About the Non-Skeds

Introduction
The theme of this report is that although federal government introduced airline regulation to promote public interest, over time the Civil Aeronautics Board tended to promote the interests of the airline industry rather than those of the public. At the expense of the public, it is my belief, that the Board did not follow certain laws. The Board's reign spanned over forty years with countless changes, amendments, and restructuring. This paper will examine the events throughout the forty-year span in order to conclude on the justification for regulating the airlines, specifically the supplemental carriers.

The Beginnings of Regulation
The Air Mail Act (also known as the Kelly Act) was the first important Act with regard to airlines and was passed in 1925 to relieve some of the problems faced by the airline industry in the early stages. It required air mail contracts to be awarded by competitive bidding and provided subsidies for commercial air mail. The goal of this legislation was to develop commercial aviation and to transfer air mail operations to private carriers. The federal government believed that development of commercial aviation was essential. It also thought that air mail operations could not be carried out more efficiently than by the private sector at a lower cost.

Between 1918 and 1937, fifteen Congressional investigations were conducted in the field of aeronautics (Sinha, 2009). The Air Commerce Act was designed to encourage passenger services and was passed in 1926. The effect of the Kelly Act was that the carriers were concentrating on air mail service and were not interested in providing passenger service. The Air Commerce Act initiated the development of civil airways and navigational aids and provided for the regulation of safety by the federal government. The government's main goal was to have a stable and viable airline industry, although the Act was more promotional than regulatory in nature.

In 1930, the Postmaster General Walter Brown, initiated the Air Mail Act of 1930. Brown urged against competitive bidding for air mail contracts and the Air Mail Act of 1930 gave the Postmaster General wide-ranging powers (Sinha, 2009). The Postmaster General could now grant air mail contracts without competitive bidding. The Act initially was to promote public interest through regulated competition rather than through a monopoly or excessive competition.

Following the election of 1932, some of the smaller airlines began complaining to news reporters and politicians that they had been unfairly denied airmail contracts by Brown (Air Transport Association of America, 2009). In response to the accusations, Senator Hugo L. Black of Alabama began conducting hearings into the matter which were referred to as the "spoils conferences." By the end of January, the Black Committee had enough evidence to recommend to President Roosevelt that all airmail contracts be canceled pending completion of new reform legislation. Roosevelt issued the cancellation order on February 9, 1934. Ten days later, the Army Air Corps began flying the mail, only to suffer a disastrous series of accidents and fatalities that turned the exercise into a public relations nightmare for the early New Deal (Lewis, 2000). The New Deal was a series of economic measures designed to alleviate the worst effects of the depression, reinvigorate the economy, and restore the confidence of the American people with the creation of various key institutions.

It was soon apparent that the only recourse would be to restore the airmail routes to the airlines, however, the provision was inserted that no airlines that had been involved in the "spoils conferences" were eligible to bid. The law made permanent the temporary airmail contracts and gave the Postmaster General authority to extend them "for an indefinite period." Rates were strictly controlled, not by the Post Office but by the Interstate Commerce Commission (Lewis, 2000). The Act once again embraced the principle of competitive bidding. Peace and stability finally came to the airline industry after nearly ten years of turmoil. It is not surprising that the New Order eventually established the Civil Aeronautics Act of 1938 (Lewis, 2000). The Civil Aeronautics Act was the most important piece of aviation legislation and became the cornerstone of American commercial aviation. The airline industry was now responsible to a single government agency, The Civil Aeronautics Authority (CAA).

The Civil Aeronautics Board
Airline regulation ultimately began with the passage of the Civil Aeronautics Act of 1938. Under the governmental reorganization act passed in 1940, Roosevelt replaced the old Civil Aeronautics Authority with an even stronger body, the Civil Aeronautics Board (CAB). The CAB was responsible for the economic supervision of the airline industry and the roles previously assigned in the Air Safety Board. The Air Safety Board was eliminated and the Administrator of Civil Aeronautics was transferred to the Department of Commerce. The Civil Aeronautics Board became the sole agency in control of economic regulation and was one of the most powerful regulatory agencies in American history (Sinha, 2009).

After 1938, no airline could perform airmail or scheduled passenger operations over any route without securing what was called a Certificate of Public Convenience and Necessity (CPCN) from the CAB (Lewis, 2000). Service could not be abandoned without formal permission once it was established on a route. No new carrier could engage in commercial aviation without CAB sanction. In addition, no merger between airlines could take place without CAB's consent. All tariffs and charges for the transport of passengers and goods had to receive CAB approval (United States Statutes, 1938).

One of the greatest attractions of the Civil Aeronautics Act of 1938 was that airlines could now be permanently certificated to operate on given routes, rather than have to submit to periodic review. The right to continue operating routes flown before 1938 was virtually automatic. A carrier merely had to present evidence of giving satisfactory performance to be "grandfathered" on a pro forma basis (Lewis, 2000). Under the "grandfather clause," sixteen carriers were granted certificates to provide air transport service. These carriers became known as the scheduled airlines (also called trunk carriers). When the certificates were being awarded under the grandfather clause for the scheduled airlines, a number of carriers were providing nonscheduled services. These nonscheduled carriers were exempt from having to obtain certificates of public convenience and necessity. The uncertified carriers were later divided into two groups: the small irregular carriers (also known as air taxi operators and commuter carriers) and large irregular carriers (also known supplemental carriers).

The Civil Aeronautics Board inherently enforced a cartel, protecting existing airlines from new competition. In the entire history of the CAB, until airlines were deregulated in 1978, the CAB did not issue a license for a single new interstate airline. Without a CAB certificate of public convenience and necessity, an airline could not fly an interstate route. The CAB made clear its intent to suppress competition when it declared, "In the absence of particular circumstances presenting an affirmative reason for a new carrier, there appears to be no inherent desirability of increasing the present number of carriers merely for the purpose of numerically enlarging the industry (Powell, 2009)."

The Rise of the Supplemental Carriers
After World War II, the airline industry was in a state of crisis because of something that lawmakers had not anticipated when they established the Civil Aeronautics Act in 1938. During World War II, pilots serving in the Air Transport Command saw the possibility of making airlift operations into private enterprises. When the war ended, large numbers of military transport planes could be acquired with very little capital. This type of business developed in a regulatory limbo because the Civil Aeronautics Act had been established to serve the interests of airlines conducting scheduled flights. The CAB used a loophole in the Civil Aeronautics Act of 1938 to certificate the operations of "irregular" air carriers without fixed schedules and routes, intended to license the activities of bush pilots, crop dusters, and various other small operators, to validate companies flying large transport aircraft (Burkhardt, 1974).

The supplemental carriers could not help but compete with the regulated industry, but they had a significant advantage in that they were not held to the same requirements for safety and service. The appearance of supplemental carriers after the war worried the trunk carriers whose leaders were naturally concerned that interlopers who had bought a motley assortment of aircraft at cheap prices would invade markets that existing airlines had worked hard to develop under stringent government regulation. It was only natural that companies with strong vested interests in things as they were would try to make things as difficult as possible for the up and coming supplemental carriers, which came to be called "nonskeds."

In 1946, the CAB launched a one-year investigation into the non-scheduled air services. This resulted in a decision in 1947 to allow these irregular airlines to operate under temporary grants of authority. As modified, the rules required a letter of registration from the Board before any large surplus aircraft could be placed into public service. Holders of the registration were commonly known as "large irregular carriers" to differentiate them from the small irregular carriers (Burkhardt, 1974).

During the 1950s, complaints to the CAB from the scheduled airlines grew in volume and resentment. Not only did the nonskeds compete on United States domestic routes but also won military contracts for overseas flights. In Europe, during the Berlin Airlift, the nonskeds carried 25 percent of the passengers and 57 percent of the cargo tonnage. During the Korean War, 50 percent of commercial air tonnage flown into the zone of warfare arrived aboard aircraft of the nonsked contractors. One 1946 estimate claimed there were 2,400 "airlines" in the United States, all but 17 of them were supplemental carriers. By the early 1950s, approximately 63 so-called large irregulars routinely transported passengers, some of them duplicating regular airline routes at drastically reduced fares (Lewis, 2000). The major airlines tried to control them by relying on regulations applied through the CAB.

The Demise of the Supplemental Carriers
In 1948, the CAB imposed a freeze on the issuance of new letters of registration. One year later, the regulation was revised and blanket exemptions were ended. In their place was a Board requirement that each carrier file for individual specific operation rights. These applications were consolidated in 1951 into a proceeding known as the "Large Irregular Air Carrier Investigation (docket 5132)." The purpose of the investigations was to determine where this class of carrier fitted into the national air transportation system, what kind of services they should be allowed to continue to operate, and whether these carriers should be granted certificates under section 401 of the Act or should continue to be allowed to operate by exemption from the certificate and the other requirements of the Board (Senate Select Committee on Small Business, 1951). This investigation dragged on for more than ten years, including the court appeals.

With tougher scrutiny and regulation, the nonskeds had a difficult time surviving in the 1950s. The Civil Aeronautics Board refused to address repeated formal requests for certification of the supplemental carriers. This lack of clear status in the governments aviation policy, which seemed to be largely the result of lobbying by established competitors. The supplemental carriers found that the CAB kept initiating new restrictions that prohibited them from flying. Not being able to fly and obtaining CAB legitimacy inherently led the majority of the supplemental carriers into bankruptcy and to their ultimate demise. Contrary to national and international regulations, the supplemental carriers could not survive long-term without redefinition. After a series of scandals over safety, service, and reliability that emerged in the late 1950s, Congress determined that it had to restructure the industry. Although most of the supplemental carriers were out of business, Public Law 87-528 passed by Congress on July 10, 1962, established the permanent role of the supplemental carriers as a legitimate part of the United States' air transport system (United States Statutes, 1958). This legislation enabled the CAB to set specific standards for the supplemental carriers, to restructure that segment of the industry, and to ensure a place for them as charter carriers fenced off from the scheduled airlines. Thus, of the 142 letters of registration issued to irregular carriers before the CAB imposed the freeze in 1948, only thirty supplemental air carriers still held authority when Public Law 87-528 was passed. The Board processed Twenty-seven applications for interim authority under that legislation and only fifteen were granted (Burkhardt, 1974).

Federal Aviation Act of 1958
The passage of the Civil Aeronautics Act of 1938 greatly increased the regulatory functions and responsibilities of the government. Additional legislation was needed to deal with various problems that cropped up because of the tremendous growth in the domestic airline industry. Under these circumstances, the Federal Aviation Act of 1958 was passed to amend the Act of 1938 (United States Statutes, 1958). It created a new agency, the Federal Aviation Agency, which is now referred to as the Federal Aviation Administration (FAA). The FAA was responsible for regulating air space, acquiring, operating and developing air navigation facilities and prescribing traffic rules for all aircraft. Air safety regulation was also the responsibility of the FAA. However, there was no change as far as economic regulation was concerned. The Civil Aeronautics Board continued to be in charge of economic regulation as well as of the investigation of civil aircraft accidents. The Act also made the Board an independent agency, rather than attached to the Department of Commerce.

The Events Leading to the Deregulation Act of 1978
In October 1974 the Civil Aeronautics Board prepared a study of the domestic route system of the forty-eight contiguous states. It found that the overall volume of service was excessive in regulation to demand competitive markets. Given the projection of relatively slow growth in demand, the study recommended that new or additional authority should be awarded at a slower rate. In October 1974 the Ford administration established a National Commission on Regulatory Reform to study the federal regulatory agencies in depth. The aim was to eliminate regulations that increased costs to the consumer (Sinha, 2009).

It was a new era, demanding an entirely new outlook based on faith in market-driven capitalism. Alfred E. Kahn, an economics professor at Cornell University, started preaching what became the credo of the future: "that market forces should be allowed to control economic enterprise and that government regulation was counterproductive." Kahn was appointed chairman of the CAB in June 1977 and within four years, the CAB ceased to exist (Lewis, 2000). A Bill was passed by the Senate in April 1978 under which airlines were given more freedom to compete and the regulatory powers of the board were reduced. Similarly, in September 1978 the House passed a Bill giving airlines more competitive freedom in setting fares and route structures. The stage was now set for the passage of the Airline Deregulation Act. President Carter signed the Act into law on October 24, 1978 (United States Statutes, 1978). The Act ended the virtual monopoly held by the trunk carriers and gradually relaxed the Civil Aeronautics Board's regulation of the airlines.

More importantly, the leaders of the supplemental carriers were able to convince many senior politicians of the unfriendly nature of the government's strict regulations and the trunk carriers desire to bar them from competition. "This is a provocative thesis that conjures up images of conspiracy and cover-up at the highest levels of government and business, collusion between the regulators and the regulated, and victimization of the weak and defenseless but nonetheless important supplemental air carriers by a far from benign airline industry elite and by the regulatory infrastructure of the Civil Aeronautics Board (Lewis, 2000)." The Senate Select Committee on Small Business endorsed this theory as early as 1951: Beginning in 1948 the Board (CAB) apparently commenced a program of strict enforcement … the certificated carriers took an active interest in these efforts to eliminate the nonscheduled air carriers…To the extent that the "nonskeds" still exist today, they have managed to survive since 1948 in spite of constant harassment…In view of the Board's responsibility for the route pattern and the determination of mail pay allowances, it is only reasonable to expect that the five Board members would generally view air transportation problems in very much the same way as they are viewed by the industry…The nonscheduled industry has kept alive and developed technical skill and administrative know-how which has proved to be of great value in defense emergencies…These carriers offer a flexible airlift capacity that can be brought into military use far more rapidly than the certificated airlines whose equipment is obligated by commitments and scheduled to service regularly appointed routes.

Senator Wayne Morse (D-Oregon) summarized the details of this perspective in 1962: "We have the picture of the aviation industry arriving at a state of total monopoly, coming to this state through the machinations of the major trunk carriers. A pliant Civil Aeronautics Board had historically responded to their bidding … and has functioned as their … devout champion over the years (Lewis, 2000).

Conclusion
Antitrust laws have long prohibited corporations and other private business firms from joining together in various restrictive commercial practices, including restrictive labor practices. The CAB was able to grant immunity from antitrust laws, which even the President of the United States, had no such power. In fact, one can argue that the Civil Aeronautics Board at one point or another violated a number of laws and Acts as described by Henry Cheeseman: Section 1 of the Sherman Act states that every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy decalred to be illegal shall be deemed guilty of a felony.

Section 2 of the Sherman Act states that every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.

Section 7 of the Clayton Act provides that it is unlawful for a person or business to acquire stock or assets of another "where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisitions may be substantially to lessen competition, or to trend to create a monopoly.

Federal Trade Commission Act was enacted to protect consumers from unfair methods of competition. These unfair or deceptive methods by a business need only to have the possible likelihood of deceiving the consumer.

Due Process Clause of the Fifth Amendment is probably the clearest violation of the Civil Aeronautics Board concerning the aviation industry. The substantive due process category of due process require that government statutes, ordinances, regulations, and other laws be clear on their face and not overly broad in scope.

Clearly, deregulation has been no solution. It has merely created new problems with which executives and federal officials alike must cope. Significantly, when deregulation did come, it came largely from outside. With few exceptions, leaders within the airline industry itself dreaded it. If reregulation should come, as many people think it inevitably will, it will be partly because the industry wants it, just as it wanted it in the late 1930s when the Civil Aeronautics Act was established that ultimately died four decades later. The business community is still as it always has been. Entrepreneurs may distrust government, but they will court its intervention if it suits their purposes to do so.

One thing, however, is predictable. If reregulated airline industry is in the future, it will not be exactly like the Civil Aeronautics Act of 1938. Nor should it be, because experience gained from the past should help lawmakers avoid making the same mistakes that their predecessors did. The CAB and the regulatory attitude it represented were products of a time when statism was in style, even in those few nations that adhered to a democratic form of government in a world dominated by various forms of dictatorship.

Works Cited
Senate Select Committee on Small Business, Report on Role of Irregular Air Carriers in the United States Air Transportation Industry, S. Rept. 540, 5, 8, 17 (82 Cong., 1st sess April 23, 1951).

Air Transport Association of America. (2009, February). Air Transport Association. Retrieved March 10, 2012, from ATA Airline Handbook: http://libraryonline.erau.edu/online-full-text/books-online/1064.pdf

Burkhardt, R. (1974). The Civil Aeronautics Board. The Green Hill Publishing Company.

Cheeseman, H. (2010). Business Law. Upper Saddle River: Pearson Education.

Lewis, W. D. (2000). Airline Executives and Federal Regulation. Columbus: The Ohio State University.

Neumann, D. (2012, March 29). (A. S. Andrew Mathis, Interviewer)

Powell, J. (2009, March 31). How FDR Promoted Price-Gouging. Retrieved March 10, 2012, from Lee Rockwell: http://www.lewrockwell.com/orig4/powell-jim7.html

Sinha, D. (2009). The regulation and deregulation of US airlines. Retrieved March 10, 2012, from Macquarie University: http://www.manchesteruniversitypress.co.uk/uploads/docs/200046.pdf

United States Statutes. (1938). Embry-Riddle Aeronautical University Libraries. Retrieved March 10, 2012, from Civil Aeronautics Act of 1938:

http://libraryonline.erau.edu/online-full-text/books-online/CivilAeronauticsAct.pdf

United States Statutes. (1958). Embry-Riddle Aeronautical University. Retrieved March 10, 2012, from Federal Aviation Act of 1958: http://libraryonline.erau.edu/online-full-text/books-online/Aviationlawpt1.pdf

United States Statutes. (1978). Embry-Riddle Aeronautical University. Retrieved March 10, 2012, from Deregulation Act of 1978: http://libraryonline.erau.edu/online-full-text/books-online/PL95-504.pdf