[Post Office rebuttal exhibit No. 1, docket No. 2913, November 24, 1954]

NARRATIVE STATEMENT

It is the position of the Post Office Department that the domestic earnings of United Air Lines in excess of a fair return should be applied as an offset against the carrier's subsidy needs in its overseas Hawaiian operation.

This exhibit shows the excess earnings realized by United in its domestic operations during the period January 1, 1951, through July 31, 1952. The excess over a fair return plus related Federal income taxes amounted to $10,690,000 in 1951 and $5,167,000 in the first 7 months of 1952 or a total of $15,857,000 1 for the period (line 28, p. 3). This amount is available for offset against the subsidy payable to the carrier for its Hawaiian operations.

The offset is derived from domestic operations beginning January 1, 1951, since this is the period during which United was operating under a permanent future domestic mail rate.

The figures shown in this exhibit are largely those reported by the carrier either in its exhibits in the present case or in Form 41 reports. Certain adjustments to the carrier's reported figures have been made, but these have only a minor effect on the final application of the offset.

One adjustment eliminates from investment in military flight equipment the increase resulting from the use of replacement rather than net book values (line 5). Another reverses the retroactive reallocation of expenses related to military contract operations, reported by the carrier in the fourth quarter of 1951 and assigned to operations for the year ended June 30, 1951 (lines 11 and 12). Profits on the military contract for the fourth quarter of 1951 and the first 7 months of 1952 have been allocated to domestic and Hawaiian operations in proportion to investment in those two operations (line 13 and footnote 5). In line with Bureau counsel's position and for reasons given in exhibit BC-1, military contract profits for the first three quarters of 1951 have been assigned exclusively to Hawaiian operations (footnote 5). The derivation of Federal income taxes is explained in footnote 7.

1 In exhibit BC-24, Bureau counsel allocated to Hawaiian and domestic operations the net recovery by the carrier of $1,219,668 from Douglas Aircraft Corp. for the Bryce Canyon and Mount Carmel DC-6 accidents. If this allocation is correct, then there should be added to the total amount available for offset, set forth above, the sum of $1,018,000, representing the domestic portion of this settlement.

1951

profits:

3 Revenues and expenses for July 1952 estimated at 13 of reported figures for 3d quarter

Reported by carrier as system items.

Total.

UNITED STATES SENATE,
May 19, 1954.

Hon. CHAN GURNEY,

Chairman, Civil Aeronautics Board,

Washington, D. C.

DEAR MR. CHAIRMAN: In accordance with the agreement reached at the last public session of the Appropriations Subcommittee considering the appropriations for the Civil Aeronautics Board, I am herewith submitting a series of questions which I would like to have answered for the committee record at the earliest possible date.

Before listing the new questions, I wish to invite to your attention four very important matters discussed very briefly at the public hearings on May 17 and 18. Because of their great importance, I think the committee should have complete and detailed answers on these points:

1. Windfalls from tax allowances.-A statement of the differences between the amounts of airmail pay and/or subsidies which the CAB has awarded from 1946 to date to companies holding airmail contracts for the purpose of enabling them to pay their Federal income taxes and on the other hand, the sums actually paid by those same companies into the United States Treasury.

2. Expense accounts.-A statement of the expense accounts, in addition to salaries, fees, bonuses, commissions, and other direct compensation, attributable, in the most recent year available, to each of the top 10 executives and to each of the outside persons or firms receiving fees from each of the companies for which you are requesting subsidy appropriations from this committee.

3. Subsidiaries.-A statement of the expenditures from 1946 to date of the subsidized airmail contractors upon each of their subsidiaries, affiliated companies, or holding companies.

4. Below-cost bidding.-How much service is the CAB planning to underwrite with subsidies on our international operations, and what are the subsidy costs to the taxpayers of overscheduling and below-cost bidding by the subsidized airlines?

It is hoped that you will be able to supply our committee with this information prior to printing of the public hearings, or if that is not possible that you can supply the information to the committee prior to consideration of the airline subsidy appropriation on the floor of the Senate, or, if you are unable to meet that date that you will supply the information to the committee when you are able to compile it.

It should be noted that you have cases pending before you which involve large retroactive adjustments in mail pay at least as far back as 1946.

I should also like to ask certain direct questions for the record of our hearings to which I hope you can supply answers following each of the questions for insertion in the record:

(1) If the Congress approved your requests for appropriations for next year (service mail pay of $60,223,000 already voted in H. R. 7893, and subsidies of $80,252,000 proposed for H. R. 8067, or a total of $140,475,000) would not the Congress be authorizing the largest expenditures for airmail and subsidy payments in American history?

(2) Does not your proposal for an increase in the airline subsidy appropriations in H. R. 8067 mean that, by your administrative separation of subsidies from service airmail pay, the two halves would total more than did the previous whole?

(3) Was not last year the most prosperous year in the history of the airlines? (4) Were not your subsidy estimates for subsidies for Pan American and other international lines, computed on a basis which is directly in conflict with the principles set forth in the unanimous decisions of the Supreme Court, February 1, 1954, in the two test cases of Summerfield v. Civil Aeronautics Board? (5) Has the Civil Aeronautics Board ever audited the books of the subsidiaries of the airline for which you are seeking the largest individual amount of subsidies, some $28,333,000, or the subsidiaries of other subsidized lines?

(6) Has the Civil Aeronautics Board requested the Congress for funds for the specific purpose of making audits which have been denied by the Congress? (7) In the CAB examiners' recommendations in pending mail-pay cases, is there any proposal to cover with mail pay the cash losses suffered by any company as a result of strikes?

(8) Is your request for an increase in the airline subsidy appropriation supported by the Department of Defense?

(9) Would any part of your requested subsidy appropriation pay for the installation in commercial transport planes of defense features required by the military?

(10) What has been the relative contribution to auxiliary civil airlift needed by the military of (a) subsidized airlines for which you are seeking subsidy appropriations in H. R. 8067 and (b) nonsubsidized airlines in support of the Berlin airlift and the Korean (or Tokyo) airlift?

Since the expense of the airmail and subsidy payments program of the CAB is borne by the American taxpayers, full public information should be available. With kindest regards, I am

Most sincerely yours,

H. M. KILGORE.

PAYMENTS TO AIRMAIL CARRIERS

Senator BRIDGES. The record will show at this point the letter received from Senator Lehman and the enclosure which deals with 1955 airline subsidies.

(The communication referred to follows:)

Hon. STYLES BRIDGES,

UNITED STATES SENATE, Washington, D. C., May 19, 1954.

Chairman, Senate Appropriations Subcommittee on State, Justice, and Commerce Departments, Senate Appropriations Committee, Washington 25, D. C.

DEAR SENATOR BRIDGES: I have had brought to my attention a statement recently issued by Citizens Public Expenditure Survey, Inc., of Albany, N. Y., dealing with the fiscal 1955 budget estimate for airline subsidies.

While I am informed that your subcommittee has concluded its hearings on H. R. 8067, embodying appropriations for the Civil Aeronautics Board, I hope that it may be possible to have my letter and the attached statement of the Citizens Public Expenditure Survey inserted in the record of your hearings on this bill. On a number of occasions since I have come to the Senate I have given my support to attempts to bring greater economy and equity into this field of subsidy payments to airlines.

Thank you for your consideration in this matter.
Yours very sincerely,

HERBERT H. LEHMAN.

CITIZENS PUBLIC EXPENDITURE SURVEY, INC., ALBANY, N. Y.

ALBANY, April 27.-Labeling a proposed $73 million appropriation for airline subsidies as an "unwarranted spending of the taxpayers' money," the Citizens Public Expenditure Survey, Inc., today called upon the Senate Appropriations Committee to cut $50 million from the subsidy appropriation bill the committee is now considering.

In telegrams to members of the Senate committee, Garth A. Shoemaker, president of the State taxpayers group, requested the cut "in the absence of a demonstrated defense need served by the airline subsidies and in view of the questionable method used in computing the subsidy amount."

Earlier in this session of Congress, the Appropriations Committee of the House of Representatives unanimously approved a reduction of $50 million from the appropriation for subsidies requested by the Civil Aeronautics Board. The bill, however, was amended on the floor of the House and the cut restored before it was passed and sent to the Senate.

The taxpayers' spokesman said that the $73 million subsidy amount was determined on basis of the separate operations of the various divisions of the airline companies rather than on basis of their total operations. He declared that this method "would certainly appear contrary" to the proper method for measuring the need for subsidies as set forth in a unanimous Supreme Court decision of February 1, 1954. In its opinion, the Court stated: "The 'need' of the carrier is measured by the entirety of its operations, not by the losses of one division or department."

Commenting on the requested spending reduction, Shoemaker pointed out that taxpayers in New York State pay approximately one-seventh of all Federal taxes.