reduction of subsidy requirements could only increase the handicap of the subsidized carriers and deprive them of modern and efficient equipment, further postponing the day when they will no longer need subsidy (H. Rept. 2530, p. 5, June 29, 1956).

The charge made against last year's bill that it would result in a windfall to the carriers is equally without merit. The bill would not give the air carriers a windfall. The property involved is property which they own. The prices of new planes have gone up to such an extent that they cost many times the cost of the old planes. Consequently, the trade-in value of the old planes has also gone up. The bill would merely allow the airlines to reinvest their money in new airplanes. It would not permit them to declare dividends, or to spend the money for any other purpose except new aircraft. To object to enactment of the bill is to object to modernizing the United States air transport industry. If it is good policy to allow the nonsubsidized carriers to reinvest the trade-in value of old planes without being penalized, it ought to be good policy for those carriers struggling for a subsidy-free status.

Turning for a moment, to a specific provision of the bill under consideration, I would like to invite the attention of the committee to the recommended effective date contained in section 2 of January 1, 1956. This is in line with the time at which the reequipment program, for which relief was contemplated in this legislation, was initiated. Section 1, however, provides that any amount deposited in a reequipment fund shall be used solely for investment in flight equipment either through payments on account of the purchase price or construction, or in retirement of debt contracted after the effective date of this act. As long as the effective date of the act remains determined by section 2 at January 1, 1956, the bill remains consistent with the period at which the carriers placed equipment orders in contemplation of such legislation. We suggest that this provision be carefully examined by the committee to insure that its terms will not be so altered as to exclude the bill's application to that aircraft ordered between January 1, 1956, and the enactment date of the bill.

We hope that the committee will give consideration to this bill and secure its enactment at this session of Congress. The need for this type of legislation is urgent. The carriers, particularly the smaller ones, cannot make equipment commitments in the absence of this legislation. With each day of delay in ordering new and modern equipment, they lag further behind in the competitive march of progress. This committee is familiar with the long lead times involved in the acquisition of new airplanes. In the case of carriers desiring to secure the development of aircraft not yet in prototype, an even longer time will elapse between the placing of an order and the final delivery of equipment. During this long period, these carriers must continue to operate with obsolete airplanes and will be prevented from achieving the objective which all of them desire—that of providing a better public service and of reducing the subsidy granted to them by the Federal Government.

It is timely and appropriate for Congress to enact legislation which will afford this opportunity to the air carriers concerned and to the public.

That concludes my statement, Mr. Chairman.

Senator MONRONEY. Thank you very much, Mr. Tipton.

I was very much impressed and I think it cannot be overemphasized, the effect inflation has played on the airlines situation. First in the cost of new equipment being as high as 10 times the cost of planes which they will replace. I think that will probably be true as comparing the jet 707 or Douglas 8 with a DC-4. Is that about, roughly, correct?

Mr. TIPTON. It is just about 10 times. Actually it is a little bit over that, but just about 10 times as expensive.

Senator MONRONEY. What we are talking about here is mostly the replacement of the DC-3, DC-4, perhaps some 202's, Martins, and some Convairs; is that correct? There will be be very few DC-6's or DC-7's which will go off the line, or Lockheed Constellations. Is that about it?

Mr. TIPTON. The bulk of equipment orders in terms of numbers that are involved here I would say that that was the case. The bill, as you know of course, covers as well the international carriers.

There you will have a need, an urgent need for large equipment, DC-7's, Boeing 707's, other equipment like that suitable for international service.

Senator MONRONEY. But all your international carriers have runs today. Some of the best runs that Pan American has are being flown by DC-4's. When you fly from Frankfurt to Berlin it is tremendously heavy run, every hour of the day. Yet you get on the worst, beatenup DC-4 that you have ever seen. A DC-6 on that run would be most suitable because it is a relatively short flight from Frankfurt to Berlin, and yet the DC-6's that may be phased off of the Paris-New York run will find a very useful place in some of their European service, and above all in their Caribbean and Latin American service where DC-4's and old equipment are still being used.

So I think that you can actually say, from my experience with our airlines on foreign runs, that they can step all of the DC-6's and DC-7's down to replace jets, but that the market is going to be hard hit on your DC-3's, DC-4's, and older Constellations.

Mr. TIPTON. I think one of the objections of our industry is to phase out, in international carriage, the DC-4, because in competition with foreign-flag carriers they must do that.

That, of course, is contemplated in the reequipment program which I testified goes up as high as $650 million. Our international service, as has been discussed already this morning, Pan American, the subsidy status of Pan American and its relationship to this bill has been fully discussed and I will not touch on that.

Our two other international carriers that are affected by this bill will be Panagra and Braniff, both operating in Latin America and under very heavy competitive conditions.

Senator MONRONEY. Delta and Braniff are no longer on subsidy? Mr. TIPTON. In international operation they are.

Senator MONRONEY. I didn't think they allowed them to divide the international from the domestic.

Mr. TIPTON. Senator, they can't divide from the standpoint of fixing the subsidy in the international field. Any domestic profits that the carrier might be so fortunate as to get are used to offset the subsidy in the international operation. But, at the present time, Braniff and Panagra do receive subsidy with respect to their international

operation. I understand that an order has recently been issued to inquire into that. But at the moment they do.

Senator MONRONEY. If the Civil Aeronautics Board is going to offset any capital gains-for example, a DC-4 plane which could perhaps be sold for $250,000 on the market, but if it has to go actually for the book value, which is all the CAB will allow them to retain, which might be as low as $25,000 or $50,000—will it not be just impossible to expect carriers in a subsidy position to sacrifice what looks like good dollars to the tune of $175,000 that they could otherwise sell and retain if this bill were effective?

Mr. TIPTON. There is no doubt but that the passage of this bill will inspire the carriers to move forward on a reequipment program for two reasons. One, this will give them ability to do so, and the second reason, it permits them to use their own money, that is, their capital assets in that equipment, to help pay for their new.

They are in that position, as any of us would be, when you are getting prepared to buy a new car, if somebody told you I will take the trade-in value from you, that would stop me real short. I wouldn't buy a new car.

Senator MONRONEY. It is just against the nature of the beast, in private free enterprise for them to give away money which they feel is their entitlement on capital gain. In other words, if they will only realize $25,000, say, out of a $225,000 or $250,000 piece of machinery, they are just going to keep that machinery and they are going to keep running it.

Mr. TIPTON. It seems to me that that is the case. Accordingly, they have no incentive.

Senator MONRONEY. You can't change human nature and you can't change free enterprise. They want to get off subsidy. For that reacon they are going to hang on to this equipment until the day they think they can finally realize from capital gains, which may be the day they get off subsidy.

If they get off subsidy they can realize that. It seems to me it would be a distinction, and particularly since the Board has now changed the basis where, once they were on a closed rate, up to 1956, as I understand it, they could realize and retain their capital gains. If they had a closed mail rate.

But only when they were on an open mail rate were they required to sacrifice that for an offset to their subsidy.

Mr. TIPTON. That's right.

Senator MONRONEY. Now the Board has come along recently and changed it, which makes the passage of this bill to clarify the policy even more important.

Mr. TIPTON. Actually, as Mr. Gurney testified, they haven't yet changed it, but their staff shows every determination to reach that conclusion, so that no carrier, closed rate or open rate, would ever be able to take advantage of his capital gain to buy new equipment.

As you say, "It is contrary to the nature of the beast." It is also contrary to the financial principles that should guide any corporation or any individual, and that is to be required, when you acquire a capital asset, to be required to pay your operating expense with it, and that is what the Board has been doing in open-rate periods. And now their staff proposes the same bad financial practice should be imported into the closed-rate periods.

Senator MONRONEY. Would it be possible for an airline-let's assume how much did Pan American receive in subsidy last year? Mr. TIPTON. None.

Senator MONRONEY. That is in the year 1958, fiscal?

Mr. TIPTON. This year, too.

Senator MONRONEY. I understood the testimony to be that this was the first year that they were off subsidy.

Mr. TIPTON. The Board was asked to comment with respect to fiscal 1958, because that was the appropriation then being considered when the Board testified. The same thing is true of fiscal 1957.

Senator MONRONEY. I didn't understand that to be the case.

Mr. RODGERS. There were no actual dollar payments to them. There have been no actual dollar payments in subsidy to Pan American during fiscal 1957 and I believe 1956. There may have been some accruals which were offset against an earlier situation. We can supply that. Senator MONRONEY. That was taken care of on mail pay?

Mr. TIPTON. They get their standard mail compensation as everybody else does. But they haven't gotten subsidy.

Senator MONRONEY. What I am trying to get from them, and I understood from the last man to testify, Bureau counsel, to say that there was only a very short period from January 1, 1956, to April in which they were subsidy-free

Mr. TIPTON. No, in which the rate was closed.

Senator MONRONEY. In which they had the privilege of keeping their capital gains.

Mr. TIPTON. That's right. It was during that period that their rates were closed, so that any equipment they sold under present policy they would be able to retain it. That period ended, insofar as capital gains are concerned, on April 6, 1956. At that point all the carriers in that proceeding, their capital gains were subject to whatever determination the Board made with respect to capital gains whenever they made it.

Senator MONRONEY. As to closed rate, mail pay as well?

Mr. TIPTON. Closed, open.

Senator MONRONEY. That is where it comes in, the closed rate, mail pay is also subject to offset where it had not been prior to that time.

Mr. TIPTON. Had not been prior to that time. Here is what happened: Many of the carriers were on closed rate, including Pan American. The Board came along on April 6, 1956, and said that we are going to investigate this capital gains problem, and we are going to reopen your rate, but only with respect to the treatment of capital

gains.

It was a closed rate in all other respects. Then in October 1956 the Board came along with respect to Pan American and opened their rate entirely.

Senator MONRONEY. That was opened, though, because of allegations of irregularity, claims of expenses that the examiners or someone insisted weren't properly charged to airline operations. Wasn't that the case?

Mr. TIPTON. I don't believe so. I don't believe that that was the case. Those allegations relate to a period prior to that time. They opened their rate entirely on October 1, 1956.

Senator MONRONEY. You estimate, as does the Civil Aeronuatics Board, that the potential exposure over the 5-year period would be

the increasing of subsidy payments through loss of offsets of $67 million, approximately, to the subsidized airlines?

Mr. TIPTON. Yes. That estimate is based upon evidence prepared by the carriers along with the staff of the Board for presentation in the Board's Capital Gain Proceeding. I would say on the basis of the present situation that that estimate is high.

Senator MONRONEY. Tell the committee why you think it is high. Mr. TIPTON. The reason I think it is high, and the most important reason, is that it does include Pan American Airways, whose subsidy status has been discussed.

Senator MONRONEY. In other words, if Pan American is off subsidy then the figure shrinks down perhaps $10 million?

Mr. TIPTON. It would shrink down on the basis of Pan American's present estimates to about $47 million. The estimate during the same period about $19 million of capital gains. That would reduce it by that amount.

Senator MONRONEY. I don't follow that.

Mr. TIPTON. If Pan American is not on subsidy, and the Board has said that it wouldn't be for 1958, and it is doubtful, or subject to litigation, as to whether it ever would be in the future, the $67 million would assume that Pan American is on subsidy and would be during that period.

Senator MONRONEY. If you knock out the capital gains, Pan American would have for the 5-year period, assuming they are off subsidy for that period?

Mr. TIPTON. Yes, sir.

Senator MONRONEY. Do you mean to tell me it is about $20 million? Mr. TIPTON. Twenty million dollars is the estimate for Pan American.

Senator MONRONEY. Where did that estimate come from?

Mr. TIPTON. It came from Pan American Airways. I can submit that in a letter from Pan American, if you would like it.

Senator MONRONEY. Yes, I would. I wonder if that is the same figure submitted to the CAB in the making up of this $67 million total capital gains. We asked them to submit their figures on the construction of that, which apparently came from the airlines themselves, so that if it is the same figure, then Pan American, being off subsidy, would result in a $20 million reduction of the $67 million; is that correct?

Mr. TIPTON. Yes. Mr. Rodgers has more detailed information on that which he will give you now.

Mr. RODGERS. I would like to check that. My understanding is that the $67 million filed with the CAB in their joint exhibit, in the proceedings on this matter before CAB, would include a different amount. It isn't broken down by carrier. They constructed the $67 million figure in the joint exhibit on the basis of numbers of aircraft by types assumed to be sold during this period.

Senator MONRONEY. I thought they had it by carrier, also. Their worksheets will show it.

Mr. RODGERS. If it does, that will be more helpful. My understanding is that the figures were constructed on the basis of the types aircraft to be sold, applying an arbitrary formula across the board as to what numbers of these would be sold. The separate estimate Mr. Tipton referred to of slightly over $19 million of capital gains to be realized