This dissertation has been 63-73 microfilmed exactly as received MIKHAIL, Azmi Danial, 1930- FINANCING THE UNITED STATES MAJOR DOMESTIC TRUNK AIRLINES, 1955-1960. The Ohio State University, Ph.D., 1962 Economics, commerce—business University Microfilms, Inc., Ann Arbor, Michigan FINANCING THE UNITED STATES MAJOR DOMESTIC TRUNK AIRLINES, 1955 - I960 DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Azmi Danial Mikhail, B. Com., Dipl. The Ohio State University 1962 Approved by Adviser Department of Business Organizat ion ACKNOWLEDGMENTS I would like to state my obligation and express my sincere appreciation to my wife, Insaf A. Mikhail, for her patience and encouragement during the course of composition, without which this dissertation could not have been completed. Also, 1 wish to express my appreciation and gratitude to my dissertation reading committee consisting of Professors Elvin F. Donaldson, N. Gilbert Riddle, and Robert D. Patton for their constructive criticism and advice. I am especially grateful to Dr. N. Gilbert Riddle for his guidance and inspiration in his role as major adviser and dissertation chairman without which this study would have been impossible. CONTENTS Page TABLES......................................................................................................... vi i Chapter i. INTRODUCTION....................... 1 Purpose of the S tu d y ......................................................................... 1 Scope of the S tu d y ........................... 5 Existing Literature . ..................................................................... 6 Methodology .................................................. 7 Limitations ....................................................... 8 Terms Employed . • .................................................... 9 II. HISTORICAL DEVELOPMENT OF THE UNITED STATES DOMESTIC TRUNK AIRLINES PRIOR TO 1955 • • 11 Traffic Operations Prior to 1955 .......................................... 11 Operations Prior to 1938 ....................................................... 12 Operations from 1938 to 19^+5 ............................ 15 Operations from 19*+6 to 195*+ ............................................... 17 Financing Prior to 1955 • ................................................... 21 Financing Prior to 1938 .......................................................... 23 Financing, 1938 to 19*+ 5 ....................................................... 25 Financing, 19*+6 to 195 *+ ........................... 26 I I I . ECONOMIC REGULATION OF AIR TRANSPORTATION ....................... 29 Statutes, Boards, and Agencies ................................................... 29 The Air Commerce Act of 1926 ................................ 29 The Air Mail Act of 193*+ ...................................................• 29 The Federal Aviation Act of 1958 ................................ 30 The Federal Aviation Agency . .............................................. 32 Government Subsidy ................... 32 Airports and Airways ........................... 32 Mai 1 Subs i d y ......................................................................... 3*+ Separating Mail Pay from Subsidy.......................................... 35 Subsidy Status ................................................................................... 36 Fares and Rate-Making ................................ *+0 Profit Element: Rate of Return on Investment . *+3 Cost of Capital ......................................... *+8 Cost of D e b t .................................... *+9 iv CONTENTS (Contd.) Chapter Page Cost of E q u ity .......................................................................... kS Capital Structure . ..............................................._ 50 Overall Returns ................... ............ 52 Rate B a s e .................................................................................. 53 Depreciation ....................................................................................... 5^ Deferred Federal Income Taxes .............................................. 55 Regulated Competition and Route Development ..... 55 Balanced Trunkline Competition ................................................... 56 M ultiplicity of Competition .... 58 Impact of Excessive Competition on Capacity and Load Factors ................................ 59 Trunk-Local A irline Competition .... ....................... 60 Government Competition . 62 Trunkline Competition with Surface Carriers ................... 63 Foreign Competition .................................................. 66 IV. SOME ECONOMIC ASPECTS OF COMMERCIAL AIR TRANSPORTATION ..... ................................ 69 Impact of Technology on C apacity . 69 Impact of Technology on Speed . .................................... 73 Impact of Technology on Fuel Consumption ....................... 79 Demand for Air Travel . ...................... 82 V ariability of Demand ....................................................... 83 Relationship of Domestic Air Travel Demand to National Income ........... 83 Substitutability and Elasticity of Demand ..... 87 Sources of Domestic Operating Revenues ....... 88 International Operations ............................................................ 93 Sources of Operating Revenues, International Operations ...................... 95 Analysis of Major Operating Expense Items ..... 98 Depreciation and Obsolescence .... 99 Maintenance Expenses . ........................... 107 Flying Operations Expenses .................. 110 V. TRUNKLINE TRAFFIC OPERATIONS, 1955-1960 . 116 Big-Four Traffic Operations, 1955-1960 ..... ......................... 116 I ntroduct i o n ......................................................................... 116 American Airlines ................................................................ 117 Eastern A ir lin e s .................................... 122 Trans Wor Id A i r 1 i nes ....................................................... 128 United Air L in e s ........................... 131 Traffic Operations of Capital Airlines, 1955-1960 . 13^ V CONTENTS (Contd.) Chapter Page VI. FINANCING THE MAJOR DOMESTIC TRUNKLINES,1955-1960 . 141 Introduction ............................................................... l4l P ro ced u re .................................................................... 142, Tabular Presentation of Summary and Conclusions of Financing . ................................................................ 146 Trunkline Industry—Sources and Uses of Funds .... 146 Financing American Airlines ............. 151 Sources and Uses of Funds ........ ....................... 151 Capital Structure .............................................................................. 154 Financing Through Leasing ............................................................ 157, Analysis of Financing ..................................................................... 158 Analysis of Leasing Arrangements . 166 Evaluation of Financing . .............................................. 170 Evaluation of Lease Financing .................................................. 176 Financing Eastern Airlines ....................... ................................ 178 Sources and Uses of Funds ................................ 178 Capital Structure . .................................................. 180 Financing Through Leasing ............................................................ 183 Development of the "Trade-in" Technique ........................... 184 Analysis of F in a n c in g ....................................................... 185 Analysis of Leasing Arrangements........................ 189 Analysis of the "Trade-in" Technique ........ 192 Evaluation of Financing ................................................................ 194 Evaluation of Leasing and 'Trade-in" Arrangements . 199 V II. FINANCING THE MAJOR DOMESTIC TRUNKLINES, 1955-1960 (Contd.) .... ................................................................ 201 Financing Trans World Airlines . 201 Sources and Uses of F u n d s ....................................................... 201 Capital Structure ..... 203 Financing Through Leasing ....................................................... 207 Analysis of Financing ............................................. 208 Analysis of Equipment Leases .................................................. 212 Evaluation of Financing ........................................................... 213 Financing United Air Lines . .................................................. 219 Sources and Uses of F u n d s ....................................................... 219 Capital Structure .... ....................................................... 222 Leasing Arrangements, .............................................................. 225 Analysis of F in a n c in g ......................................................... 226 Evaluation of F in a n c in g .......................V .......................... 230 vi CONTENTS (Contd.) Chapter Page V III. FINANCING AND MERGER OF CAPITAL AIRLINES ........................... 235 Sources and Uses of Funds ......................................................... 235 Capital Structure . 241 Lease Arrangements .......................................................................... 243 Analysis of Financing ...............................................................