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UBC Theses and Dissertations

Study of selected Pacific air services : with some implications for a Canadian carrier and Canadian… Smallenberg, Gary Allen 1971

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A STUDY OF SELECTED PACIFIC AIR SERVICES: WITH SOME IMPLICATIONS FOR A CANADIAN CARRIER AND CANADIAN AIR TRANSPORT POLICY by GARY ALLEN SMALLENBERG B.Comm., U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1970 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION i n the F a c u l t y o f G r a d u a t e S t u d i e s We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o the r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA September, 1971 In presenting th i s thes is in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Univers i ty of B r i t i s h Columbia, I agree that the L ibrary shal l make i t f ree l y ava i l ab le for reference and study. I further agree that permission for extensive copying of th i s thes i s for scho lar ly purposes may be granted by the Head of my Department or by his representat ives. It is understood that copying or pub l i ca t ion of this thes is fo r f inanc ia l gain sha l l not be allowed without my written permission. Department of The Univers i ty of B r i t i s h Columbia Vancouver 8, Canada ABSTRACT The purpose o f t h i s s t u d y i s t h r e e f o l d . F i r s t l y , a w o r k i n g measure of the p r o f i t a b i l i t y r e a l i z e d by C P . A i r i n t h e i r P a c i f i c o p e r a t i o n s s h o u l d be d e r i v e d . T h i s w i l l be gauged t h r o u g h the c a l c u l a t i o n o f p r o f i t i n d i c a t o r s on each o f e i g h t r o u t e segments. W i t h the a i d of t h e s e i n d i c a t o r s , some s u g g e s t i o n s can be g i v e n r e g a r d i n g the p r e s e n c e and degree o f c r o s s - s u b s i d i z a t i o n i n C P . A i r ' s o v e r a l l o p e r a t i o n . S e c o n d l y , the impact o f p o s s i b l e c h a r t e r development on s c h e d u l e d s e r v i c e s s h o u l d be a s c e r t a i n e d . U n c o v e r i n g the n a t u r e o f the P a c i f i c a i r t r a v e l market and the major t r e n d s t h e r e i n w i l l complement the d i s c u s s i o n o f t h i s e v o l u t i o n . T h i r d l y , c o n s i d e r a t i o n s h o u l d be g i v e n t o the i m p l i c a t i o n s t h a t a r i s e f o r C a n a d i a n r e g u l a t o r y p o l i c y . I n p a r t i c u l a r , r e f e r e n c e s h o u l d be made t o the a v i a t i o n p o l i c i e s s e t out by the Ca n a d i a n T r a n s p o r t Commission and to the s t a t e d o b j e c t i v e o f the N a t i o n a l T r a n s p o r t a t i o n A c t o f 1967. T h i s w i l l s e r v e t o h i g h l i g h t the a r e a s i n w h i c h r e g u l a t o r y i n c o n s i s t e n c i e s o c c u r and i n w h i c h q u e s t i o n s may be asked c o n c e r n i n g the l o n g - r u n development o f C a n a d i a n a i r l i n e companies. C o s t and performance d a t a as w e l l as i n f o r m a t i o n on the g e n e r a l development o f the P a c i f i c a i r t r a v e l market was c o l l e c t e d and a n a l y z e d . T h i s a n a l y s i s p r o v i d e d a b a s i s f o r the s t u d y o f the P a c i f i c o p e r a t i o n s o f C P . A i r . Through t h i s p r o g r e s s i v e a n a l y s i s , p r o f i t i n d i c a t o r s were d e r i v e d on a r o u t e b a s i s . I n o r d e r t o a s s e s s t h e e f f e c t o f n o n - s c h e d u l e d o p e r a t o r s on r e g u l a r P a c i f i c a i r s e r v i c e s , a g r a v i t y - t y p e model was f o r m u l a t e d and t e s t e d f o r t h e y e a r s 1962 - 1968. The impact o f c h a r t e r s was measured t h r o u g h t h e i n c l u s i o n o f a "dummy-variable" i n t h e m u l t i p l e r e g r e s s i o n framework. The p r o c e s s was f u r t h e r r e f i n e d t o i n c l u d e some f a c t o r a n a l y s i s i n o r d e r t o d e t e r m i n e t h e p r i n c i p a l d i m e n s i o n s o f demand. U s i n g t h e r e s u l t s o f t h e s t a t i s t i c a l a n a l y s i s , s e l e c t e d a s p e c t s o f r e g u l a t o r y p o l i c y were d i s c u s s e d . T h i s e n a b l e d q u e s t i o n s t o be asked r e g a r d i n g t h e a p p r o p r i a t e n e s s o f some c u r r e n t t r a n s p o r t p o l i c i e s . I t was c o n c l u d e d t h a t C P . A i r was a p p a r e n t l y r e a l i z i n g s i z e a b l e r e t u r n s on many P a c i f i c r o u t e s . A l t h o u g h i t was n e c e s s a r y t o q u a l i f y t h i s f i n d i n g , i t c o u l d not be d e n i e d t h a t p r o f i t s seemed h i g h and C P . A i r w o u l d n o t w i s h any d i s t u r b a n c e t o o c c u r . S h o u l d c h a r t e r s e v o l v e i n t h e P a c i f i c t o a s i g n i f i c a n t m a g n i t u d e , i t was f e l t a l a r g e impact would be made on C P . A i r ' s s c h e d u l e d s e r v i c e s . F i n a l l y , i t was c o n c l u d e d t h a t d o m e s t i c r e g u l a t o r y p o l i c y must be improved. The sys t e m s h o u l d encourage e f f i c i e n t o p e r a t i o n s d o m e s t i c a l l y and r e i n s t a t e t h e t r u e , s p i r i t o f s e r v i n g t h e p u b l i c i n t e r e s t . ACKNOWLEDGEMENT T h i s t h e s i s c o u l d n ot have been a c c o m p l i s h e d w i t h o u t t h e a s s i s t a n c e , g u i d a n c e , and encouragement o f P r o f e s s o r s J o h n K. Welsby and W.G. W a t e r s , b o t h o f t h e D i v i s i o n o f T r a n s p o r t a t i o n . The a d v i c e o f Mr. Douglas W i l l i a m s , r e g a r d i n g t h e computer a p p l i c a t i o n s u sed i n t h i s s t u d y , i s a l s o g r a t e f u l l y acknowledged. The w r i t e r r e s e r v e s t o h i m s e l f t h e r e s p o n s i b i l i t y f o r any e r r o r s o f commission o r o m i s s i o n . TABLE OF CONTENTS C h a p t e r Page I . INTRODUCTION . . 1 O b j e c t i v e s o f t h e Study 1 Importance o f t h e Study 2 L i m i t a t i o n s o f t h e Study . 3 Methodology and O u t l i n e o f t h e Study 4 D e f i n i t i o n o f Terms 6 I I . DEVELOPMENT OF THE PACIFIC TRAVEL MARKET 8 T r a f f i c Growth and P a s s e n g e r F a r e s 9 Economic Development i n t h e P a c i f i c Rim 14 The Importance o f Time S a v i n g s 18 Summary 19 I I I . PACIFIC OPERATIONS OF A U.S. CARRIER 21 The Pan A m e r i c a n A i r w a y s Example 21 C o m p e t i t i o n and t h e T r a n s - P a c i f i c Route I n v e s t i g a t i o n 26 E f f e c t o f U.S. C a r r i e r s on C P . A i r 28 C o m p a r a b i l i t y o f C P . A i r and U.S. C a r r i e r s . . . 29 IV. THE PACIFIC OPERATIONS OF C P . AIR 31 Co s t I n f o r m a t i o n 32 R e l a t i o n s h i p o f P a c i f i c O p e r a t i o n s t o T o t a l O p e r a t i o n s f o r C P . A i r 39 V. ESTIMATION OF THE DEMAND FOR PACIFIC AIR PASSENGER SERVICES 41 N o r t h A t l a n t i c E x p e r i e n c e w i t h C h a r t e r s 41 I.A.T.A. P o l i c y 42 P o l i c y o f P a c i f i c Rim N a t i o n s 44 Demand D e t e r m i n a n t s o f P a c i f i c T r a v e l 46 D i f f i c u l t i e s E n c o u n t e r e d i n t h e A p p l i c a t i o n o f t h e G r a v i t y T e c h n i q u e 62 Summary 66 C h a p t e r Page V I . REGULATORY POLICY AND ITS IMPLICATIONS 68 The N a t i o n a l T r a n s p o r t a t i o n A c t . 68 C P . A i r ' s S e r v i c e Quotas 70 Long-Run E f f e c t s 72 Q u e s t i o n s on R e g u l a t o r y P o l i c y . . 74 Comments on P o l i c y Q u e s t i o n s 75 V I I . SUMMARY AND CONCLUSIONS 77 Summary . . . . . . . 77 C o n c l u s i o n s 79 APPENDIX - AIRCRAFT TYPES AND OPERATING CHARACTERISTICS,. 81 Cost S t u d y o f t h e B-707-300C 83 The DC-8-50 85 The DC-8-61 86 The DC-8-30 88 Summary 90 BIBLIOGRAPHY 93 LIST OF TABLES T a b l e Page I I - 1 T r a v e l Volumes and Average C o s t o f F a r e on C P . A i r S e r v i c e s i n t h e P a c i f i c f o r the Y e a r s 1962-1968 . . 10 I I - 2 D i r e c t i o n a l F l o w o f T r a f f i c Between Canada . , and P a c i f i c Rim D e s t i n a t i o n s v i a C P . A i r . . . . . 15 I I - 3 Demographic Data on P a c i f i c Rim C o u n t r i e s f o r the Y e a r s 1962-1968 16 I I I - l Pan A m e r i c a n A i r w a y s , B-707-300C, O p e r a t i n g C o s t s - P a s s e n g e r C a b i n C o n f i g u r a t i o n -P a c i f i c O p e r a t i o n f o r 1967 and 1968 22 I I I - 2 Pan-American A i r w a y s - Revenue and C o s t per Passenger M i l e 24 I V - 1 O p e r a t i n g C o s t s o f DC-8 J e t A i r c r a f t f o r the Year 1968, by U.S. C a r r i e r s i n t h e i r I n t e r n a t i o n a l / T e r r i t o r i a l O p e r a t i o n s . . 32 IV-2 I n d i r e c t C o s t s A s s o c i a t e d w i t h the O p e r a t i o n o f DC-8 J e t A i r c r a f t , C a n a d i a n C a r r i e r s , . . . 1966, N o r t h A t l a n t i c Routes 33 IV-3 T o t a l C o s t s o f O p e r a t i o n of DC-8 J e t A i r c r a f t on Long-Haul I n t e r n a t i o n a l R o u t e s , 1968 . . . . . . . . . 34 IV-4 T o t a l O p e r a t i n g C o s t per F l i g h t on V a r i o u s P a c i f i c R o u t e s , O r i g i n o r D e s t i n a t i o n , Vancouver, 1968 35 IV-5 A p p r o x i m a t e C o s t / F a r e Spreads on V a r i o u s P a c i f i c Routes - 1968 38 IV-6 P a c i f i c C o n t r i b u t i o n t o C o r p o r a t e Revenues f o r C P . A i r - 1968 . 40 V - l R e g r e s s i o n R e s u l t s E x c l u d i n g C h a r t e r V a r i a b l e . . . . 53 V-2 R e g r e s s i o n R e s u l t s I n c l u d i n g C h a r t e r V a r i a b l e . . . . 54 T a b l e Page V-3 F a c t o r A n a l y s i s o f F i v e S i g n i f i c a n t Independent V a r i a b l e s 60 V-4 F a c t o r A n a l y s i s o f F i v e S i g n i f i c a n t Independent V a r i a b l e s 61 A - l O p e r a t i n g C o s t s f o r B-707-300C Pa s s e n g e r C a b i n C o n f i g u r a t i o n U.S. I n t e r n a t i o n a l / T e r r i t o r i a l O p e r a t i o n s i n 1967 and 1968 83 A-2 O p e r a t i n g C o s t s f o r DC-8-50 P a s s e n g e r C a b i n C o n f i g u r a t i o n U.S. I n t e r n a t i o n a l / T e r r i t o r i a l O p e r a t i o n s i n 1967 and 1968 85 A-3 O p e r a t i n g C o s t s f o r DC-8-61 P a s s e n g e r C a b i n C o n f i g u r a t i o n U.S. I n t e r n a t i o n a l / T e r r i t o r i a l O p e r a t i o n s i n 1967 and 1968 87 A-4 O p e r a t i n g C o s t s f o r DC-8-30 Pa s s e n g e r C a b i n C o n f i g u r a t i o n U.S. I n t e r n a t i o n a l / T e r r i t o r i a l O p e r a t i o n s i n 1967 and 1968 89 A-5 Summary o f O p e r a t i n g C o s t s f o r B-707-300C, DC-8-50, DC-8-61, and DC-8-30 f o r 1967 and 1968 . . 90 CHAPTER I INTRODUCTION O b j e c t i v e s o f the Study The o b j e c t i v e s o f t h i s s t u d y a r e t h r e e f o l d . F i r s t l y , a w o r k i n g measure of the p r o f i t a b i l i t y r e a l i z e d by C P . A i r i n t h e i r P a c i f i c o p e r a t i o n s s h o u l d be d e r i v e d . T h i s w i l l be gauged t h r o u g h the c a l c u l a t i o n o f p r o f i t i n d i c a t o r s on each o f e i g h t r o u t e segments. W i t h the a i d o f t h e s e i n d i c a t o r s , some s u g g e s t i o n s can be g i v e n r e g a r d i n g the p r e s e n c e and degree of c r o s s -s u b s i d i z a t i o n i n C P . A i r ' s o v e r a l l o p e r a t i o n . S e c o n d l y , the impact o f p o s s i b l e c h a r t e r development on s c h e d u l e d s e r v i c e s s h o u l d be a s c e r t a i n e d . U n c o v e r i n g the n a t u r e o f the P a c i f i c a i r t r a v e l market and the major t r e n d s t h e r e i n w i l l complement the d i s c u s s i o n o f t h i s e v o l u t i o n . T h i r d l y , c o n s i d e r a t i o n s h o u l d be g i v e n t o the i m p l i c a t i o n s t h a t a r i s e f o r C a n a d i a n r e g u l a t o r y p o l i c y . I n p a r t i c u l a r , r e f e r e n c e s h o u l d be made t o the a v i a t i o n p o l i c i e s s e t out by the Ca n a d i a n T r a n s p o r t Commission and to the s t a t e d o b j e c t i v e o f the N a t i o n a l T r a n s p o r t a t i o n A c t o f 1967. T h i s w i l l s e r v e t o h i g h l i g h t the a r e a s i n w h i c h r e g u l a t o r y i n c o n s i s t e n c i e s o c c u r and i n w h i c h q u e s t i o n s may be asked c o n c e r n i n g the l o n g - r u n development o f C a n a d i a n a i r l i n e companies. Importance o f the Study F i r s t l y , the number of i n q u i r i e s w h i c h have been u n d e r t a k e n on a i r l i n e s e r v i c e s i n the P a c i f i c r e g i o n i s e x t r e m e l y s m a l l . The p r i n c i p a l r e a s o n has been the r e l a t i v e i n s i g n i f i c a n c e o f the P a c i f i c market i n terms o f the t o t a l w o r l d market f o r a i r t r a n s p o r t s e r v i c e s . I n f a c t , the P a c i f i c a c c o u n t s f o r o n l y a bout 3 p e r c e n t o f the t o t a l revenue m i l e s f l o w n by the w o r l d ' s s c h e d u l e d c a r r i e r s . 1 However, i n r e c e n t y e a r s , the P a c i f i c a i r t r a v e l market has e x p e r i e n c e d tremendous growth and t h i s t r e n d w i l l u n d o u b t e d l y c o n t i n u e . W i t h the i n c r e a s i n g s i g n i f i c a n c e o f the P a c i f i c r e g i o n , more c a r e f u l i n v e s t i g a t i o n s o f the f a c t o r s u n d e r l y i n g and i n f l u e n c i n g t h i s d e v e l o p -ment a r e mandatory. T h i s paper w i l l s t r i v e to a c c o m p l i s h t h i s end. S e c o n d l y , the p r o f i t s r e a l i z e d by C P . A i r i n t h e i r P a c i f i c o p e r a t i o n s w i l l be demonstrated t o be r e l a t i v e l y l a r g e . G i v e n t h i s and the f a c t t h a t t h e o v e r a l l p r o f i t o f the a i r l i n e i s n o t as h i g h as i t m i g ht be (below even the 6-7 p e r c e n t deemed a p p r o p r i a t e f o r r e g u l a t e d u t i l i t i e s ) , c r o s s - s u b s i d i z a t i o n i s a p p a r e n t . W h i l e C P . A i r i s c u r r e n t l y r e p o r t i n g a p r o f i t , how much d i s t u r b a n c e o f P a c i f i c p r o f i t a b i l i t y c o u l d the Company a b s o r b and s t i l l m a i n t a i n a p r o f i t p o s i t i o n ? T h i s t o p i c must be pursued. T h i r d l y , a h y p o t h e s i s w i l l be o f f e r e d , t o the e f f e c t t h a t c h a r t e r o p e r a t i o n s may e v o l v e i n the P a c i f i c . By d r a w i n g on e x p e r i e n c e g a i n e d t h r o u g h o b s e r v a t i o n o f the N o r t h A t l a n t i c t r a v e l m a rket, the impact o f c h a r t e r s on f u t u r e s c h e d u l e d s e r v i c e s i n the P a c i f i c w i l l be Mahlon S t r a s z h e i m , "The I n t e r n a t i o n a l A i r l i n e I n d u s t r y " , (Washington: The B r o o k i n g s I n s t i t u t i o n , 1969), p. 109. d i s c u s s e d . S h o uld the p r o f i t a b i l i t y on P a c i f i c s c h e d u l e d s e r v i c e s d e c l i n e as a r e s u l t of c h a r t e r development, o v e r a l l c o r p o r a t e p r o f i t s may s u f f e r . F o u r t h l y , a i r l i n e s must f u n c t i o n w i t h i n the r e g u l a t o r y framework p r o v i d e d by government b o d i e s . These r e g u l a t i o n s do n o t n e c e s s a r i l y r e f l e c t the b e s t i n t e r e s t s o f the c a r r i e r s . I n p a r t i c u l a r , a t t e n t i o n w i l l be f o c u s e d on the f o l l o w i n g : (1) The N a t i o n a l T r a n s p o r t a t i o n A c t o f 1967 (Canada) and i t s emphasis on e n c o u r a g i n g t r a n s p o r t s e r v i c e s t o o p e r a t e as c o r p o r a t e e n t i t i e s , r e s p o n s i b l e f o r t h e i r own s u r v i v a l wherever p o s s i b l e ; and (2) The C a n a d i a n T r a n s p o r t Commission p o l i c y w h i c h r e s t r i c t s C P . A i r t o 25 p e r c e n t o f the t r a n s c o n t i n e n t a l p a s senger s e r v i c e s a v a i l a b l e t o C a n a dian a i r c a r r i e r s . P o s s i b l e c o n t r a d i c t i o n s a r e e v i d e n t i n t h e s e pronouncements and t h e y c e r t a i n l y w i l l a f f e c t the l o n g - r u n development o f C a n a d i a n a i r l i n e s . L i m i t a t i o n s o f the Study There a r e two e v i d e n t l i m i t a t i o n s o f t h i s s t u d y . One, the p r o f i t a b i l i t y i n d i c a t o r w h i c h i s d e r i v e d i s o n l y an a p p r o x i m a t i o n . T h i s stems from the f a c t t h a t (a) revenue y i e l d s , n o t a c t u a l f a r e s , were used due t o the c o m p l e x i t y o f f a r e s c h e d u l e s and (b) the c o s t d a t a was e i t h e r A m e r i c a n ( o p e r a t i n g c o s t s ) o r s l i g h t l y o u t d a t e d ( i n d i r e c t expenses used were t h o s e i n c u r r e d i n 1966). Two, the a p p l i c a b i l i t y o f the model r e s u l t s may be q u e s t i o n e d i f (a) the a s s u m p t i o n s upon w h i c h i t r e s t s a r e r e j e c t e d o r (b) i f one contends t h a t the 1962-1968 p e r i o d i s n o t i n d i c a t i v e o f p r e s e n t c i r c u m s t a n c e s . W h i l e o b v i o u s l y the r e a d e r w i l l p e r c e i v e o t h e r l i m i t a t i o n s , the a u t h o r f e e l s t h a t t h o s e l i s t e d above c o u l d have the g r e a t e s t i m p l i c a t i o n s f o r the c o n c l u s i o n s w h i c h a r e r e a c h e d l a t e r i n the paper. Methodology and O u t l i n e o f the Study Subsequent t o t h i s i n t r o d u c t o r y c h a p t e r , the s t u d y w i l l p r o ceed i n i t i a l l y towards the evolvement of p r o f i t i n d i c a t o r s . F a c t o r s w h i c h a f f e c t t h e s e measures a r e c o s t s , c o m p e t i t i o n , market e n v i r o n m e n t , t r a f f i c volumes, and f a r e s . These a s p e c t s a r e a l l d i s c u s s e d i n C h a p t e r I I t h r o u g h IV and i n the A p p e n d i x . C h a p t e r I I w i l l i l l u s t r a t e the development of the P a c i f i c a i r t r a v e l market from 1962-1968. The r e g i o n w i l l be s t u d i e d by u t i l i z i n g a v a r i e t y o f s o u r c e s o f demographic and s o c i o - e c o n o m i c i n f o r m a t i o n . S u p p l e m e n t i n g t h i s , d a t a a c q u i r e d from C P . A i r ' s own s t a t i s t i c s and s t u d i e s w i l l be employed t o d e p i c t t h a t c a r r i e r ' s p a r t i c u l a r e x p e r i e n c e i n the a r e a . I n C h a p t e r I I I , an example w i l l be g i v e n of a U.S. c a r r i e r (Pan A m e r i c a n A i r w a y s ) and f o l l o w i n g t h i s , C h a p t e r IV w i l l d i s c u s s the P a c i f i c o p e r a t i o n s of C P . A i r . The i n f o r m a t i o n used r e g a r d i n g (1) equipment o p e r a t i n g c o s t s and (2) the o p e r a t i o n s o f the A m e r i c a n c a r r i e r w i l l be drawn l a r g e l y from p u b l i c a t i o n s o f the U.S. C i v i l A e r o n a u t i c s B o a r d . T h i s i s n e c e s s a r y due t o the l a c k of d a t a a v a i l a b l e from C a n a d i a n s o u r c e s . However, i n a s t u d y completed a t the U n i v e r s i t y of B r i t i s h C o l umbia 2 i n 1969 , i t was c o n c l u d e d t h a t o p e r a t i n g c o s t s i n c u r r e d by C a n a d i a n George J . V o n d r a c e k , T r a n s c o n t i n e n t a l V e r s u s N o r t h A t l a n t i c A i r  P a s s e n g e r S e r v i c e s : A C o s t A n a l y s i s , (Vancouver: U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1969, M.B.A. T h e s i s ) . and U.S. c a r r i e r s were r e a d i l y c omparable, i n f a c t , a l m o s t i d e n t i c a l f o r c e r t a i n a i r c r a f t . F a r e and t r a f f i c d a t a s u p p l i e d by C P . A i r w i l l s e r v e as a p a r t i a l b a s i s f o r the a n a l y s i s i n C h a p t e r IV. I t i s hoped t h a t , from t h e s e t h r e e c h a p t e r s and the A p p e n d i x , a s u f f i c i e n t b a s i s can be e s t a b l i s h e d t o d e r i v e p r o f i t measures f o r the P a c i f i c s e r v i c e s o f C P . A i r . I n r e c e n t y e a r s , the e x p a n s i o n o f a i r c h a r t e r o p e r a t i o n s i n the N o r t h A t l a n t i c has had an impact on s c h e d u l e d o p e r a t o r s . C h a r t e r s e r v i c e s have a l s o been budding i n the P a c i f i c t r a v e l market. I t i s i n t e r e s t i n g , t h e r e f o r e , t o propose a h y p o t h e t i c a l s i t u a t i o n , namely the e v o l u t i o n o f s i g n i f i c a n t c h a r t e r o p e r a t i o n s i n the P a c i f i c , and to o b s e r v e the p o s s i b l e impact on s c h e d u l e d s e r v i c e s . T h i s w i l l be the o b j e c t i v e o f C h a p t e r V. I n o r d e r t o a s s e s s the e f f e c t o f i n c r e a s i n g n o n - s c h e d u l e d s e r v i c e s , i t i s i m p o r t a n t t o i n v e s t i g a t e some d e t e r m i n a n t s o f the demand f o r P a c i f i c a i r s e r v i c e s . A g r a v i t y - t y p e model w i l l be formu-l a t e d and t e s t e d f o r the y e a r s 1962-1968. The impact o f c h a r t e r s w i l l be measured t h r o u g h the i n c l u s i o n o f a "dummy v a r i a b l e " i n the m u l t i p l e r e g r e s s i o n framework. The p r o c e s s w i l l be f u r t h e r r e f i n e d t o i n c l u d e some f a c t o r a n a l y s i s i n o r d e r t o d e t e r m i n e the p r i n c i p a l d i m e n s i o n s of demand. C h a p t e r V I w i l l d e a l w i t h the p o l i c y i m p l i c a t i o n s w h i c h a r i s e f r o m the f i n d i n g s a p p a r e n t i n C h a p t e r s I V and V. R e f e r e n c e w i l l be made to p r e v i o u s l y mentioned r e g u l a t o r y p o l i c i e s and q u e s t i o n s w i l l be posed w i t h i n t h a t c o n t e x t . C h a p t e r V I I w i l l p r o v i d e a summary and the c o n c l u s i o n o f the s t u d y . The A p p e n d i x a t t e m p t s to i l l u s t r a t e the t y p e s o f a i r c r a f t used i n the P a c i f i c o p e r a t i o n s o f major U.S. c a r r i e r s and the o p e r a t -i n g c o s t s and c h a r a c t e r i s t i c s a s s o c i a t e d w i t h t h e s e a i r c r a f t . D e f i n i t i o n o f Terms The P a c i f i c - r e f e r s t o the c o u n t r i e s i n and around t h e P a c i f i c Ocean w h i c h a r e s e r v e d by C P . A i r ' s s c h e d u l e d s e r v i c e s . These a r e : J a p a n , Hong Kong, H a w a i i , M e x i c o , P e r u , F i j i , A u s t r a l i a , and New Z e a l a n d . C o s t o f T r a v e l t o the P a s s e n g e r - i s d e p i c t e d by the revenue y i e l d s on v a r i o u s r o u t e s as c a l c u l a t e d by C P . A i r . These f i g u r e s r e f l e c t the a v e r a g e c o s t o f t r a v e l to the p a s s e n g e r and a r e e x p r e s s e d i n c e n t s per revenue passenger m i l e . F u l l y - A l l o c a t e d C o s t s - b o t h the d i r e c t and i n d i r e c t expenses a s s o c i a t e d w i t h the o p e r a t i o n o f an a i r c r a f t on a g i v e n r o u t e . These a r e e x p r e s s e d i n d o l l a r s per b l o c k h o u r . P r o f i t I n d i c a t o r - the d i f f e r e n c e between the revenue y i e l d s and f u l l y a l l o c a t e d c o s t s . P e r c e n t a g e s a r e e x p r e s s e d i n terms o f t h e f o r m e r . C r o s s - s u b s i d i z a t i o n - the p r a c t i c e o f u s i n g the p r o f i t s o f one segment of the Company's o p e r a t i o n s t o a p p l y a g a i n s t l o s s e s i n c u r r e d on o t h e r segments of the o p e r a t i o n . B l o c k Hours - the hours computed f r o m the moment the a i r c r a f t f i r s t moves under i t s own power f o r purposes o f f l i g h t , u n t i l i t comes t o r e s t a t a p o i n t o f l a n d i n g . N o r t h P a c i f i c o r O r i e n t Routes - a r e t h o s e r o u t e s w h i c h c o n n e c t the c o u n t r y - p a i r s o f Canada-Japan and Canada-Hong Kong. C e n t r a l P a c i f i c Routes - a r e t h o s e r o u t e s w h i c h c o n n e c t Canada-Hawaii and a l s o t h o s e f l o w n by U.S. c a r r i e r s t o the O r i e n t w h i c h pass t h r o u g h H a w a i i . South P a c i f i c Routes - a r e t h o s e r o u t e s w h i c h c o n n e c t Canada-Mexico, Canada-Peru, C a n a d a - F i j i , Canada-New Z e a l a n d , and Canada-Aus t r a l i a . CHAPTER I I DEVELOPMENT OF THE PACIFIC TRAVEL MARKET The purpose o f t h i s c h a p t e r i s t o d e p i c t t h e development i n t h e P a c i f i c a i r t r a v e l market d u r i n g the 1962-1968 p e r i o d . The g e o g r a p h i c a r e a w h i c h w i l l be s t u d i e d i s t h a t encompassed by the P a c i f i c r o u t e network o f C P . A i r . T h i s i n c l u d e s t h e f o l l o w i n g c o u n t r i e s : Canada, J a p a n , Hong Kong, H a w a i i , M e x i c o , P e r u , F i j i , New Z e a l a n d , and A u s t r a l i a . The P a c i f i c t r a v e l market i s r e l a t i v e l y s m a l l i n r e l a t i o n t o markets such as t h e N o r t h A t l a n t i c . The l a t t e r market has been e s t i m a t e d t o be f i v e t i m e s t h e s i z e o f the N o r t h P a c i f i c and t e n time s t h a t o f the C e n t r a l and Sou t h P a c i f i c i n terms o f passenger 2 m i l e s f l o w n , r e v e n u e s , and t o t a l t r a f f i c . Y e t , t h e i m p o r t a n c e o f the P a c i f i c i s g r o w i n g r a p i d l y . I t s h o u l d be s t r e s s e d t h a t a l l t r a f f i c and f a r e d a t a , w h i c h i s p r e s e n t e d i n t h i s c h a p t e r , p e r t a i n s o n l y t o C P . A i r ' s P a c i f i c o p e r a t i o n s . The use o f l i m i t e d i n f o r m a t i o n s u c h as t h i s i s j u s t i -f i a b l e f o r t h e f o l l o w i n g r e a s o n s : a) D e t a i l e d i n f o r m a t i o n s u c h as t h a t p r o v i d e d i n t h i s c h a p t e r was not g e n e r a l l y a v a i l a b l e f o r o t h e r c a r r i e r s on a r o u t e b a s i s . b) W i t h t h e development o f t h e whole P a c i f i c a i r t r a v e l m a r k e t , i t i s f e l t t h a t e x p a n d i n g t r a f f i c volumes w o u l d be e x p e r i e n c i n g by a l l c a r r i e r s . Hence, C P . A i r i s used o n l y as an example. c) S i n c e t h e m a j o r i t y o f P a c i f i c s e r v i c e s a r e i n t e r n a t i o n a l , f a r e s a r e l a r g e l y I.A.T.A. d e t e r m i n e d . As s u c h , f a r e l e v e l s would be s i m i l a r f o r a l l P a c i f i c c a r r i e r s . V o n d r a c e k , Op. C i t . , p. 30. There a r e some c h a r a c t e r i s t i c s o f the P a c i f i c t r a v e l market 3 growth w h i c h a r e n o t e w o r t h y : (1) An enormous i n c r e a s e i n p l e a s u r e t r a v e l t o t h i s a r e a has been w i t n e s s e d . I n f a c t , by the mid-1960's, more p l e a s u r e t r a v e l than b u s i n e s s t r a v e l o c c u r r e d i n the P a c i f i c . (2) Much o f the i n c r e a s e i n p l e a s u r e t r a f f i c has been d e s t i n e d f o r H a w a i i and M e x i c o . (3) D u r i n g the 1960's pure j e t a i r c r a f t were o p e r a t e d to a l m o s t e v e r y major l o c a t i o n i n the P a c i f i c r e g i o n . (4) A more s o p h i s t i c a t e d network o f r e g i o n a l a i r t r a n s p o r t s e r v i c e s has d e v e l o p e d w i t h i n the P a c i f i c f a c i l i t a t i n g t h e economic and p o l i t i c a l growth o f the a r e a . W i t h t h e s e p o i n t s i n mind, c o n s i d e r a t i o n w i l l t u r n t o the f a c t o r s a f f e c t i n g t r a v e l growth. F i r s t , a t t e n t i o n w i l l be f o c u s e d on the t r e n d s i n a i r t r a v e l volumes and passenger f a r e s . T h i s d a t a i s i l l u s t r a t e d i n T a b l e I I - l . Second, economic and demographic developments i n P a c i f i c Rim n a t i o n s w i l l be p r e s e n t e d . These w i l l be measured by r e f e r e n c e t o per c a p i t a g r o s s n a t i o n a l p r o d u c t , changes i n p o p u l a t i o n , and per c a p i t a income. T h i r d , the i m p o r t a n c e o f time and i t s r e l a t i o n s h i p t o modal c h o i c e w i l l be d i s c u s s e d . Throughout the a n a l y s i s i n t h i s c h a p t e r , d a t a f r o m 1962 to 1968 w i l l be u t i l i z e d whenever p o s s i b l e . ( i ) T r a f f i c Growth and Passenger F a r e s W i t h the e x c e p t i o n o f New Z e a l a n d , i t i s a p p a r e n t from T a b l e I I - l t h a t t h e volume of a i r passenger t r a f f i c has grown e n o r -mously d u r i n g the seven y e a r p e r i o d . T r a v e l s i n c e 1962 has d o u b l e d between most c o u n t r y - p a i r s and i n some c a s e s t r i p l e d . F. M a r v i n P l a k e , " P a c i f i c A r e a V i s i t o r s may i n c r e a s e more tha n f o u r t i m e s by 1980", I.C.A.O. B u l l e t i n , No. 8, A u g u s t 1970, pp. 22-24. TABLE I I - 1 TRAVEL VOLUMES AND AVERAGE COST OF FARES ON C P . AIR SERVICES IN THE PACIFIC FOR THE YEARS 1962-1968 From Canada T o t a l A n n u a l A v e r a g e C o s t t o A i r T r a v e l Volume o f F a r e ($) Y e a r D e s t i n a t i o n To and From Canada (one way) 1962 Japan 4,500 349.87 1963 4,950 352.18 1964 5,912 352.30 1965 7,366 340.89 1966 8,572 323.39 1967 10,325 309.68 1968 11,533 291.19 1962 Hong Kong 6,000 489.88 1963 6,600 494.51 1964 7,883 481.93 1965 9,821 477.30 1966 11,429 452.80 1967 13,766 433.61 1968 15,378 409.12 1962 H a w a i i 16,628 121.22 1963 (U.S.) 23,515 121.77 1964 26,512 122.32 1965 36,870 115.71 1966 48,684 117.36 1967 56,364 117.09 1968 57,462 117.64 1962 M e x i c o 20,530 126.86 1963 24,693 127.12 1964 28,921 118.53 1965 29,230 112.28 1966 28,977 134.68 1967 36,370 120.87 1968 38,885 122.44 The average c o s t o f the f a r e was d e r i v e d by m u l t i p l y i n g d i s t a n c e f l o w n by r o u t e y i e l d s e x p r e s s e d i n c e n t s per p a s s e n g e r - m i l e . TABLE I I - 1 (Cont'd) From Canada T o t a l A n n u a l A v e r a g e C o s t t o A i r T r a v e l Volume o f F a r e ($) Year D e s t i n a t i o n To and From Canada (one way) 1962 1963 1964 1965 1966 1967 1968 P e r u 392 496 498 689 813 1,178 1,332 289.08 294.34 331.65 324.29 308.00 299.59 305.90 1962 1963 1964 1965 1966 1967 1968 F i j i 156 137 346 444 583 702 1,067 404.26 403.07 399.50 393.56 404.85 .405.37 396.82 1962 New Z e a l a n d 1,116 539.58 1963 1,391 537.99 1964 1,563 533.23 1965 2,165 525.30 1966 1,499 540.37 1967 1,525 553.07 1968 1,238 530.85 1962 A u s t r a l i a 543 539.58 1963 466 537.99 1964 628 533.23 1965 651 525.30 1966 1,247 540.37 1967 1,383 553.07 1968 1,647 530.85 Sou r c e : C a r r i e r s t a t i s t i c s . U t i l i z a t i o n o f j e t a i r c r a f t i n the P a c i f i c was s t i l l i n i t s i n f a n c y i n 1962. Improved t e c h n o l o g y was i n t r o d u c e d on v e r y dense r o u t e s i n i t i a l l y , such as tho s e i n the N o r t h A t l a n t i c . As more advanced t e c h n o l o g y found i t s way i n t o the P a c i f i c , t r a v e l became more a t t r a c t i v e . I n c r e a s e d speed, c o m f o r t , and c o n v e n i e n c e drew t r a v e l l e r s t o t h i s mode of t r a n s p o r t . Thus, t r a v e l has expanded w i t h t e c h n o l o g i c a l growth. . S i n c e a l l o f C P . A i r ' s P a c i f i c s e r v i c e s a r e i n t e r n a t i o n a l , i t must be r e c a l l e d t h a t f a r e s a r e d e t e r m i n e d by the I n t e r n a t i o n a l A i r T r a n s p o r t A s s o c i a t i o n . Y e t , f a r e s w i l l be shown to have had l i t t l e o b v i o u s i n f l u e n c e on t r a v e l volumes. F a r e s i n the P a c i f i c a r e h i g h . The a i r l i n e s have n o t a d v o c a t e d l o w e r f a r e s presumably because p r o f i t s a r e h i g h and demand 4 i s i n e l a s t i c . F a r e s bear l i t t l e r e l a t i o n s h i p t o c o s t s and the P a c i f i c has e v o l v e d as the one o f h i g h e s t p r o f i t a r e a i n the w o r l d market f o r a i r t r a n s p o r t s e r v i c e s . 5 The I.A.T.A. r a t e s t r u c t u r e i s n o t g e n e r a l l y c o n d u c i v e t o i n c r e a s i n g a i r t r a v e l . S t r e n g t h i s g i v e n to t h i s s t a t e m e n t by n o t i n g the tremendous growth i n c h a r t e r s as compared t o the much s l o w e r growth o f s c h e d u l e d c a r r i e r s . I.A.T.A. has a t t r i b u t e d the l a t t e r t o the poor economic c o n d i t i o n s o f r e c e n t t i m e s . Y e t , the c h a r t e r s have d e v e l o p e d i n s p i t e o f t h e s e c o n d i t i o n s . T h i s w o u l d l e a d one t o ,be s u s p i c i o u s o f the I.A.T.A. c l a i m t h a t t h e i r r a t e s t r u c t u r e i s the S t r a s z h e i m , Op. C i t . , p. 148. S t r a s z h e i m , Op. C i t . , p. 148. most c o n d u c i v e to i n c r e a s i n g a i r t r a v e l . The P a c i f i c A r e a T r a v e l A s s o c i a t i o n f e e l s t h a t the e x c e s s i v e l y h i g h f a r e s may have a r e t a r d -i n g e f f e c t on the development o f the P a c i f i c t r a v e l m arket.^ T h i s t r e n d i n f a r e s i s i n d i r e c t c o n t r a s t t o the s i t u a t i o n i n the N o r t h A t l a n t i c market. T h e r e , a g e n e r a l l o w e r i n g o f a i r f a r e s o v e r t i m e has been w i t n e s s e d . 7 From 1962-1968 P a c i f i c f a r e s were r e l a t i v e l y c o n s t a n t w i t h the e x c e p t i o n o f the North. P a c i f i c r o u t e s . T h e r e , f a r e s have d e c l i n e d n o t a b l y . W h i l e the l a r g e s t p e r c e n t a g e i n c r e a s e s i n t r a f f i c volumes have been o b s e r v e d on the O r i e n t r o u t e s , t h o s e t o H a w a i i and M e x i c o have a l s o d i s p l a y e d tremendous growth i n the absence o f reduced f a r e s as have o t h e r P a c i f i c r o u t e s . So t h e n , f o r the g i v e n p e r i o d , i t would appear t h a t f a r e s have had a m i n i m a l e f f e c t on i n c r e a s i n g t r a v e l volumes. I n g e n e r a l , t r a f f i c has expanded i n s p i t e o f r i g i d f a r e l e v e l s . T a b l e I I - 2 d e p i c t s the d i r e c t i o n a l f l o w o f p a s s e n g e r s between Canada and P a c i f i c Rim n a t i o n s v i a C P . A i r . Note can be made o f the p e r s i s t e n t i m b a l a n c e w h i c h was p r e s e n t . T h i s stemmed f r o m the i n f l o w o f i m m i g r a n t s to Canada, p a r t i c u l a r l y f r o m the O r i e n t . T h e a v e r a g e a n n u a l r a t e of, growth i n a i r t r a f f i c f rom 1962-1968 was 17.7 p e r c e n t . T h i s o c c u r r e d i n t h e absence o f f a r e r e d u c t i o n s . F o r the sake o f c o m p a r i s o n , a s t u d y c a r r i e d o u t on the N o r t h A t l a n t i c g a i r t r a v e l market found t h a t t o t a l t r a f f i c grew a t a 16 p e r c e n t r a t e f r o m 1962-1966 and was accompanied by numerous f a r e r e d u c t i o n s . F. M a r v i n P l a k e , " P a c i f i c A r e a V i s i t o r s may i n c r e a s e more than f o u r t i m e s by 1980", I.C.A.O, B u l l e t i n , No. 8, A u g u s t 1970, pp. 22-24. Vondracek, Op. C i t . , p. 36. V o n d r a c e k , Op. C i t . , p. 36. ( i i ) Economic Development i n the P a c i f i c Rim Changes i n p o p u l a t i o n , . p e r c a p i t a g r o s s n a t i o n a l p r o d u c t , and per c a p i t a income f o r s e l e c t e d P a c i f i c Rim n a t i o n s a r e shown i n T a b l e I I - 3 . The most r a p i d e x p a n s i o n i n per c a p i t a g r o s s n a t i o n a l p r o d u c t (G.N.P.) was a c c o m p l i s h e d by Japan. Her per c a p i t a G.N.P. m u l t i p l i e d two and o n e - h a l f t i m e s i n the c o u r s e o f the seven y e a r p e r i o d . A u s t r a l i a and Canada b o t h e x p e r i e n c e d 50 p e r c e n t i n c r e a s e s i n G.N.P. Per c a p i t a income l e v e l s g i v e an i n d i c a t i o n o f the economic a f f l u e n c e o f a c o u n t r y . The d i s t r i b u t i o n o f t h i s income w i t h i n t he c o u n t r y i s l i k e l y t o be a key f a c t o r i n f l u e n c i n g t r a v e l . A l s o , as per c a p i t a income r i s e s , d i s c r e t i o n a r y income may i n c r e a s e . I t i s the l a t t e r p o r t i o n o f an i n d i v i d u a l ' s income w h i c h would be a l l o c a t e d t o t r a v e l l i n g e x penses. As incomes r i s e , more p e o p l e become f i n a n c i a l l y a b l e t o t r a v e l by a i r . Hence, an impetus i s p r o v i d e d f o r the growth i n a i r t r a v e l volume. I n the P a c i f i c c o u n t r i e s the f o l l o w i n g t r e n d s were o b s e r v e d . The O r i e n t and the A m e r i c a s have e x p e r i e n c e d the l a r g e s t i n c r e a s e s i n per c a p i t a income. On the o t h e r hand, P e r u and F i j i r a n k ed l o w e s t . Y e t , a l l c o u n t r i e s r e a l i z e d some i n c r e a s e i n per c a p i t a income o v e r the p e r i o d . A t the same t i m e , the volumes o f t r a v e l between P a c i f i c Rim c o u n t r i e s and Canada d i s p l a y e d a r a n k i n g s i m i l a r t o t h a t o b s e r v e d w i t h incomes. The g r e a t e s t i n c r e a s e s i n passenger t r a f f i c have been to and fr o m the O r i e n t and H a w a i i , where incomes have i n c r e a s e d by the h i g h e s t p e r c e n t a g e s . TABLE I I - 2 DIRECTIONAL FLOW OF TRAFFIC BETWEEN CANADA AND PACIFIC RIM DESTINATIONS VIA CANADIAN SCHEDULED CARRIERS Y e a r From Canada To Canada T o t a l (Number of P a s s e n g e r s ) 1962 24,077 25,788 49,865 1963 30,378 31,870 62,248 1964 34,633 37,630 72,263 1965 41,682 45,554 87,236 1966 49,682 52,932 102,614 1967 56,061 65,552 121,613 1968 60,304 68,238 128,542 P e r c e n t o f Change 1962 - 1963 1963 - 1964 1964 - 1965 1965 - 1966 1966 - 1967 1967 - 1968 A v e r a g e A n n u a l R a t e o f Growth + 26 + 14 + 20 + 19 + 13 + 8 % % % % 1 % 16.7 % S o u r c e : C a r r i e r s t a t i s t i c s . + 24 + 21 + 21 + 16 + 24 + 4 % % % % % % + 25 + 18 + 21 + 17 + 19 + 6 18.3 % 17.7 % TABLE I I - 3 DEMOGRAPHIC DATA ON PACIFIC RIM COUNTRIES FOR THE YEARS 1962-1968 G.N.P. Income Pe r C a p i t a P er C a p i t a Y e a r C o u n t r y P o p u l a t i o n (U.S.$) (U.S.$) 1962 Japan 9.0,000,000 591.00 510.00 1963 90,000,000 709.00 576.00 1964 90,000,000 800.00 650.00 1965 90,000,000 901.00 721.00 1966 90,000,000 1,027.00 '820.00 1967 90,000,000 1,198.00 959.00 1968 90,000,000 1,404.00 1,122.00 1962 Hong Kong 3,500,000 323.00 101.00 1963 3,500,000 335.00 110.00 1964 3,500,000 340.00 131.00 1965 3,500,000 351.00 141.00 1966 4,000,000 380.00 160.00 1967 4,000,000 400.00 181.00 1968 4,000,000 411.00 203.00 1962 H a w a i i 605,336 2,960.00 2,315.00 1963 (U.S.) 649,590 3,166.00 2,562.00 1964 3,372.00 2,780.00 1965 3,578.00 2,921.00 1966 3,874.00 3,175.00 1967 726,312 4,057.00 3,310.00 1968 4,379.00 3,578.00 1962 M e x i c o 34,923,129 351.00 317.00 1963 386.00 349.00 1964 39,642,671 420.00 380.00 1965 40,913,498 455.00 412.00 1966 44,145,000 493.00 446.00 1967 47,471,000 528.00 478.00 1968 48,933,000 566.00 511.00 TABLE I I - 3 (Cont'd) G.N.P. Income P e r C a p i t a P er C a p i t a Y e a r C o u n t r y P o p u l a t i o n (U.S.$) (U.S.$) 1962 P e r u 10,420,357 222.00 190.00 1963 236.00 202.00 1964 248.00 212.00 1965 11,750,430 257.00 218.00 1966 12,103,000 271.00 228.00 1967 12,486,000 284.00 244.00 1968 13,272,630 291.00 246.00 1962 F i j i , 427,851 290.00 250.00 1963 441,301 296.00 256.00 1964 456,390 303.00 260.00 1965 469,934 308.00 263.00 1966 476,727 306.00 265.00 1967 319.00 276.00 1968 324.00 280.00 1962 New Z e a l a n d 2,498,411 1,645.00 1,450.00 1963 2,533,419 1,756.00 1,506.00 1964 2,590,787 1,869.00 1,600.00 1965 2,640,117 1,981.00. 1,709.00 1966 2,676,919 2,033.00 1,750.00 1967 2,727,148 2,007.00 1,714.00 1968 2,755,092 2,025.00 1^760.00 1962 A u s t r a l i a 10,705,121 1,695.00 1,325.00 1963 10,916,249 1,810.00 1,472.00 1964 11,135,500 1,913.00 1,525^00 1965 11,359,510 2,016.00 1,622.00 1966 11,544,691 2,163.00 1,747.00 1967 2,253.00 1,807.00 1968 11,990,787 2,479.00 1,960.00 1962 Canada 18,896,000 1,980.00 1,550.00 1963 19,237,000 2,121.00 1,602.00 1964 19,571,000 2,270.00 1,720.00 1965 19,919,000 2,461.00 1,830.00 1966 20,405,000 2,677.00 1,990.00 1967 20,744,000 2,806.00 2,085.00 1968 21,061,000 2,997.00 2,247.00 S o u r c e : Europa Yearbook 1962-1969. U.N. S t a t i s t i c a l Yearbook 1969. The s t a n d a r d o f l i v i n g o f the p o p u l a t i o n s (as r e f l e c t e d by per c a p i t a G.N.P. and income) would appear to be d i r e c t l y r e l a t e d t o the development of the P a c i f i c a i r t r a v e l market. ( i i i ) The Importance o f Time S a v i n g s The i m p o r t a n c e o f speed, a predominant c h a r a c t e r i s t i c o f a i r t r a n s p o r t , i s r e f l e c t e d i n t h e c o m p e t i t i v e advantage o f t h i s 1 9 mode e s p e c i a l l y o v e r l o n g d i s t a n c e s . T h i s f a c t can be i l l u s t r a t e d by r e f e r r i n g t o s t a t i s t i c s p r e s e n t e d i n S t r a s z h e i m ' s book on i n t e r -. . 10 n a t i o n a l a v i a t i o n . He n o t e s t h a t , i n . 1 9 6 3 , 90 p e r c e n t o f the N o r t h P a c i f i c t r a f f i c and 70 p e r c e n t o f the South P a c i f i c t r a f f i c u t i l i z e d a i r t r a n s p o r t i n c o n t r a s t to the s u r f a c e mode. He goes on to s t a t e t h a t , f r o m 1957-1961, the s i z e o f the P a c i f i c a i r market i n c r e a s e d 100 p e r c e n t f r o m one b i l l i o n t o two b i l l i o n p a s senger m i l e s f l o w n . Thus, t e c h n o l o g i c a l improvements w o u l d seem t o have an impact on modal c h o i c e . As time s a v i n g s have i n c r e a s e d , more and more p e o p l e have t r a v e l l e d by a i r . Time i s a s c a r c e r e s o u r c e and commands a p o s i t i v e p r i c e . The c o s t o f a t r i p i s i n c r e a s e d f o r a pa s s e n g e r who a s s i g n s a v a l u e t o h i s t i m e . The v a l u e p l a c e d on time i n c r e a s e s w i t h a household*'s i n c o m e . 1 1 The incomes o f the c i t i z e n s o f some P a c i f i c Rim n a t i o n s Vondracek, Op. C i t . , p. 38. S t r a s z h e i m , Op. C i t . , p. 108. Reuben Gronau, The V a l u e o f Time i n P a s s e n g e r T r a n s p o r t a t i o n :  the Demand f o r A i r T r a v e l , (New Y o r k : N a t i o n a l Bureau o f Economic R e s e a r c h , 1970), p. 3. have been g r o w i n g , thus t h e v a l u e o f t h e i r t i m e has i n c r e a s e d . F u r t h e r , t h e h i g h e r t h e consumer's p r i c e o f t i m e , the s m a l l e r h i s tendency t o use t i m e - i n t e n s i v e modes. Over and above t h e speed o f a g i v e n mode, the ti m e s p e n t t r a v e l l i n g depends on d i s t a n c e . One wo u l d e x p e c t t h a t f a r e s on t h e f a s t e r modes would be h i g h e r t h a n f a r e s on s l o w e r modes, and w h i l e t h i s i s t r u e , " t h e t i m e d i f f e r e n t i a l s i n c r e a s e f a s t e r t h a n t h e f a r e d i f f e r e n t i a l s r e s u l t i n g i n an i n c r e a s e d 12 t e n d e n c y t o s h i f t t o a f a s t e r mode as d i s t a n c e i n c r e a s e s " . T h e r e f o r e , the p r i c e o f t i m e has a c r u c i a l i m p a c t on modal c h o i c e . W i t h the advent o f pure j e t a i r c r a f t , a l a r g e i n c r e a s e i n the volume o f P a c i f i c a i r t r a f f i c has been w i t n e s s e d . A l t h o u g h p a r t o f t h e g r o w i n g t r a v e l volume must be a t t r i b u t e d t o economic a f f l u e n c e and p r o m o t i o n a l e f f o r t s , a p o r t i o n o f t h e g r o w t h has a c c r u e d from t i m e s a v i n g s a s s o c i a t e d w i t h t e c h n o l o g i c a l l y s u p e r i o r equipment. An i n d i -v i d u a l may w e l l p l a c e a v a l u e on h i s t i m e and be w i l l i n g t o pay t h e p r i c e o f h i g h e r f a r e s ( a i r f a r e s ) i n o r d e r t o a r r i v e a t h i s d e s t i n a t i o n s o o n e r . ( i v ) Summary The P a c i f i c a i r t r a v e l m arket has t r a d i t i o n a l l y been c h a r a c t e r i z e d by h i g h f a r e s and h i g h p r o f i t s . T r a f f i c volumes i n c r e a s e d a t an a n n u a l r a t e o f 17.7 p e r c e n t from 1962-1968. These two p o i n t s make the P a c i f i c r e g i o n an i m p o r t a n t economic l e v e r f o r a i r l i n e s o p e r a t i n g i n the market. I b i d , p. 3. The i n f o r m a t i o n i n t h i s c h a p t e r s u g g e s t s t h a t a i r f a r e s have n o t p l a y e d a l e a d i n g r o l e i n t h e evolvement o f t h i s market. I n s t e a d , the g e n e r a l economic development w i t h i n t h e P a c i f i c Rim n a t i o n s and t h e s i g n i f i c a n c e o f ti m e s a v i n g s have made t h e most p o s i t i v e c o n t r i b u t i o n s t o the development o f the P a c i f i c m a r k e t . J a p a n , A u s t r a l i a , and Canada have p r o v i d e d the impetus i n terms o f economic development. The i n t r o d u c t i o n o f j e t t e c h n o l o g y has a f f o r d e d t h e o p p o r t u n i t y f o r time s a v i n g s . F u r t h e r , t h e f a c t t h a t p l e a s u r e t r a v e l has s u r p a s s e d b u s i n e s s t r a v e l as t h e major component o f t o t a l t r a v e l volume p o i n t s t o a n o t h e r r e a s o n f o r t h e growth i n the P a c i f i c . H a w a i i and M e x i c o , havens o f warm c l i m a t e and r e l a x e d atmosphere, have e x h i b i t e d t w o f o l d i n c r e a s e s i n a i r t r a v e l l e r v i s i t a t i o n s o v e r t h e s e v e n y e a r s . T h e r e i s g r e a t p o t e n t i a l t o be ta p p e d i n t h e P a c i f i c and t h i s h i g h l i g h t s t h e i m p o r t a n c e o f i n v e s t i g a t i n g i t s development. The f a c t t h a t a C a n a d i a n c a r r i e r has a v i t a l i n t e r e s t i n t h e P a c i f i c s h o u l d be o f p r i m a r y c o n c e r n t o i n d i v i d u a l s c r e a t i n g C a n a d i a n d o m e s t i c a i r t r a n s p o r t p o l i c y . T h i s a r e a w i l l be c o n s i d e r e d i n g r e a t e r d e p t h i n C h a p t e r V I . CHAPTER III PACIFIC OPERATIONS OF A U.S. CARRIER ( i ) The Pan A m e r i c a n A i r w a y s Example The p a u c i t y o f d i v e r s i f i e d d a t a on a i r l i n e o p e r a t i o n s n e c e s s i t a t e s the r e l i a n c e on C i v i l A e r o n a u t i c s Board s t a t i s t i c s . Through t h e s e f i g u r e s , an a p p r o x i m a t i o n o f the o p e r a t i n g c h a r a c t e r -i s t i c s o f equipment used by a U.S. c a r r i e r i n the P a c i f i c can be g a i n e d . Pan A m e r i c a n A i r w a y s i s the o n l y a i r l i n e d e a l t w i t h s i n c e t h i s a i r l i n e s u p p l i e s d i v i s i o n a l i n f o r m a t i o n and hence the need t o e x t r a p o l a t e from a g g r e g a t e f i g u r e s i s r e d u c e d . B o t h 1967 and 1968 f i g u r e s w i l l be c o n s i d e r e d and i m p o r t a n t v a r i a t i o n s e x p l a i n e d . C o n s i d e r a t i o n i s g i v e n f i r s t t o the a i r c r a f t w h i c h Pan A m e r i c a n u t i l i z e i n t h e i r P a c i f i c d i v i s i o n . O n ly the equipment w h i c h was a r r a n g e d i n p assenger c a b i n c o n f i g u r a t i o n was s t u d i e d . Pan A m e r i c a n uses t h r e e v a r i a t i o n s o f the B o e i n g 707. i n the P a c i f i c m arket - the B-707--300, the B-707-300B, and the B-707-300C. A l l t h r e e s e r i e s l e n d t h e m s e l v e s to the l o n g - h a u l n a t u r e o f the P a c i f i c r o u t e s . F o r s i m p l i c i t y , however, o n l y the most e c o n o m i c a l o f the t h r e e - the B-707-300C - w i l l be i l l u s t r a t e d . The c o s t s a s s o c i a t e d w i t h t h i s a i r c r a f t type a r e shown i n T a b l e I I I - l . To d e p i c t a m e a n i n g f u l r e l a t i o n s h i p , t h e s e f i g u r e s must be compared w i t h the U.S. i n d u s t r y a v e r a g e d a t a f o r B-707-300C 1s. The l a t t e r i n f o r m a t i o n i s g i v e n i n T a b l e A - l i n the A p p e n d i x . TABLE I I I - l PAN AMERICAN AIRWAYS B-707-300C (TURBO-FAN) OPERATING COSTS - PASSENGER CABIN CONFIGURATION PACIFIC OPERATION (PER BLOCK HOUR) F l y i n g O p e r a t i o n s : Crew F u e l and O i l I n s u r a n c e Other TOTAL M a i n t e n a n c e - F l i g h t Equipment: D i r e c t M a i n t e n a n c e - a i r f r a m e ani D i r e c t M a i n t e n a n c e - e n g i n e M a i n t e n a n c e Burden TOTAL TOTAL DEPRECIATION 1967 1968 180.64 187.48 245.97 233.87 17.46 17.33 0.04 0.06 444.11 438.75 o t h e r 59.95 59.95 35.66 34.03 80.11 87.76 175.73 181.74 89.74 138.67 TOTAL OPERATING COSTS 709.57 759.16 Source: C.A.B. O p e r a t i n g C o s t s and Perfor m a n c e Data f o r 1967 and 1968. A c t u a l f l y i n g expenses a r e 22 p e r c e n t h i g h e r f o r Pan A m e r i c a n , w h i l e m aintenance c o s t s were 29 p e r c e n t h i g h e r f o r t h i s a i r l i n e i n co m p a r i s o n t o the i n d u s t r y average f o r c a r r i e r s u t i l i z i n g the same equipment o v e r s i m i l a r i n t e r n a t i o n a l / t e r r i t o r i a l r o u t e systems. T h i s c l a s s i f i c a t i o n i n c l u d e s N o r t h w e s t A i r l i n e s , T r a n s -W o r l d A i r w a y s , Pan A m e r i c a n A i r w a y s . A t the same t i m e , d e p r e c i a t i o n expenses were a p p r o x i m a t e l y e q u a l i n each t a b l e . T o t a l o p e r a t i n g c o s t s were 12 p e r c e n t h i g h e r f o r Pan A m e r i c a n . The p e r c e n t a g e s p r e s e n t e d above i m p l y t h a t Pan A m e r i c a n r a n k s below the i n d u s t r y a verage i n terms o f o p e r a t i n g e f f i c i e n c y . 1 T h i s b e h a v i o u r i s u n d o u b t e d l y r e f l e c t e d i n t h e i r p r o f i t f o r the P a c i f i c d i v i s i o n . In-1967- and 1968, t o t a l o p e r a t i n g revenues f o r Pan A m e r i c a n ' s 2 P a c i f i c r o u t e s were $375,073,000 and $394,573,000 r e s p e c t i v e l y . 3 The components o f t h e s e o p e r a t i n g revenues a r e : S c h e d u l e d passenger revenues 47 % M a i l Revenues 20 % C h a r t e r Revenues 10 % F r e i g h t Revenues 20 % O t h e r Revenues 3 % G i v e n d a t a on b o t h o p e r a t i n g revenues and o p e r a t i n g c o s t s f o r Pan A m e r i c a n ' s P a c i f i c d i v i s i o n , a rough o p e r a t i n g p r o f i t m a r g i n can be c a l c u l a t e d . 1 A l t h o u g h i t seems t h a t Pan A m e r i c a n i s o p e r a t i n g i n e f f i c i e n t l y , i t may be t h a t d i f f e r e n c e s i n r o u t e s t r u c t u r e u n d e r l i e t h e s e d i s p a r i t i e s . A d d i t i o n a l l y , h i g h e r c o s t s e x p r e s s e d i n c e n t s per pa s s e n g e r m i l e may stem from the f a c t t h a t s e a t i n g c a p a c i t i e s v a r y . 2 C.A.B. A i r l i n e Handbook (1969) e d i t i o n , (Washington: U.S. C i v i l A e r o n a u t i c s B o a r d , 1969), C a r r i e r P r o f i t and Loss S t a t e m e n t s , T a b l e 77. These p e r c e n t a g e s were d e r i v e d from the income d a t a shown i n T a b l e 77 o f the 1969 e d i t i o n o f the U.S.C.A.B. A i r l i n e Handbook. To f a c i l i t a t e t h i s c o m p u t a t i o n , r e v e n u e s per passenger m i l e were d e r i v e d . T h i s was done by d i v i d i n g t o t a l p a s s e n g e r revenues by t o t a l p a s senger m i l e s f l o w n . T h i s c a l c u l a t i o n i s shown i n T a b l e I I I - 2 . T h i s f i g u r e i s compared w i t h the c o s t per passenger 4 m i l e w h i c h i s g i v e n i n C.A.B. p u b l i c a t i o n s . By s u b t r a c t i n g c o s t per p a s s e n g e r m i l e f r o m revenue per pa s s e n g e r m i l e , an a p p r o x i m a t i o n o f o p e r a t i n g p r o f i t m a r g i n w i l l r e s u l t . I t i s e x p r e s s e d as a pe r c e n t a g e o f revenue per pa s s e n g e r m i l e . TABLE I I I - 2 PAN AMERICAN AIRWAYS: REVENUE AND COST PER PASSENGER MILE 1967 1968 P a s s e n g e r Revenues ($000) S c h e d u l e d Non-scheduled 174,494 4 5 , 2 6 2 194,414 41 ,997 (a) T o t a l 219,756 2 3 6 , 4 1 1 P a s s e n g e r M i l e s F l o w n ( ' 0 0 0 ) S c h e d u l e d Non-scheduled 3 , 7 5 4 , 8 3 2 2 , 0 4 2 , 2 9 3 4 , 1 9 6 , 6 0 4 2 , 1 0 4 , 8 1 9 (b) T o t a l 5 , 7 9 7 , 1 2 5 6 , 3 0 1 , 4 2 3 Revenue per P a s s e n g e r M i l e (c) = (a) d i v i d e d by (b) 3.791c 3 . 7 5 2 c C o s t per Revenue P a s s e n g e r M i l e (c) 1.828c 2 . 3 8 2 c M a r g i n ( o p e r a t i n g ) 51.8% 3 6 . 5 % S o u r c e : U.S.C.A.B. A i r l i n e Handbook, 1969 e d i t i o n . U.S.C.A.B. O p e r a t i n g C o s t s and Per f o r m a n c e Data f o r 1967 and 1968, (Washington: U.S. C i v i l A e r o n a u t i c s B o a r d , 1969). The o v e r a l l p i c t u r e emerges from T a b l e I I I - 2 t h a t o p e r a t i n g p r o f i t s f r o m p a s s e n g e r s e r v i c e s were l a r g e . Y e t , i t can be demonstrated t h a t the t o t a l o p e r a t i n g m a r g i n s r e a l i z e d by Pan A m e r i c a n was n o t as i m p r e s s i v e . 1967 1968 $375,073,000 $394,573,000 78,360,000 58,229,000 20.9 % 14.7 % The t o t a l o p e r a t i n g m a r g i n was c o n s i d e r a b l y l o w e r t h a n t h a t r e s u l t i n g s o l e l y f r o m passenger s e r v i c e s . P r o f i t s on p a s s e n g e r s e r v i c e s stem i n p a r t f r o m a r t i f i c i a l l y h i g h f a r e s w h i c h e x i s t i n the P a c i f i c t r a v e l m a r k e t , and w h i c h e n a b l e the a i r l i n e s t o r e a p h i g h p r o f i t s f r o m t h e s e s e r v i c e s . A l t h o u g h t h e r e was a s i g n i f i c a n t d e c l i n e i n o p e r a t i n g p r o f i t s f r o m 1967 t o 1968, Pan A m e r i c a n m a i n t a i n e d a good i n d u s t r y p o s i t i o n i n the P a c i f i c . Pan A m e r i c a n i s f a c e d w i t h r e l a t i v e l y l i t t l e c o m p e t i t i o n i n t he P a c i f i c . Thus, w i t h the a i d of h i g h f a r e s , the a i r l i n e can r e a p r e a s o n a b l e p r o f i t s i n s p i t e o f i n e f f i c i e n t o p e r a t i n g p e r f o r m a n c e . I n c o m p a r i s o n to the C.A.B. - d e s i g n a t e d i d e a l o f 9 p e r c e n t , Pan A m e r i c a n w o u l d appear t o be p e r f o r m i n g w e l l . Y e t , i t must be n o t e d t h a t P a c i f i c r o u t e s have t r a d i t i o n a l l y y i e l d e d r e t u r n s i n e x c e s s o f 25 p e r c e n t . ~* I n t h i s c o n t e x t , Pan A m e r i c a n ' s achievement i s l e s s t h a n e x c e p t i o n a l . T o t a l O p e r a t i n g Revenues T o t a l O p e r a t i n g P r o f i t T o t a l O p e r a t i n g M a r g i n S t r a s z h e i m , Op. C i t . , p. 177. So t h e n , u s i n g Pan A m e r i c a n as an example o f U.S.- c a r r i e r s o p e r a t i n g i n the P a c i f i c f o r the y e a r s 1967 and 1968, the f o l l o w i n g summary p o i n t s can be made. (1) There a r e l a r g e o p e r a t i n g p r o f i t s t o be r e a l i z e d i n P a c i f i c o p e r a t i o n s and Pan A m e r i c a n h a s , t o some e x t e n t , t a k e n advantage o f t h e s e . (2) Pan A m e r i c a n performed below the i n d u s t r y a v e r a g e i n terms o f o p e r a t i n g c o s t s . T h i s o c c u r r e d i n s p i t e o f t h e f a c t t h a t t h e s e r o u t e s , w h i c h have l o n g e r average s t a g e l e n g t h , l e n d t h e m s e l v e s to o p e r a t i n g economies. (3) A s i g n i f i c a n t d e c l i n e i n o p e r a t i n g m a r g i n between 1967 and 1968 was i l l u s t r a t e d . ( i i ) C o m p e t i t i o n and the T r a n s - P a c i f i c Route I n v e s t i g a t i o n I n a d d i t i o n t o the o p e r a t i n g p e r f o r m a n ce of an a i r l i n e , the c o m p e t i t i v e e n v i r o n m e n t i n w h i c h i t e x i s t s i s e x t r e m e l y i m p o r t a n t . Up t o 1968, Pan A m e r i c a n had v e r y l i t t l e r i v a l r y i n the P a c i f i c a i r t r a v e l market. T h i s was c o n s i s t e n t w i t h two f a c t o r s w h i c h t y p i f i e d t h i s t r a f f i c a r e a . One, the market was s m a l l ; i n f a c t , i t r e p r e s e n t e d o n l y 3-5 p e r c e n t of the t o t a l p a s s e n g e r m i l e s f l o w n by the w o r l d ' s a i r c a r r i e r s . Two, the C i v i l A e r o n a u t i c s B oard had h i s t o r i c a l l y p r e v e n t e d what i t r e f e r r e d t o as " d e s t r u c t i v e c o m p e t i t i o n " . T h i s r e g u l a t o r y body had p r o h i b i t e d o t h e r a i r l i n e s f r o m p a r t i c i p a t i n g i n the P a c i f i c m a r k et. I n 1968, the C.A.B. began the s t u d y w h i c h was known as the T r a n s - P a c i f i c Route I n v e s t i g a t i o n . T h i s i n v e s t i g a t i o n was the f i r s t t o be u n d e r t a k e n i n the P a c i f i c f o r more th a n a decade. Not o n l y i n t e r n a t i o n a l r o u t e s b u t a l s o d o m e s t i c ones ( m a i n l a n d - H a w a i i ) were s t u d i e d . A t the c o n c l u s i o n o f the i n q u i r y , recommendations were implemented t h a t a l t e r e d the c o m p e t i t i v e s t r u c t u r e t o some degree. One g e n e r a l c o n c l u s i o n o f t h i s i n q u i r y was t h a t a l l o f the major P a c i f i c r o u t e s were now d e v e l o p e d enough t o m e r i t i n c r e a s e d c o m p e t i t i o n . A d d i t i o n a l l y , the C e n t r a l P a c i f i c r o u t e t o the O r i e n t v i a H a w a i i c o u l d s u s t a i n t h r e e c a r r i e r c o m p e t i t i o n . On the l a t t e r r o u t e , t r a f f i c was g r o w i n g a t a 20 p e r c e n t a n n u a l r a t e . Y e t , p a s s e n g e r s were burdened w i t h h i g h f a r e s and the i n c o n v e n i e n c e a s s o c i a t e d w i t h h i g h l o a d f a c t o r s . 7 W h i l e l i t t l e c o u l d be done by the a i r l i n e s about h i g h f a r e s , i n c r e a s e d c a p a c i t y c o u l d a l l e v i a t e the d i s a d v a n t a g e s o f h i g h l o a d f a c t o r s . T h i s c a p a c i t y c o u l d be p r o v i d e d by the i n t r o d u c t i o n o f a d d i t i o n a l c a r r i e r s i n t o t h e P a c i f i c m a r k et. A l o n g w i t h i n c r e a s e d c o m p e t i t i o n , the C i v i l A e r o n a u t i c s B o ard wanted to m a i n t a i n a b a l a n c e between Pan A m e r i c a n A i r w a y s and N o r t h w e s t A i r l i n e s . These were t h e two p r i n c i p a l A m e r i c a n - b a s e d c a r r i e r s , w h i c h o p e r a t e i n the P a c i f i c . Route awards were g i v e n i n a l l t h r e e g e o g r a p h i c a r e a s of t h e m a r k e t , i . e . , the N o r t h P a c i f i c , the C e n t r a l P a c i f i c , and the S outh P a c i f i c . The e f f e c t o f t h e s e r o u t e a l l o c a t i o n s was to b o l s t e r the Pan A m e r i c a n - N o r t h w e s t b a l a n c e i n the N o r t h and C e n t r a l P a c i f i c and t o i n t r o d u c e a new c a r r i e r t o the South P a c i f i c . A m e r i c a n A i r l i n e s was g i v e n p e r m i s s i o n t o o p e r a t e i n the South P a c i f i c , a l t h o u g h t h e Pan A m e r i c a n s t r o n g h o l d t h e r e was a l s o p r e s e r v e d . T h i s was a c c o m p l i s h e d by p e r m i t t i n g Pan A m e r i c a n t o s e r v e more d e s t i n a t i o n s . The o n l y r e a l a r e a of d r a m a t i c change was i n the C e n t r a l P a c i f i c r e g i o n ( t h e m a i n l a n d -H a w a i i r o u t e s ) . A l t h o u g h the r e m a i n i n g r e g i o n s c o u l d s u p p o r t i n c r e a s e d O p i n i o n , Docket #16242, T r a n s - P a c i f i c Route I n v e s t i g a t i o n ( I n t e r - n a t i o n a l P h a s e ) , (Washington: U.S. C i v i l A e r o n a u t i c s B o a r d , November 18, 1968), p. 6. 7 I b i d , p. 7. c o m p e t i t i o n , f o r e i g n p o l i c y c o n s i d e r a t i o n s and Pan A m e r i c a n - N o r t h w e s t l o b b y s t r e n g t h p r e v e n t e d s i g n i f i c a n t r o u t e a l t e r a t i o n s . I t would appear t h a t the e f f e c t o f the i n v e s t i g a t i o n was n e g l i g i b l e . The d e s i r e t o p r e s e r v e the c o m p e t i t i v e b a l a n c e , i n s p i t e of e v i d e n c e w h i c h s u p p o r t e d the need f o r i n c r e a s e d c o m p e t i t i o n , would seem the p r i n c i p a l cause o f t h i s i n e f f e c t u a l l y . The s t a t u s quo was n o t d i s t u r b e d . Hence, no impetus was g i v e n t o the a i r l i n e s t o a c h i e v e o p e r a t i n g e f f i c i e n c y i n the P a c i f i c a i r m a r ket. ( i i i ) E f f e c t o f U.S. C a r r i e r s on C P . A i r Do the U.S. c a r r i e r s o p e r a t i n g i n the P a c i f i c a f f e c t the P a c i f i c o p e r a t i o n s o f C P . A i r , and i f s o , t o what e x t e n t ? T h e r e i s an i n d i r e c t i m p a c t made on C P . A i r by U.S. c a r r i e r s . No d i r e c t e f f e c t o c c u r s s i n c e C P . A i r does n o t have r o u t e s t h r o u g h t h e C e n t r a l P a c i f i c . T h i s i s the most h i g h l y c o m p e t i -t i v e r e g i o n i n terms o f the number of U.S. c a r r i e r s . A d d i t i o n a l l y , i n the N o r t h and South P a c i f i c , C P . A i r ' s r o u t e s a r e n o t i n d i r e c t c o m p e t i t i o n w i t h t h o s e o f the U.S. a i r l i n e s . T here i s a p o s s i b i l i t y t h a t , i n the case o f H a w a i i , A m e r i c a n c a r r i e r s do d i v e r t a s m a l l p o r t i o n o f t r a f f i c w h i c h w o u l d o t h e r w i s e f l y v i a C P . A i r . N o r t h w e s t A i r l i n e s and Pan A m e r i c a n A i r w a y s a r e p r e s e n t l y c o m p e t i n g s t r o n g l y f o r t r a f f i c t o H a w a i i . The b a s i s of t h i s c o m p e t i t i v e d r i v e i s p r i c e . B o t h a i r l i n e s a r e o f f e r i n g v e r y low f a r e s f r o m S e a t t l e t o H a w a i i . I t i s e n t i r e l y p o s s i b l e t h a t W e s t e r n Canadians may f i n d i t advantageous to t r a v e l t o S e a t t l e and d e p a r t f r o m t h e r e . There i s one o t h e r a r e a i n w h i c h C P . A i r may be a f f e c t e d by U.S. c a r r i e r s w i t h P a c i f i c s e r v i c e s . T h i s i s n o t a r e s u l t o f any r o u t e advantage o r c o m p e t i t i v e a p p e a l . I n s t e a d , i t stems from the t r a v e l p a t t e r n s o f O r i e n t a l businessmen. . F o r example, i t i s n o t u n u s u a l t o f i n d a Japanese businessman t r a v e l l i n g t o Vancouver, c o m p l e t i n g h i s work t h e r e , and p r o c e e d i n g on t o San F r a n c i s c o . From t h e r e , he woul d r e t u r n home on a U.S. a i r l i n e . These seem the p r i n c i p a l a r e a s i n w h i c h C P . A i r m i g h t f a c e c o m p e t i t i o n and/or t r a f f i c d i v e r s i o n f r o m U.S. c a r r i e r s . ( i v ) C o m p a r a b i l i t y o f C P . A i r and U.S. C a r r i e r s The most o b v i o u s p o i n t o f co m p a r i s o n r e l a t e s t o the owner-s h i p c h a r a c t e r i s t i c s o f U.S. a i r l i n e s and C P . A i r . U n l i k e the m a j o r i t y o f w o r l d a i r l i n e s , U.S. c a r r i e r s and C P . A i r a r e p r i v a t e l y owned. Hence, one would e x p e c t t h a t t h e y would s t r i v e f o r maximum c o r p o r a t e p r o f i t . T h i s i m p l i e s t h a t e f f i c i e n t o p e r a t i o n s h o u l d be a g o a l o f a l l t h e s e companies. N e x t , the i n p u t f a c t o r p r i c e s w h i c h must be borne a r e r o u g h l y , e q u i v a l e n t f o r U.S. and Ca n a d i a n a i r l i n e s . The f u e l expense i s t he same. A l t h o u g h C a n a d i a n l a b o u r expense i s s l i g h t l y l ower than t h a t i n c u r r e d i n the U n i t e d S t a t e s , the c o s t o f c a p i t a l i s f r a c t i o n a l l y h i g h e r i n Canada. D e p r e c i a t i o n c h a r g e s a r e s i m i l a r s i n c e the i n i t i a l c o s t o f the a i r c r a f t i s i d e n t i c a l and d e p r e c i a t i o n methods a r e comparable. Spare p a r t s c o s t s a r e e q u a l i n b o t h c o u n t r i e s . Route s y s t e m s , w h i l e n o t i d e n t i c a l , b e a r s i m i l a r i t i e s . They have l o n g a v e r a g e s t a g e l e n g t h s and many o f the same d e s t i n a -t i o n s a r e s e r v e d b o t h by C P . A i r and U.S. c a r r i e r s . F a r e s o n . a l l i n t e r n a t i o n a l r o u t e s a r e governed by the I n t e r n a t i o n a l A i r T r a n s p o r t A s s o c i a t i o n . So t h e n , t h e r e a r e many a s p e c t s w h i c h C P . A i r and U.S. c a r r i e r s (Pan Ame r i c a n ) have i n common. These f a c t o r s s e r v e t o s t r e n g t h e n the l i m i t e d comparisons w h i c h f o l l o w i n t h i s s t u d y . CHAPTER IV THE PACIFIC OPERATIONS-OF C P . AIR The p r i n c i p a l aim o f t h i s c h a p t e r i s t o d e r i v e an a p p r o x i m a t i o n o f the P a c i f i c p r o f i t a b i l i t y r e a l i z e d by C P . A i r i n 1968. T h i s w i l l be a c c o m p l i s h e d by d e t e r m i n i n g p r o f i t i n d i c a t o r s f o r P a c i f i c o p e r a t i o n s . However, some s i g n i f i c a n t d i f f i c u l t i e s do a r i s e . F i r s t l y , c u r r e n t C a n a d i a n c o s t i n f o r m a t i o n was n o t a v a i l a b l e . Hence, a r e l i a n c e was p l a c e d on c o s t s f r o m two a l t e r n a t i v e s o u r c e s . 2 One, the 1969 p u b l i c a t i o n s o f the U.S. C i v i l A e r o n a u t i c s Board were c o n s u l t e d f o r d i r e c t o p e r a t i n g e xpenses. Two, the 1966 c o s t 3 d a t a p r e s e n t e d i n Vondracek's t h e s i s was used t o a p p r o x i m a t e i n d i r e c t c o s t s . W h i l e the i n d i r e c t c o s t s a p p o r t i o n e d t o equipment o b s e r v e d i n t h i s s t u d y were i n c u r r e d on N o r t h A t l a n t i c r o u t e s , enough o f a s i m i l a r i t y e x i s t s t o p e r m i t t h e i r u s e . S e c o n d l y , r o u t e revenues a r e c a l c u l a t e d by m u l t i p l y i n g the average c o s t o f a f a r e i n 1968 by the number of pa s s e n g e r s t r a v e l l i n g between g i v e n c o u n t r y - p a i r s . The c r u d e n e s s o f t h i s c o m p u t a t i o n must be r e a l i z e d and revenue f i g u r e s a c c e p t e d w i t h d i s c r e t i o n . T h i s a n a l y s i s p e r t a i n s o n l y t o passenger t r a f f i c . U.S.C.A.B., O p e r a t i n g C o s t s and Performance Data f o r 1967 and 1968, (Washington: U.S.C.A.B., 1969). Vondracek, Op. C i t . , p. 70. T h i r d l y , w h i l e f a r e s have n o t changed m a r k e d l y s i n c e 1968, c o s t s have i n c r e a s e d due to m ounting i n f l a t i o n a r y p r e s s u r e . Thus, i t i s v e r y p r o b a b l e t h a t the r e t u r n s shown i n t h i s c h a p t e r have narrowed i n subsequent y e a r s . ( i ) C o s t I n f o r m a t i o n H a v i n g s e t a b a s i s f o r the f o l l o w i n g a n a l y s i s , the s t u d y w i l l p r o c e e d t o l o o k a t the c o s t s i d e o f P a c i f i c o p e r a t i o n s . A s e r i e s of t a b l e s w i l l be p r e s e n t e d and d i s c u s s i o n w i l l f o l l o w them. .TABLE IV-1 OPERATING COSTS OF DC-8 JET AIRCRAFT FOR THE YEAR 1968 BY U.S. CARRIERS IN THEIR INTERNATIONAL/TERRITORIAL OPERATIONS Pe r B l o c k Hour f o r DC-8-61 F l y i n g O p e r a t i o n s : Crew 194.08 F u e l and O i l 229.57 I n s u r a n c e 21.60 O t h e r 0.18 TOTAL FLYING OPERATIONS 445.13 M a i n t e n a n c e -F l i g h t Equipment 142.70 D e p r e c i a t i o n and R e n t a l s 173.02 TOTAL OPERATING COSTS 761.14 Sou r c e : U.S.C.A.B. O p e r a t i n g C o s t s and P e r f o r m a n c e Data f o r 1967 and 1968. TABLE IV-2 INDIRECT COSTS ASSOCIATED WITH THE OPERATION OF DC-8 JET AIRCRAFT CANADIAN CARRIERS 1966 NORTH ATLANTIC ROUTES (P e r B l o c k Hour i n U.S. D o l l a r s ) D i r e c t M a i n t e n a n c e -Ground P r o p e r t y and Equipment $ 11.58 D e p r e c i a t i o n -M a i n t e n a n c e Equipment, Ground P r o p e r t y and Equipment 13.63 P a s s e n g e r S e r v i c e s 162.03 A i r c r a f t and T r a f f i c S e r v i c i n g ( i n c l u d i n g l a n d i n g f e e s ) 235.38 P r o m o t i o n and S a l e s 395.11 G e n e r a l A d m i n i s t r a t i o n 71.93 I n t e r e s t Expenses 78.95 TOTAL INDIRECT EXPENSES $ 968.61 Sou r c e : George Vondracek, C a n a d i a n N o r t h A t l a n t i c v e r s u s C a n a d i a n T r a n s c o n t i n e n t a l S e r v i c e s : A C o s t A n a l y s i s . TABLE IV-3 TOTAL COSTS OF OPERATION OF DC-8 JET AIRCRAFT ON LONG HAUL INTERNATIONAL ROUTES 1968 ( P e r B l o c k Hour i n U.S. D o l l a r s ) T o t a l O p e r a t i n g Expenses (1968) $ 761.14 T o t a l I n d i r e c t Expenses (1966) 968.61 TOTAL OPERATING COSTS $1,729.75 (P e r B l o c k Hour) So u r c e : T a b l e I V - 1 and T a b l e I V - 2 . TOTAL BLOCK-TO-BLOCK TIME FOR PACIFIC ROUTES WITH EITHER ORIGIN OR DESTINATION VANCOUVER (Hours) Vancouver - Tokyo 9.5 Vancouver - Hong Kong 13.5 Vancouver - H a w a i i 6.1 Vancouver - M e x i c o 5.3 Vancouver - F i j i 12,4 Vancouver - Lima 10.6 Vancouver - Sydney 16.4 Vancouver - A u c k l a n d 16.2 S o u r c e : C P . A i r T i m e t a b l e s . TABLE IV-4 TOTAL OPERATING COST PER FLIGHT (I N DOLLARS) ON VARIOUS PACIFIC ROUTES ORIGIN OR DESTINATION VANCOUVER (1968) Per A i r c r a f t + Per A v a i l a b l e S e a t " Per P a s s e n g e r ** Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver Tokyo Hong Kong H a w a i i M e x i c o F i j i Lima Sydney A u c k l a n d 16,432.62 23,351.62 10,551.47 9,167.67 21,448.90 18,335.35 28,367.90 28,021.95 78.63 111.73 50.49 43.90 102.63 87.73 135.73 134.08 157.26 223.46 100.98 87.80 205.26 175.46 271.46 268.16 S o u r c e : T a b l e IV-3. F o r DC-8-61. Assumes s e a t i n g c a p a c i t y o f 209 p a s s e n g e r s . 197 - economy 12 - f i r s t - c l a s s = A v e r a g e s e a t i n g c a p a c i t y x a v e r a g e l o a d f a c t o r assume l o a d f a c t o r o f 50 p e r c e n t (as g i v e n i n 1968 a n n u a l r e p o r t o f C P . A i r ) . I n the f i r s t two t a b l e s i n t h i s c h a p t e r , d i r e c t and i n d i r e c t c o s t s a r e i l l u s t r a t e d f o r DC-8 a i r c r a f t i n 1968. These c o s t s c a n be d e f i n e d as f o l l o w s : " A i r c r a f t o p e r a t i n g e x p e n s e s , sometimes c a l l e d d i r e c t o p e r a t i n g expenses o r s i m p l y d i r e c t e x p e n s e s , i n c l u d e t h o s e i t e m s o f expense w h i c h can be d i r e c t l y t r a c e d t o the o p e r a t i o n o f a i r -c r a f t , s u c h as p i l o t ' s pay, f u e l , d i r e c t a i r c r a f t m a i n t e n a n c e and a i r c r a f t d e p r e c i a t i o n . Ground and i n d i r e c t expenses i n c l u d e a l l o t h e r o p e r a t i n g expense i t e m s i n c l u d i n g t r a f f i c s o l i c i t a t i o n and h a n d l i n g , ground o p e r a t i o n s , and a d m i n i s t r a t i v e expenses..'"^ The t a b l e s p r o v i d e a more d e t a i l e d l i s t i n g o f expense j c a t e g o r i e s . C o s t s a r e b r o k e n down t o a b l o c k hour b a s i s . T a b l e IV-3 shows t h e a p p r o x i m a t e c o s t o f o p e r a t i n g a DC-8-61 a i r c r a f t o v e r l o n g - h a u l r o u t e s . C P . A i r o p e r a t e s DC-8 a i r c r a f t on most i n t e r n a t i o n a l r o u t e s . T h e i r p r e s e n t f l e e t c o n s i s t s , i n p a r t , o f t h e f o l l o w i n g s e r i e s : DC-8-43 5 a i r c r a f t DC-8-53 1 a i r c r a f t DC-8-55 1 a i r c r a f t DC-8-63 4 a i r c r a f t The r e m a i n d e r o f t h e i r f l e e t i s c o m p r i s e d o f s h o r t - h a u l j e t s made by B o e i n g . On P a c i f i c r o u t e s , the m a j o r i t y o f t r a f f i c i s c a r r i e d by DC-8-63's. T h i s i s a " s t r e t c h e d " v e r s i o n o f the c o n v e n t i o n a l DC-8 a i r c r a f t . P a u l W. C h e r i n g t o n , A i r l i n e P r i c e P o l i c y , ( B o s t o n : G r a d u a t e S c h o o l o f B u s i n e s s A d m i n i s t r a t i o n , H a r v a r d U n i v e r s i t y , 1958), p. 45. I n the d a t a s o u r c e s used f o r t h i s study,, o n l y i n c o m p l e t e i n f o r m a t i o n was a v a i l a b l e f o r the 63 s e r i e s . However, the 61 s e r i e s was found t o measure up i n terms o f o p e r a t i n g e f f i c i e n c y . Thus, C o s t i n f o r m a t i o n f o r the DC-8-61 was used to gauge t h e d i r e c t c o s t s a s s o c i a t e d w i t h C P . A i r ' s P a c i f i c o p e r a t i o n s . . T o t a l O p e r a t i n g C o s t ( T a b l e IV-4) was deduced by m u l t i p l y i n g the c o s t f i g u r e s i n T a b l e IV-3 by the b l o c k - t o - b l o c k f l i g h t t i m e s on g i v e n r o u t e s . C o s t s a r e shown on a per a i r c r a f t , p e r a v a i l a b l e s e a t , and p e r p a s s e n g e r b a s i s . The l a s t one i s r e l e v a n t f o r t h i s s t u d y . I t must be r e c a l l e d t h a t t h e s e c o s t s a r e f u l l y a l l o c a t e d , i . e . , t h e y i n c l u d e b o t h d i r e c t and i n d i r e c t e x panses. W h i l e i t i s c ontended t h a t t h i s i s n o t t h e b e s t b a s i s f r o m w h i c h to e v a l u a t e t h e p r i c i n g o f t r a n s p o r t s e r v i c e s 5 , i t e n a b l e s an e s t i m a t e o f r o u t e p r o f i t a b i l i t y t o be d e r i v e d when compared w i t h the a v e r a g e c o s t o f a f a r e . F u l l y - a l l o c a t e d c o s t per p a s s e n g e r was d e t e r m i n e d by d i v i d i n g the a v e r a g e number o f p a s s e n g e r s per f l i g h t i n t o t o t a l c o s t per f l i g h t . A v e r a g e number o f p a s s e n g e r s was computed by a p p l y i n g l o a d f a c t o r s t o a v a i l a b l e s e a t s per a i r c r a f t . A .50 p e r c e n t a v e r a g e l o a d f a c t o r was assumed (as g i v e n i n C P . A i r ' s 1968 A n n u a l R e p o r t ) . T h i s was m u l t i p l i e d by the s t a n d a r d number o f s e a t s a v a i l a b l e on a DC-8-61 w h i c h was 209. Hence, on the a v e r a g e f l i g h t , 104.5 p a s s e n g e r s were c a r r i e d . M e r r i l R o b e r t s , " R e g u l a t i o n and Economic E f f i c i e n c y " , T r a f f i c  W o r l d , ( A p r i l 1959), p. 26. A t t h i s p o i n t a c o m p a r i s o n was made between t h e c o s t s c a l c u l a t e d e a r l i e r i n t h i s c h a p t e r and the ave r a g e c o s t o f t r a v e l w h i c h was p r e s e n t e d i n C h a p t e r I I . TABLE IV-5 APPROXIMATE COST/FARE SPREADS ON VARIOUS PACIFIC.ROUTES - 1968 Spread A v e r a g e F a r e * C o s t p e r Pa s s e n g e r D o l l a r s As % o f F a r e (one way) Vancouver - Tokyo 291.19 157.26 133.93 46 % Vancouver - Hong Kong 409.12 223.46 185.66 45 % Vancouver - H a w a i i 117.64 100.98 16.66 15 % Vancouver - M e x i c o 122.44 87.80 44.64 29 % Vancouver - Lima 305.90 205.26 100.64 42 % Vancouver - F i j i 396.82 175.46 221.36 48 % Vancouver - Sydney 530.85 271.46 259.39 48 % Vancouver - A u c k l a n d 530.85 268.16 262.69 48 7o From T a b l e - I I - l . + From T a b l e I V - 4 . The f o l l o w i n g d i s c u s s i o n i s drawn from the i l l u s t r a t i o n i n T a b l e IV-5.. (1) The r o u t e s w i t h the h i g h e s t t r a f f i c d e n s i t i e s , i . e . , H a w a i i and M e x i c o , o p e r a t e a t the l o w e s t m a r g i n s . (2) These p r o f i t i n d i c a t o r s a r e a p p r o x i m a t i o n s o n l y . The revenue and c o s t d a t a used t o c a l c u l a t e them was t o some e x t e n t i n a p p r o p r i a t e . (3) There appeared to be no r e l a t i o n s h i p between f a r e s and c o s t s i n c u r r e d on t h e s e r o u t e s . T h i s i s a common f i n d i n g i n market a r e a s where f a r e s a r e I.A.T.A. d e t e r m i n e d . (4) I t was e s t i m a t e d t h a t the m a j o r i t y o f P a c i f i c r o u t e s were o p e r a t e d a t about a 40 p e r c e n t m a r g i n . T h i s i s s i m i l a r t o the N o r t h A t l a n t i c r o u t e s where a comparable m a r g i n was computed.6 (5) I f C P . A i r does c r o s s - s u b s i d i z e i t s d o m e s t i c r o u t e s w i t h p r o f i t s r e a l i z e d on i n t e r n a t i o n a l r o u t e s , t h e n the P a c i f i c m arket would be an i m p o r t a n t revenue s o u r c e . ( i i ) R e l a t i o n s h i p o f P a c i f i c O p e r a t i o n s t o T o t a l O p e r a t i o n s f o r C P . A i r ' A .suggested p r o f i t i n d i c a t o r f o r C P . A i r ' s P a c i f i c o p e r a -t i o n s has been d e r i v e d i n t h i s c h a p t e r . These f i g u r e s a r e a h i s t o r i c a l phenomenon and n o t a r e c e n t development. I t i s i m p o r t a n t t o r e l a t e t h i s r e g i o n a l performance to c o r p o r a t e p r o f i t . D e s p i t e s e e m i n g l y h i g h p r o f i t s on r o u t e s i n the P a c i f i c (as w e l l as o t h e r i n t e r n a t i o n a l , r o u t e s ) , C P . A i r ' s 1968 A n n u a l R e p o r t shows o n l y a 4.6 p e r c e n t r e t u r n . b e f o r e t a x e s . T h i s r e t u r n a p p l i e s t o o p e r a t i n g and n o n - o p e r a t i n g r e v e n u e s . Based on o n l y o p e r a t i n g r e v e n u e s , the r e t u r n b e f o r e t a x e s was c l o s e r t o 4 p e r c e n t . An i m p o r t a n t i m p l i c a t i o n a r i s e s f r o m the above f a c t s . I f i n t e r n a t i o n a l r o u t e s a r e h i g h l y p r o f i t a b l e y e t o v e r a l l c o r p o r a t e r e t u r n i s low, one m i g h t s u s p e c t t h a t d o m e s t i c o p e r a t i o n s a r e c a r r i e d o u t a t a l o s s . T h i s a l s o s u g g e s t s t h a t C P . A i r p r a c t i c e s a p o l i c y o f c r o s s - s u b s i d i z a t i o n . I t should be n o t e d t h a t p u b l i c r e g u l a t o r y a u t h o r i t i e s i n Canada do n o t p e r m i t c r o s s - s u b s i d i z a t i o n between d o m e s t i c r o u t e s but V o n d r a c e k , Op. C i t . , p. 98. do n o t p r o h i b i t c r o s s - s u b s i d i z a t i o n o f d o m e s t i c r o u t e s by i n t e r n a t i o n a l o p e r a t i o n s . • . > By m u l t i p l y i n g the a v e r a g e y i e l d per p a s s e n g e r ( d i s t a n c e t i m e s revenue per p a s s e n g e r m i l e ) on a p a r t i c u l a r r o u t e by the t r a f f i c volumes, an a p p r o x i m a t i o n o f revenue g e n e r a t i o n can be g a i n e d f o r P a c i f i c r o u t e s . . T h i s i s d e p i c t e d below. TABLE IV-6 PACIFIC CONTRIBUTION TO CORPORATION REVENUES FOR.CP. AIR 1968 T o t a l O p e r a t i n g Revenues $106,697,984 E s t i m a t e d P a c i f i c O p e r a t i n g Revenues 23,533,014 P a c i f i c Revenue as a P e r c e n t a g e o f T o t a l Revenue 22 % I n terms o f t h e p e r c e n t a g e c o n t r i b u t i o n t o c o r p o r a t e o p e r a t i n g r e v e n u e s the P a c i f i c c o m p r i s e s 22 p e r c e n t . Even more s i g n i f i c a n t i s the c o n t r i b u t i o n t o o p e r a t i n g p r o f i t i f we assume the r e t u r n s i n T a b l e IV-5 t o be a p p l i c a b l e . O p e r a t i n g p r o f i t s i n 1968 f o r the P a c i f i c m arket under the above a s s u m p t i o n would have been $7,880,000, a f i g u r e w h i c h exceeds the c o r p o r a t e p r o f i t r e p o r t e d i n 1968. A l t h o u g h t h i s i s by no means an a c c u r a t e f i g u r e , i t l e n d s some s u p p o r t t o the c o n t e n t i o n t h a t c r o s s - s u b s i d i z a t i o n e x i s t s w i t h i n C P . A i r . I t a l s o d e m o n s t r a t e s the v i t a l r o l e w h i c h i s p l a y e d by the P a c i f i c r o u t e system. The i m p o r t a n c e o f i n t e r n a t i o n a l r o u t e s t o C a n a d i a n a i r l i n e s w i t h i n t h e framework of e x i s t i n g d o m e s t i c r e g u l a t o r y p o l i c y becomes a p p a r e n t . CHAPTER V ESTIMATION OF THE DEMAND FOR PACIFIC AIR PASSENGER SERVICES ( i ) N o r t h A t l a n t i c E x p e r i e n c e w i t h C h a r t e r s D u r i n g the p e r i o d , 1964-1969, s c h e d u l e d t r a f f i c between Canada and Europe grew a t an a n n u a l compounded r a t e o f 14 p e r c e n t . A t the same t i m e , n o n - s c h e d u l e d t r a f f i c expanded a t a 28 p e r c e n t r a t e . F u r t h e r , non I.A.T.A. c a r r i e r s e x p e r i e n c e d a 50 p e r c e n t growth p e r annum d u r i n g the pe r i o d . . These f i g u r e s r e v e a l t h a t n o n - s c h e d u l e d s e r v i c e s a r e gr o w i n g f a s t e r t h a n r e g u l a r s e r v i c e s , and t h a t a l a r g e p o r t i o n o f t h i s i n c r e a s e has been r e a l i z e d by non I.A.T.A. c a r r i e r s . The C a n a d i a n s c h e d u l e d a i r l i n e s b e l i e v e t h a t t he r a t e of growth o f non I.A.T.A. c a r r i e r s began a f f e c t i n g market s h a r e s i n 1967. By 1969, t h e y were i n d e e d v e r y w o r r i e d about t h e impact o f c h a r t e r o p e r a t i o n s . The prob l e m has been a g g r a v a t e d i n r e c e n t y e a r s by an e x c e s s c a p a c i t y demise w h i c h has p l a g u e d most N o r t h A m e r i c a n s c h e d u l e d c a r r i e r s . A p r e v i o u s l y - n o t e d s t u d y i l l u s t r a t e d t h a t the N o r t h A t l a n t i c had been a h i g h p r o f i t market f o r r e g u l a r C a n a d i a n c a r r i e r s ( a p p r o x i m a t e l y a 40 p e r c e n t markup o v e r f u l l y - a l l o c a t e d c o s t s ) / George Vondracek, C a n a d i a n N o r t h A t l a n t i c v e r s u s T r a n s c o n t i n e n t a l  S e r v i c e s , A C o s t A n a l y s i s , M.B.A. T h e s i s , U n i v e r s i t y o f B.C., November 1969, p. 102. T h i s p r o f i t a b i l i t y on N o r t h A t l a n t i c r o u t e s w i l l u n d o u b t e d l y d e c l i n e w i t h the f u r t h e r e x p a n s i o n o f c h a r t e r s e r v i c e s . Thus, c h a r t e r development i n the N o r t h A t l a n t i c has had and w i l l c o n t i n u e to have r e p e r c u s s i o n s on the s c h e d u l e d o p e r a t i o n s o f C a n a d i a n a i r l i n e s . W i t h . t h i s i n mind, the q u e s t i o n can be a s k e d : what would be the impact on C P . A i r s h o u l d the c h a r t e r s d e v e l o p i n the P a c i f i c as they, have i n the N o r t h A t l a n t i c ? T here a r e t h r e e p r i n c i p a l d e t e r m i n a n t s a f f e c t i n g t h i s development: . . . (1) I.A.T.A. p o l i c y ; (2) P o l i c y o f P a c i f i c Rim n a t i o n s ; and (3) The f a c t o r s a f f e c t i n g demand f o r t r a v e l i n the P a c i f i c v i a C P . A i r . , . G e n e r a l c o n s i d e r a t i o n w i l l be g i v e n the f i r s t two f a c t o r s , and more d e t a i l e d a n a l y s i s w i l l be c a r r i e d out on the t h i r d a s p e c t . I n the l a t t e r c a s e , a model, w h i c h w i l l c o r r e l a t e t r a v e l volume and the f a c t o r s i n f l u e n c i n g t h i s t r a f f i c , w i l l be c o n s t r u c t e d . The p e r i o d , 1962-1968, w i l l be s t u d i e d . ( i i ) I.A.T.A. P o l i c y One o f the e x p r e s s e d purposes of the I n t e r n a t i o n a l A i r T r a n s p o r t A s s o c i a t i o n i s : To promote s a f e , r e g u l a r , and e c o n o m i c a l a i r t r a n s p o r t f o r the b e n e f i t o f the p e o p l e o f the w o r l d , t o f o s t e r a i r commerce, and t o s t u d y the problems c o n n e c t e d t h e r e w i t h . 2 W h i l e the a d j e c t i v e s , " s a f e and r e g u l a r " may w e l l a p p l y , i t i s open t o q u e s t i o n as t o whether o r n o t I.A.T.A. i s p r o m o t i n g 2 Canada, P a r l i a m e n t , A c t t o I n c o r p o r a t e I n t e r n a t i o n a l A i r T r a n s p o r t  A s s o c i a t i o n , 1945 S t a t u t e s of Canada, C h a p t e r 51. " e c o n o m i c a l a i r t r a n s p o r t " . I t has e l i m i n a t e d a l l . p r i c e c o m p e t i t i o n between member c a r r i e r s . The o r g a n i z a t i o n contends t h a t i t s r e l a t i v e l y h i g h e r f a r e s , w h i l e r e p r e s e n t i n g c e r t a i n m i s a l l o c a t i o n s of r e s o u r c e s , a r e j u s t i f i e d i n the l o n g r u n by a s s u r i n g a h i g h q u a l i t y o f s e r v i c e . Y e t , c h a r t e r f l i g h t s a r e r e p u t e d to have a q u a l i t y o f i n - f l i g h t s e r v i c e w h i c h e q u a l s , • a n d a t tim e s e x c e l s , t h a t o f f e r e d by s c h e d u l e d o p e r a t o r s . On the o t h e r hand, s c h e d u l e d c a r r i e r s do o f f e r a g r e a t e r f r e q u e n c y o f d e p a r t u r e s and a r e g e n e r a l l y more r e l i a b l e i n terms o f on-time p e r f o r m a n c e . These f a c t o r s r e p r e s e n t a " t r a d e - o f f " t o tho s e who w i s h cheaper f a r e s . F u r t h e r , , t h e e x i s t e n c e o f some e l a s t i c i t y o f demand, a s s o c i a t e d w i t h l o w e r f a r e s , has been c o n f i r m e d by the s u c c e s s o f c h a r t e r companies. These e n t e r p r i s e s compete p r i m a r i l y on a p r i c e b a s i s w i t h r e g u l a r . s e r v i c e s and have succeeded i n d r a w i n g b u s i n e s s f r o m them. The p r i n c i p a l cause f o r t h e i r s u c c e s s i s the c o m b i n a t i o n o f i n f l e x i b i l i t y and r e s i s t e n c e t o change w h i c h i s i n h e r e n t i n the I.A.T.A. o r g a n i z a t i o n a l s t r u c t u r e . Y e t , i n a d d i t i o n , t h e i r p r a c t i c e o f o f f e r i n g a lower number o f f l i g h t s w i t h e x t r e m e l y h i g h l o a d f a c t o r s has c o n t r i b u t e d t o t h e i r s u c c e s s i n d e p e n d e n t o f I.A.T.A. p o l i c y . These h i g h l i g h t s have been p r e s e n t e d so t h a t the p o l i c y s t a t e m e n t below can be more f u l l y a p p r e c i a t e d . Whereas I.A.T.A. members a r e p r o v i d i n g s c h e d u l e d i n t e r n a t i o n a l p u b l i c a i r s e r v i c e s under the a u t h o r i t y and c o n t r o l o f governments, s u b j e c t t o the b i l a t e r a l a i r t r a n s p o r t agreements between governments and under the o b l i g a t i o n s imposed by t h e i r o p e r a t i n g l i c e n s e s ; Whereas t h e s e s c h e d u l e d i n t e r n a t i o n a l a i r s e r v i c e s c o n t i n u e t o p r o v i d e s u b s t a n t i a l economic and s o c i a l b e n e f i t s to the n a t i o n s o f the w o r l d ; Whereas t h e s e economic and s o c i a l b e n e f i t s a r e b e i n g p l a c e d i n j e o p a r d y by the a c t i o n o f c e r t a i n governments who, w h i l e p r e s s i n g f o r l o w e r f a r e s and r a t e s on the n o r m a l s c h e d u l e d s e r v i c e s , a t the same ti m e a u t h o r i z e o r p e r m i t l a r g e s c a l e c o m m e r c i a l a i r c r a f t o p e r a t i o n s under A r t i c l e 5 o f the C h i c a g o C o n v e n t i o n w i t h o u t e f f e c t i v e c o n t r o l and a t terms and c o n d i t i o n s more f a v o u r a b l e t h a n t h o s e g o v e r n i n g s c h e d u l e d a i r -l i n e s ( r e f e r s t o c h a r t e r s ) ; Be i t r e s o l v e d t h a t members urge a l l governments, as t h e i r c o n t r i b u t i o n t o the development o f i n t e r n a t i o n a l c i v i l a v i a t i o n t o , e x e r c i s e e f f e c t i v e c o n t r o l t h r o u g h - l i c e n s i n g o r o t h e r w i s e a i r c r a f t o p e r a t i o n s a v a i l a b l e t o the p u b l i c under A r t i c l e 5 o f the C h i c a g o C o n v e n t i o n . 3 R e c e n t l y , t h e r e has been a s t r o n g , I.A.T.A. based movement to e l i m i n a t e c h a r t e r o p e r a t o r s o r a t l e a s t s i g n i f i c a n t l y r e d u c e t h e i r i m p a c t . No b a s i s f o r o p t i m i s m i n the s u c c e s s o f t h i s movement i s e v i d e n t . C h a r t e r o p e r a t o r s can be o u s t e d o n l y i f governments b e g i n t o l e g i s l a t e a g a i n s t them and t h i s i s p a r t i c u l a r l y u n l i k e l y . So t h e n , w h i l e I.A.T.A. p o l i c y r e g a r d i n g c h a r t e r o p e r a t i o n s i s o b v i o u s , i t i s i n e f f e c t u a l . Hence, no s e r i o u s t h r e a t on the p a r t of I.A.T.A. seems p r e s e n t t o p r e v e n t c h a r t e r development i n the P a c i f i c o r e l s e w h e r e . ( i i i ) P o l i c y o f P a c i f i c Rim N a t i o n s A.summary s t a t e m e n t w h i c h r e f l e c t s the p o l i c y o f e i g h t n a t i o n s w i t h r e s p e c t t o n o n - s c h e d u l e d s e r v i c e s i s d i f f i c u l t to d e r i v e . The f a c t o r s w h i c h a f f e c t such a p o l i c y a r e v a r i e d . They I.A.T.A. News R e l e a s e , M o n t r e a l , Canada, November 2, 1970. range f r o m p r o t e c t i n g the i n t e r e s t s o f a n a t i o n a l c a r r i e r , t o the economic impact o f t o u r i s m , t o the p o l i t i c a l r e l a t i o n s h i p between two c o u n t r i e s . Perhaps a d i s c u s s i o n o f some p a r t i c u l a r c o u n t r i e s w o u l d be h e l p f u l . C o n s i d e r a t i o n w i l l be g i v e n t o J a p a n , M e x i c o , and H a w a i i . A t p r e s e n t , t h e s e a r e the o n l y d e s t i n a t i o n s s e r v e d by C P . A i r w h i c h a r e a s s o c i a t e d w i t h s i g n i f i c a n t c h a r t e r o p e r a t i o n s ( i n c l u s i v e t o u r ) . The most r e s t r i c t i v e i s Japan. She has a s t a t e d i n t e r e s t i n p r e s e r v i n g the p o s i t i o n o f h e r n a t i o n a l c a r r i e r ( J . A . L . ) . Japan w i l l p e r m i t c h a r t e r o p e r a t i o n s o v e r some d e s i g n a t e d maximum, o n l y i f t he c a r r i e r i n v o l v e d can demo n s t r a t e t h a t , a l l s c h e d u l e d c a r r i e r s o p e r a t i n g on t h a t r o u t e , on t h a t day, e x p e r i e n c e l o a d f a c t o r s o f a t l e a s t 70 p e r c e n t . The n a t u r e o f c h a r t e r o p e r a t i o n s p r e c l u d e s t h i s a b i l i t y . The government o f M e x i c o f l u c t u a t e s i n i t s s t a n d on c h a r t e r s . W h i l e i n the p a s t , t h e i r s has been a k i n t o Japanese p o l i c y , o f l a t e , a v e r y l i b e r a l p o s i t i o n has been m a i n t a i n e d . P r e s e n t l y , as many t o u r i s t s as p o s s i b l e a r e encouraged t o e n t e r M e x i c o i n o r d e r t o h e l p a l l e v i a t e B a l a n c e o f Payments d i f f i c u l t i e s . The means o f a r r i v a l i s i n c o n s e q u e n t i a l . H a w a i i , w h i c h f a l l s under the p o l i c y j u r i s d i c t i o n o f the U n i t e d S t a t e s , i s v e r y l i b e r a l on the number o f f l i g h t s , c h a r t e r e d o r o t h e r w i s e , t h a t a r e p e r m i t t e d a c c e s s t o the I s l a n d s . The t o u r i s t t r a d e i s v e r y i m p o r t a n t t o H a w a i i and a c t i o n s t o s t i m u l a t e i t a r e i n e v i t a b l e . The p o l i c i e s o f the r e m a i n i n g c o u n t r i e s a r e u n c l e a r . The e v i d e n c e from t h e s e t h r e e c o u n t r i e s i n d i c a t e s t h a t t h o s e w h i c h a r e dependent on the t o u r i s t t r a d e would be r e l u c t a n t t o impose r e s t r i c t i o n s on c h a r t e r development. O n l y on the N o r t h P a c i f i c r o u t e s , w h i c h c a r r y a h i g h e r p r o p o r t i o n o f b u s i n e s s t r a v e l l e r s r e l a t i v e t o p l e a s u r e t r a f f i c , w ould f u t u r e r e s t r i c t i o n s be f o r e s e e a b l e . F o r the r e m a i n d e r o f the P a c i f i c Rim n a t i o n s e x p e c t a t i o n s a r e t h a t open p o l i c i e s w i l l e x i s t . The r e l u c t a n c e o f governments t o f o r m a l i z e t h e i r p o l i c i e s , w i t h r e g a r d t o c h a r t e r s e r v i c e s , has n e c e s s i t a t e d t h a t some a s s u m p t i o n s be made. Thus, the c o n c l u s i o n s must be viewed w i t h c a u t i o n . However, the c o n t e n t i o n w i l l be t h a t a t p r e s e n t a l l P a c i f i c Rim n a t i o n s a r e w i l l i n g t o p e r m i t c h a r t e r development. W h i l e i n the f u t u r e some c o u n t r i e s c o u l d become opposed t o n o n - s c h e d u l e d s e r v i c e s , N o r t h A t l a n t i c e x p e r i e n c e s u g g e s t s t h a t c h a r t e r o p e r a t i o n s can and w i l l e v o l v e on the h i g h l y p r o f i t a b l e P a c i f i c r o u t e s . ( i v ) Demand D e t e r m i n a n t s o f P a c i f i c T r a v e l I n t h i s s e c t i o n o f the s t u d y , an a t t e m p t i s made t o a p p l y a g r a v i t y - t y p e t e c h n i q u e t o o b s e r v e some f a c e t s o f the demand f o r P a c i f i c a i r t r a v e l . W h i l e some c o n c e p t s were t a k e n f r o m a s t u d y 4 u n d e r t a k e n by Baumol and Quandt , i t must be s t r e s s e d t h a t the method used h e r e i s n o t t h e i r a b s t r a c t mode model. D e t e r m i n i n g demand f o r a i r t r a v e l i n the P a c i f i c i n v o l v e s many o f t h e t r a d i t i o n a l problems t h a t stem f r o m t h i s t y p e o f f o r e -c a s t i n g t e c h n i q u e and t h e d a t a upon w h i c h i t i s based. Foremost, Baumol and Quandt, "The Demand f o r A b s t r a c t T r a n s p o r t Modes: Theory and Measurement", J o u r n a l o f R e g i o n a l S c i e n c e , V o l . 6, No. 2, 1966, p. 13. t h e r e i s a p a u c i t y o f d a t a , e i t h e r p u b l i s h e d o r u n p u b l i s h e d , upon w h i c h t o b e g i n a s t u d y o f t h i s n a t u r e . A l s o , the l a r g e r the g e o g r a p h i c a r e a w h i c h must be encompassed by a model, the l e s s l i k e l y , i t i s t h a t r e q u i r e d d a t a o f u n i f o r m q u a l i t y can be f o u n d . 5 (a) The V a r i a b l e s • The p o p u l a t i o n s (P) o f Canada, J a p a n , Hong Kong, H a w a i i , M e x i c o , F i j i , P e r u , A u s t r a l i a , and New Z e a l a n d were o b t a i n e d . I n t h e o r y , the p o p u l a t i o n v a r i a b l e i s c e n t r a l t o i n t e r a c t i o n i n g r a v i t y - t y p e models, s i n c e as p o p u l a t i o n i n c r e a s e s , i t i s th o u g h t t o have an i n c r e a s i n g e f f e c t on t r a v e l . However, a p o i n t n o t e d by Baumol and Quandt • s h o u l d be r e s t a t e d h e r e , t h a t b e i n g , "nodes a r e o f t e n m e r e l y t r a n s i t p o i n t s i n t r a v e l , the measurement o f f l o w s a l o n g v a r i o u s a r c s , and do n o t unambiguously i m p l y node-to-node movement." T h i s i s p a r t i c u l a r l y t r u e o f P a c i f i c t r a v e l where l i m i t e d t r u e o r i g i n and d e s t i n a t i o n s t a t i s t i c s i n d i c a t e t h a t some c o u n t r i e s s e r v e a d u a l r o l e , b o t h as d e s t i n a t i o n and s t o p - o v e r p o i n t . (2) Income - a n n u a l per c a p i t a income (Y) was us e d . U n i t e d N a t i o n s s t a t i s t i c s were c o n s u l t e d where o f f i c i a l government p u b l i c a t i o n s were n o t a v a i l a b l e . (3) A b s o l u t e T r a v e l Time - A t o t a l t r a v e l time (T) was implemented, i . e . , time i n f l i g h t , p l u s p r o c e s s i n g t i m e , p l u s 5 I b i d . , p. 13. 6 I b i d . , p. 18. the time between f l i g h t s . The l a t t e r i s i n c o r p o r a t e d i n t o t h i s v a r i a b l e r a t h e r t h a n to d e a l s e p a r a t e l y w i t h f r e q u e n c y o f d e p a r t u r e . Note s h o u l d be made o f the f a c t t h a t i n the P a c i f i c , t ime between f l i g h t s i s by f a r the most s i g n i f i c a n t component o f a b s o l u t e t r a v e l t i m e . The v a r i a b l e was s a i d to be c o n s t a n t f r o m 1962 t o 1968 s i n c e s c h e d u l i n g f r e q u e n c i e s have remained r e l a t i v e l y f i x e d . A few h o urs change i n p r o - . c e s s i n g o r f l i g h t time i s n o t m e a n i n g f u l when t a l k i n g i n terms of days. (4) A b s o l u t e C o s t - The f i g u r e s used were i n c e n t s per revenue p a s s e n g e r m i l e . These d e p i c t the a v e r a g e c o s t o f t r a v e l (C) t o the p a s s e n g e r on a g i v e n r o u t e . (5) P r o m o t i o n - was e x p r e s s e d i n terms o f the number o f d o l l a r s s p e n t by the r e s p e c t i v e government-sponsored t o u r i s t b u reaus on an a n n u a l b a s i s . ( P r ) The i n f o r m a t i o n s o u r c e s were the p u b l i c a t i o n s o f the o r g a n i z a t i o n s c o n c e r n e d wherever p o s s i b l e o r the I n t e r n a t i o n a l U n i o n o f T o u r i s t O r g a n i z a t i o n s . (6) D i s t a n c e - the number o f s t a t u t e m i l e s s e p a r a t i n g the nodes. (D) (7) Trade - was d e s i g n a t e d i n terms of t o t a l t r a d e , i . e . , e x p o r t s p l u s i m p o r t s between the c o u n t r y p a i r s . The g r e a t e s t volume o f t r a d e ( T r ) appeared i n the N o r t h P a c i f i c , a l t h o u g h M e x i c o and A u s t r a l i a a l s o had r e a s o n a b l y l a r g e t r a d e volume w i t h Canada. (8) I m m i g r a t i o n - t h i s was deemed t o be a h i g h l y s i g n i f i c a n t f a c t o r c o n t r i b u t i n g t o the volume of p a s s e n g e r s e m i n a t i n g from Hong Kong and d e s t i n e d f o r Canada. The o t h e r major i m m i g r a t i o n ( I ) t r e n d o c c u r s between A u s t r a l i a and Canada. Immigrants were a r r i v i n g from M e x i c o and New Z e a l a n d b u t i n s m a l l numbers. F o r the r e m a i n d e r of the P a c i f i c Rim n a t i o n s i m m i g r a t i o n i s i n c o n s e q u e n t i a l f o r the purposes o f t h e model and was s a i d t o be z e r o . I n g a t h e r i n g t h e d a t a , o n l y t h o s e i m m i g r a n t s a r r i v i n g by a i r were i n c l u d e d . (9) and (10) T o t a l T r a v e l Time as a P e r c e n t a g e o f L e n g t h of S t a y f o r b o t h P l e a s u r e and B u s i n e s s (B and R) - i t was assumed t h a t t i m e h e r e i s e q u i v a l e n t t o v a r i a b l e t h r e e . A c a r r i e r s u r v e y was used t o d e t e r m i n e the av e r a g e l e n g t h o f s t a y (by purpose) f o r t r a v e l l e r s d e s t i n e d f o r v a r i o u s c o u n t r i e s . ( I I ) C h a r t e r s - C h a r t e r o p e r a t i o n s i n the P a c i f i c were i n t r o -duced i n t o the model i n the f o r m o f a dummy v a r i a b l e . The i n t e n t i o n was t o d e p i c t the e f f e c t o f c h a r t e r s on s c h e d u l e d t r a f f i c volumes. C h a r t e r s were s a i d t o be o p e r a t i n g f r o m 1965 on the Canada t o H a w a i i r o u t e and from 1967 on the Canada t o M e x i c o and Canada t o Japan r o u t e s . I t s h o u l d be n o t e d t h a t t h i s means c h a r t e r s o p e r a t e d by any c a r r i e r . C h a r t e r s e r v i c e s were n o t s i g n i f i c a n t f o r o t h e r P a c i f i c r o u t e s d u r i n g t h i s p e r i o d . The v a r i a b l e was i n t r o d u c e d i n t o the second s e t of r e g r e s s i o n e q u a t i o n s . (12) Volume o f T r a v e l - i s the dependent v a r i a b l e (VT) o f the model, w i t h the e s t i m a t e s o f t r a f f i c d e r i v e d as one-way j o u r n e y s . I t must be r e c a l l e d t h a t t h i s model was d e v e l o p e d u s i n g i n f o r m a t i o n from o n l y one a i r l i n e and the r e l a t i o n s h i p s do n o t n e c e s s a r i l y h o l d t r u e f o r o t h e r Companies, (b) The Model The volume o f t r a v e l between two c o u n t r i e s i s s a i d t o be a m u l t i p l i c a t i v e f u n c t i o n o f the v a r i a b l e s as d e f i n e d i n the p r e v i o u s s e c t i o n . F o r ease o f a n a l y s i s , a c o n v e r s i o n i s made to l o g a r i t h m i c v a l u e s i n o r d e r t o o b t a i n a l i n e a r r e l a t i o n s h i p . Hence, the model may be r e p r e s e n t e d a s : l o g VT.. = b + b, l o g P. + b„ l o g Y. + b„ l o g T ° i j o 1 ° 1 2 ° x 3 + b^ l o g C + b 5 l o g P r + b 6 l o g D + b ? l o g T r + b g l o g I + b 9 l o g B + b 1 Q l o g R Routes Under Study 1. Canada - Japan 2. Canada - Hong Kong 3. Canada - H a w a i i 4. Canada - M e x i c o 5. Canada - P e r u 6. Canada - F i j i 7. Canada - A u s t r a l i a 8. Canada - New Z e a l a n d 9. The i n v e r s e s o f a l l Thus, s i x t e e n c o u n t r y p a i r s a r e i n v o l v e d . C r o s s - s e c t i o n a l d a t a has been g a t h e r e d f o r t h e s e r o u t e s o v e r the seven y e a r time p e r i o d . The r e a d e r w i l l n o t e t h a t t h i s p r o c e s s i n v o l v e s a p o o l i n g o f c r o s s -s e c t i o n a l and t i m e s e r i e s d a t a . S t r a s z h e i m d e m o n s t r a t e d i n h i s A p p e n d i x C 7 t h a t t h i s i s an a c c e p t a b l e method o f demand e s t i m a t i o n . The s u b j e c t i s d e v e l o p e d i n d e t a i l by R a i f f a and S c h l a i f e r i n t h e i r 8 d i s c u s s i o n o f the B a y e s i a n r e g r e s s i o n model. 7 Mahlon S t r a s z h e i m , The I n t e r n a t i o n a l A i r l i n e I n d u s t r y . (Washington: The B r o o k i n g s I n s t i t u t e , 1969). g R a i f f a , Howard and S c h l a i f e r , R o b e r t , A p p l i e d S t a t i s t i c a l D e c i s i o n  T h e o r y , ( H a r v a r d U n i v e r s i t y , G r a d u a t e S c h o o l o f B u s i n e s s Admin-i s t r a t i o n , D i v i s i o n o f R e s e a r c h 1961). (c) U n d e r l y i n g A s s u m p t i o n s o f the Model C P . A i r has t r u e o r i g i n and d e s t i n a t i o n s t a t i s t i c s f o r 1968 and 1969 o n l y . However, an o p e r a t i v e e s t i m a t e o f t r a f f i c volumes f r o m 1962-1968 can be o b t a i n e d by u s i n g the p e r c e n t a g e s e v i d e n t i n . 1968 and 1969 and a p p l y i n g t h e s e to c a r r i e r s t a t i s t i c s on coupon o r i g i n and d e s t i n a t i o n o v e r the seven y e a r p e r i o d . F o r t h e sake o f t h i s s t u d y , t r u e o r i g i n and d e s t i n a t i o n i n f o r m a t i o n i s t h a t w h i c h d e p i c t s the f u l l e x t e n t o f a p a s s e n g e r ' s j o u r n e y and n o t s i m p l y a t i c k e t e d s t a g e o f a j o u r n e y . Coupon o r i g i n and d e s t i n a t i o n d a t a i s t h a t c o m p i l e d from t i c k e t v o u c h e r s and does n o t n e c e s s a r i l y r e p r e s e n t a t r i p i n i t s e n t i r e t y . These s t a t e m e n t s s e r v e t o c l a r i f y the n a t u r e o f the d a t a r a t h e r t h a n the s t a t i s t i c a l a n a l y s i s w h i c h f o l l o w s . (.2) A t t e n t i o n i s d e v o t e d to c o u n t r y p a i r s n o t c i t y p a i r s . (3) The v a r i a b l e s chosen as i n d e p e n d e n t v a r i a b l e s h o p e f u l l y w i l l d e p i c t a m e a n i n g f u l r e l a t i o n s h i p i n r e s p e c t o f t r a v e l volume. (4) V a r i a b l e s w h i c h t o o k on s i g n s c o n t r a r y t o what was i n t u i t i v e l y e x p e c t e d were d e l e t e d . (5) F i n a l l y , the a s s u m p t i o n s i n h e r e n t i n g r a v i t y - t y p e models m a n i f e s t t h e m s e l v e s i n t h i s model as w e l l . (d) R e g r e s s i o n R e s u l t s The r e g r e s s i o n s c a l c u l a t e d i n each c a s e a r e p r e s e n t e d i n T a b l e s 1 and 2. An e x p l a n a t i o n w i l l be o f f e r e d o n l y f o r the l a s t r e g r e s s i o n i n each t a b l e , s i n c e i n p r o c e e d i n g from one r e g r e s s i o n t o the n e x t , i n s i g n i f i c a n t v a r i a b l e s were o m i t t e d . Thus, i n the f i n a l i n s t a n c e , o n l y t h o s e v a r i a b l e s w h i c h a r e s i g n i f i c a n t and have the. e x p e c t e d s i g n have been r e t a i n e d . Key to the V a r i a b l e s R e g r e s s i o n u s i n g L o g a r i t h m i c V a l u e s 1. Log o f P o p u l a t i o n 2. Log o f P e r C a p i t a Income 3. Log o f A b s o l u t e Time 4. Log o f A b s o l u t e C o s t 5. Log o f P r o m o t i o n 6. Log o f D i s t a n c e 7. Log o f Trade 8. Log o f I m m i g r a t i o n 9. Log o f T o t a l T r a v e l Time L e n g t h o f S t a y ( B u s i n e s s ) 10. Log o f T o t a l T r a v e l Time L e n g t h o f S t a y ( P l e a s u r e ) 11. C h a r t e r s - added t o t h e f u n c t i o n i n the second s e t o f r e g r e s s i o n s 12. Log o f T.. - Dependent v a r i a b l e , however, v a l u e s were n o t 1-' c a l c u l a t e d f o r the f a c t o r . TABLE V - l REGRESSION RESULTS EXCLUDING CHARTER VARIABLE (11) R e g r e s s i o n Number V a r i a b l e s 1. 2. C o n s t a n t 5.95 5.92 5.54 1. -.1582 -.1665 (11.643) (16.335) deleted! 2. -.6051 -.6038 (44.259) (44.445) d e l e t e d 3. d e l e t e d d e l e t e d d e l e t e d 4. - 2.55 - 2.66 - 2.84 (29.686) (52.441) (81.858) 5. .7168 .7167 .7173 (92.496) (93.142) (93.440) 6. -.1798 -.1508 (1.102) (.863) d e l e t e d 7. -.0212 (.157) d e l e t e d d e l e t e d 8. .0336 .0331 .0297 (15.448) (15.455) (15.396) 9. -.3850 -.3765 -.3924 (10.901) (10.868) (12.095) 10. - 2.53 - 2.51 - 2.58 (149.145) (164.100) (211.828) R .94978 .94971 .89111 F 118.748 134.541 162.306 TABLE V-2 REGRESSION RESULTS INCLUDING CHARTER 1 VARIABLE (11) R e g r e s s i o n Number V a r i a b l e s 1. 2. 3. C o n s t a n t 5.84 5.81 5.40 1. -.1479 -.1595 (10.484) (15.084) d e l e t e d 2. -.6057 -.6042 (45.091) (45.226) d e l e t e d 3. d e l e t e d d e l e t e d d e l e t e d 4. - 2.29 - 2.43 - 2.63 (22.294) (39.148) (61.431) . 5. .6997 .6998 . .7010 (88.047) (88.661) (88.972) 6. -.1984 -.1643 r i -(1.248) (1.037) d e l e t e d 7. -.0248 (0.218) d e l e t e d d e l e t e d 8. .0341 .0335 .0297 (16.134) (16.055) (15.694) .9. -.3855 -.3755 -.3929 (11.111) (10.990) (12.304) 10. - 2.49 - 2.45 - 2.54 (143.466) (156.291) (203.422) 11. .1299 .1285 .1247 (2.954) (2.916) (2.753) R .95107 .95098 .90123 F 108.969 121.874 153.818 I n each t a b l e , the v a r i a b l e s e n t e r i n g the r e g r e s s i o n s a r e l i s t e d i n the l e f t - h a n d column, t o g e t h e r w i t h the m u l t i p l e c o r r e l a -t i o n c o e f f i c i e n t and the F - s t a t i s t i c f o r t e s t i n g t h e g e n e r a l l i n e a r h y p o t h e s i s . The numbers i n the r e s p e c t i v e columns a r e the c o e f f i c i e n t s o f the v a r i a b l e i n q u e s t i o n , t o g e t h e r w i t h the c o r r e s -p o n d i n g f - v a l u e ( i n p a r e n t h e s i s ) . The word " d e l e t e d " i n d i c a t e s t h a t the p a r t i c u l a r v a r i a b l e was n o t i n c l u d e d i n t h a t r e g r e s s i o n . The dependent v a r i a b l e was t r a v e l volume i n e v e r y c a s e . I t became a p p a r e n t t h a t the r e s u l t s o f t h i s a n a l y s i s d i f f e r e d from t h o s e u s u a l l y e x p e c t e d from the employment o f a g r a v i t y t y p e t e c h n i q u e . F o r t h i s r e a s o n , d i s c u s s i o n o f some o f the c o n c e p t u a l d i f f i c u l t i e s i n u s i n g t h i s method, t o g e t h e r w i t h the f a c t o r s u n d e r l y i n g the d e l e t i o n o f c e r t a i n v a r i a b l e s i s w a r r a n t e d and w i l l be p r e s e n t e d subsequent t o the i n t e r p r e t a t i o n o f r e s u l t s and f a c t o r a n a l y s i s . (e) I n t e r p r e t a t i o n o f R e s u l t s I t s h o u l d be n o t e d a t the o u t s e t t h a t v a r i a b l e t h r e e -a b s o l u t e time - was o m i t t e d from the a n a l y s i s due t o problems o f m u l t i c o l l i n e a r i t y . Because t h e r e was h i g h i n t e r c o r r e l a t i o n w i t h t h i s and o t h e r v a r i a b l e s , c o n s i d e r a b l e d i s t o r t i o n would have o t h e r w i s r e s u l t e d . I n a d d i t i o n t o computing the r e g r e s s i o n u s i n g a l l v a r i a b l e s each was r u n a l o n e t o d i s c o v e r i t s i m p a ct on the dependent v a r i a b l e ( r e s u l t s n o t shown). ( T a b l e 1. R e s u l t s ) The c o e f f i c i e n t s o f p o p u l a t i o n a r e s i g n i f i c a n t , b u t do n o t have the e x p e c t e d s i g n and hence t h e v a r i a b l e was o m i t t e d . S i m i l a r l y w i t h per c a p i t a income, the e x p e c t e d s i g n was n o t f o r t h c o m i n g . So as w i t h p o p u l a t i o n , i t was s u b s e q u e n t l y d e l e t e d . I n the case o f b o t h p o p u l a t i o n and income, t h e i r l a c k o f i m p o r t a n c e was c o n f i r m e d b y . l o o k i n g a t the r e s u l t s when each v a r i a b l e was c o n s i d e r e d i n i s o l a t i o n . B o t h a r e l a c k i n g i n e x p l a n a t o r y power, 2 h a v i n g R 's o f .008 and .002 r e s p e c t i v e l y . Thus, i n and o f t h e m s e l v e s , t h e s e v a r i a b l e s a r e n o t v e r y m e a n i n g f u l . A b s o l u t e t i m e was o m i t t e d . A b s o l u t e c o s t was h i g h l y s i g n i f i c a n t and had the e x p e c t e d s i g n , i n d i c a t i n g t h a t as c o s t d e c r e a s e s more p e o p l e may be w i l l i n g t o t r a v e l . P r o m o t i o n was found t o be s i g n i f i c a n t and had the e x p e c t e d p o s i t i v e s i g n . D i s t a n c e was u l t i m a t e l y d e l e t e d f r o m the a n a l y s i s . T h i s s u g g e s t s t h a t the i n f o r m a t i o n c o n t a i n e d i n t h i s v a r i a b l e i s a d e q u a t e l y p r o v i d e d by o t h e r s . I m m i g r a t i o n was h i g h l y s i g n i f i c a n t and had the e x p e c t e d s i g n . T rade was i n s i g n i f i c a n t i n the a n a l y s i s . I n t h e N o r t h P a c i f i c , t r a d e i s more i m p o r t a n t owing t o the h i g h p r o p o r t i o n o f b u s i n e s s t r a v e l t h e r e . I t s impact i s m i n i m i z e d , however, i n the c o n t e x t o f the e n t i r e P a c i f i c . B o t h v a r i a b l e s w h i c h r e l a t e t r a v e l time t o l e n g t h o f s t a y appear t o be h i g h l y s i g n i f i c a n t . The s u g g e s t i o n i s t h a t , as they g e t s m a l l e r , t r a v e l volume would r i s e . How the n m i g h t t h i s o c c u r ? I n two ways: (a) t o t a l t r a v e l time d e c l i n e s o r (b) l e n g t h o f s t a y i n c r e a s e s . S i n c e t o t a l t r a v e l time was h e l d c o n s t a n t o v e r the p e r i o d , i t e m (b) p r o v i d e s the e x p l a n a t i o n . The ave r a g e l e n g t h o f s t a y has i n c r e a s e d d u r i n g t h e seven y e a r s and c o r r e s p o n d i n g l y t r a v e l volume has grown. These two v a r i a b l e s p r o v e d v e r y s t r o n g i n the a n a l y s i s , and as s u c h , a r e i n f l u e n t i a l i n t h e d e t e r m i n a t i o n o f demand. The amount o f t i m e t h a t i s a v a i l a b l e f o r t h e t r i p i s v e r y i m p o r t a n t . Because the P a c i f i c as a whole has d e v e l o p e d as a p l e a s u r e t r a v e l m a r k e t , v a c a t i o n time a l l o w e d (as r e f l e c t e d by l e n g t h o f s t a y ) w i l l be k e y n o t e . O n l y w i t h more l e i s u r e time can p e o p l e j o u r n e y t h r o u g h the P a c i f i c due t o the o b v i o u s g e o g r a p h i c c o n s t r a i n t s . The m u l t i p l e c o r r e l a t i o n c o e f f i c i e n t s i n d i c a t e t h a t a v e r y s u b s t a n t i a l p r o p o r t i o n o f t h e v a r i a t i o n i n the dependent v a r i a b l e has been e x p l a i n e d . The F - v a l u e s a r e a l l s i g n i f i c a n t . There i s good s t a b i l i t y i n the v a l u e s o f p a r t i c u l a r r e g r e s s i o n c o e f f i c i e n t s from r e g r e s s i o n t o r e g r e s s i o n . The p r o b l e m o f m u l t i c o l l i n e a r i t y i s m i n i m a l s i n c e the c o r r e l a t i o n m a t r i x i n d i c a t e d t h a t t h e i n t e r d e p e n d e n c e between i n d e p e n d e n t v a r i a b l e s was low. To summarize, the most m e a n i n g f u l v a r i a b l e s a f f e c t i n g t r a v e l volume would appear to be: A b s o l u t e c o s t , p r o m o t i o n , i m m i g r a -t i o n , and t o t a l t r a v e l time as a p e r c e n t a g e o f l e n g t h o f s t a y f o r b o t h b u s i n e s s and p l e a s u r e p u r p o s e s . Subsequent to the above a n a l y s i s , c h a r t e r o p e r a t i o n s were i n t r o d u c e d i n t o the model and the i m p a ct n o t e d . The r e s u l t s w i l l be e x p l a i n e d below. ( T a b l e 2. R e s u l t s ) I n terms o f r e l e v a n t v a r i a b l e s and t h e i r s i g n i f i c a n c e , T a b l e 2 shows l i t t l e change i n T a b l e 1. N o t e w o r t h y i s the f a c t t h a t c h a r t e r o p e r a t i o n s a r e s t i l l I n the e q u a t i o n a f t e r t h r e e p r o g r e s s i v e s t a g e s . The F - v a l u e t h a t i s a s s o c i a t e d w i t h c h a r t e r s a t t h a t p o i n t denotes t h a t the v a r i a b l e i s s i g n i f i c a n t a t the 90 p e r c e n t c o n f i d e n c e l e v e l . . F u r t h e r , a t . t h a t s t a g e i t was the l e a s t s i g n i f i c a n t v a r i a b l e i n the e q u a t i o n and hence, was the n e x t to be o m i t t e d . F o r the p u r p o s e s o f t h i s s t u d y , the c o n t e n t i o n i s t h a t the 90 p e r c e n t l e v e l i s s t a t i s t i c a l l y a d equate, i . e . , i n 90 p e r c e n t o f a l l c a s e s i t w o u l d be c o r r e c t to assume t h a t c h a r t e r s w i l l have an i m p a c t on s c h e d u l e d s e r v i c e s . T h i s v a r i a b l e does behave as e x p e c t e d . I t has b o t h a p o s i t i v e c o e f f i c i e n t and p o s i t i v e c o r r e l a t i o n w i t h the dependent v a r i a b l e . What does t h i s s u g g e s t ? (1) G i v e n the n a t u r e o f demand, c h a r t e r s do have a s i g n i f i c a n t i m p a c t on s c h e d u l e d s e r v i c e s . (2) As s c h e d u l e d s e r v i c e s grow i n t h e P a c i f i c , we can e x p e c t t h a t c h a r t e r s too w i l l grow. (3) I f the N o r t h A t l a n t i c e x p e r i e n c e can be t a k e n as r e p r e s e n t a t i v e , c h a r t e r s w i l l d e v e l o p on the more p r o f i t a b l e r o u t e s . (4) T h i s argument i s l e n t a d d i t i o n a l s u p p o r t by n o t i n g t h a t , p o s t 1968, c h a r t e r s ( i n c l u s i v e t o u r ) d e v e l o p e d on the r o u t e s t o J a p a n , M e x i c o , and H a w a i i to a g r e a t e r e x t e n t . These have been C P . A i r ' s h i g h e s t t r a f f i c and p r o f i t r o u t e s i n the P a c i f i c . (5) The o n l y q u e s t i o n r e m a i n i n g unanswered i s : c o u l d c h a r t e r growth o u t s t r i p t h a t o f s c h e d u l e d s e r v i c e s as i t has i n the N o r t h A t l a n t i c ? A t e n t a t i v e answer wou l d be: Yes! (6) Thus the c o n c l u s i o n i s t h a t , as the P a c i f i c t r a v e l m arket expands i n the n e x t f i v e t o t e n y e a r s , c h a r t e r s w i l l grow and s i g n i f i c a n t l y a f f e c t P a c i f i c s c h e d u l e d s e r v i c e s . ( f ) F a c t o r A n a l y s i s The g o a l o f f a c t o r a n a l y s i s i s the r e d u c t i o n of a c o l -l e c t i o n o f v a r i a b l e s t o a s m a l l e r s e t o f new, u n c o r r e l a t e d v a r i a b l e s w h i c h a r e d e f i n e d s o l e l y i n terms of t h e o r i g i n a l d i m e n s i o n s o f a problem. They r e t a i n the most i m p o r t a n t i n f o r m a t i o n c o n t a i n e d i n the o r i g i n a l d a t a . F a c t o r s , t h e n , a r e d i m e n s i o n s o f t h e same g e n e r a l n a t u r e as the d a t a f r o m w h i c h t h e y a r e d e r i v e d . They a r e used t o d e s c r i b e the r e s u l t s a t a h i g h e r l e v e l o f a b s t r a c t i o n . D e s p i t e the f a c t t h a t the r e g r e s s i o n a n a l y s i s r e d u c e d the number o f s i g n i f i c a n t v a r i a b l e s t o f i v e , a d d i t i o n a l work was deemed a p p r o p r i a t e . T h i s was n e c e s s i t a t e d by the f a c t t h a t t h e r e appeared to be adegree of i n t e r d e p e n d e n c y between the s i g n i f i c a n t i n d e p e n d e n t v a r i a b l e s . T h i s meant t h a t some o f the same i n f o r m a t i o n was b e i n g p r o v i d e d by two o r more o f the v a r i a b l e s . F a c t o r a n a l y s i s s e r v e s t o p u r i f y the d i m e n s i o n s o f the p r o b l e m so t h a t a s e t o f t o t a l l y u n c o r r e l a t e d f a c t o r s may be f o u n d . T h i s p r o c e s s enhances the r e s u l t s o b t a i n e d from the r e g r e s s i o n a n a l y s i s , as i t e n a b l e d a more p r e c i s e p i c t u r e t o be seen. W i t h the use o f f a c t o r a n a l y s i s , r e g r e s s i o n r e s u l t s may be d e f i n e d w i t h no redundancy and thus a model can be r e s o l v e d w i t h a h i g h degree o f a c c u r a c y . F o r p r e s e n t p u r p o s e s , the f i v e s i g n i f i c a n t a t t r i b u t e s o f demand e x c l u d i n g c h a r t e r s were c o n s i d e r e d and a f a c t o r a n a l y s i s u n d e r t a k e n . The r e s u l t s a r e shown below. TABLE V-3 FACTOR ANALYSIS OF FIVE SIGNIFICANT INDEPENDENT VARIABLES I n i t i a l f a c t o r M a t r i x V a r i a b l e F a c t o r I F a c t o r I I F a c t o r I I I 1. 2. 3. 4. 5. ( C o s t ) (Prom) (Immi) (T/LSb) (T/LSp) .09331 -.52437 .32867 -.78831 -.67739 -.60893 .61297 -.29738 -.45991 -.61440 -.41874 -.09350 .66570 -.08035 -.12719 TABLE V-4 FACTOR ANALYSIS OF INDEPENDENT FIVE SIGNIFICANT VARIABLES R o t a t e d F a c t o r M a t r i x V a r i a b l e F a c t o r I F a c t o r I I F a c t o r I I I 1. ( C o s t ) -.35448 -.57915 -.30622 2. (Prom) -.06474 .79126 -.17072 3. (Immi) .18876 -.36315 "• .68.710 4. (T/LSb) -.90767 .11283 .05312 5. (T/LSp) -.91931 -.08112 .02834 The p i c t u r e emerges f r o m T a b l e 4, t h a t f a c t o r I " l o a d s " h e a v i l y on v a r i a b l e s f o u r and f i v e . These r e p r e s e n t the l e n g t h o f s t a y d i m e n s i o n . F a c t o r I I " l o a d s " on v a r i a b l e s one and two w h i c h a r e t r a v e l l i n g c o s t and p r o m o t i o n . These can be g e n e r a l i z e d t o d e p i c t economic a f f l u e n c e . F i n a l l y , f a c t o r I I I emphasizes v a r i a b l e t h r e e - i m m i g r a t i o n . T h i s s e r v e s t o h i g h l i g h t the i m p o r t a n c e o f i m m i g r a t i o n f r o m t h e O r i e n t as a s o u r c e of a i r t r a f f i c . So t h e n , t h e o v e r - r i d i n g f a c t o r s w h i c h c o n t r i b u t e t o P a c i f i c a i r t r a v e l demand would appear t o be: i n c r e a s e d l e n g t h o f s t a y , economic a f f l u e n c e , and g r o w i n g i m m i g r a t i o n . A l l f a c t o r s i n d i c a t e t h a t the e n v i r o n m e n t i s c o n d u c i v e t o c h a r t e r development. As s u c h , i t i s n o t u n r e a s o n a b l e t o h y p o t h e s i z e t h a t the N o r t h A t l a n t i c ease may r e - o c c u r . (v) D i f f i c u l t i e s E n c o u n t e r e d i n the A p p l i c a t i o n o f the G r a v i t y T e c h n i q u e  The s t a t i s t i c a l a n a l y s i s u n d e r t a k e n i n t h i s s t u d y p r o -v i d e d , some i n s i g h t i n t o the n a t u r e o f a i r t r a v e l demand i n the P a c i f i c r e g i o n . However, t h e r e a r e some c o n c e p t u a l drawbacks i n the t e c h n i q u e as a p p l i e d . H i s t o r i c a l l y , g r a v i t y - t y p e s p a t i a l i n t e r a c t i o n models have been based upon a n a l o g i e s t o the laws o f s p a t i a l a t t r a c t i o n as d e v e l o p e d by Newton. They have been used to d e s c r i b e such s o c i a l phenomenon as p o p u l a t i o n m i g r a t i o n , f l o w o f goods, money, 9 and i n f o r m a t i o n , t r a f f i c movements, and t o u r i s t t r a v e l . W h i l e many f a c t o r s a f f e c t the movement o r i n t e r a c t i o n o f p e r s o n s and t h i n g s i n s p a c e , g r a v i t y models a r e used t o c a l c u l a t e t h e number o f i n t e r a c t i o n s between two g e o g r a p h i c a r e a s o r p o i n t s . The f u n d a m e n t a l i d e a u n d e r l y i n g g r a v i t y models i s t h a t the degree o f i n t e r a c t i o n between two g e o g r a p h i c a r e a s i s a f u n c t i o n o f (a) c o n t r i b u t i n g o r s u p p o r t i n g f a c t o r s and (b) i m p eding f a c t o r s . T r a d i t i o n a l l y , the f o r m e r have been r e p r e s e n t e d by popu-l a t i o n and t h e l a t t e r by d i s t a n c e . However, an i n d i v i d u a l o r group o f i n d i v i d u a l s c a n n o t t a k e an u n l i m i t e d number o f t r i p s s i n c e t h e y a r e s u b j e c t t o such c o n s t r a i n t s as time and c o s t . Hence, the v a r i a b l e s a p p l i e d to the measure o f i n t e r a c t i o n , and the degree to w h i c h t h e y a r e c o n s t r a i n e d , d i r e c t l y a f f e c t the f i n a l r e s u l t s and J.H. N e i d e r c o r n and B.V. B e c h d o l t J r . , "An Economic D e r i v a t i o n o f the ' G r a v i t y Law' o f S p a t i a l I n t e r a c t i o n " , J o u r n a l o f R e g i o n a l  S c i e n c e . V o l . 9, No. 2, 1969, p. 274. s u b s e q u e n t l y t h e i r i n t e r p r e t a t i o n . The model u t i l i z e d i n t h i s s t u d y p r o v e d t o be no e x c e p t i o n . A d i s c u s s i o n o f t h e d i f f i c u l t i e s e n c o u n t e r e d c a n be a p p roached by c o n s i d e r i n g t h e v a r i a b l e s d e l e t e d i h t h e c o u r s e o f t h e r e g r e s s i o n a n a l y s i s , namely p o p u l a t i o n , per c a p i t a income, a b s o l u t e t i m e , d i s t a n c e , and t r a d e . (a) The p o p u l a t i o n v a r i a b l e w h i c h s e r v e s as p a r t of t h e backbone o f the g r a v i t y model was n o t s i g n i f i c a n t i n t h i s a n a l y s i s . Y e t , i n r e t r o s p e c t , one can see why t h i s m i ght be t h e c a s e . I t may w e l l be t h a t t h e m a j o r i t y o f t r a f f i c c a r r i e d by C P . A i r i n t h e P a c i f i c i s d e t e r m i n e d by a s m a l l p o r t i o n o f t h e C a n a d i a n p o p u l a t i o n . As s u c h , t h e c o n c e n t r a t i o n o f p o p u l a t i o n i n o t h e r c o u n t r i e s i s i n c o n s e q u e n t i a l . P e o p l e have a tendency t o t r a v e l v i a t h e i r n a t i o n a l f l a g a i r l i n e whenever p o s s i b l e . I t w o u l d be e x p e c t e d t h a t O r i e n t a l s would f l y on J a p an A i r l i n e s , A u s t r a l i a n s on Q a n t a s , Canadians on C P . A i r , e t c . Hence, a sense o f n a t i o n a l i s m would appear more c r u c i a l t h a n p o p u l a t i o n d e n s i t i e s i n d e t e r m i n i n g t r a f f i c c a r r i e d v i a a p a r t i c u l a r c a r r i e r . Y e t , p o p u l a t i o n cannot be i g n o r e d e n t i r e l y . I t i s p o s s i b l e t h a t o n l y one l e v e l o r s o c i o - e c o n o m i c c l a s s w i t h i n a g i v e n p o p u l a t i o n i s a b l e t o t r a v e l , and t h u s , t h i s s h o u l d be c o n s i d e r e d as a c o n s t r a i n t t o the i n i t i a l p o p u l a t i o n v a r i a b l e used i n the g r a v i t y e q u a t i o n . G i v e n the c o n s i d e r a t i o n s r e g a r d i n g p o p u l a t i o n , t h i s r e a s o n i n g can be r e a d i l y e x t e n d e d t o i n c l u d e per c a p i t a income. A n a l y s i s showed t h a t per c a p i t a income was a l s o i n s i g n i f i c a n t i n the c o n t e x t o f the P a c i f i c R e g i o n . One can deduce t h r e e p o s s i b l e e x p l a n a t i o n s f o r t h i s f i n d i n g : (1) I f o n l y a p a r t o f C a n a d i a n p o p u l a t i o n i s r e l e v a n t f o r a s c e r t a i n i n g t r a v e l v i a C P . A i r , then a t most, o n l y C a n a d i a n per c a p i t a income i s cogent and n o t t h a t o f e i g h t o t h e r n a t i o n s . (2) S i n c e the c o s t o f t r a v e l may be p r o h i b i t i v e t o p e o p l e o f low incomes, a i r t r a v e l i s a v i a b l e a l t e r n a t i v e o n l y f o r a s p e c i f i c segment o f the . p o p u l a t i o n . I n g e n e r a l , s u b s t a n t i a l per c a p i t a income was e n j o y e d o n l y by C anadians and A m e r i c a n s and n o t by the whole o f the P a c i f i c Rim. Low income groups would tend t o skew the d i s t r i b u t i o n t o the l e f t , i n d i c a t i n g t h a t o n l y i n d i v i d u a l s e a r n i n g a c e r t a i n number o f d o l l a r s s h o u l d have been i n c l u d e d . (3) The d a t a p r o v i d e d by the income v a r i a b l e was a l s o i m p l i c i t i n the c o s t v a r i a b l e . (c) Time was o m i t t e d f r o m the a n a l y s i s i n i t s e a r l y s t a g e s f o r r e a s o n s d i s c u s s e d more f u l l y e a r l i e r i n t h i s c h a p t e r . B r i e f l y , time d i s p l a y e d a h i g h degree o f m u l t i c o l l i n e a r i t y , and as s u c h , was deemed d e s t r u c t i v e t o the f i n a l r e s u l t s and was d e l e t e d . (d) The o t h e r key component o f g r a v i t y models i s d i s t a n c e . T h i s v a r i a b l e was shown to be i n a p p r o p r i a t e s i m p l y because o f the f a c t t h a t a l l d i s t a n c e s i n the P a c i f i c a r e g r e a t . That i s , the a b s o l u t e d e v i a t i o n between d i s t a n c e s i s s m a l l and, t h e r e f o r e , has no r e a l b e a r i n g upon the d e c i s i o n to t r a v e l . (e) The e x c l u s i o n o f the t r a d e v a r i a b l e i s u n c l e a r . Y e t , a t e n t a t i v e e x p l a n a t i o n may r e s t i n the f a c t t h a t the a v a i l a b i l i t y o f a i r t r a v e l i s n o t c r u c i a l t o the ' e x i s t e n c e o r t o the magnitude o f c o m m e r c i a l t r a n s a c t i o n s . Thus, the volume o f a i r t r a v e l v i a a p a r t i c u l a r c a r r i e r i s d i v o r c e d f r o m the l e v e l o f t r a d e between two c o u n t r i e s , a t l e a s t i n the P a c i f i c R e g i o n . C l e a r l y , i t can be seen t h a t any e s t i m a t i o n o f demand f o r a i r t r a v e l i n the P a c i f i c must go beyond the major v a r i a b l e s u t i l i z e d i n t h i s s t u d y . W h i l e the s i g n i f i c a n t v a r i a b l e s do p r o v i d e i n s i g h t i n t o demand f o r a i r t r a v e l , t h e r e must be more t o c o n s i d e r . To s t u d y the t r a f f i c c a r r i e d by a s i n g l e a i r l i n e , i t may w e l l be more a p p r o p r i a t e to u t i l i z e s p e c i f i c v a r i a b l e s t o g e t h e r w i t h t h e i r r e l e v a n t c o n s t r a i n t s . These v a r i a b l e s would be more r e a l i s t i c a l l y d e f i n e d and would r e f l e c t more a d e q u a t e l y t h e a u r a s u r r o u n d i n g demand f o r s e r v i c e s o f a u n i q u e c a r r i e r . I t i s i m p o r t a n t t h a t f u t u r e r e s e a r c h e r s be aware o f the f a c t t h a t the l e v e l o f a g g r e g a t i o n and t h e s p e c i f i c a t i o n o f v a r i a b l e s a r e v i t a l t o the s t a t i s t i c a l a n a l y s i s when d e a l i n g w i t h a r e s t r i c t e d d a t a sample. T h i s appeared t o be the major p i t f a l l e n c o u n t e r e d i n s t u d y i n g the P a c i f i c o p e r a t i o n s o f o n l y one a i r l i n e . ( v i ) Summary A t the o u t s e t i t was contended t h a t the development, o f c h a r t e r o p e r a t i o n s i n the P a c i f i c would be a f f e c t e d by t h r e e f a c t o r s : I.A.T.A. p o l i c y , the p o l i c y o f P a c i f i c Rim n a t i o n s , and the d e t e r m i n a n t s o f demand. F i r s t l y , I.A.T.A. p o l i c y has been and w i l l l i k e l y c o n t i n u e t o be i n e f f e c t u a l i n r e s p e c t t o c h a r t e r s . Thus, no e f f e c t i v e b a r r i e r s t o development s h o u l d be f o r t h c o m i n g f r o m t h a t s o u r c e . S e c o n d l y , the n a t i o n s o f the P a c i f i c have been l a r g e l y u n w i l l i n g to f o r m a l i z e t h e i r p o l i c i e s r e g a r d i n g n o n - s c h e d u l e d s e r v i c e s . A d d i t i o n a l l y , the p r e s e n t p r a c t i c e s o f n a t i o n s d i f f e r i n t h e i r . d e g r e e o f freedom. On the w h o l e , however, no f o r m a l o p p o s i t i o n f r o m t h e s e c o u n t r i e s i s e x p e c t e d s h o u l d c h a r t e r o p e r a t o r s d e c i d e t o expand i n t o the P a c i f i c . T h i r d l y , t h r o u g h the development o f a model the f a c t o r s a f f e c t i n g the demand f o r . a i r t r a v e l i n the 1962-1968 p e r i o d were i l l u s t r a t e d , and t h e s e f a c t o r s a r e deemed t o be c o n d u c i v e t o c h a r t e r e v o l vement. The i n f o r m a t i o n p r o v i d e d by N o r t h A t l a n t i c e x p e r i e n c e made p o s s i b l e the f o r m u l a t i o n o f s e v e r a l c o n c l u s i o n s . I t was f e l t t h a t c h a r t e r s w o u l d d e v e l o p , p a r t i c u l a r l y on the more l u c r a t i v e r o u t e s , and t h a t t h e y would have an i m p act on s c h e d u l e d s e r v i c e s . I n the l o n g e r r u n , p r o f i t a b i l i t y o f the l a t t e r w i l l be a f f e c t e d . A l l t h e s e have s p e c i f i c i m p l i c a t i o n when r e l a t e d t o government p o l i c y ( C a n a dian) w i t h r e g a r d t o C P . A i r . F i n a l l y , the s t a t i s t i c a l a n a l y s i s implemented i n s t u d y i n g the P a c i f i c a i r t r a v e l m arket must be q u a l i f i e d . The l e v e l o f a g g r e g a t i o n seemed i n a p p r o p r i a t e i n s p e c i f i c i n s t a n c e s f o r c o n s i d e r i n g a u n i q u e c a r r i e r . The c o n c e p t s u n d e r l y i n g t r a d i t i o n a l g r a v i t y models a r e a p p a r e n t l y n o t f l e x i b l e enough t o p e r m i t d i r e c t a p p l i c a t i o n i n the P a c i f i c r e g i o n . CHAPTER VI REGULATORY POLICY AND ITS IMPLICATIONS I n the l a s t c h a p t e r , i t was s u g g e s t e d t h a t , s h o u l d c h a r t e r o p e r a t i o n s r e a c h a s u f f i c i e n t magnitude, an i n f l u e n c e c o u l d be made on t h e c o r p o r a t e p r o f i t a b i l i t y o f C P . A i r . F u r t h e r , s i n c e the p r o f i t i n d i c a t o r s d e p i c t e d e a r l i e r were somewhat o v e r - e s t i m a t e d , the r e t u r n s i n the P a c i f i c a r e a c t u a l l y s m a l l e r . T h i s means t h a t i t would t a k e l e s s o f an impact by c h a r t e r s t o a f f e c t C P . A i r . The i m p l i c a t i o n s o f t h e s e f i n d i n g s must be s t u d i e d i n l i g h t o f c u r r e n t C a n a d i a n r e g u l a t o r y p o l i c y . I n p a r t i c u l a r , a t t e n t i o n w i l l be d e v o t e d t o the a v i a t i o n p o l i c i e s o f the C a n a d i a n T r a n s p o r t Commission and t o the s t a t e d o b j e c t i v e o f the N a t i o n a l T r a n s p o r t a t i o n A c t o f 1967. ( i ) The N a t i o n a l T r a n s p o r t a t i o n A c t The N a t i o n a l T r a n s p o r t a t i o n A c t d e f i n e s the n a t i o n a l t r a n s -p o r t a t i o n p o l i c y o f Canada i n t h e s e t e r m s : 1 I t i s h e r e b y d e c l a r e d t h a t an economic and e f f i c i e n t t r a n s p o r t a t i o n s y s t e m making the b e s t use o f a l l a v a i l a b l e modes a t t h e l o w e s t t o t a l c o s t i s e s s e n t i a l t o p r o t e c t the i n t e r e s t s o f the u s e r s o f t r a n s p o r t a t i o n and t o m a i n t a i n the economic w e l l - b e i n g and growth o f Canada, and t h a t t h e s e o b j e c t i v e s a r e most l i k e l y t o be a c h i e v e d when a l l the modes o f t r a n s p o r t a r e a b l e t o compete under c o n d i t i o n s e n s u r i n g t h a t : (a) r e g u l a t i o n o f a l l modes o f t r a n s p o r t w i t h due r e g a r d t o the n a t i o n a l i n t e r e s t w i l l n o t be o f such a n a t u r e as t o r e s t r i c t t he a b i l i t y o f any Canada, P a r l i a m e n t , N a t i o n a l T r a n s p o r t a t i o n A c t , 1967 S t a t u t e s o f Canada, C h a p t e r 69. mode o f t r a n s p o r t t o compete f r e e l y w i t h any o t h e r mode o f t r a n s p o r t ; each mode o f t r a n s p o r t , so f a r as p r a c t i c a b l e b e a r s a f a i r p r o p o r t i o n o f the r e a l c o s t s o f the r e s o u r c e s , f a c i l i t i e s , and s e r v i c e s p r o v i d e d t h a t mode o f t r a n s p o r t a t p u b l i c expense; and each mode o f t r a n s p o r t , so f a r as p r a c t i c a b l e r e c e i v e s c o m p e n s a t i o n f o r the r e s o u r c e s , f a c i l i t i e s , and s e r v i c e s t h a t i t i s r e q u i r e d to p r o v i d e as an imposed p u b l i c d u t y . These pronouncements v e r i f y the d e s i r a b i l i t y o f i n t e r m o d a l c o m p e t i t i o n . Y e t , th e y make no m e n t i o n o f c o m p e t i t i o n w i t h i n a g i v e n mode o f t r a n s p o r t . However, i t does seem l o g i c a l t h a t t h i s t y p e o f c o m p e t i t i o n would n o t be r e s t r i c t e d and t h i s i s c o n f i r m e d 2 i n t he f o l l o w i n g m i n i s t e r i a l s t a t e m e n t : Where s e r v i c e s do n o t have a degree o f e s s e n t i a l i t y , i t w ould seem r e a s o n a b l e t o adop t a more l i b e r a l a t t i t u d e towards l i c e n s i n g and a l l o w the f o r c e s o f demand and o f c o m p e t i t i v e r e l a t i o n s h i p s t o p l a y a maj o r p a r t i n a d j u s t i n g s u p p l y . Y e t , t h e r e i s an a p p a r e n t c o n t r a d i c t i o n between t h i s s t a t e -ment and the p u b l i c p o l i c y w i t h r e s p e c t t o d o m e s t i c m a i n l i n e a i r s e r v i c e s . The l a t t e r s t a t e s t h a t w h i l e t h e p r i n c i p l e o f c o m p e t i t i o n i s n o t r e j e c t e d , t h i s c o m p e t i t i o n s h o u l d n o t t h r e a t e n the economic 3 v i a b i l i t y o f A i r Canada's d o m e s t i c o p e r a t i o n s . C o m p e t i t i o n w i l l be p e r m i t t e d o n l y i f t h i s c o n d i t i o n i s met. A t t h a t t i m e , e q u a l oppor-t u n i t y f o r growth w i l l be o f f e r e d t o b o t h A i r Canada and C P . A i r . (b) ( c ) C a n a d i a n T r a n s p o r t Commission, I n the M a t t e r o f t h e A e r o n a u t i c s  A c t and the D e c i s i o n o f the A i r T r a n s p o r t Committee d a t e d  16 J a n u a r y 1968, p. 4, U n p u b l i s h e d documents. H.L. Pu r d y , T r a n s p o r t C o m p e t i t i o n and P u b l i c P o l i c y i n Canada, (Vancouver: U n i v e r s i t y o f B r i t i s h C o l u m b i a , 19,71), p. 20. ( i i ) C P . A i r ' s S e r v i c e Quotas A c o m p e t i t i v e e n v i r o n m e n t may be d e f i n e d as f o l l o w s f o r the purposes o f t h i s s t u d y . I t i s one i n w h i c h the b l e n d i n g o f a v a i l a b l e a i r c r a f t , r e g u l a t e d f a r e l e v e l s , and p u b l i c demand w i l l d e t e r m i n e the amount o f c a p a c i t y t h a t i s p r o v i d e d by a c a r r i e r . I t i s n o t one i n w h i c h an a r b i t r a r y c a p a c i t y c e i l i n g i s s e t . I t i s d i f f i c u l t f o r a c o m p e t i t i v e e n v i r o n m e n t t o e x i s t so l o n g as the c a p a c i t y c e i l i n g r emains on C P . A i r ' s d o m e s t i c s e r v i c e s . T h i s r e s t r i c t i o n e v o l v e d f r o m the f i n d i n g s o f a s t u d y u n d e r t a k e n by Stephen W h e a t c r o f t and p r e s e n t e d t o P a r l i a m e n t i n 1966. The s t u d y i l l u s t r a t e d t h a t C P . A i r ' s p r o v i s i o n o f d o m e s t i c s e r v i c e s - w h i l e p r o d u c i n g n e i t h e r major improvements i n e f f i c i e n c y n o r new t r a f f i c - had l e d t o w i d e r p u b l i c s a t i s f a c t i o n t h r o u g h the a v a i l a b i l i t y o f c h o i c e . A l s o , i t showed t h a t r evenue had been d i v e r t e d f r o m A i r Canada b u t t h a t t h e y s t i l l r e a l i z e d a d o m e s t i c p r o f i t . The consequence o f W h e a t c r o f t ' s u n d e r t a k i n g was the f o l l o w i n g . Government p o l i c y was r e v i s e d t o p e r m i t C P . A i r t o i n c r e a s e c a p a c i t y to 25 p e r c e n t o f t o t a l t r a n s c o n t i n e n t a l s e r v i c e s by 1970. By 1969, C P . A i r was p r o v i d i n g a p p r o x i m a t e l y 20 p e r c e n t o f t o t a l c a p a c i t y and had the p r o s p e c t o f a d d i n g one more d a i l y f l i g h t . The above o b s e r v a t i o n s l e a d one t o s u g g e s t t h a t : (1) C o m p e t i t i v e f o r c e s between t h e two ma j o r C a n a d i a n a i r l i n e s a r e b e i n g i n f l u e n c e d i n the d o m e s t i c m a r k et; (2) the government-owned Company, A i r Canada, i s r e c e i v i n g p r e f e r e n t i a l t r e a t m e n t ; (3) the c o n d i t i o n s o f t h e n a t i o n a l t r a n s p o r t p o l i c y , e s p e c i a l l y S e c t i o n s 1 ( a ) and 1 ( c ) , a r e n o t b e i n g f u l l y adhered t o ; (4) the s y s t e m o f t r a n s p o r t a t i o n i s n o t making the b e s t use o f a l l a v a i l a b l e modes; and (5) t h i s a p p a r e n t c o n f l i c t has been a v o i d e d i n the i n t e r n a t i o n a l market s i n c e each C a n a d i a n c a r r i e r has a c l e a r g e o g r a p h i c d i v i s i o n i n w h i c h t o o p e r a t e . How t h e n do the above c o n t e n t i o n s r e l a t e t o C P . A i r and the f i n d i n g s o f t h i s s t u d y ? There i s e v i d e n c e t o i n f e r t h a t C P . A i r uses c r o s s -s u b s i d i z a t i o n . T h i s i s seen by t h e f a c t t h a t the Company i s r e a l i z i n g r e a s o n a b l e p r o f i t s i n t e r n a t i o n a l l y , b u t r e p o r t s meagre p r o f i t s on the w h o l e . The i n f e r e n c e i s t h a t they a r e l o s i n g money on d o m e s t i c s e r v i c e s . The l a t t e r can be a t t r i b u t e d i n p a r t t o two f a c t o r s : the f o r c e d u t i l i z a t i o n o f improved t e c h n o l o g y and the r e s t r i c t i o n s l i m i t i n g the e f f i c i e n t use o f t h i s t e c h n o l o g y . W i t h t h e advent o f new and more s o p h i s t i c a t e d j e t t e c h n o l o g y , the w o r l d ' s a i r l i n e s have f e l t c o m p e l l e d t o p u r c h a s e t h e most advanced equipment. These a c q u i s i t i o n s have been made i n s p i t e o f s p i r a l l i n g c a p i t a l c o s t s and the p r e s e n c e of u n d e p r e c i a t e d f l e e t s . S t i l l a dequate equipment i s b e i n g abandoned. W i t h i n c r e a s e o f f l e e t q u a l i t y , c o r p o r a t e p r o f i t a b i l i t y r e s t s more upon the e f f i c i e n t u t i l i z a t i o n o f the new t e c h n o l o g y . C..P. A i r must m a i n t a i n a p r o p o r t i o n o f t h e i r advanced j e t f l e e t i n Canada i n o r d e r t o s e r v i c e t h e i r t r a n s - c o n t i n e n t a l r o u t e s . Y e t , they a r e , i n a s e n s e , i n h i b i t e d i n t h e i r a b i l i t y t o f u l l y u t i l i z e t h e s e a i r c r a f t . C o m p e t i t i v e m a r k e t f o r c e s have been s u b o r d i n a t e d t o A i r Canada's economic v i a b i l i t y . By r e s t r a i n i n g C P . A i r ' s a b i l i t y t o compete f r e e l y , r e g u l a t i o n i s f a i l i n g i n i t s duty to a c t i n t h e n a t i o n a l i n t e r e s t . I t may w e l l be c o n t r i b u t i n g t o CP.. A i r ' s d o m e s t i c demise and l i m i t i n g t h e i r r i g h t t o r e c e i v e c o m p e n s a t i o n f o r t h e r e s o u r c e s , f a c i l i t i e s , and s e r v i c e s w h i c h they a r e r e q u i r e d t o p r o v i d e as an imposed p u b l i c du t y . T h e r e f o r e , i t appears t h a t t h e a s p e c t s o f r e g u l a t i o n con-s i d e r e d i n t h i s c h a p t e r may n o t be i n the b e s t i n t e r e s t s o f C P . A i r . The purpose o f p o l i c y seems t o be t o e n s u r e the e x i s t e n c e o f A i r Canada. Thus, p o l i c y i s n o t f o s t e r i n g t h e l o n g - r u n development o f a l l C a n a d i a n a v i a t i o n companies. The l o n g - r u n e f f e c t s w h i c h may r e s u l t from t h i s a t t i t u d e a r e d i s c u s s e d below. ( i i i ) Long-Run E f f e c t s (1) S h o u l d P a c i f i c p r o f i t a b i l i t y be a f f e c t e d as i n the example ( C h a p t e r V ) , d o m e s t i c r e g u l a t o r y p o l i c y may a g g r a v a t e l o s s e s . (2) C P . A i r may be f o r c e d i n t o a c h r o n i c d e f i c i t p o s i t i o n and i t s economic v i a b i l i t y w i l l become q u e s t i o n a b l e . (3) The aim o f f o s t e r i n g l o n g - r u n a v i a t i o n development w i l l n o t be met. (4) The advantages w h i c h a c c r u e from c o m p e t i t i v e f o r c e s w i l l be l o s t t o C a n a d i a n s , and hence, t h e n a t i o n a l i n t e r e s t w i l l n o t be s e r v e d . C h a p t e r I V s u g g e s t e d t h a t C P . A i r r e a l i z e d and depended on P a c i f i c p r o f i t s . These r e t u r n s p l a y an i m p o r t a n t r o l e i n the c r o s s - s u b s i d i z a t i o n p r a c t i c e o f the a i r l i n e . I t was a l s o s u g g e s t e d i n C h a p t e r V t h a t l a r g e s c a l e c h a r t e r development would have an i m p a c t on s c h e d u l e d s e r v i c e s . I f t h e r e i s a r e d u c t i o n o f P a c i f i c p r o f i t s , the number o f d o l l a r s a v a i l a b l e t o a p p l y a g a i n s t l o s s e s i n c u r r e d d o m e s t i c a l l y w i l l be r e d u c e d . The c o r p o r a t e p r o f i t p i c t u r e c o u l d change r a p i d l y . I n 1968, C P . A i r r e p o r t e d p r o f i t s s l i g h t l y i n e x c e s s o f $4,000,000. I n 1969, t h e y were $3.5 m i l l i o n , and i n 1970 p r o f i t s were o n l y $1 m i l l i o n . Hence, a r e l a t i v e l y s m a l l change i n P a c i f i c p r o f i t s (15 p e r c e n t o f t h e f i g u r e c a l c u l a t e d i n C h a p t e r IV) c o u l d p l a c e C P . A i r i n a d e f i c i t p o s i t i o n . One w o u l d hope t h a t i n d u s t r y and government w o u l d t a k e a p p r o p r i a t e s t e p s t o a v o i d t h i s s i t u a t i o n . S i n c e C P . A i r i s a p r i v a t e l y - o w n e d Company, a d e f i c i t p o s i t i o n would n o t be t o l e r a t e d f o r v e r y l o n g . One o f the few r e a s o n a b l e a l t e r n a t i v e s m i g h t be a merger w i t h A i r Canada. T h i s c o u l d o n l y s e r v e t o make worse the l a c k o f a c o m p e t i t i v e e n v i r o n m e n t i n C a n a d i a n a v i a t i o n . E x i s t i n g r e g u l a t i o n has been shown to be somewhat d e t r i -m e n t a l . T h i s i s n o t i t s purpose. I t s h o u l d a c t t o b e n e f i t t h e p u b l i c i n t e r e s t t h r o u g h t h e l o n g - r u n m a i n t e n a n c e o f a c o m p e t i t i v e , d e v e l o p i n g a v i a t i o n i n d u s t r y . B o t h Caves and- S t r a s z h e i m have argued t h a t the b a s i s f o r p u b l i c i n t e r e s t i n the a i r l i n e i n d u s t r y i s n o t the t r a d i t i o n a l one o f an i n d u s t r y w h i c h r e q u i r e s economic r e g u l a t i o n as a n a t u r a l monopoly; i n s t e a d , a c o m p e t i t i v e market e n v i r o n m e n t w o u l d c r e a t e 4 the b e s t i n d u s t r y p e r f o r m a n c e . One can u n d e r s t a n d r e g u l a t i o n s a g a i n s t f o r e i g n c a r r i e r s s i n c e no n a t i o n w i s h e s t o r i s k the f o r t u n e s o f t h e i r f l a g a i r l i n e s i n a c o m p e t i t i v e e n v i r o n m e n t . However, p r e f e r e n c e s h o u l d n o t be g i v e n one c a r r i e r o v e r a n o t h e r i n t h e d o m e s t i c m a rket. W i t h f a v o u r e d t r e a t m e n t , the market e n v i r o n m e n t becomes d i s t o r t e d , e f f i c i e n c y i s l o s t , and r e s o u r c e s a r e m i s a l l o c a t e d . These c r i t i c i s m s n e c e s s i t a t e t h a t some p o l i c y q u e s t i o n s be asked and t h e s e a r e p r e s e n t e d n e x t . ( i v ) Q u e s t i o n s on R e g u l a t o r y P o l i c y T here w o u l d appear t o be t h r e e major a r e a s i n w h i c h q u e s t i o n s s h o u l d be r a i s e d . These a r e : (1) S h o u l d r e s t r i c t i o n s be p l a c e d on P a c i f i c c h a r t e r o p e r a t i o n s now o r i n the f u t u r e ? I s t h i s i n k e e p i n g w i t h the a t t i t u d e p r e s e n t l y h e l d w i t h r e g a r d t o N o r t h A t l a n t i c c h a r t e r f l i g h t s ? (2) S h o u l d a more f r e e l y c o m p e t i t i v e e n v i r o n m e n t be encouraged by: (a) d r o p p i n g the q u o t a on C P . A i r ' s d o m e s t i c s e r v i c e s a l t o g e t h e r , and t h u s , (b) cease p r e s e n t p r o t e c t i o n o f A i r Canada i n the d o m e s t i c m a r k e t s ? (3) S h o u l d a i r l i n e s be p e r m i t t e d t o abandon non-e s s e n t i a l r o u t e s and s u b s i d i e s be c o n s i d e r e d f o r e s s e n t i a l d o m e s t i c r o u t e s w h i c h a r e l o s i n g money? R i c h a r d E. Caves, A i r T r a n s p o r t and I t s R e g u l a t o r s , ( B o s t o n : H a r v a r d U n i v e r s i t y P r e s s , 1962), and S t r a s z h e i m , Op. C i t . (v) Comments on P o l i c y ' Q u e s t i o n s F i r s t l y , the C a n a d i a n government has o p t e d t o f o r e g o r e g u l a t i o n o f c h a r t e r o p e r a t i o n s on N o r t h A t l a n t i c r o u t e s i n terms o f t h e number o f f l i g h t s p e r m i t t e d . The r e s u l t has been an i n c r e a s e i n c o m p e t i t i o n f o r the s c h e d u l e d c a r r i e r s . T h i s has f o r c e d the s c h e d u l e d a i r l i n e s t o t a k e a l o n g , h a r d l o o k a t t h e i r o p e r a t i o n s and t o r e t a l i a t e w h e r e v e r p o s s i b l e . The e f f e c t has been a p o s s i b l e improvement i n e f f i c i e n c y ( d i f f i c u l t t o s u b s t a n t i a t e ) and the p r o v i s i o n o f q u a l i t y s e r v i c e a t a r e d u c e d p r i c e . The l a t t e r i s v e r y much i n the i n t e r e s t o f the p u b l i c . I t would seem t h a t a s i m i l a r s i t u a t i o n c o u l d e v o l v e i n the P a c i f i c s h o u l d c h a r t e r d e v e l o p -ment o c c u r t h e r e . S e c o n d l y , a move to more c o m p e t i t i o n and the r e m o v a l o f the market d i s t o r t i o n caused by p r o t e c t i v e r e g u l a t i o n i s a d v o c a t e d . T h i s i s i n k e e p i n g w i t h the n a t i o n a l t r a n s p o r t p o l i c y and, i n t h e l o n g r u n , would c o n t r i b u t e t o w i d e r p u b l i c s a t i s f a c t i o n , improved e f f i c i e n c y , and c o n t i n u e d i n d u s t r y development. T h i r d l y , i f encouragement i s t o be g i v e n t o c o m p e t i t i o n and e f f i c i e n t o p e r a t i o n , a s s u r a n c e i s n e c e s s a r y t h a t a i r l i n e s w i l l n o t be f o r c e d t o m a i n t a i n u n p r o f i t a b l e , n o n - e s s e n t i a l r o u t e s . Where e s s e n t i a l i t y e x i s t s , the r e g u l a t o r y a u t h o r i t i e s must e n s u r e t h a t c a r r i e r s a r e compensated f o r the s e r v i c e s t h a t a r e p r o v i d e d t h r o u g h imposed p u b l i c d u t y . S u b s i d i e s a r e a p o s s i b l e remedy. On u n d e s i r a b l e , n o n - e s s e n t i a l r o u t e s , abandonment o r s e r v i c e r e d u c t i o n s s h o u l d be a l l o w e d . These wo u l d depend on t h e economic d e m o n s t r a t i o n by t h e c a r r i e r t h a t t h e s e s e r v i c e s were n o t i n the b e s t l o n g - r u n i n t e r e s t o f t h e a i r l i n e . I f Companies a r e encouraged t o o p e r a t e as c o m m e r c i a l e n t e r p r i s e s , any l o g i c a l a l t e r n a t i v e s a v a i l a b l e t o u n r e g u l a t e d companies s h o u l d a l s o be a v a i l a b l e t o them. These a r e the m a j o r p o l i c y q u e s t i o n s w h i c h may be a s k e d about the development o f C a n a d i a n a v i a t i o n and w h i c h c o n c e r n the impact o f P a c i f i c c h a r t e r development on the o p e r a t i o n s o f C P . A i r CHAPTER V I I SUMMARY AND CONCLUSIONS ( i ) Summary The P a c i f i c a i r t r a v e l market has n o t been a major a i r s e r v i c e s market. However, i t s i m p o r t a n c e i s g r o w i n g r a p i d l y . T h i s r e g i o n i s o f s p e c i a l s i g n i f i c a n c e t o C P . A i r s i n c e i t i s h e r e t h a t a l a r g e p o r t i o n o f t h e i r i n t e r n a t i o n a l s e r v i c e s a r e p r o v i d e d . I n the 1962-1968 p e r i o d , the volume o f t r a f f i c c a r r i e d by C P . A i r i n the P a c i f i c d i s p l a y e d an upward t r e n d . Much o f the growth was r e a l i z e d i n p l e a s u r e t r a f f i c i n c r e a s e s . D u r i n g the 1960's, p l e a s u r e t r a v e l s u r p a s s e d b u s i n e s s t r a v e l as the major component o f t o t a l volume. C o n t r a r y t o o b s e r v a t i o n s i n o t h e r markets such as the N o r t h A t l a n t i c , r i s e s i n p a s s e n g e r t r a f f i c d i d n o t seem d i r e c t l y r e l a t e d t o f a r e d e c r e a s e s . Throughout t h i s p e r i o d , f a r e s remained h i g h . The development o f the P a c i f i c a i r t r a v e l m arket f r o m .1962-1968 was a t t r i b u t e d t o b o t h the g e n e r a l economic development o f the P a c i f i c Rim n a t i o n s and the t i m e s a v i n g s a c c r u i n g f r o m improved t e c h n o l o g y . The U.S. ( H a w a i i ) , J a p a n , A u s t r a l i a , and Canada were the n a t i o n s t h a t p r o v i d e d the major i m p e t u s . To g a i n a p e r s p e c t i v e o f the p r o f i t a b i l i t y t h a t C P . A i r e x p e r i e n c e d i n t h e i r P a c i f i c o p e r a t i o n s , a c rude b u t o p e r a t i o n a l a n a l y s i s was u n d e r t a k e n . The aim was t o e s t a b l i s h the r e l a t i o n s h i p between the a v e r a g e c o s t o f t r a v e l f o r the p a s s e n g e r and the c o s t s i n c u r r e d by the a i r l i n e i n p r o v i d i n g the s e r v i c e . The f i r s t s t e p was t o c o n s i d e r the equipment, c o s t s , and r o u t e s y s t e m o f a major U.S. c a r r i e r i n the P a c i f i c . Then, by r e l y i n g on the o b s e r v a t i o n s and c o n c l u s i o n s o f an e a r l i e r s t u d y 1 , the c o n t e n t i o n was made t h a t t h e c o s t s i n c u r r e d by a C a n a d i a n c a r r i e r w o u l d be e q u i v a l e n t t o t h o s e o f a U.S. c a r r i e r . I n t h i s p r o c e s s , b o t h d i r e c t and i n d i r e c t c o s t s were s t u d i e d . The r e s u l t was a measure o f f u l l y - a l l o c a t e d c o s t s and t h e s e were compared to the a v e r a g e p r i c e o f a p a s s e n g e r f a r e on each r o u t e . The s u g g e s t e d r e t u r n on each r o u t e was found t o be s u b s t a n t i a l . The h i g h e s t m a r g i n s were o b s e r v e d on the l o w e s t d e n s i t y r o u t e s . Subsequent t o t h i s a n a l y s i s , a h y p o t h e t i c a l s i t u a t i o n was p r e s e n t e d w h i c h m i g h t have a l o n g - r u n d e t r i m e n t a l e f f e c t on P a c i f i c p r o f i t s . Through the d e r i v a t i o n o f a s t a t i s t i c a l model, the i m p a c t o f c h a r t e r development was s t u d i e d . F i n a l l y , the i m p l i c a t i o n s the s t u d y ' s f i n d i n g s were s t a t e d w i t h i n t h e framework o f c u r r e n t r e g u l a t o r y p o l i c y . The r e s u l t s of the s t u d y ' s a n a l y s i s a r e summarized below: (1) I t was s u g g e s t e d the a i r c r a f t o p e r a t i n g c o s t s ( d i r e c t c o s t s ) i n c u r r e d by C P . A i r i n the P a c i f i c d i d n o t d i f f e r a p p r e c i a b l y f r o m th o s e o f Pan A m e r i c a n A i r w a y s . These c o s t s were computed i n b l o c k h o u r s . (2) The equipment used by each c a r r i e r ( C P . A i r and Pan A m e r i c a n ) was e q u i v a l e n t , and hence, c o s t economies r e a l i z e d f r o m l o n g - h a u l r o u t e s were a v a i l a b l e t o b o t h . V ondracek, Op. C i t . (3) Of n e c e s s i t y , the i n d i r e c t o p e r a t i n g c o s t s f o r C P . A i r were t a k e n t o be t h o s e i n c u r r e d by C a n a d i a n c a r r i e r s i n t h e i r 1966 i n t e r n a t i o n a l o p e r a t i o n s . T h i s r e p r e s e n t s an u n d e r - e s t i m a t e and so p r o f i t s a r e s l i g h t l y o v e r s t a t e d . (4) I t was s u g g e s t e d t h a t f u l l y - a l l o c a t e d c o s t s were a f a i r b a s i s f o r d e t e r m i n i n g p r o f i t i n d i c a t o r s . T here appeared t o be no r e l a t i o n s h i p between f a r e s c h a r g e d and c o s t s i n c u r r e d on P a c i f i c s e r v i c e s . The m a j o r i t y o f r o u t e s had s u g g e s t e d r e t u r n s o f a t l e a s t 40 p e r c e n t w i t h t h e e x c e p t i o n s b e i n g H a w a i i and M e x i c o . (5) E v i d e n c e s u g g e s t e d t h a t C P . A i r u s e d a p r a c t i c e o f c r o s s - s u b s i d i z a t i o n . T h i s s e r v e d t o h i g h l i g h t the i m p o r t a n c e o f i n t e r n a t i o n a l o p e r a t i o n s t o C a n a d i a n c a r r i e r s . (6) Through t h e d e r i v a t i o n o f a s t a t i s t i c a l m odel, t h e d e t e r m i n a n t s o f P a c i f i c t r a v e l demand were d e v e l o p e d . These were: a b s o l u t e c o s t , p r o m o t i o n , i m m i g r a t i o n , and t o t a l t r a v e l t i m e as a p e r c e n t a g e o f l e n g t h o f s t a y f o r b o t h b u s i n e s s and p l e a s u r e . F u r t h e r a n a l y s i s showed t h a t c h a r t e r evolvement c o u l d have a s i g n i f i c a n t impact on s c h e d u l e d s e r v i c e s . F a c t o r a n a l y s i s was u n d e r t a k e n and the g e n e r a l d i m e n s i o n s o f demand were d e m o n s t r a t e d . (7) Some d i s c u s s i o n and e x p l a n a t i o n was o f f e r e d c o n c e r n i n g t h e a p p l i c a t i o n o f t h e g r a v i t y t e c h n i q u e i n t h e c o n t e x t o f t h e P a c i f i c a i r t r a v e l market. These c o n s i d e r a t i o n s s e r v e d t o h i g h l i g h t the i n s u f f i c i e n c y o f t o t a l r e l i a n c e on t h e above method and p o i n t e d t o some p i t f a l l s w h i c h s h o u l d be a v o i d e d by f u t u r e r e s e a r c h e r s . (8) The a p p a r e n t i n c o n s i s t e n c i e s between r e g u l a t i o n and c a r r i e r a c t i v i t i e s were n o t e d . T h i s e n a b l e d p o l i c y q u e s t i o n s t o be a s k e d . ( i i ) C o n c l u s i o n s The a n a l y s i s i n C h a p t e r s I I I and IV s u g g e s t e d t h a t t h e r e was no economic r e l a t i o n s h i p between c o s t s and f a r e s . T h i s s e r v e d t o c o n f i r m t h e f i n d i n g s o f o t h e r s t u d i e s , i . e . , I.A.T.A.-determined f a r e s a r e a r t i f i c i a l l y h i g h . The above-mentioned s i t u a t i o n e n a b l e d C P . A i r t o r e a l i z e 40 p e r c e n t a p p a r e n t r e t u r n s on many P a c i f i c r o u t e s . However, n o t e must be made o f the f a c t t h a t a s s u m p t i o n s , c o n c e r n i n g l o a d f a c t o r s , c o s t s , and revenue y i e l d s , were made i n o r d e r t o d e r i v e p r o f i t a b i l i t y measures. Y e t , i t cannot be d e n i e d t h a t p r o f i t s a r e h i g h and t h a t C P . A i r does n o t w i s h any d i s t u r b a n c e t o o c c u r . The p o s s i b l e development o f c h a r t e r f l i g h t s becomes p a r t i c u l a r l y r e l e v a n t . S h o u l d c h a r t e r s e v o l v e i n the P a c i f i c to the same magnitude as the N o r t h A t l a n t i c , a l a r g e i m p a ct c o u l d be f e l t by C P . A i r . R e d u c t i o n i n s c h e d u l e d s e r v i c e p r o f i t s w o u l d r e s u l t , and a l t e r a t i o n w o u l d be made i n the c o r p o r a t e p r o f i t p i c t u r e . S i n c e t h e r e i s e v i d e n c e to s u g g e s t t h a t C P . A i r c r o s s -s u b s i d i z e s i t s r o u t e s y s t e m s , p r o f i t c u r t a i l m e n t c o u l d f o r c e C P . A i r i n t o a d e f i c i t p o s i t i o n . The P a c i f i c i s one o f the few r e m a i n i n g s a n c t u a r i e s o f h i g h p r o f i t s e r v i c e s . As s u c h , the e f f e c t i v e n e s s o f c r o s s - s u b s i d i z a t i o n t o C P . A i r would be r e d u c e d w i t h the d e c l i n e i n P a c i f i c p r o f i t a b i l i t y . The c h a r t e r e v o l u t i o n , s h o u l d i t o c c u r , w o u l d be o f v i t a l s i g n i f i c a n c e t o t h e P a c i f i c a i r t r a v e l m a r k et. I t seems i n e v i t a b l e t h a t P a c i f i c r e g i o n p r o f i t s w i l l e v e n t u a l l y be r e d u c e d . E i t h e r i n c r e a s e d s c h e d u l e d s e r v i c e s o r c h a r t e r s w i l l c r e a t e a more c o m p e t i t i v e e n v i r o n m e n t i n o r d e r t o o b t a i n "a s h a r e o f the p r o f i t s " . A d d i t i o n a l l y , the r e g u l a t o r y s y s t e m must be improved t o encourage e f f i c i e n t o p e r a t i o n s t o e v o l v e d o m e s t i c a l l y . The t r u e s p i r i t o f s e r v i n g t he p u b l i c i n t e r e s t must be r e i n s t a t e d i n r e g u l a t o r y p o l i c y . APPENDIX A AIRCRAFT TYPES AND OPERATING CHARACTERISTICS The purpose o f t h i s A p p e n d i x i s t o i l l u s t r a t e the o p e r a t i n g and p e r f o r m a n c e c h a r a c t e r i s t i c s o f v a r i o u s a i r c r a f t t y p e s . The l o n g -h a u l o p e r a t i o n s w h i c h t y p i f y the P a c i f i c m arket l e n d t h e m s e l v e s t o the e f f i c i e n t use o f most j e t equipment. However, a t t e n t i o n w i l l be d e v o t e d o n l y t o t h a t equipment w h i c h i s a c t u a l l y u t i l i z e d by i n t e r -n a t i o n a l c a r r i e r s i n the P a c i f i c . The s t a t i s t i c s o f t h e U.S. C i v i l A e r o n a u t i c s B oard (C.A.B.) w i l l be r e l i e d on f o r two r e a s o n s : . (1) o t h e r r e l i a b l e d a t a i s l i m i t e d ; and .(2) t h e f a c t t h a t most non-American i n t e r n a t i o n a l c a r r i e r s a r e c o n t r o l l e d t o v a r y i n g degrees by t h e i r r e s p e c t i v e governments can i n t r o d u c e s t a t i s t i c a l d i s t o r t i o n . T h i s w o u l d be i n the n a t u r e o f p r e f e r e n t i a l t r e a t m e n t o f f e r e d to n a t i o n a l f l a g c a r r i e r s . The C.A.B. i n f o r m a t i o n i s f r o m c a r r i e r s who f u n c t i o n i n an a l m o s t homogeneous e n v i r o n m e n t . A H c a r r i e r s a r e s u b j e c t t o the same r e g u l a t i o n s and a r e r e l a t i v e l y f r e e f r o m the government i n f l u e n c e a s s o c i a t e d w i t h s t a t e - o w n e d a i r l i n e s . F u r t h e r , s i n c e t h e s e a i r l i n e s a r e p r i v a t e l y - o w n e d , i t can be assumed t h a t o n l y t h r o u g h e f f i c i e n t o p e r a t i o n can t h e y r e a l i z e a p r o f i t . I n f a c t , t h i s i s the purpose o f t h e i r e x i s t e n c e . The y e a r s 1967 and 1968 w i l l be c o n s i d e r e d and s i g n i f i c a n t v a r i a t i o n s i n o p e r a t i n g and performance c a t e g o r i e s w i l l be d i s c u s s e d . The f o l l o w i n g c h a r a c t e r i s t i c s w i l l be o b s e r v e d f o r each equipment t y p e : (1) o p e r a t i n g e x p e n s e s ; (2) c o s t p e r a v a i l a b l e t o n - m i l e ; (3) c o s t per revenue p a s s e n g e r - m i l e ; (4) a v e r a g e s t a g e l e n g t h f l o w n ; (5) a i r c r a f t u t i l i z a t i o n ; and (6) p a s s e n g e r l o a d f a c t o r s . These c l a s s i f i c a t i o n s w i l l p r o v i d e a b a s i s f o r c o m p a r i s o n f r o m y e a r t o y e a r and between equipment t y p e s . C o n s i d e r a t i o n w i l l be g i v e n t o t h e a i r c r a f t m e ntioned below: (1) B-707-300C (2) DC-8-61 (3) DC-8-50 (4) DC-8-30 These were chosen because t h e y a r e r e p r e s e n t a t i v e o f the equipment u t i l i z e d i n the P a c i f i c o p e r a t i o n s o f U.S. c a r r i e r s . A l s o , s i m i l a r t y p e s o f equipment a r e used by C a n a d i a n a i r l i n e s . The d a t a c o n t a i n e d i n T a b l e s A - l t h r o u g h A-4, as w e l l as t h a t p r e s e n t e d i n e s s a y form, d e p i c t s i n d u s t r y a v e r a g e f i g u r e s , n o t tho s e o f a p a r t i c u l a r c a r r i e r . C o s t Study o f the B-707-300C OPERATING COSTS - PASSENGER CABIN CONFIGURATION U.S. INTERNATIONAL/TERRITORIAL OPERATIONS 1967 AND 1968 (PER BLOCK HOUR) ( D o l l a r s ) B-707-300C (Turbo-Fan) F l y i n g O p e r a t i o n s : 1967 1968 Crew 151.18 163.59 F u e l and O i l 196.04 201.03 I n s u r a n c e 16.18 16.32 O t h e r 2.26 1.74 TOTAL 365.65 382.67 M a i n t e n a n c e - F l i g h t Equipment: D i r e c t M a i n t e n a n c e - a i r f r a m e and o t h e r 43.24 53.75 D i r e c t M a i n t e n a n c e - e n g i n e 40.13 42.58 M a i n t e n a n c e Burden 46.77 - 52.86 TOTAL 130.14 149.19 TOTAL DEPRECIATION 136.71 141.10 TOTAL OPERATING COSTS . 632.50 672.96 S o u r c e : C.A.B. O p e r a t i n g C o s t s and Performance Data (1969) f o r 1967 and 1968. T a b l e A - l p r o v i d e s i n f o r m a t i o n on the B-707-300C. The f i g u r e s r e v e a l t h a t f l y i n g expenses r o s e by 5 p e r c e n t between 1967 and 1968 w h i l e t o t a l d e p r e c i a t i o n and t o t a l o p e r a t i n g c o s t s r o s e by 4 p e r c e n t and 6 p e r c e n t r e s p e c t i v e l y . The most s i g n i f i c a n t i n c r e a s e was e v i d e n t i n the d i r e c t m a intenance on a i r f r a m e and o t h e r non-engine p a r t s . T h i s i t e m r o s e by 20 p e r c e n t and a c c o u n t s f o r o v e r h a l f o f the i n c r e a s e i n f l i g h t equipment maintenance expense. Y e t , a con-s i d e r a t i o n w h i c h u n d e r l i e s t h e s e maintenance c o s t s i s the equipment maintenance c y c l e . I t i s p o s s i b l e t h a t expenses r o s e s i m p l y because more a i r c r a f t were due t o be o v e r - h a u l e d and n o t because o f o p e r a t i n g c o n d i t i o n s . S u p p l e m e n t i n g T a b l e A - l the f o l l o w i n g f a c t s were c o m p i l e d on the B-707-300C. C o s t s per. a v a i l a b l e t o n - m i l e r o s e from 6.219 c e n t s i n 1967 to 6.937 c e n t s i n - 1 9 6 8 - up 9 p e r c e n t . A t the same t i m e , c o s t per revenue p a s s e n g e r - m i l e r o s e 7 p e r c e n t f r o m 2.186 c e n t s to 2.437 c e n t s . T h i s i n c r e a s e i n c o s t s can be p a r t i a l l y e x p l a i n e d by l o o k i n g a t a v e r a g e s t a g e l e n g t h and a i r c r a f t u t i l i z a t i o n . 1 Between 1967 and 1968, the i n d u s t r y mean s t a g e l e n g t h f o r B-707-300C's f e l l f r o m 2344 to 2219 m i l e s , and revenue h o u r s per a i r c r a f t p er day ( u t i l i z a t i o n ) dropped f r o m 11.00 t o 10.91 h o u r s . Thus, t h e r e were fewer a v a i l a b l e t o n - m i l e s o v e r w h i c h t o p r o - r a t e c o s t s , and t h e equipment was n o t used as e f f i c i e n t l y . The r e s u l t was a r i s e i n c o s t s . A n o t h e r f a c t o r w h i c h c o n t r i b u t e d t o r i s i n g c o s t s was d e c l i n i n g l o a d f a c t o r s . They dropped f r o m 50.7 p e r c e n t i n 1967 t o 48.0 p e r c e n t i n 1968. S i n c e o p e r a t i n g c o s t s can be a l l o c a t e d among fewer p e o p l e , c o s t per revenue p a s s e n g e r - m i l e i n c r e a s e s . Mahlon S t r a s z h e i m , The I n t e r n a t i o n a l A i r l i n e I n d u s t r y , (Washington: The B r o o k i n g s I n s t i t u t i o n , 1969), p. 85. F o r the DC-8-50's, f l y i n g c o s t s r o s e by.7 p e r c e n t o v e r 1967 e x p e n s e s , w h i l e m aintenance and d e p r e c i a t i o n d e c l i n e d by 6 p e r c e n t and 20 p e r c e n t r e s p e c t i v e l y . The l a r g e drop i n d e p r e c i a t i o n expense may stem f r o m the f a c t t h a t t h e r e t i r e m e n t d a t e s e t f o r t h i s s e r i e s o f DC-8's i s .1972. TABLE A-2 OPERATING COSTS - PASSENGER CABIN CONFIGURATION U.S. INTERNATIONAL/TERRITORIAL OPERATIONS 1967 AND 1968 (PER BLOCK HOUR) ( D o l l a r s ) DC-8-50 (Turbo-Fan) F l y i n g O p e r a t i o n s 1967 1968 Crew 177.02 197.94 F u e l and O i l 196.49 196.55 I n s u r a n c e 6.62 13.52 Ot h e r 0.22 0.14 TOTAL 380.34 408.15 M a i n t e n a n c e - F l i g h t Equipment D i r e c t M a i n t e n a n c e - a i r f r a m e and o t h e r 52.21 55.88 D i r e c t M a i n t e n a n c e - e n g i n e 55.46 42.29 M a i n t e n a n c e Burden 79.12 75.98 TOTAL 186.79 174.14 TOTAL DEPRECIATION 210.41 168.79 TOTAL OPERATING COSTS 777.55 751.08 So u r c e : C.A.B. O p e r a t i n g C o s t s and Perfo r m a n c e Data (1969) f o r 1967 and 1968. Hence, the m a j o r p o r t i o n o f t h e d e p r e c i a t i o n a l l o w a n c e would have a l r e a d y been c l a i m e d . T h i s assumes t h a t the a i r c r a f t a r e b e i n g d e p r e c i a t e d on a d e c l i n i n g b a l a n c e b a s i s . T o t a l o p e r a t i n g c o s t s f e l l by 4 p e r c e n t w h i l e c o s t per a v a i l a b l e t o n - m i l e remained c o n s t a n t a t 9.323 c e n t s . However, c o s t per revenue p a s s e n g e r - m i l e i n c r e a s e d f r o m 1.665 c e n t s t o 1.940 c e n t s up 19 p e r c e n t . The p r i n c i p a l cause o f the l a t t e r was d e c l i n i n g l o a d f a c t o r s . Between 1967 and 1968, l o a d f a c t o r s dropped from 70.3 p e r c e n t t o 61.4 p e r c e n t . On the o t h e r hand, the c o n s i s t e n c y o b s e r v e d i n c o s t per a v a i l a b l e t o n - m i l e a p p ears a t t r i b u t a b l e to c o u n t e r b a l a n c i n g f o r c e s : (1) a l t h o u g h average s t a g e l e n g t h f e l l f r o m 2152 t o 1944 m i l e s and u t i l i z a t i o n was down to 9.46 h o u r s i n 1968 compared t o 9.67 h o u r s a y e a r e a r l i e r ; (2) d e c r e a s e s i n maintenance and d e p r e c i a t i o n expenses had an o f f s e t t i n g e f f e c t . Hence, c o s t s d i d n o t r i s e as m i g h t o t h e r w i s e be e x p e c t e d . The DC-8-61 I n the c a s e o f the DC-8-61, the most s i g n i f i c a n t change between the two y e a r s was an 18 p e r c e n t r e d u c t i o n i n m a intenance expense. T h i s s a v i n g a c c r u e d f r o m improvements made i n e x p e n d i t u r e s f o r e n g i n e m a i n t e n a n c e . Change i n o t h e r expense c l a s s i f i c a t i o n s was m i n o r . Y e t , t h i s equipment d i d show i n c r e a s e s i n b o t h c o s t p e r a v a i l a b l e t o n - m i l e and c o s t per revenue p a s s e n g e r m i l e . The f o r m e r r o s e f r o m 6.031 t o 6.101 c e n t s , w h i l e the l a t t e r went f r o m 1.295 t o 1.386 c e n t s . OPERATING COSTS - PASSENGER CABIN CONFIGURATION U.S. INTERNATIONAL/TERRITORIAL OPERATIONS 1967 AND 1968 (PER BLOCK HOUR) ( D o l l a r s ) DC-8-61 (Turbo-Fan) F l y i n g O p e r a t i o n s 1967 1968 Crew 192.31 194.08 F u e l and O i l 219.14 229.57 I n s u r a n c e 19.16 21.60 Ot h e r 0.20 0.18 TOTAL 430.81 445.43 M a i n t e n a n c e - F l i g h t Equipment D i r e c t M a i n t e n a n c e - a i r f r a m e and o t h e r 57.14 56.96 D i r e c t M a i n t e n a n c e - e n g i n e 45.31 29.29 M a i n t e n a n c e Burden 71.88 56.45 TOTAL 174.33 142.70 TOTAL DEPRECIATION 170.13 173.02 TOTAL OPERATING COSTS 775.27 761.14 So u r c e : C.A.B. O p e r a t i n g C o s t s and Perfo r m a n c e Data (1969) f o r 1967 and:1968. The m i n i m a l r i s e i n c o s t per a v a i l a b l e t o n - m i l e can be r e l a t e d t o the f a c t t h a t a v e r a g e s t a g e l e n g t h d e c l i n e d s l i g h t l y . I n s t e a d o f 2166 m i l e s , the av e r a g e s t a g e l e n g t h was o n l y 2066 m i l e s i n 1968. Thus, fewer a v a i l a b l e t o n - m i l e s would be used t o p r o - r a t e c o s t s . C o s t per revenue p a s s e n g e r - m i l e c l i m b e d f r o m 1.295 to 1.386 c e n t s , w h i l e a t t h e same t i m e l o a d f a c t o r s f e l l f r o m 62.3 p e r c e n t to 58.9 p e r c e n t . T h i s d e c l i n e i n l o a d f a c t o r s h e l p s t o e x p l a i n the r i s e i n c o s t s . On the w h o l e , the v a r i o u s components o f o p e r a t i n g c o s t s appeared t o c o u n t e r b a l a n c e each o t h e r . Thus, the r e s u l t i n g v a r i a n c e i n t o t a l o p e r a t i n g c o s t s from 1967 to 1968 was a r e l a t i v e l y s m a l l 2 p e r c e n t . N e x t , c o n s i d e r a t i o n w i l l be devoted t o one f i n a l equipment type - the DC-8-30. The r e a d e r s h o u l d n o t e t h a t t h i s a i r c r a f t i s a t u r b o - j e t v a r i e t y i n c o n t r a s t t o the p r e v i o u s t h r e e t y p e s w h i c h were t u r b o - f a n . F o r the DC-8-30 equipment, maintenance and d e p r e c i a t i o n expenses i n c r e a s e d s i g n i f i c a n t l y d u r i n g the y e a r . The h i g h e r m a i ntenance expenses can be l i n k e d t o t h e f a c t t h a t t h i s s e r i e s o f j e t s has been i n s e r v i c e f o r q u i t e some t i m e . Hence, f r o m y e a r t o y e a r , more and more p a r t s a r e g o i n g t o need r e p l a c e m e n t . The cause o f the d e p r e c i a t i o n i n c r e a s e i s u n c l e a r . OPERATING COSTS - PASSENGER CABIN CONFIGURATION U.S. INTERNATIONAL/TERRITORIAL OPERATION 1967 AND 1968 (PER BLOCK HOUR) ( D o l l a r s ) DC-8-30 ( T u r b o - J e t ) F l y i n g O p e r a t i o n s 1967 1968 Crew 181.56 185.80 F u e l and O i l 256.89 246.13 I n s u r a n c e 8.75 8.58 Other 0.16 0.22 TOTAL 447.37 440.73 M a i n t e n a n c e - F l i g h t Equipment D i r e c t M a i n t e n a n c e - a i r f r a m e and o t h e r 95.89 93.42 D i r e c t M a i n t e n a n c e - e n g i n e 60.27 75.66 M a i n t e n a n c e Burden 123.73 147.23 TOTAL 279.89 316.31 TOTAL DEPRECIATION 151.66 171.77 TOTAL OPERATING COSTS 878.92 928.80 So u r c e : C.A.B. O p e r a t i n g C o s t s and Perfo r m a n c e Data (1969) f o r 1967 and 1968. From 1967 t o 1968, f a v o u r a b l e developments were o b s e r v e d i n a v e r a g e s t a g e l e n g t h and a i r c r a f t u t i l i z a t i o n c a t e g o r i e s . A v erage s t a g e l e n g t h grew f r o m 1351 t o 1590 m i l e s , w h i l e u t i l i z a t i o n jumped f r o m 9.72 t o 10.20 h o u r s . I n s p i t e o f t h e s e improvements, t o t a l o p e r a t i n g c o s t s went up by 6 p e r c e n t . I t would seem t h a t the i n c r e a s e s i n m a i n t e n a n c e and d e p r e c i a t i o n expenses o u t w e i g h e d the u t i l i z a t i o n and s t a g e l e n g t h b e t t e r m e n t s . R e f l e c t i n g t h e s e r i s i n g c o s t s , c o s t per a v a i l a b l e t o n - m i l e went f r o m 11.676 t o 12.119 c e n t s . S i m i l a r l y d e c l i n i n g l o a d f a c t o r s (53.0 p e r c e n t t o 51.9 p e r c e n t ) combined w i t h h i g h e r o p e r a t i n g e x p e n s e s , and c o s t per revenue p a s s e n g e r - m i l e c l i m b e d f r o m 3.023 t o 3.233 c e n t s . Summary TABLE A-5 SUMMARY OF OPERATING COSTS FOR B-707-300C, DC-8-50, DC-8-61, DC-8-30 1967 AND .1968 T o n - M i l e (c) B-707-300C DC-8-50 DC-8-61 DC-8-30 T o t a l O p e r a t -i n g C o s t s 1967 632.50 777.55 775.27 878.92 ( p e r b l o c k hour ($) 1968 672.96 .751.08 761.14 928.80 C o s t p e r A v a i l a b l e 1967 6.219 9.323 6.031 11.676 1968 6.937 9.323 6.101 12.119 C o s t p e r Revenue 1967 2.186 1.665 1.295 3.023 P a s s e n g e r M i l e ( c ) 1968 2.347 1.940 1.386 3.233 T a b l e A-5 i l l u s t r a t e s two p o i n t s : (1) the advantage o f t u r b o - f a n equipment; and (2.) the d i r e c t i o n i n w h i c h c o s t s have moved. I t would appear ;from the s e l e c t i v e sample o f a i r c r a f t t y p e s chosen t h a t t u r b o - f a n equipment i s more e c o n o m i c a l t h a n t u r b o -j e t t y p e s . T h i s i s due t o the more s o p h i s t i c a t e d e n g i n e d e s i g n and lo w e r m a i n t e n a n c e r e q u i r e m e n t s o f t u r b o - f a n a i r c r a f t . F u r t h e r , i n the two y e a r p e r i o d , the tendency was f o r c o s t s t o i n c r e a s e i n r e l a t i o n t o a v a i l a b l e t o n - m i l e s . The e x c e p t i o n to t h i s was the DC-8-50. C o s t r i s e s were t h r o u g h t a t t r i b u t a b l e i n most c a s e s t o a d v e r s e movements i n maintenance expense, a i r c r a f t u t i l i z a t i o n and a v e r a g e s t a g e l e n g t h . However, as was no t e d e a r l i e r , t he ma i n t e n a n c e c y c l e f o r j e t equipment under n o r m a l u t i l i z a t i o n c o n d i t i o n s i s two y e a r s . I t may be t h a t 1968 was s i m p l y the second y e a r o f the c y c l e and thus more o v e r - h a u l s were c a r r i e d o u t . The upward t r e n d i n c o s t per revenue p a s s e n g e r - m i l e was e x p l a i n e d i n a l m o s t a l l i n s t a n c e s by d e c l i n i n g l o a d f a c t o r s . The most a p p a r e n t example was f o u n d i n the DC-8-50. T h e r e , l o a d f a c t o r s f e l l by 8.9 p e r c e n t and were accompanied by a 19 p e r c e n t i n c r e a s e i n c o s t per revenue p a s s e n g e r - m i l e . The a n a l y s i s i n t h i s c h a p t e r i n f e r s t h a t c o s t p er a v a i l a b l e t o n - m i l e depends on a i r c r a f t u t i l i z a t i o n and ave r a g e s t a g e l e n g t h . On the o t h e r hand, c o s t per revenue p a s s e n g e r - m i l e i s a f f e c t e d by the l o a d f a c t o r s w h i c h a c a r r i e r e x p e r i e n c e s . There appears t o be a d i r e c t r e l a t i o n s h i p between c o s t s and t h e i r c o n t r o l l i n g f a c t o r s . 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