$IINNIPEG, Mar\ITOBA
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THE UNTVERSITY OF MANITOBA TIÏE ECO}TOI4TCS AND REGIII,ATTON OF COMMERCIAL ATR TRANSPORT TÍITH PARTICULAR REFERENCE TO MA,NTTOBA AND 'THTRD LEVEL' CAR.RIERS þy ROBERT COKE A THESTS SUBT4ÏTTED TO TT{E FACI.TLTY OF GRADUATB STUDTES TN PARTIAL FITLFII,MENT OF THE REQUIREMENTS FOR THE DFGREE OF MASTER OF ARTS DEPARTI'TENT OF ECONOMICS $IINNIPEG, MAr\ITOBA FEBRUARY, L973 ?rC l CdO'r fL I )GIÌ,111 irTT S Tl.ris tl-iesis 'began in the sil;r.ii1.er of L97L as a con- ti-nuati-c:'l of a r::ssa::ca assi-s'::alc::slr:'-p .,^tiri-cir I bec;an '.,.'i'ch Pro.". P.a.i-pir Har:,:j-s a'L the llnir¡ersity of i'1an-i-tclca tlrc pre- ceCi-ng vear. To]ri.ngoi1i)¡since::estthanl.'-,sfo:ce.ncouragien'lnt' sr:pÞort., a;rC per-ti-ence. In irel-'l:j.:rE mc to qa.i-n the opi:o::'tun-i-tr¡ of-,.:o:rl;..ì.;rg.uirða,:.theaj-c'oftjreCanad-j.anT:,:ansportColilir-is'sion, in s ti:ir-r.iati:rE irf inte:::.s't ì rr. thc stuc1V, a ril i-n sitpcortiact r.â r¡11;-¡¡;rri-ir i-h j.S l 3 lOnq .3:i ¡ -e v.! l::\,2 t.::l:'ì t.:C¡:l--,, Pi:O:1 " IIa.',:f deSe fVlS ì co:it -;-:,:'-ri-:c; a?lf: : ¡i at j-o,r . I I:r 'i:ho ccÌ-,.rse oL-" ü.'¡ stL1cLj.,:s, I r.rcir.J.c-1. .fLr--cthorro.ce l--'i-l;e 'i--.c €t:a:.'ìr..:,. Ìi.12 tlieîlis to t:re fol 1or..t:-:lg, -."¡,lc cont:¡iltu,r;ec.1. so r-i::srl-:Iisl.llv 'to '¿his ...'o::l:, i,ies G.-'a.l:an cf 'bhe ìianj-i-o'la : Grf:¡?:fl.,r,e:rt¡ Sta;r Caicl.r'¡el-l- cf Il-:î,or':1..-F.i,.'."r:lr:o:1. Ài::"øa.-rzs, and. li c-rr3 l--c' a,i,:i .,)a--r i-acfc;-tc;¿i--l- o-î --,'::a-:cii-i-::-.i:r:11,;lst ,\i:,:ii::es ..- | -- La,a. : Fina-l-l-.¡, I \..,a:1: 'Lo c:-¡ncl. :r-¿ ,:-ì. 1?r:.,g-L a..lp::e c j atíca ',:o sot-r::trc.le =¡-i-tìtou': r,,-'to.=-, nr1:?, rrl.,-.r-.:stae:-1i-:-rq, eLc.t- sy::r-ra.ilíì)¡,- i :."i.g-:1: Iìi:v.,aî ie-i¡" fr-,,1-fj-'i.'l-:-ii gì.a'ì. a.,..'c.:l;. patti. ABSTR.ACT The study examines the econonics and regulation of commercial air transport, with particular reference to those I'Ianitoba-basect air carriers generally regarded. as 'third level', and with the basic objective of considering appropriate public policy in the regulation of such carriers At present, no universally recognized definition of 'third level' commercial air transport exists. Concomitantly, there tras been no statement of public policy regarding the regn:lation of this sector, Hence, the setting of some terms of reference, in defining the norms of public policy, in con- sidering ihe econornic implications of alternative approaches, and in defining the inoustry, is the task of this analysis. l In bríef, it is only in examining the interaction of insti- tutional, enviÉonmental, and, operational variables that the devising of regulatory policy may be pursued The immediate need for a proper weighting of the object- ives of public policy is evident. nt; study places emphasis on Lr developing concepts of: 1. procluctive efficiency in a static sense 2. dynamic efficiency 3. optim.um allocative efficiency 4. the proper role of comPetition 5. service integration In conclusion, the pr-rblic policy recommendations offered imply a consj-cleration of a1l these norms; yet,'in the final devetopment of policy, the role of normative judgment cannot be ignored. The thesís dran^¡s from this broacl consideration of the theoretical implÍcations of differ-ent regulatory appÉoaches as v¡ell as from a consíderation of actual t{anitoba air trans- port experience, and a contrast of 'third level' and 'regional' air carrier situations. An interpretation of existing regu- latory influence and of the 'thírd. level' air carrier's dis- tinctive problem is derived. In short, it is the problem of ínstitut.ional inflexibility in a c'lynamícally fluctuatíng en- vironrnent. In the end, a change in the direction of regu- lation, avray from the present case-by-case consideration of indivíc1ual market requirementsr or'structuralist' approach, and tolards a more flexible arrang:ement of licensing with some degree of investment guid.ance, is suggested. La t- As a gieneralization, 'third level' air carriers re- present a 'fringe' of Canadian domestiq air transport operating in thin markets suitable to small capacity aircraft, low frequency operatioa, and rnonopolistic seller concentration. Because of their monopolistic positions, these carriers gain an importance in public policy which signíficantly outvreighs their size. At the same time, hovrever, the prevalence of small orrzn€r-Inê.nager enterprises in this sector has lecl to ad hoc, short-run, and often opportunis.tic behaviour by these firms consistent rvith their lack of specialízation and stability. A general tendency to heterog'eneous fleets and excess capacity is tl.us attributed to the industry-. The need for some form of regulatory control on expansions of capacity is undeniable. Concuri:ently, the volatility of seasonal demand fluctuatíons and of temporary d.emands suggests a strong need for variability in the cost structures of tTrese firms ærd fle><ibility in their abilities to reallocate resouries as d.emanils change. To some extent, these needs are met by the operational requirements of the licence authorities under which these firms are legally aIloro'ed to provide air services. l_v As a result, 'tirird level' commercial air carriers have not exirerienced the critical losses associated with 'regional' air carriers in the mid-1960's and reflected in present 'reg'ional' oolicy. The requirement for a different regulatory approach relative to 'regional, policy is thus established.. The emphasis here is on 'dynamic efficíency', the abiríty to adapt to'exogienous' change over tíme in a manner which avoid.s serious maladjustrnents in individual markets. The objective set, furthermore, is the maíntenance of totar capacity ín a 'general' equilibrium isith total clemand. rather than on any 'partíal' or individ.ual market basis Present regulation operates onry ambiguously and in- flexibly. ïn interpreting the 'public interest', regulators have seen fit to concentrate most particurarry on selrer concentrations'and the licensing of entry to individial markets. As a result, inflexibilities in reallocating resources over a system of fluctuating markets has been observecl. rn com- bination with the over-expansionary and inconsiste-rt invest- ment policies of these smaller firms, a tendency to¡¡¡ard merger and consolidation activity and a lack of abirity to otherwise integrate services is noted As a change in public policy, therefore, it is sug- gested that the present policy of licensing entry to specific points on an individual trial basis be altered in favor of a more fle>rible arrangenent. A policy which aIlows greater freeclom in rearlocating capacity among specific points and, at the same time, regulates capacity in a g:eneral eguilibrium- sense, i.e. in relation to some total system of markets or demands, is advocated. Such a policy should remove the . problems of excess capacity.attributed to the 'third leveL. industry. Concomitantly, increased market-orientation by the. regulatory authority and. the individual firrns, greater ínter- line co-operation, and a greater integration and rationalization of route systems can be established. vL nl^ ñ1 ñõ Ll)'lJl r lir) Page Chapter II I f " I COS'.1' PlÌRÌ-¡Onr-/rAl\lC :ì DI Fl¡riRIÌi,lT AIlìCr'{Al¡T À-r,¡AiL;\RLìÌ 77 i IT. 2 BIì: A:Ii.CV]]N TOLI, 1ìEQUIIìEJ.;E}TTS 7A-79 Cìrapter f T I III. I TRÄNSAIR Lfl:.iITtrD STATEl.lEidT OF LOSS AND DEFTCTT . II2 : III.. 2 MIDT,IEST AïRLTNES LII-{ITED STATtr}4ENT Ctr ' , INCOI'ÍE AND RETAINED ËARI'TINGS ILz Chapter IV TV. 1 RELATTON OF 'THIRD LEVTIL' CAIIRTERS TO T'OTA.T- DOI,'IESTTC COMI.{NRCTAL AVIATIOI'{ I51 rv. 2 AVEP"AGE TOTAL ASSETS/Cí-U,ÍPANY I53 , IV- 3 AIR SERVICES REidÐlìRI.i), 1-970 l.54 : IV. 1¡ SOURCES OF ri-'tcoi.;..,j, L970 155 TV. 5 ATRCRAFT RNPRìTSJIJ-']TA'IÏVE OF ITI-ITRD LBVtrL' trLEET CI]A2\C'TtrRISTTCS T57 ,t'..: TV. 6 QUARTERLY FLUCTUATTo}IS TN ToTAL UT.TIT ] TOLL SERVICtrS 168 : IV. 7 QUA]'.TERL)I FLTJCTU-ATIONS IN TOTAI, CTIAIìTßR REVET{UBS 169 IV. B QUARTEIìLY FT,UCTUATIOi{S TN ALL SERVTCES BY MÏLES FLOlnr, L97O . L7O : IV. 9 AVI]RAC.;tr STAGE LEI{GTI_IS OF CANADIAN ATR cAR!ìt:rJRS, L97O . L72 var Page IV. IO REPOIITI]D OI?I]TLATING COSTS l-74 IV. 1I soltlìcxs cF opltR^Tjiìrc co3'IS 31a r,liiìcrij:;i?ÀG i ìs 1.7 i¡ T1.7 1 ) I.l:í'lElìi:l5ll jil -l','iiilSfl ÀS ji\ P'lìiì-cllìl'i¡'Gl ì or TOilhI-, OPiIfìl1T-l-i:iG Í;-'íP lilSi 115 .r^dtñõ 177 rv. l- 3 liV r',iU\þr- L(rti f È) T\7 1L VARIzr'Ti,.Ji'iS IN Q'irÀR.TiRLY OUTPi.jTS iiir'ii) COSTS I7Íl T\2. 15 COl,illÄP.ISOtT Oi¡ QUARTERLY CIl¡ìITGtrS IN OUTPUTS AId) COSTS L79 TV. 16 opEr?.ÄTrI{G TNCOI,'IES (+) QUARTEP'LY R.I]SULTS ilOR T97A IB0- 101 ]V. L7 I\TET TI.TCOI,íE AFTEIT II{COI''IE TA>íES ($) LB2 TV. 1B AVtrR.AGE }TET T}TCOI.ÎE AS A PERCENTAGE OF AVERAGE TOTAL ASSETS 183 rv.