without being placed at an unfair competitive dis-
advantage. We will work to reform and modernize the
international aviation structure in order to enable well-
managed U.S. carriers to serve the public interest by
providing economic air travel, to compete successfully
with foreign air carriers, and to earn a reasonable rate
of return on investment.
The international aviation policy of the United States
should be consistent with and contribute toward U.S.
objectives in the areas of national defense, foreign
policy, and international commerce. We recognize that our
international aviation policy objectives can best be
achieved in cooperation with other governments, working
through bilateral and multilateral channels.
The Structure of International Air Service
There are three major considerations in the development
of international air service: The route patterns which
define the markets to be served; capacity, meaning the
number of flights and types of aircraft flying in these
markets; and the fares charged for different kinds of
services and consumers. All three are integrally related
economic issues. As we attempt to introduce greater
FORD
GERALD
LIBRARY
-2-
rationality into the international aviation structure,
we will take pragmatic steps to bring about more rational
pricing policies that reflect actual costs and are responsive
to consumer demand, to relate capacity to demand, and to
select routes that closely reflect natural traffic patterns
and are economically viable. As a result of these steps,
U.S. carriers should be able to operate profitably, and
the users of air transport services will be well-served.
The United States cannot impose its economic philosophy
on the rest of the world, but as a significant participant
in the international aviation community we can work through
bilateral and multilateral forums to bring about constructive
change for the benefit of the international air travelers,
shippers, and carriers of all nations. We recognize that
international transportation presents special challenges
-- the most obvious being the need to deal with other sover-
eign nations. While the governments of other nations may
share our objective of efficient transportation service,
many differ sharply in their views as to how such transporta-
tion should be organized, financed, regulated, and promoted.
Thus, the means by which we pursue our international policy
goals often cannot be the same as those by which we conduct
our domestic transportation system.
While this Policy Statement contains a large measure of
regulatory reform, consistent with our domestic aviation
policy, the significant differences between the approaches
taken here and those in the proposed Aviation Act of
1975 reflect awareness of the substantial differences
that exist between the international and domestic operating
environments. Some of these differences are:
Private U.S. companies must compete with state enter-
prises in most markets.
Competition in international air transportation is
limited by government policy in almost all countries.
In some instances restraints are imposed against
efficient competitive practices.
Some foreign states, seeking foreign exchange earnings
from American tourists, underwrite their national
carrier's losses in order to maintain large capacity
to the United States.
Foreign carriers sometimes seek below-cost cargo rates
as a means of promoting their nation's exports.
FORD is LIBRARY GERALD
-3-
On many international routes, the ratio of daily flights
to the number of competing carriers is much lower than
domestically.
The dense domestic markets provide greater opportunity
for carriers to adjust capacity to demand.
Many travelers plan their international flights far
in advance and are willing to gather at gateway points,
whereas the nature of domestic demand requires more
frequent, short-notice service.
Long route segments, multiple time zone changes, and
airport curfews inhibit carrier flexibility in arranging
intercontinental schedules. Thus, flights are constrained
to operate during certain "windows".
International aircraft (because of economic and safety
considerations on long intercontinental segments)
are larger, on average, compounding the problem of
tailoring the supply of seats to meet the traffic demand.
Principal Objectives
In addition to promotion of an international economic environ-
ment and aviation structure conducive to healthy competition
among air carriers, four principal objectives should guide
U.S. international air transportation policy for the future.
They are:
First, to provide for the international air trans-
portation of people, mail, and goods, at as low a
cost as is economically justified, wherever a sub-
stantial need exists.
Second, to support a private U.S. international air
transportation industry that is economically viable
and efficient, and that will generate sufficient earnings
to attract private capital and provide job opportunities.
Third, to be consistent with, and contribute toward
U.S. national objectives in the areas of defense and
security, foreign policy, and international commerece.
Fourth, to encourage a'safe and efficient system of
airports and airways and to further the U.S. goals
relating to the environment.
GERALD FORD LIBRARY
-4-
In pursuing these objectives, the United States is con-
cerned with both the interests of the public in obtaining
low-cost, readily available air transportation, and the
interests of the industry in achieving a financially
viable international aviation system. We recognize the
primary importance of maintaining a scheduled U.S. flag
system to meet the public need for regular and frequent
air services on an economically sound basis. We also
recognize the growing demand for low-cost services and
the inherent efficiencies of full plane operations gen-
erally characterized by charter-type services; and the
need to have governmental policies that will accomodate
the competitive interrelationships between these two
types of services.
This Policy Statement identifies ways in which the private
enterprise U.S. international aviation industry and concerned
U.S. Government agencies can move toward the stated objectives.
However to avoid undue disruption, there should be an
equitable phasing of the elimination or relaxation of
the regulatory restrictions called for here.
FORD & GERALD LIBRARY
-5-
II. PUBLIC SERVICE CONSIDERATIONS
The United States seeks to meet the needs of the consumer
by providing for the safe and efficient transportation
of people, mail, and goods. The international air trans-
port system should have a favorable impact on the economic
growth and foreign commerce of the United States and
of our trading partners.
In pursuit of this objective, the United States seeks
an international air transport system that provides the
capability and flexibility to respond efficiently to
changing market conditions and requirements, wherever
a substantial need for air transportation exists.
GOALS
To this end, the United States will pursue the following
goals:
Regularly scheduled international air transportation
of people, mail, and goods at as low a cost as
is economically justified.
International air charter transportation of people
and goods by charter specialists and scheduled
carriers operating charter flights, at as low a
cost as is economically justified, to the extent
such operations do not prejudice essential levels
of economically viable scheduled service.
Effective competition among carriers and among
the classes of service offered, including a fair
and equal competitive opportunity for the private
enterprise air carriers of the United States.
POLICY
U.S. Flag International Route System
Air transportation is essential for mail, high priority
cargo, government and business travel, and urgent
personal travel. It is a desirable, low-cost means of
international pleasure travel. Aviation is an essential
part of the foreign commerce and international trade
of the United States.
FORD
Air transport interests are best assured for Americans
by the presence of a strong, viable, privately-owned
BRALD
U.S. flag international air fleet. Such a fleet is also
LIBRARY
an important reserve asset to meet U.S. military require-
ments and non-military emergency situations. An important
factor in determining the size of the U.S. air fleet
is the extent of U.S. international route operations.
International air transportation operates in a complex
and changing regime of law and politics involving a few
multilateral treaties, many bilateral arrangements, and
a wide collection of national laws, regulations, and policies.
Continuation of a U.S. flag air transportation system will
require continuing negotiations between the United States
and other nations to arrange equitable operating rights
and privileges.
Extent of Route System. Because most business travelers,
many other international travelers, and most air freight
shippers rely on the regular availability of air service
on relatively short notice that is characteristic of
scheduled services, the U.S. Government should encourage
a system of routes, as extensive as can be economically
sustained, with regular, scheduled service by U.S. flag
air carriers.
Unless a specific and clearly defined national interest
dictates otherwise, the basic consideration in determining
whether a U.S. carrier should be authorized to schedule
service on a new or an existing route is the commercial
viability of the route and its impact on the international
route system. The U.S. Government should support fully
actions by U.S. flag carriers to rationalize their route
structures -- to drop uneconomic routes, to identify
new markets that are economically viable, and to seek
an overall route structure that is responsive to consumer
demand and profitable to operate. In those rare instances
where the national interest may require service by a
U.S. carrier on a route that is not economically viable,
then direct Federal subsidy would be preferable to a
policy of indirect subsidy or cross-subsidization from
profitable routes.
In promoting economically viable routes, the carriers
and the U.S. Government should review regularly the net-
work of international routes operated by U.S. carriers
to assure that potentially profitable segments are added
and that unprofitable segments are deleted before they
become a serious financial drain on the operating carriers.
New international route authority is awarded to U.S.
carriers in the context of the bilateral framework within
which international air transportation operates. Thus
decisions on entry raise issues that must be negotiated
between governments. It does not serve the interest
of the United States to be put in a position where foreign
governments can seek a valuable right for their carriers
as a consequence of our granting an uneconomic route
for one of ours. Given the policy that international
routes should be economically viable, it follows that
GERALD FORD LIBRARY
where the United
sions for the traffic rights which could be implemented
in a given route award proceeding, an important decisional
criterion in carrier selection is the ability to compete
effectively with foreign flag carriers in the market
at issue.
U.S. policy continues to be that negotiations should lead
to an equitable exchange of route rights for both scheduled
and charter services. Our primary and overriding objective
is to achieve an international environment in which privately
owned and operated U.S. air carriers have a fair and equal
opportunity to compete for benefits at least as great as
those available to foreign carriers.
The United States will continue to endorse the exchange
of air transport rights and privileges through the system
of bilateral air transport agreements. We have considered
multilateral agreements and alternative approaches to the
inherent problems of the bilaterals, but have not yet seen
any evidence that another system would work more effectively.
While particular problems, such as fare and rate regulation,
may require multilateral discussion, we can work within
the basic structure of bilateral agreements which provides
that flexibility required to accommodate most circumstances.
Emphasis on Major Trunk Routes. Major traffic flow patterns
and trunk routes between the United States and four principal
areas of the world--Europe, Africa, Central/South America,
and Asia/Oceania--are clearly discernible. U.S. carrier
operations over these trunk routes form the backbone of
the intercontinental air transport system. U.S. carrier
participation on these routes is essential to the maintenance
of a U.S. flag system. Aside from transborder and adjacent
island operations, major trunk routes and markets should
be identified by the U.S. air carriers and given priority
negotiating attention by the U.S. Government. Reciprocal
operations provided by foreign carriers with supporting
secondary traffic should be expected on such routes. As
the quality and quantity of foreign flag air service between
foreign air traffic hubs improves, U.S. flag carriers should
emphasize third and fourth-freedom scheduled services,
even while recognizing that fifth-freedom traffic is important
for their economic viability.
Viable airline routes, particularly long-haul trunk routes,
draw upon a variety of traffic flows for support. Many
cities in foreign countries are situated ideally to serve
as gateways, or conduits, through which foreign carriers
have attracted traffic flows and thus improved their
FORD i GERALD LIBRARY
-8-
competitive position relative to U.S. carriers. In negoti-
ating international route patterns for U.S. carriers, the
U.S. Government should structure routes in a way that enables
our carriers to draw upon natural traffic flows and, thereby,
compete effectively with foreign carriers.
Relationship to Domestic System. The U.S. international
route system is not completely separate from the domestic
system, and should not be viewed as a separate system,
even though recognition must be given to the differences
between domestic and international air transportation.
The growing volume of international traffic, both passenger
and freight, has resulted in expansion of direct inter-
national scheduled services at many American cities. A
number cities are seeking new direct and nonstop services
to points in Europe, Asia, and South America. The United
States-Canada routes already resemble natural extensions
of the domestic networks in both counties; the United States-
Mexico routes increasingly reflect extensions of the domestic
route structures.
Closer integration of international and domestic route
systems is in the public interest, as the channeling
of passengers and freight through gateway points inconven-
iences passengers and shippers and ignores, in some
instances, natural traffic flows, market requirements,
and the economics of modern aircraft. The following
steps will lessen the artificial, regulatory distinctions
between domestic and international traffic categories.
They will result in greater convenience for the public
and operating efficiency and competitive opportunity
for the carriers.
Services to Canada, Mexico, and the Carribean should
be extensions of the domestic route system.
Authority to carry local traffic on domestic
segments of international flights, both passenger
and freighter, should be granted, as regulatory
restrictions on the local traffic authority of U.S.
international air carriers no longer serve the
public interest. Such authority will increase the
economic viability of domestic extensions of
international flights, thereby supporting more direct
services for the shipping and traveling public.
Blocked space agreements on domestic segments of
international flights and equipment interchange
agreements should be considered by the carriers and
the Civil Aeronautics Board as means to increase
the economic viability of behind-the-gateway
sègments, and hence to benefit the public with
more direct service at more American cities.
FORD & LIBRARY GERALD
All U.S. international carriers should be permitted
to have domestic traffic systems to feed traffic
to their international operations.
Consideration should also be given (1) to the competitive
and public service benefits that might be achieved in
major international markets by authorizing different
U.S. carriers to serve a single foreign point or area
from different cities or regions of the United States,
and (2) to lessening the emphasis on the traditional
intercontinental gateways, by granting direct service
authority at more domestic points. The need to gather
traffic at "gateways" in order to have the high load
factors in widebodied equipment that permit low fares
and fuel savings, however, must be taken into account.
Competition
A basic tenet of U.S. economic philosophy is that market-
place competition results in improved service and lower
total costs to the consumer. This is as true in
aviation as it is in other areas of commercial activity.
However, it does not follow that on international routes
there must be multiple U.S. flag carriers. Foreign carriers
are sophisticated competitors for U.S. carriers in most
markets; the foreign competition needs to be taken into
account as we determine whether more than one U.S. carrier
should be designated for a particular route or market
area. Too many U.S. carriers on a route may undercut
the economic viability of U.S. flag service without bene-
fiting the public.
In addition to competition between the carriers on a
route, area competition is an important characteristic
in international air transportation. This kind of competition
among carriers should be recognized in designating U.S.
carriers for international routes, because tourists who are
flexible as to destination constitute a large share of
intercontinental air passengers. Beach resorts in Acapulco,
Costa del Sol, and Hawaii (and the carriers serving them)
often compete, for example, for the same tourists. The
Alps and the Rockies may compete as destinations for
skiers. Even within Europe, Amsterdam, Brussels, Copenhagen,
and Luxembourg compete with Frankfurt, London, Paris,
and Rome as the start-points for European holidays.
The air carriers serving these points, both charter and
scheduled, compete in arranging and offering tourist
opportunities, both group and individual, to the destinations
they serve. Air carrier service, both pre-flight and
in-flight, is an integral part of the total tourist package.
GERALD FORD LIBRARY
-10-
Furthermore, the service benefits, stimulated by U.S.
carrier competition on an area basis for the destination-
flexible tourist traffic, are of course available to
the destination-inflexible traveler.
If the U.S. Government authorizes more air carriers than
a particular international market will support, predatory
pricing or market restrictions by other governments
may result. The United States should authorize competition
between U.S. flag airlines in scheduled international
markets only if they can operate profitably, taking into
consideration the presence of competition from both foreign
scheduled airlines and domestic and foreign charter airlines.
Relative Roles of Scheduled and Charter Passenger Operations
There are generally two kinds of international. air pass-
engers:' those who are time-sensitive and relatively
insensitive to price, and those who are price-sensitive
and relatively insensitive to time. In most cases, time-
sensitive travelers have fixed engagements at foreign
points; they rely primarily upon scheduled air service
available on short notice. For the benefit of these
passengers, the Government has the responsibility to
assure that essential levels of regularly scheduled service
can be economically maintained. Restraints on charter
services should not go beyond what is needed for this
purpose.
Travelers, who are primarily concerned with price, generally
are willing and able to accept advance purchase require-
ments. Since many of these passengers have considerable
flexibility in the day and time of their travel, they
usually can adjust their schedules to fit efficient patterns
of capacity. Therefore, they should enjoy the price
benefits that result from the inherent efficiency of
high load factor or planeload movements and the flexibility
realized by the carriers in scheduling capacity for maximum
utilization. Bringing the benefits of such efficiencies
to the traveling public offers the best opportunity for
increasing traffic in the price-elastic sectors of the
market. Thus, there is a substantial public need for
charter-type passenger operations in international markets.
The 1970 Statement of International Aviation Policy recog-
nized the value of competitive, yet complementary, scheduled
and charter passenger services. The basic policies articu-
lated there will be continued. However, the regulatory
structure at the Civil Aeronautics Board and within the
International Air Transport Association, as it affects
FORD is GERALD LIBRARY
-11-
scheduled and charter services, requires substantial
alteration to improve the efficient utilization of equipment
and energy resources, thereby assuring the lowest possible
fares over the long term. Considerations of economic
efficiency, service innovation, responsiveness to market
factors, competitiveness, and profitability should be
foremost as the relative roles of scheduled and charter
passenger operations are assessed.
The industry should continue to have the primary responsi-
bility for adapting its air transport product to public
demand. Regulatory regimes imposed by governments should
not stifle the flexibility of the international air carrier
industry to respond to this demand, nor should it remove
incentives to keep costs low. This is particularly true
in the area of charter transportation where regulatory
structures traditionally have been restrictive. In particular,
the United States will use all appropriate means to prevent
restrictions by foreign governments on the competitiveness
of passenger charter operations by all U.S. carriers.
Charter Services
Regulations. Consistent with the foregoing principles,
the administrative regulations constraining the availability
and operation of charter services should be modified
to make more low-cost services available to the traveling
public. This government is presently developing new
charter program types to replace some existing types
that have not served the public well, either because
they are discriminatory or overly-restricted. Our objective
is to reduce a multiplicity of charter types to a smaller
number, with simplified regulations to facilitate their
use by the public and the travel industry. As discussed
below, we request other governments to accept U.S.-origin
charters of these basic types.
A year ago the Civil Aeronautics Board took an important
step in broadening the availability of low cost travel
opportunities by announcing the One-Stop Tour Charter
(OTC) programs.
The Civil Aeronautics Board has proposed regulations
for a charter type new to the United States--the Advance
Booking Charter (ABC). Final ABC regulations should
be promulgated at the earliest opportunity, with conditions
that will assure their viability in the market place.
Charter regulations that impose requirements not related
to cost or quality of service, such as prior-affinity
requirements or three-stop requirements should be elimin-
ated as soon as viable alternatives are in place. The
overly-restrictive Travel Group Charters should be eliminated.
ALD FORD LIBRAS
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Although empty seats are an inevitable product of any
on-demand, scheduled transportation system, they represent
an inefficient and wasteful use of resources, if some
of the seats might be filled without turning away on-demand
traffic. The scheduled carriers should have the flexibility
of carrying advance-purchase charter groups on either
their regularly scheduled flights or on flights dedicated
to charter movements. However, it is important that
neither the financial soundness of the scheduled carriers,
nor the operations of the supplemental carriers, be unduly
harmed by this new authority.
In the long-term it would be desirable to achieve as much
commonality among nations as possible on the regulatory
principles governing charter traffic. However, because
the specifics of charter regulations must be adapted to
the particular economic and marketing circumstances of
the country in which the traffic is organized, it cannot
be expected that complete international commonality can
be achieved. Accordingly, the United States will continue
to advocate the "country of origin" concept, enabling each
country to adopt those requirements that meet its unique
needs.
Landing Rights. The United States will continue to pursue
landing rights for charter services that are as free from
restrictions as possible, and will seek the negotiation
of agreements wherever appropriate. At issue in such negotia-
tions will be the continuation of charter rights held by
foreign carriers, and the nature of such rights. While
charter service landing rights should be negotiated on
their own merit, U.S. policy should provide sufficient
flexibility to take into account the present and future
realities of the marketplace, including the relationship
between scheduled and charter operations. The United States
will continue to insist that U.S. scheduled and supplemental
carriers be treated alike with regard to charter services.
Authority for Charter Services. While they may have had
some regulatory value in the past, distinctions between
on-route and off-route charters for scheduled carriers
and geographic restrictions on the charter authority of
supplemental carriers reduce competitive flexibility and
the availability of charter services.
In place of the present on-route/off-route distinctions
for international charters by scheduled carriers, U.S.
international carriers should have unrestricted charter
authority within the regions where they provide scheduled
FORD & GERALD LIBRARY
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services. The supplemental carriers already have authority
on a regional basis. Both international scheduled and
supplemental carriers should have liberal opportunity
to operate charter flights outside their authorized regions.
Expansion of Supplemental Carriers
That a carrier started as a supplemental should not bar
it, as a matter either of law or of regulation, from
acquiring a scheduled certificate, so long as it meets
the same requirements that a scheduled carrier must meet.
Since 1963, mergers, bankruptcies, and other adjustments
have caused a substantial reduction in the number of
supplemental air carriers. Of the thirteen U.S. carriers
originally granted supplemental certificates, only six
are currently active operators of charter authority.
In the past decade the supplemental carriers have proven
to be an effective, valuable competitive spur. They
have fostered market development and introduction of
new price/quality options that have benefited the traveling
public and the tourist industry here and abroad. While
the number of supplemental carriers is not an index of
the quality of the competitive stimulus provided by this
important segment of the air transport industry, there
may now be opportunities for additional supplemental
carriers to initiate economically viable operations.
The ranks of the supplementals should be opened to new
entrants where this is the case.
Cargo Services
International air cargo operations respond to the need
of commerce and the shipping public for fast, reliable
transport of relatively high-value and/or short-life
goods. The 1970 Policy Statement recognized the impact
of wide-bodied aircraft on passenger services. Now U.S.
policy must be cognizant of their impact on freight service
and development. Freight and passenger service character-
istics differ in important areas; where they do, freight
issues merit separate consideration.
Because of the inherent cost advantage and energy effici-
ency of surface transportation, air freight is and always
will be a premium transportation service, while for
international passenger service air travel is the low cost
FORD
option. A great many commodities cannot be attracted
to air, except in a relatively few cases of compelling
time urgency. While surface transport provides for the
GERALD
regular flow of most goods, air freight is and must be
available for urgent shipments to respond to peak require-
ments, to compensate for underestimates of product demand,
and to. remedy untimely shipping delays. Air freight needs
to be viewed as a part of the total freight transportation
system, which inevitably involves truck transport, and often
-14-
rail or water movement as well. Thus, we view air trans-
port as an important component of an expedited intermodal
freight delivery system. The air carriers should seek
to improve the quality of the total transport by effective,
direct linking of the ground and air transport segments.
The key objectives are to lessen total transit time,
improve shipment security, and lower transport costs.
Much of the growth of international air cargo service
is attributable to the competitive stimulus of all-cargo
scheduled air carriers, whose existence depends upon
innovation, efficiency, and dedication to air freight
development. Combination carriers have responded with
all-cargo operations of their own and increased efforts
to exploit the large cargo holds of wide-bodied aircraft.
Route Authority. All-cargo and intermodal services provide
a distinct benefit to shippers; their expansion should
be encouraged where economically justified. In granting
authority for all-cargo operations, recognition should
be given to the need for routing and scheduling flexibility,
which may differ considerably from passenger routing
and scheduling patterns.
At present, if an all-cargo carrier wishes to obtain
route authority, it must make a public convenience and
necessity (PC&N) argument based on freight operations
alone. A passenger carrier, however, can make its PC&N
argument based on passenger traffic only or on a combina-
tion of passenger and freight traffic, initiate passenger
(and combination freight) service, and then, at its option,
initiate freighter service as the air freight market
develops without any regulatory PC&N requirement or hearing
before the Civil Aeronautics Board. In such a regulatory
cycle the cargo specialists, who have been the spur of
cargo development, have little opportunity to compete
for new markets and to speed freight market development.
Thus to stimulate competition for entry into new air
freight markets, the Board should grant separate certi-
ficates for combination passenger/cargo authority and
for freighter authority, after making separate deter-
minations of PC&N.
To stimulate further competition in the development and
service of air freight markets, the Board should consider
granting the U.S. all-cargo carriers authority for inter-
national scheduled freighter services on a regional basis.
Such authority would enable the all-cargo carriers to
institute new scheduled freighter services in their service
region at their option without the need for and the delays
-15-
inherent in successive regulatory "public convenience
and necessity" investigations. The authority for the
combination carriers to institute freighter services
on any of their routes which now serve passengers pre-
dominantly would remain unchanged.
Rights for all-cargo routes should be incorporated into
existing bilateral agreements, rather than being made
the subject of separate agreements.
Service Considerations. Because shippers place a high
value on the availability and timeliness of delivery,
the primary service considerations for the international
freight shipper are departure time and arrival time.
Freight generally seeks the on-demand availability character-
istic of scheduled service. Indeed, small shippers do
not even have access to charter services. Consequently,
it is important for air freight traffic development to
provide substantial service improvements for those shippers,
large and small, who desire or require the premium transporta-
tion service offered by reliable, frequent, extensive
schedules of freighter aircraft. The greater the volume
moving on scheduled services the more extensive can be
the scheduled route network and, by increasing the load
factor, the lower the cost to the shipper. The availability
of charter services is especially important for off-route
freight shipments and for freight requiring peculiar
handling or security arrangements.
Split Charters. Passenger charter operators are permitted
to carry separate charter groups on the same flight,
but currently are prohibited from carrying passenger
and cargo charter traffic on the same flight; this may
result in inefficient aircraft utilization. The economic
efficiency of charter operations would be enhanced by
removing this prohibition, and permitting separate cargo
charters to be carried on passenger charter flights.
III. VIABILITY OF THE U.S. INTERNATIONAL
AIR TRANSPORTATION SYSTEM
The United States supports a private U.S. international
air transportation industry that is viable, efficient,
and capable of generating sufficient earnings to attract
private capital and provide job opportunities.
GOALS
In pursuit of this objective, the United States will
support vigorously:
A strong, viable system of international routes.
A modernized regulatory structure within which
carriers can respond to changing market conditions.
Fare structures that respond to consumer demand,
offer price and quality of service alternatives,
enable long-term market growth, and permit
profitable operations by efficient carriers.
Innovation in developing services that expand markets
and attract passengers and cargo shipments.
Efficient use of fuel and other resources.
Prevention of predatory or monopolistic practices.
POLICY
Capacity
Because international routes are determined by government
agreements and tariff structures are determined within
the International Air Transport Association (IATA) forum,
capacity has been the principal competitive medium.
However, in recent years excess capacity, caused by commit-
ment to too many aircraft and by declining traffic, has
been a severe economic burden to the industry. Many
carriers have chosen to compete through illegal fare
discounting or excessive payments to middlemen rather
than risk the loss of market share by reducing capacity.
Although perceptions may differ, it appears that the
industry managers attach significant value to market
share. Of particular relevance to government policy
is the fact that many foreign governments attach great
importance to market share and are thus willing to underwrite
the costs of excess capacity in order to preserve or
improve the market share of their national carriers or
to generate additional foreign exchange earnings.
-17-
In adjusting capacity to changes in traffic, carriers
must contend with the relatively low frequency of long-haul
international flights, the number of carriers in any given
market, and the size of efficient modern long-range aircraft,
all of which impede scheduling flexibility and aggravate
attempts to rationalize capacity. Carriers on only four
or five intercontinental routes operate more than once-daily
service. In many international markets, direct services
are operated only two or three times a week. Bilateral
exchanges have led to the authorization of at least two
air carriers on most international routes even though
the optimum number of daily flights is much lower on
many international routes than on domestic routes. Long
route segments, multiple time zone changes, and airport
curfews inhibit carrier flexibility in arranging intercon-
tinental schedules.
Three principal international capacity issues that require
attention are excess capacity, market share, and sixth
freedom capacity.
Excess Capacity. Even under circumstances of extreme
financial distress, the preferred approach to excess
capacity is unilateral reductions by the carriers. However,
in the recent past, in a marked departure from fundamental
U.S. policy, limited and temporary carrier agreements
on capacity have been permitted. This exception was
made because of the serious level of excess capacity
(i.e., capacity in excess of traffic demand at a reasonable
load factor) in the international aviation system and
the resulting financial distress of the U.S. carriers.
This excess capacity resulted from the purchase of equipment
in anticipation of continued traffic growth which failed
to occur during the fuel crisis and worldwide recession.
As the economic recovery continues and demand catches
up with capacity, such agreements may no longer be necessary.
The recovery of the world economy should absorb the present
excess over the next several years, and market-based
decisions will again be adequate to establish rational
levels. Nevertheless, because of the importance of
economically viable operations, we should support CAB
approval of temporary carrier agreements if the following
standards apply:
-18-
-- Excess capacity is having a serious, adverse impact
on the viability of operations on the route system
in question.
-- The public interest is served by assuring adequate
scheduled service on the route by a U.S. carrier.
-- Unilateral reductions, or other more competitive
alternatives, are shown by clear and convincing
evidence of past practice to be infeasible, and,
if undertaken in the current context, would put
the carrier making them at a significant competitive
disadvantage.
Carrier agreements should be temporary and subject to
approval, monitoring, and evaluation by the Civil Aero-
nautics Board. Any renewal of such agreements should
be subject to the foregoing standards.
Capacity agreements arrived at between governments generally
do not have the benefit of exposure to public reaction
and response as carrier agreements do. Government intervention
should be used only where there is a clear need for capacity
reduction, as defined above, and attempts at unilateral
cutbacks and carrier agreements have been ineffective.
Market Share. The second capacity issue is market share.
The United States has traditionally espoused the Bermuda
system, under which each carrier determines for itself
the level of capacity it believes is warranted, subject
only to ex post facto review by governments. The United
States is faced with increasing criticism of the Bermuda
system by foreign governments whose perceptions of competi-
tive principles differ from our own. The preservation
of the underlying competitive concept behind the Bermuda
system is vital, because systems under which carriers or
governments predetermine capacity for market share reasons
can introduce artificial restraints unrelated to carrier
efficiency or traffic demand. When capacity disputes
arise, the United States must must weigh carefully each
situation to determine overall U.S. interests. Special
procedures to deal with capacity disputes may be appro-
priate in some instances. In some markets, provisions
for greater flexibility in pricing competition may warrant
less flexibility in capacity competition.
Sixth Freedom Capacity. The third capacity issue arises
from situations where carriers rely excessively on traffic
having its origin or destination behind the homeland of
the carrier. Such reliance is contrary to the provisions
-19-
of our bilateral air transport agreements, and these opera-
tions have severely distorted traffic distribution in certain
markets. The United States will seek bilateral review
of foreign carrier operations considered to be in violation
of such provisions and will attach high priority to resolution
of this matter.
Cooperative Agreements
The United States will continue to have a flexible policy
with respect to operating arrangements, such as interline
agreements, equipment interchanges, and blocked space
agreements. Arrangements of these kinds can help to promote
efficiency and improve service. They may also allow
economically viable operations in markets that might
otherwise go unserved, and may meet other international
aviation policy objectives as well. Such arrangements
may be permitted and even encouraged in cases where their
service benefits clearly are more substantial than their
anticompetitive impact. On the other hand, economic
agreements such as revenue or traffic pools generally
are contrary to the public interest and will be dis-
couraged. Pooling proposals should be disapproved unless
there is clear and convincing evidence that the pool
would achieve significant U.S. policy objectives and
more competitive alternatives are not available. Strict
reporting and fare/rate conditions must be integral to
such agreements to assure that they are not contrary
to the public interest.
Fares and Rates
The preferred means of assuring economic efficiency is
through the operation of free-market forces. However,
fundamental restraints limit the operation of free com-
petition in international air services. In support of an
economically sound and efficient air carrier industry,
therefore, the United States must continue a system of
government oversight and regulation of international
passenger fares and cargo rates.
International fares and rates should to the maximum degree
feasible, be cost-related, responsive to consumer demand,
and established on the basis of competitive market forces.
The tariff structure, based on these principles, should
substantially benefit passengers, shippers, and carriers
alike. Within such a structure we would expect to achieve
fares and rates that are:
Set at the lowest levels that permit an efficient
carrier to earn a reasonable return.
Greatly simplified compared with the present prolif-
eration of discount arrangements, yet sufficiently
flexible to provide genuine price/service options.
-20-
A more simplified fare structure, including simplified
construction rules, stopover provisions, and circuity allow-
ances, would facilitate adherence to and enforcement of
the agreed fares.
The compulsion of some carriers to pursue traffic at
any cost on a total market share basis, whether to maintain
market share or to support unneeded capacity, has resulted
in special, low nonproductive fares. It also led to
unlawful discounting. Such practices obviously have
aggravated the carriers' financial difficulties in the
past. In the last analysis, however, carriers cannot
expect to achieve profitable operations unless capacity
is related to demand.
Role of IATA. Most other governments are unwilling
to accept a system in which fares are established by
carriers unilaterally. The alternative of establishing
fares by intergovernmental agreement, whether bilaterally
or multilaterally, would be complex and unwieldy. Moreover,
it is not a desirable alternative because governments
should not be involved in fixing international fares
as a general practice. Therefore, the United States
will continue to accept the International Air Transport
Association as the principal vehicle for intercarrier
negotiation of scheduled tariffs. At the same time IATA
and its member carriers should revise their tariff-setting
structure, so that it can be more responsive to market
forces and innovative fare programs, including greater
flexibility for rate setting by individual carriers.
IATA has taken steps in two important directions:
Reform of the unanimity rule
Reduction in the size of regional traffic conferences.
These steps should be implemented promptly, and monitored
carefully to assure that the anticipated benefits are realized.
Further revisions in the IATA structure may be desirable
or required.
Role of CAB. The Civil Aeronautics Board (CAB), in reviewing
both agreements and individual tariffs, should provide
a meaningful opportunity for public hearings or other
public review. Board action on IATA agreements should
be taken in a timely fashion, so that the member carriers
of IATA can give reasonable public notice of new tariff
schedules prior to their implementation.
-21-
To assist in achieving a cost-based tariff structure and
maximum pricing efficiency, the Board should identify the
costs that it will apply in determining whether to approve
rate agreements or individual tariff filings. Generally,
these should be the costs of the most efficient carrier.
The Board should publish its cost data well in advance
of IATA traffic conferences or the likely dates of sig-
nificant new individual tariff filings.
Passenger Fares. The present international fare structure
contains fares that are largely unrelated to the costs
of providing the service, and aggregate revenues are
inadequate as a result. Because of its unwarranted complexity,
the present fare structure also is unfair to the traveling
public, as it results in frequent misquotation and miscon-
struction of fares.
The United States also has serious reservations as to
the practice of charging normal-fare passengers fares
that are unreasonably in excess of fully allocated costs,
in order to subsidize the carriage of other passengers
at fares unreasonably below cost. Since today only about
twenty percent of North Atlantic travel is at undiscounted
fares, the point of departure for rationalization of
the fare structure lies with the promotional fares.
Across-the-board percentage fare increases will not solve
this fundamental problem. The United States supports
a narrowing of the gap between normal economy fares
and promotional fares and the rationalization of the
present charter-competitive fares on a cost-related basis.
These fares, as well as any new promotional fares,
must be justified on their respective economic merits.
In evaluating any new proposals for promotional fares,
the CAB should take into account the relationship to
scheduled service costs. Further, the entire question
of the validity of the present highly differentiated
North Atlantic passenger fare structure should be explored
in depth in the North Atlantic Passenger Fare Investigation,
presently before the CAB.
A more rational relationship between normal and promotional
fares is not inconsistent with the use of price-flexibility
as a means of achieving a satisfactory balance between
traffic and capacity levels. As noted earlier, the
nature of the long-haul international markets confounds
GERALD FORD LIBRARY
-22-
the carriers' ability to adjust capacity to meet daily
and seasonal fluctuations in demand. Pricing policy
can be an important tool for lessening these fluctuations
by encouraging traffic to adjust to efficient schedules
of capacity. Increased efficiency in capacity utilization
means higher average load factors, which can then permit
lower fares, stimulating still more traffic. As much
of the international air travel market is composed of
price-sensitive, destination-flexible vacation travelers,
the traffic stimulus of lower fares is large, as has
been demonstrated in the transatlantic market in the
past decade with the major expansion of charter services.
Such traffic expansion, of course, results in greater
revenues for the carriers and in greater tourism receipts
for the destination countries. The carriers, however,
need to exercise some restraint in their pricing practices.
In seeking charter-competitive fares, the carriers have
paid insufficient attention to demand peaking, incurred
major losses, and attempted to offset these losses by
increasing the regular fares. Peak/off-peak pricing
and charter groups on scheduled service should, to the
contrary, enable carriers to lower the regular fares
by attracting additional traffic to utilize otherwise
unused capacity. While some carriers will argue that
the result is to dilute yield -- i.e., revenue per revenue-
passenger-mile -- the actual result is to increase total
flight revenue, meaning that the regular fare passenger
has a lower expense burden per aircraft mile. Governments,
however, must prevent predatory price competition.
Charter Rates. Charter rates, for both passenger and
freight, should be subject to the same criteria and policies
as fares for scheduled air services, particularly their
relationship to costs. The CAB proposed several years
ago a system of minimum passenger charter rates related
to costs. While the courts held that this proposal exceeded
the Board's powers, the Board should publish its cost
data against which particular charter rates are to be
judged, as is recommended above for scheduled service
fares. There is no fundamental reason why charter rates
should not be subject to the same scrutiny as scheduled
service fares, particularly when much of the promotional
fare structure is designed to be charter competitive.
Cargo Rates. Cargo rates should be responsive to shipper
demand and related to actual costs. The CAB should prevent
the use of scheduled cargo rates below the costs of the
most efficient all-cargo carrier, whether the rates are
offered by all-cargo or combination carriers.
-23-
With the further introduction of wide-bodied all-cargo
aircraft, appropriate weight breaks reflecting large
volume cost savings should be permitted.
The present structure of specific commodity rates (SCRs)
is, as the Civil Aeronautics Board has stated, unfair both
to the shipper (and hence, the consumer) and to the carrier.
Rate differences among commodities do not reflect inherent
carrier cost differences, and so result in cross-
subsidization -- one commodity paying, in part, for the
transport of another. Unduly low SCRs invite misclassifica-
tion of commodities, thereby sapping carrier revenues or
posing a burdensome tariff enforcement requirement.
Continued reliance on moving two-thirds to three-quarters
of the tonnage at promotional specific commodity rates
based on marginal costs is incompatible with developing
a sound ,economic structure for air freight service.
To encourage the long-term growth of the air freight
industry, general commodity rates should be established
at reasonable levels; the specific commodity rates as
they exist today should be abandoned. The introduction
or maintenance of a limited number of specific commodity
rates, where considered essential to attract new traffic
would be desirable. These rates should not remain in
the structure indefinitely, but should be increased over
a period of time to the general commodity levels. Special
commodity rates may also continue to be appropriate for
commodities that have special handling or shipping require-
ments.
-24-
Mail Rates. The Civil Aeronautics Board should act expedi-
tiously on proposed changes in rates for the international
air transportation of mail. The Board should provide
for temporary rates, which cover the costs of U.S. carriers,
until final Board resolution of the issue. The Board,
as provided by the International Air Transportation Fair
Competitive Practices Act of 1974, should give proper
consideration to the cost-related elements of the Universal
Postal Union (UPU) rates. In addition, the Congress
has directed that the Board consider the competitive
disadvantage of U.S. flag carriers resulting from their
foreign competitors' receiving the UPU rates for carriage
of foreign mail.
Tariff Integrity
The existence of a tariff structure is of little value
if there is widespread deviation from the published tariffs.
In the past few years, the practice of undercutting published
tariffs has become common in international operations,
and is now of considerable economic significance. We
are concerned about this erosion of tariff integrity
and the harmful discrimination that results from it.
The general public suffers from higher fares, and the
carriers from reduced net revenues. A basic consideration
in this area is the need to relate fares more closely
with costs and to eliminate the excess capacity which
encourages undercutting.
Role, Compensation, and Regulation of Middlemen
Transportation middlemen-- travel agencts, tour operators,
air frieght forwaders, cargo agencs and others -- perform
a valuable service for the traveling and shipping public.
The majority of international traffic is handled through
the thousands of businesses that compete in arroanging
not only air transportation services, but the ancillary
services that faciliate the efficient flow of passengers
and goods.
-25-
Since middlemen are an integral part of the international
air transport system, it is essential that reasonable
standards for consumer protection be observed. Federal
licensing or certification of middlemen should be con-
sidered only to the extent necessary to ensure minimum
consumer protection standards. Those middlemen that
operate as indirect air carriers (air freight forwarders,
inclusive tour charter operators, and military charter
operators) should continue to be regulated by the Civil
Aeronautics Board only to the extent necessary to protect
the consumer. Self-regulation is more appropriate for
the remainder of the industry which should establish
standards and conditions of operation, subject to Govern-
ment review.
The compensation of travel agents by commissions has
become a subject of considerable controversy. Rather
than having IATA involved in the establishment of commis-
sion levels, we recommend that each carrier establish
its commission structure independently. This will promote
additional competition and allow each carrier to tailor
its approach to commission structure independently.
It would also permit each carrier to relate the level
of commissions to the value of the middlemen's services.
To help ensure consumer awareness and to permit the CAB
to take commission costs into account in determining
total carrier costs as a basis for fare decisions, carrier
commission structures should be filed for public inspection
at the Civil Aeronautics Board. However, the Board should
not regulate the level of commission rates. As long
as travel agent commissions are a part of the air ticket
price, the public should be informed as to the arrangement
between the carrier and the middlemen. This will guard
against undue preference or advantage being given to
any particular agency or individual.
Government Procurements
U.S. Government procurement of foreign and overseas air
transportation services from U.S. flag carriers helps
to sustain the U.S. international route system, and there-
by to assure the continuing availability of U.S. flag
service for the transport of U.S. mail, U.S. Government
personnel, and U.S. citizens.
-26-
We should make better use of civil capacity to meet Depart-
ment of Defense and other Government air transportation
needs. Specifically, we should minimize the economic
impact on commercial air carriers of large scale operations
by the Military Airlift Command (MAC) fleet by utilizing
civil capacity rather than MAC capacity to the extent
practicable in peacetime. However, this policy recognizes
the need to maintain an effective MAC capability and
to use efficiently the MAC airlift capacity resulting
as a by-product of training.
U.S. carriers are encouraged to continue participation
in the Civil Reserve Air Fleet (CRAF) program. The airlift
capability maintained by normal civil air carrier operations
and, therefore, available for national emergency use
is a major contribution to the preparedness of the United
States and makes military duplication of that capacity
unnecessary. A viable U.S. flag industry is essential
to make the program effective; any diminution of U.S.
flag capability would reduce the effectiveness of the
CRAF program.
As set forth in the International Air Transportation
Fair Competitive Parctices Act of 1974, U.S. Government-
financed air transportation must be performed on U.S.
flag carriers to the extent such services are available.
The Government should pay the same tariff rates as the
general public for all its procurements of air transport
service except where a separate rate is established on
the basis of costs incurred by the airlines in providing
specific services to the U.S. Government.
In the event that U.S flag scheduled flights are not
available for the timely transport of U.S. mail, the
Postal Service should attempt to transport the mail on
charter flights of U.S. carriers, route or supplemental.
To the extent that the CAB determined international mail
rates are below UPU rates, this practice would offer
cost savings to the Postal Service.
The International Competitive Environment
The United States opposes unfair, discriminatory, or
restrictive practices by foreign countries that limit
the competitive capability of U.S. flag carriers. Section
2 of the International Air Transportation Fair Competitive
Practices Act of 1974 specifically directs Departments
and Agencies of this Government to seek elimination of
these practices; this policy will be pursued vigorously.
-27-
The United States also opposes discriminatory or inequitable,
charges imposed on U.S. flag carriers, for the use of
airway and airport properties, and we will utilize to
the maximum extent feasible Section 3 of the International
Air Transportation Fair Competitive Practices Act of
1974, or Section 301 of the Trade Act of 1974, to correct
inequities. This Government clearly recognizes the need
to recover from users the costs of the services provided.
We believe, however, that in imposing such charges, care
should be taken to ensure that they are not discriminatory
and that the level of the charge is related to cost.
On both of these issues, U.S. policy will be to seek
change through negotiation. As a last resort, however,
the United States may take unilateral action to correct
the problem.
-28-
IV. SAFETY, ENVIRONMENTAL, AND
OTHER CONSIDERATIONS
It is the objective of the United States to achieve an
advanced, safe, and efficient system of airports and
airways to support international air transport.
GOALS
In support of the foregoing objective, the United States
will pursue the following goals:
Full and fair allocation of the costs of
operating airports and airway systems
among users.
Prevention of hijacking, air piracy, and
terrorism.
Maintenance and development of high quality
aircraft, airports, and navigational systems
and development and implementation of
technological improvements that enhance
energy and economic efficiency in air
transportation.
Enforcement of regulations to protect the U.S.
environment.
POLICY
International Organizations
The United States will continue to support the International
Civil Aviation Organization (ICAO) and its efforts to
adopt and implement international standards. A fundamental
policy principle is to promote, through ICAO, common
requirements and practices regarding technical, facilitation,
and legal matters affecting international civil aviation.
In this respect, the United States believes that ICAO
should continue to direct its activities towards those
issues where solutions customarily have been sought through
multilateral governmental action.
-29-
A basic strength of ICAO has been its ability to focus
on the technical aspects of international aviation and
the willingness of its members to minimize political
influences on the work of the organization. The United
States will resist the injection of non-aviation issues
into ICAO proceedings; we urge other governments to adopt
a similar position.
Certification and Operation of Aircraft
We will continue the present U.S. policies concerning
safety, security, the environment, and fuel availability.
Safety. With respect to safety (including the air movement
of hazardous materials), the United States supports the
development of uniform international regulations governing
flight safety, airspace systems, operations, and airworthi-
ness. To advance this objective, the United States has
embarked upon comprehensive biennial reviews of its safety
regulations to ensure that its aircraft are produced
and operated safely as air navigation technology advances.
These reviews are being conducted in cooperation with
other nations with the intention of achieving more general
agreement on common standards.
Availability, Allocation, and Cost of Fuel. Nations
should treat their own carriers and foreign carriers
the same in any system of fuel allocation and pricing
for international air transport. The United States intends
to adhere to this principle and expects other countries
to do likewise.
Environmental Objectives and Their Impact. The United
States encourages agreement on international environmental
issues through the ICAO forum. This should promote equal
treatment for foreign and domestic carriers through inter-
national regulations and preclude any unwarranted economic
advantages or disadvantages for competing carriers which
would otherwise have to satisy diverse national requirements.
While the environmental needs and resources of the United
States may differ from those of other nations, every
effort will be made to obtain international acceptance
of U.S. requirements. The actions taken by the U.S.
Government must be responsive to the legislative mandates
that seek to protect the public health and welfare of
American citizens. If it proves impossible to obtain
international agreement on environmental problems such
as noise and pollution, the United States may then find
it necessary to develop U.S. national standards more
stringent than those which can be developed through ICAO,
in order to protect human health and environmental quality.
-30-
[Add here a para from the aircraft noise/retofit policy
as it affects international aircraft]
Security Objectives and Their Impact. Travel on all
air carriers must be safe and secure from unlawful acts.
The Anti-Hijacking Act of 1974 and the Air Transportation
Security Act of 1974 strengthened the U.S. domestic and
international civil aviation security program, which
is based upon the sharing of responsibilities among air
carriers, airports, and the Federal Government. The
basic objective of these Acts is to prevent the carriage
of weapons, explosives, and incendiary devices on board
U.S. carrier aircraft, and unauthorized access to aircraft
on the ground. Security responsibilities are clearly
delineated in the Acts.
Airport operators and air carriers are required to develop
and implement acceptable security programs. The Federal
Aviation Administration provides advisory technical assist-
ance to operators of U.S. air carriers and airports,
enforces Federal security regulations, and evaluates
the program to assure effectiveness.
There has been substantial improvement in security measures
throughout the world since 1970 resulting in increased
protection of civil aviation and its users from criminal
acts that threaten their safety. Nevertheless, the United
States supports and seeks adoption by ICAO of even stronger
security standards and recommended practices. We shall
also continue bilateral programs to provide technical
assistance to, and exchange information with, foreign
nations to improve security at foreign airports having
a direct impact on safety of U.S. citizens abroad.
HOUSE
NGTON
COMMITTEE MEMBERS
erials will be discussed
Executive Committee
OF
all
THE
TREASURY
DEPARTMENT OF THE TREASURY
1789
WASHINGTON. D.C. 20220
ASSISTANT SECRETARY
AUG 2 1976
MEMORANDUM FOR:
Economic Policy Board
Executive Committee
FROM: Charles M. Walker
Assistant Secretary for Tax Policy
SUBJECT: Treasury regulations concerning bonds
issued "on behalf of" a State or
political subdivision
Last fall there was discussion of the need to develop
new tax regulations dealing with the situation where bonds
are issued by a nonprofit corporation or other entity "on
behalf of" a State or political subdivision. After some
general discussion as to whether the bond interest should be
tax exempt, the question focused specifically on proposals
for organizing municipal power pools on a regional basis.
The Treasury was asked to take a restrictive position
in proposed regulations to prevent the proliferation of tax-
exempt bonds issued by nonprofit corporations or other
entities having no specific authorization from, and very
little connection with, the political subdivision. There
also was concern that the growth of public power pools
financed with tax-exempt bonds would place private electric
utilities at a competitive disadvantage and lead to the
expansion of municipal systems at the expense of investor-
owned utilities. Based on these considerations, it was
decided that the regulations would provide that an issuer
cannot act "on behalf of" more than one municipality.
I. The Proposed Regulations and State and Local Response.
In February, Treasury proposed regulations establishing
detailed requirements for qualification as an "on behalf of"
issuer. The regulations required specific State authoriza-
tion for the issuer and its bonds. We also provided that
the issuer could not act on behalf of more than one State or
political subdivision. As applied to the regional power
- 2 -
pools, this additional requirement meant that municipalities
in a given region could not band together and use a non-
profit corporation for tax-exempt financing of a large
electric generating plant serving the entire region.
On April 26, a public hearing was held on the proposed
regulations. The Governor of one State, a Congressman from
another, and numerous State and local representatives and
bond counsel laid down a heavy barrage against the proposed
regulations. The basic complaint was that our proposals
disrupted long-standing State and local financing arrange-
ments, wholly apart from the regional power pool questions,
and amounted to an unwarranted intrusion on State and local
affairs.
As frequently occurs after regulations are proposed, we
learned that there were many situations in various States
which would be adversely impacted by the proposal. In
California, for example, in order to avoid stringent ref-
erendum requirements, public projects such as court houses,
municipal buildings and schools have frequently been fi-
nanced through "on behalf of" issuers. In Oklahoma, so-
called public trusts have been used for similar purposes.
We learned also that regional water quality systems and
other environmental agencies have been organized with a view
to issuing bonds for projects on behalf of more than one
political subdivision. The larger the area subject to the
system, the better the overall control can be.
II. Recommended Revision of the Regulations.
The development of such regional environmental arrange-
ments strongly suggests that, if an issuer is adequately
authorized to act for more than one governmental unit, we
should permit this under our tax regulations. Furthermore,
the requirement in the proposed regulations that there be
specific legislative authorization seems to provide an
adequate safeguard for regional power pools or similar
arrangements. We understand that in several cases State
legislation specifically authorizing the issuer in question
has been obtained or is now being sought in connection with
the power pools. On the other hand, a plan calling for
participation by municipalities in Iowa, South Dakota and
Minnesota in a regional pool was submitted to each of the
- 3 -
three State legislatures but approved only in Minnesota.
The requirement of legislative authorization thus has forced
proponents of regional arrangements to bring their proposals
before the legislatures. If the appropriate legislatures
give specific consideration to the desirability of such
regional projects, this should be satisfactory from a tax
standpoint regardless of the State legislative decision
ultimately made. This requirement also prevents unauthor-
ized expansion of public power at the expense of private
power.
In view of the foregoing, we recommend EPB concurrence
in our decision to delete the proposed rule that an "on
behalf of" issuer can issue bonds for only one political
subdivision.
III. Other Changes in the Proposed Regulations.
The proposed regulations have now been revised to
provide considerably more flexibility for financing of
authorized municipal projects. Special rules have been
added to permit "on behalf of" issuers to finance buildings
which will be leased for public purposes. We also provide
greater flexibility in the types of boards which authorities
issuing the bonds may have. The regulations now permit the
issuance of tax-exampt bonds by authorities organized under
a home-rule ordinance, thus reflecting the way in which
issuers are established in many instances. Finally, there
is a provision whereby an entity which complies substantially
with the requirements of the regulations, but does not
satisfy all of them, may nevertheless qualify as an "on
behalf of" issuer if an advance ruling is obtained from IRS.
This should insure flexibility in the administration of the
regulations.
IV. ACIR Consultation.
The Intergovernmental Assistance Act of 1968 provides
that representatives of State and local groups shall have
the right to consult with Federal departments and agencies
before the promulgation of regulations dealing with such
matters as State and local financing. Pursuant to this Act
and OMB Circular A-85, we have been conferring with repre-
sentatives of the Advisory Commission on Intergovernmental
Relations for the purpose of obtaining their comments on the
revised regulations. Treasury plans to make whatever
further changes seem appropriate to us in light of the ACIR
input and then issue the revised regulations.
THE WHITE HOUSE
WASHINGTON
FOR EPB EXECUTIVE COMMITTEE MEMBERS
The attached materials are for your
information.
OF
DEPARTMENT THE TREASURY
THE
THE DEPUTY SECRETARY OF THE TREASURY
WASHINGTON, D.C. 20220
1789
August 13, 1976
MEMORANDUM FOR EXECUTIVE COMMITTEE
ECONOMIC POLICY BOARD
SUBJECT: Bank Regulatory Reform Task Force
Attached is a memorandum describing a plan to carry
out the instructions of the Board with respect to further
action on this matter. It suggests that a major flaw in
the earlier effort was the absence of continuous high-
level participation. Accordingly, we recommended that a
policy level Treasury/OMB/CEA group be established to
participate on an ongoing basis. Bob Gerard will be our
representative, and will be in touch with the other
agencies.
George Gro Dixon
August 13, 1976
MEMORANDUM TO:
DEPUTY SECRETARY DIXON
SUBJECT:
Bank Regulatory Task Force - EPB Request for
Follow-Up
Specifically, the EPB has requested that Task Force "expand
its consideration of the impact of the present structure of
divided regulatory responsiblity" on:
(1) promotion of innovation; and
(2) fostering of duplication and overlap.
In addition, it has been suggested that the Task Force take
a closer look at the interrelationship of bank regulatory
structure and monetary policy and at the feasibility of making
the Federal Reserve "discount window" available to a wider variety
of financial institutions.
Finally, it would be useful to take a broader look at current
levels of regulation from two perspectives:
(1) whether current levels of regulation strike an appropriate
balance between the Government's interest in oversight and
the benefits of unfettered competitive activity; and
(2) how the regulatory and enforcement policies of the banking
agencies compare to the policies of other regulators of
financial intermediaries
1. Composition of Task Force -- The greatest deficiency in
the Task Force to date has been the lack of direct input from
individuals sufficiently well-versed in banking and regulatory
reform matters. As a result, the initial Task Force report fails
to reflect an adequate depth of understanding and/or analysis of
the basic facts and issues underlying the bank regulatory reform
controversy.
With this in mind, we recommend that the composition of the
Task Force be modified to include direct, on-going participation
from high-level officials of Treasury, OMB, and the Council of
Economic Advisors. In addition, for technical support in the
early stages, representatives of the Office of the Comptroller of
the Currency, the Federal Reserve Board and the Federal Deposit
Insurance Corporation should be available.
- 2 -
2. Objectives of Task Force -- As a first step, the modified
Task Force should consider what seems to be an underlying
shortcoming with respect to the Administration's bank
regulatory analysis to date. Specifically, there appears to be
a great deal of fuzziness as to what the term "bank regulatory
reform" actually means, and what practical goal or result is
sought to be accomplished through such reform. In this regard,
it seems that at least three interpretations of the term "bank
regulatory reform" have been adopted by the Administration:
(a) that such reform means an attempt to modify or
restructure bank regulation so as to make banks more directly
responsive to the needs of consumers;
(b) that such reform means an attempt to modify or
restructure bank regulation SO as to make banks more directly
responsive to the objectives of the regulators (and through the
regulators to the Congress) ; and/or
(c) that such reform means an attempt to modify or
restructure bank regulation so as to make banks more directly
responsive to economic policy makers. (This interpretation is
suggested by the recommendations concerning the interrelationship
of bank regulation and economic policy, and the possibility of
broader utilization of the Federal Reserve "discount window").
It is conceivable that all three of these interpretations
might be embodied in the Administration's concept of "bank
regulatory reform" but to my knowledge such a position has not
been verbalized. A further consideration is whether or not the
term "bank regulatory reform" suggests by definition or widely
accepted use a simplification of banking regulation. If so,
such an interpretation should be brought into balance with what
appears to be the likelihood of increased regulation if the third
interpretation of "bank regulatory reform" set forth above is
indeed subscribed to by the Administration.
Before any meaningful action can be taken in addressing
specific issues of bank regulatory reform, a consensus as to
the general definition and goals of such reform must be reached
within the Administration. Once general guidelines have been
established, specific issues can be approached in a more
organized fashion.
3. Specific Issues -- As noted above, the EPB has requested
that the Task Force take a closer look at the manner in which
the present bank regulatory system has: (1) promoted regulatory
innovation, and (2) fostered regulatory duplication and overlap.
With respect to these issues, both the Comptroller of the
Currency and the Federal Reserve Board have previously compiled
examples of both innovations and duplication.
- 3 -
4. Timetable -- Although the EPB has set no specific dead-
line, the modified Task Force should begin its assignment as
soon as possible, that interim deadlines be established and
enforced, and that a written report be prepared for submission
to the EPB no later than November 15, 1976.
5. , Administration's Regulatory Reform Proposals -- In view
of the fact that the Administration has recently developed a
timetable for regulatory reform in a wide variety of subject
matter areas, including bank regulatory reform, coordination
should be established with the parties responsible for the over-
all regulatory reform effort.
Robert PAS Cerard
STATES
DEPARTMENT OF AGRICULTURE
OFFICE OF THE SECRETARY
WASHINGTON, D. C. 20250
August 18, 1976
MEMORANDUM FOR:
EXECUTIVE COMMITTEE-EPB
SUBJECT:
EEC Complaint Against U.S. Phosphate Industry
There have been indications that some members of the EPB are
interested in information regarding recent complaints lodged
against the U.S. phosphate industry by the EEC.
The excess supply situation for phosphates this past year has
apparently made it difficult for European firms to compete with
exports of phosphatic fertilizers from the U.S. and Eastern
Europe. The French further claim that the U.S. is pricing rock
phosphate (the main raw material used to manufacture phosphatic
fertilizer) higher in Europe than in the U.S. Current information
does not support the allegation. The Europeans are also raising
concerns about U.S. industry efforts to acquire assets of foreign
firms.
J. DAWSON AHALT
Chairman, Interagency
Fertilizer Task Force
Enclosure: Paper on "EEC Complaint Against U.S. Phosphate
Industry"
EEC COMPLAINT AGAINST U.S. PHOSPHATE INDUSTRY
Background
Current economic conditions in world fertilizer markets and the impact
on the European phosphate industry have apparently prompted the EEC to
complain that the U.S. phosphate industry is conducting discriminatory
pricing practices. It is alleged that exports of U.S. manufactured
phosphate-fertilizers are being sold in Europe at prices below which the
French are able to compete with. On the other hand the Europeans claim
that the U.S. industry is charging higher prices for phosphate rock (the
basic raw material for manufacturing phosphatic fertilizers) in export
markets than to U.S. customers. The European industry further says that
U.S. companies have offered access to phosphate rock at low prices as an
inducement to gain control of European firms.
Analysis of Present Situation
The problems facing the European phosphate industry are heavily influenced
by internal economic policies. Prices of marufactured fertilizers in
Europe are isolated from world levels through price controls and subsidies.
This of course has hurt the European industry. It has made it difficult
for the industry to respond to changes in raw material prices such as rock
phosphate which is purchased in the spot market. Moreover, the Government's
interference with the market has resulted in the European industry being
less efficient. As a result U.S. and Eastern European exporters have
sharply expanded shipments of finished fertilizer materials into Europe.
(See attached table.)
- 2 -
The allegation that U.S. producers are charging higher prices ($33
to European customers versus $15 per ton to U.S. buyers) may be an exceptional
case. However, there is a basis for the price differential. First, most
U.S. firms are vertically integrated; i.e., they mine rock phosphate and
produce finished phosphatic fertilizers. As a result there is the issue
of transfer pricing of phosphate rock. Additionally, those fertilizer
manufacturers that do not have their own rock supplies generally have long-
term contracts with rock producers. A number of these contracts were
signed prior to the explosion in fertilizer prices in 1974; thus prices
are below spot quotes which are in a rather thin market. Finally, the
industry indicates that freight charges to Western Europe are currently
about $10 per ton. Hence, any comparison of prices must be based on
delivered rather than f.o.b. prices at the mine or the port.
Two export associations handle phosphate materials. They are:
Phosrock which exports phosphate rock and Phoschem which is organized to
ship abroad manufactured phosphatic fertilizers. Both organizations are
registered with the FTC under the Webb-Pomerene Act and are exempt from
U.S. antitrust laws in their export activities. However, the law forbids
members of these associations to interfere with exports of nonmembers or to
take joint action in domestic marketing activities. The associations may
agree on export prices but they are not allowed to do so in collusion
with international cartels.
With regard to world phosphate rock prices, it is significant to point
out that although the U.S. is the world's largest phosphate rock producer,
- 3 -
its reserves are second to those held by Morocco. Moreover, Morocco leads
the U.S. both in total exports as well as exports to Western Europe. The
Soviet Union is the third largest exporter followed by several North
African countries. In recent years Morocco has accounted for slightly less
than half of the rock exports to Western Europe, while U.S. shipments have
represented between 15-20 percent of the total. However, not all U.S.
exporters belong to Phosrock. Of the total U.S. trade to Western Europe,
only a little over half is represented by Phosrock. The remaining shipments
abroad are accounted for primarily by Mobil, Swift, and Texas Gulf. Further
evidence that the U.S. is not the pace-setter in world phosphate markets
is supported by the fact that Morocco was the first exporter to boost prices
in the 1974 period of surging prices. Morocco's prices peaked at $68 per
ton while the high for Phosrock was $60 per ton. Currently, Moroccan
quotes to Europe are averaging about $40 per ton, although some prices are
down to about $25. Trade sources indicate one U.S. supplier will now offer
rock for about $20 a ton for sale abroad.
The allegation that the U.S. fertilizer industry is using discriminatory
pricing techniques to acquire ownership of European firms stems from recent
moves by the Williams Companies (Agrico Chemical Company). Recently,
Agrico and Cofaz (a French fertilizer firm) came to an agreement that will
result in substantial quantities of phosphate rock being shipped to France.
Although the agreement has not been signed, it calls for plans for Cofaz
to set up a U.S. subsidiary to purchase part of Agrico's phosphate rock
reserves. In return Agrico would obtain 40 percent ownership in the French
firm. Recently, Agrico acquired a 50 percent share of Goulding Chemicals,
an Irish firm that has been operating at a loss. The Irish company controls
- 4 -
about half of the Irish fertilizer market and has recently been buying
large quantities of phosphate rock from Morocco. These mergers reflect
an effort on the part of Agrico to expand its markets in the face of a
depressed fertilizer situation. While on the other hand, the European
firms are looking toward obtaining interests in Florida phosphate supplies.
Industry sources indicate that raw materials will be made available to
the French affiliate at prices which will represent a "substantial savings."
Recently, Becker Industries signed a similar agreement with an Italian
company. Becker is already operating in West Germany. A large phosphate
processing plant is expected to come on stream in 1977. This facility
will receive government subsidies. It is expected that Becker will make
available from the U.S. "low priced raw materials." This activity is
apparently causing concern among German producers already facing difficulties
from imported materials from the U.S. and Eastern Europe.
Acquisitions, of course, occur on a two-way street. During the early
1970's when the U.S. fertilizer industry was incurring substantial losses,
a French firm, Gardinier, purchased the large U.S. integrated phosphate
facilities of the Tennessee Corporation. Following this transaction
most of the output from Gardinier's facility was tied up through long-term
contracts in the U.S. market. Recently, however, this firm has begun to
export although the destination of its shipments are unknown at this time.
The Department of Justice has had the U.S. fertilizer industry under
a grand jury investigation for more than 18 months. This activity led
to the indictment of the 8 major potash producers in late June on charges
of conspiring to restrict production to stabilize prices. A new Federal
grand jury has been convened by Justice to look specifically at the
- 5 -
phosphate industry. The Justice lawyers indicate that initial evidence
gathered thus far does not indicate any antitrust violations by either
Phosrock or Phoschem. However, Justice is continuing to explore the
question of possible collusion between Phosrock and Moroccan cartel (OCP).
The Justice Department has been involved in helping analyze the allegations
raised by the EEC delegation. EEC representatives have been to Washington
to discuss this matter and have asked the Chief of the Foreign Commerce
Unit in the Antitrust Division to come to Brussels in September to discuss
activities of the U.S. phosphate industry and the phosphate export
associations.
Future Developments
The possibility exists that individual EEC countries may resort to
GATT Article 19 which allows for an emergency action to halt imports in
order to protect a particular domestic industry. Such a move would, of
course, require prior consultation between exporting and importing countries.
The State Department, however, feels that the EEC is likely to try to
defer any member countries from attempting such a move. In the meantime
the State Department is transmitting a cable to embassies in Brussels and
Paris outlining the situation along the lines described above.
The Interagency Fertilizer Task Force will continue to monitor
activities and report any significant developments to the EPB.
August 1976
Exports Phosphate Rock and Phosphatic Fertilizers from the
United States and Morocco to France
:
UNITED STATES 1/
MOROCCO 1/
Year
:
Phosphate
:
Ammonium
: Concentrated
Phosphate
:
Rock
:
Phosphate
:
Superphosphate
Rock
:
- Short Tons -
Metric Tons -
:
(000)
(000)
:
1960/61
---
---
---
1,121
1961/62
---
---
---
1,096
1962/63
30
10
---
---
1963/64
:
19
10
9
1,417
1964/65
61
10
22
1,696
1965/66
77
6
7
1,820
1966/67
155
7
2
1,736
1967/68
150
23
15
1968/69
292
26
52
1,756
1969/70
327
24
2
1970/71
494
68
49
1,639
1971/72
516
80
31
1,501
1972/73
544
88
15
1,546
1973/74
:
386
142
-91
1,792
1974/75
270
96
38
2,403
1975/76
:
799
227
124
1,225
:
1/ United States figures are for fiscal years; Morocco figures are for
calendar years.