J[kt"l C (il -� CANADIAN TRANSPORTATION RESEARCH FOR UM )l., ::- LE GROUPE DE RECHERCHES SUR LES TRANSPORTS AU CANADA PROCEEDINGS OF SEVENTEENI'H ANNUAL MEEI'ING CANADIAN TRANSPORTATION RESEARCH FORUM Volume 1 MONTREAL, WEB&:: MAY 26, 27 & 28, 1982 Compiled by: R. Lande & K. Tansey .... VI-22 • VI-2 1 Introduction Weather and population are frequently cited as reasons why U.S.-style airline deregulation is not a feasible policy for Canada. The argument is that Canada's more severe winter weather and its small and dispersed population result in unique oper- ating problems that require the continuation of the extensive regulation that has 1 characterized Canadian air transportation since 1938. At the same time, while these differences between Canada and the United States are relied upon to oppose the imple- WEATHER, POPULATION AND CANADIAN AIRLINE REGULATORY POLICY mentation of deregulation, no explanation is given as to why these differences did not serve to prevent Canada's adoption of airline regulation back in 1938 when regulation was also adopted by the United States.2 This raises the question of why is the argument asymmetrical? Why should weather and population constitute reasons for differentiating between Canadian and U.S. policies since 1978 while not providing a basis for doing so between 1938 and 1978 when regulation was the common policy of both countries? If weather and population have important differentiating effects on William A. Jordan airline per- Professor of Economics formance, it seems reasonable to expect that those concerned with airline operations Faculty of Administrative Studies and regulation would have studies that York University sponsored or been aware of measured the effects of those factors so that specific adjustments could have been made to reflect their impact. Yet, nowhere in their statements regarding weather and population have the opponents of deregulation referred to research findings that support their assertions. This apparent lack of formal evidence deserves to be rectified. In a recently completed research project jointly sponsored by Consumer and Corporate Affairs Canada and the Economic Council of Canada (in collaboration with Transport Canada), the question of the effects of weather and population differences was studied within the context of whether or not regulation has an appreciable effect on airline performance.3 While major performance differences were found to be asso- ciated with differences in regulation, both direct and indirect evidence failed to identify appreciable effects of either weather or population on operating expenses per RTM or on employee productivity. This paper will summarize these research findings. In the process, it will demonstrate that substantial similarities existed in airline operations in the two countries under common regulatory environments, thereby implying that airline performance in the two countries would also be similar under deregulation. Methodology and Data Sources The research project was based on comparisons of the performance of the Canadian CTRF Annual Meeting May 26-28, 1982 airlines operating large turbine Montreal, Quebec -powered aircraft with that of selected U.S. airlines operating the same aircraft types. All of the Canadian airlines were regulated by the -2- VI-.23 VI-24 Transport Commission [CTC(A)], and they con- Air Transport Committee of the Canadian The data analyzed in the research project emphasized the four-year period from carriers), plus Eastern Provincial, sisted of Air Canada and CP Air (the mainline 1975 through 1978. Four years were analyzed in order to avoid anomalies occurring in Transair (the regional carriers). Seven of Nordair, Pacific Western, Quebecair and a single year. The comparison ends with 1978 because the major changes in U.S. air- federally-regulated, but by the Civil Aeronautics the U.S. airlines studied were also line regulation resulting from the passage of the Airline Deregulation Act (ADA) on Northwest and Trans World (trunk carriers Board (CAB). They consisted of Delta, October 24, 1978, make it inappropriate to use U.S. data for subsequent years during carriers) plus Allegheny, Frontier, North Central and similar to the Canadian mainline which the transition from regulation to deregulation has been in progress.5 Southern (local service carriers similar to Canadian regional carriers). Except for Delta and Southern, they were selected because their systemwide geographic operating Weather and Airline Performance areas were most similar to those of the Canadian carriers. Delta and Southern, in Weather affects productivity, and therefore costs, in all industries where signif- contrast, were selected because their operating areas were located largely in the icant proportions of total production must be undertaken outdoors. Examples include southern United States and both were headquartered in Atlanta, Georgia. Thus, if agriculture, construction and all transport modes. It happens that airlines have an adverse weather has a significant impact on operations, their performance should be advantage over surface modes in being less affected by snow, ice, rain and fog during that of the Canadian and the more northern U.S. airlines. superior to or enroute operations. Especially adverse weather can often be avoided by flying over four U.S. airlines included in the study were not regulated by a An additional to around it at relatively low additional cost, while surface carriers generally have federal commission. These were the four major intrastate carriers -- Air California, plough through adverse conditions. Airlines are, however, disadvantaged relative to Air Florida, PSA and Southwest -- that, prior to the end of 1978, were regulated only surface carriers in terms of weather in and around terminals. Airplanes can only stop by state commissions. Since these intrastate carriers served city pairs within (land) at airports, and this can be done only if local weather conditions are not too Texas that were also served by CAB-regulated airlines, they California, Florida and or severe. Also, an airplane cannot depart from an airport if it is closed by weather operated within regulatory duopolies comprised, on the one hand, of a group of air- if the destination and alternative airports are forecast to be closed at the estimated the other hand, by intrastate carriers regulated lines regulated by the CAB and, on are time of arrival. Clearly, the critical weather conditions of airline operations was in sharp contrast to the regulatory monopolies that by a state commission. This effects those experienced at airports rather than enroute. Thus, a comparison of the of the U.S. under the CAB, and in Canada under the existed throughout the remainder conditions of weather on airline performance can concentrate on the relative weather CTC(A). Not only did the regulatory duopolies allow the entry of new airlines into at the airports served by each carrier. Finally, it should be recognized that all the intense rivalry that developed among the air- the U.S. industry, but they allowed degree airlines experience adverse weather conditions. Therefore, the question is the lines to be expressed both through lower fares and through differentiations in service to which some airlines experience relatively more adverse weather than other airlines, is in contrast to the regulatory monopolies that virtually prohibited quality. This conditions. not whether some airlines enjoy good weather conditions while others have bad the entry of new airlines and rarely allowed general fares to deviate from commission- approved fare formulas. As a result, rivalry solely between federally-regulated air- Direct Evidence Regarding Weather lines was restricted mainly to improving service quality through scheduling more all) airports served by the airlines flights with newer aircraft and by providing higher levels of inflight service. Not Historical weather data for many (but not U.S. Department of Commerce.6 From surprisingly, these differences in regulatory environments resulted in the federally- have been published by Environment Canada and the weather factors were recorded for every regulated airlines providing levels of service that were generally superior to those these sources, the data pertaining to four in 1978 by each of the 18 Canadian and U.S. of the intrastate carriers, which, in turn, adopted fares that were as much as 50 available North American airport served resulting "sample" ranged from a 93 percent percent below the levels set by the CTC(A)/CAB fare formulas.4 Overall, since they airlines included in this study. The percent for Air California. The four weather allowed both entry and price competition, the regulatory environments within California, coverage for Air Canada down to 45 snowfall; percentage of times during regularly Florida and Texas approached the environment associated with deregulation and, there- factors studied were: mean annual (taken throughout the day) that the ceiling and/or fore, provide evidence on how airlines will perform after the full effects of deregu- scheduled weather observations Category I minimums of 200 foot ceiling and/or one-half mile lation have had time to work their way through the airline industry. visibility fell below the -3- -4- VI-25 VI-26 Table 1 visibility, thereby preventing landings and takeoffs at most major airports; mean minimum temperatures during December through March; and the mean maximum temperatures Weather Factors,a System Operating Expenses per RTM and Passenger Trip Lengths Canadian during June through August. Mainline, Regional and Selected U.S. Carriers The simple averages for the four weather factors for each carrier are presented in Mean % of Obs. Table 1. These averages show that Canadian carriers face heavier snowfalls 1975-78 Average System within Carrier Annual Belay Mean Temp.( °F) Op. Exp./RTM Pax. North America than do the federally-regulated U.S. carriers, and that the U.S. intra- Snowfall Category I Dec-Mar Jun-Aug SCan. & U.S. Ol Trip (inches) Minimumsb Minimum Maximum state carriers experience very little snow. Associated with this is the expected Actual Trend Lengthd finding that Canadian carriers have lower average minimum winter temperatures than U.S.