estimate. We don't contemplate, if this bill is passed and these aircraft are available by 1958, that there would be immediately a wholesale conversion. I assume that this transition would take some time. They would operate a mixed configuration of aircraft at least until the DC-3's have been fully depreciated and get them out of service and the modern aircraft in service as rapidly as possible. I assume that will take some time.

Production plans of the Frye Corp. will not be firm, it is understood, until final financial arrangements are made to establish an assembly line and start production. It is our understanding that the Douglas Aircraft Co. also contemplates a replacement for the DC-3.

It is possible only to speculate as to the extent that the 13 local service carriers may find it necessary, or possible, to replace their present fleets of DC-3 aircraft with a specialized high-capacity airplane whose initial cost might range from approximately $600,000 to $1,250,000 per aircraft.

Senator BIBLE. Will you develop that for me?

Mr. DURFEE. I think the last figure we got on the F-27 was about $620,000.

Senator BIBLE. There was testimony

Mr. DURFEE. It started out around $350,000 or $100,000. I think the last figure was about $620,000.

Senator BIBLE. There was earlier testimony that the estimated cost was in the neighborhood of $550,000.

Mr. DURFEE. I understand the original orders that were placed were for around $545,000. In our conference at Hagerstown with the Fairchild people they intimated the price was going to go up.

Senator BIBLE. What do you get for $1,250,000? That is a lot different from $550,000.

Mr. DURFEE. I believe that that figure contemplates a different type of aircraft. I understand that Douglas is talking about a four-engine local service jet aircraft which I assume

Senator BIBLE. Is that what the figure $1,250,000 per aircraft represents?

Mr. DURFEE. Yes, sir.

Senator BIBLE. That represents what again, for the record? Somebody is going to ask us.

Mr. DURFEE. That represents an estimate by the Board of perhaps a higher cost four-engine jet aircraft for local service, plans for which are completely tentative except as to what we have been informed of by the Douglas Co. as to what they are planning.

Senator BIBLE. This is all in the planning stage?

Mr. DURFFE. Yes, sir.

Senator BIBLE. No such plane has been produced?

Mr. DURFEE. There is no prototype or mockup of this aircraft available. We have had no definite figures on it.

Senator BIBLE. We are advised, for the purpose of the record, from the Fairchild plant, in order to make the record very clear on this point, that as of today there are 55 firm orders for F 27's, and there are 20 on option.

Senator SCHOEPPEL. Domestic?

Senator BIBLE. My understanding is that that is combined. Is that correct!

Mr. BAYNTON. Yes, sir.

Senator SCHOEPPEL. A considerable number of those orders have been taken in the South American trade, I understand. Is there a member of the Fairchild Corp. here?

Mr. BAYNTON. Yes, sir. He will testify.

Senator BIBLE. Please continue.

Mr. DURFEE. The present financial position of the local service carriers is not strong. (See appendix 3.) Equity capital reported by these carriers ranges from $83,039 in common stock outstanding for 1 carrier to $1,140,500 for another. The 13 carriers' reported gross investment in all flying equipment, including spare parts, totaled approximately $26 million. Their reported depreciation expenses for such equipment amounted to about $2 million for the 12 months ended September 30, 1956. Purchase of new specialized transport aircraft which are expected to be in production in the foreseeable future will require the raising of additional capital in amounts in excess of the ability of the typical local carrier to finance on reasonable terms.

Senator BIBLE. Right there, Mr. Chairman, will you indicate what the total gross investment is of the 13 carriers? That figure is something in the neighborhood of $26 million. Do you have something to indicate the amount of the investment for the additional 8 carriers that are embraced within this bill, the Hawaiian and Alaskan carriers! That may be shown on the appendix.

Mr. DURFEE. I believe that is shown on appendix 3, the long-term debt, the net worth and the total invested capital is shown separately for the local service carriers and Alaskan carriers and for the two Hawaiian carriers.

Senator BIBLE. Very well, as long as it is within that appendix. Thank you.

Mr. DURFEE. In summary, it is believed that the relatively limited capacity and cost characteristics of the DC-3 indicate that it is an uneconomic aircraft for the expanding operations of the local service carriers. The specialized short-haul air transportation requires, for some or all of their routes in the future, a specialized aircraft having improved cost characteristics, greater capacity, greater speed, improved design especially as to traffic loading and capacity configuration, improved operating characteristics with respect to airport requirements, and pressurization which will not only promote and increase traffic but also lessen the time required for ascents and descents from altitude flying on intercity hops of relatively short distances.

The local service carriers are steadily increasing their generation of traffic and revenue over the route systems they operate. Through numerous formal route proceedings being carried on to consider the needs for new or improved local air transportation throughout the country, the Civil Aeronautics Board and the carriers are now actively engaged in modifying and improving the local route patterns.

It is apparent that one of the major problems faced by the local service carriers is the financing of new aircraft as they become available and are needed. The ability of the carriers to purchase new and efficient aircraft as soon as their existing and future routes demonstrate the need, will be important in the future growth and progress of these carriers. The ability of the Board to strengthen routes of the feeders may be tied to their obtaining improved aircraft.

I refer specifically, Mr. Chairman, to the series of consolidated proceedings that are being carried on in contiguous geographical areas

across the country involving local service where we have attempted to consolidate a number of applications into one case and work out an overall more efficient composite pattern for feeder and local service. Senator SCHOEPPEL. I take it that where feasible and practical that would be one of the conditions that the Board would impose before they would approve some of the loans under this type legislation?

Mr. DURFEE. I think we anticipate, Senator, that by the time we would be called on to approve these loans, the Board will have accomplished a substantial improvement in the route structure of these local service carriers so as to utilize the improved characteristics of these aircraft to the best possible advantage.

With regard to the specific provisions of the bill, I call attention to the fact that two cushions are provided to protect the interest of the Government. In the first place, the maximum amount of the loan cannot exceed 90 percent of the purchase price of the equipment. That is, the air carrier must pay out of its own funds at least 10 percent of the purchase price. In addition, the Government guaranty cannot exceed 90 percent of the loan. That means, of course, that the banker lending the money must take at least 10 percent of the risk upon himself.

Senator BIBLE. May I ask you there how you arrived at the figure of 90 percent? Why isn't it 80, or 85?

Mr. DURFEE. Mr. Chairman, that is a judgment figure. If the testimony developed during this hearing should demonstrate that 80 percent or 95 percent would be a better figure, the Board has no positive predilection that 90 percent is the correct amount. I believe that our own rate people and our own staff people, with the concurrence of the Board, arrived at that as the best judgment figure that we could work out in proposing this legislation. If the committee should feel that some other figure was more appropriate, I am sure the Board would be disposed to view any revision of that figure as an exercise of judgment by the committee on the basis of the record which perhaps would be well justified.

The 90 percent in brief, Mr. Chairman, is a judgment figure by the Board and its staff after a great many conferences with the carriers, conferences with some of the investment people, the expertise of the Board's own staff. That is a judgment figure.

Senator BIBLE. Do you have any information as to the general terms of loans already made to local service carriers on the 50 loans that have already been granted? What are the general conditions? How much interest do they pay? What is the length of time and the type security required?

Mr. DURFEE. I believe I could refer that question, Mr. Chairman, to Mr. Roth, who is the former head of our Rates Division and who, I believe, has more intimate information.

Senator BIBLE. Would you identify yourself for the purpose of the record?

Mr. ROTH. I am Irving Roth, Associate Director of the Bureau of Air Operations.

The Board has pending formal proceedings in which a very comprehensive record is now being made as to the exact financial condition of the local service carriers. There is also information there as to the present outstanding loans of the carriers and any commitments they may have in connection with the acquisition of new equipment.

In general, the financing of the local carriers has been for relatively. short periods of time. I cannot recall

Senator BIBLE. What does that mean, relatively short periods of time?

Mr. ROTH. I believe a maximum of 5 years. I am not aware of any bank loans, for example, that go beyond the 5-year period. The industry representatives that frequently have occasion to discuss their problems with us have stressed that the 5-year period is just about the maximum period for which the banks are willing to advance money to that type of carrier. That is one of the most critical problems the local carriers face in their attempts to work out financing of new equipment because it is extremely likely that the service life of the new equipment will be far in excess of 5 years.

Senator BIBLE. What is the anticipated service life of an F-27? Mr. ROTH. The Board has not faced that problem heretofore. The Board has used a 7-year service life for all of the postwar aircraft. But the Board has not yet reached any decision on the service life for any aircraft with turbine power.

In some of the proceedings now pending before the Board the Board will have its first occasion to face the question whether the service life of the turbine-powered aircraft, such as the Vickers Viscount now flying on Capital Airlines routes, or in the near future the F-27 on various local service routes, should have a service life for ratemaking purposes in excess of 7 years.

Senator BIBLE. What service life do you give to a DC-3?
Is that 7 years?

Mr. ROTH. No, sir. The DC-3 has generally been depreciated over a 3-year life in the postwar period. I believe the typical life was about 5 years in the prewar days when the DC-3 was the newest airplane available. But for the local carriers we have generally used a 3-year service life since 1946.

Senator BIBLE. What service life do you give to a DC-7B?
Mr. ROTH. Seven years with a 15 percent residual value.

Senator BIBLE. What does that last statement mean, the 15 percent residual value?

Mr. ROTH. The residual value is that portion of the original cost of acquisition that is not subject to depreciation at all.

Senator BIBLE. You depreciate 85 percent in 7 years?

Mr. ROTH. Yes, sir. There are some carriers that have a more rapid writeoff of the aircraft for bookkeeping purposes, but for ratemaking purposes the Board for quite a few years now has adopted a policy of 7 years and a 15 percent residual value.

Senator BIBLE. On loans that have been or may be negotiated for these 50 F-27s that are now under order at Hagerstown, Md., you say from the best information available to you that the period of time is 5 years, is that correct?

Mr. Rотн. Yes, the maximum loans that appear to be available. Senator BIBLE. What interest rates do you pay? What is the range? Mr. ROTH. I couldn't say, Mr. Chairman, because the interest rate has risen so sharply over the past year. I would hesitate, without checking our records further, to indicate what rates are currently being quoted.

Senator BIBLE. Three and a half?

Mr. Roтu. Oh, no, sir.

"Senator BIBLE. Four? Six?

Mr. ROTH. I don't believe that a local service carrier could borrow money at 412 today. But how much above that I think would depend on which carrier, what term of years and the other provisions of the loan.

Senator BIBLE. I recognize that. You couldn't give us a range for the purpose of the record?

Mr. ROTH. I think it would be a minimum figure of 5 percent. Senator BIBLE. A minimum of 5 percent? I imagine the carriers can furnish that information for the use of the committee.

Mr. ROTH. I believe that currently the strong trunkline carriers that are off subsidy are no longer able to borrow money at rates less than 412 percent as a result of the general rise in the interest rate for the country as a whole.

Senator BIBLE. Did the passage of the permanent certification bill in 1955 make the securing of these loans easier either termwise or interestwise?

Mr. ROTH. In my opinion it did not have a very pronounced effect, but whatever effect it did have is reflected in the interest rate. During the period, since the passage of the permanent certification bill, interest rates have risen very sharply for all air carriers as well as all other types of borrowers.

Senator BIBLE. Senator Schoeppel?

Senator SCHOEPPEL. I have one question. We have a number of these certificated carriers who have already made their loan arrangements and transactions, some of them concluded just very recently. There is no retroactive provision in this bill within the contemplation of the Board. Would that be taken into consideration?

Mr. DURFEE. I don't believe the bill contains any retroactive provision.

Senator SCHOEPPEL. No, it does not. I think it would be a mistake to include it within the bill, administratively speaking. On a new loan arrangement, they could appear.

Mr. DURFEE. I assume, Senator, if they had arranged a loan, and if it appeared they could arrange a more favorable loan in terms of interest and term of the loan, and if they filed an application for a new loan under the guaranty, I assume that if the Board found that public convenience and necessity and the position of the carrier would be strengthened, particularly with respect to subsidy, I assume that the Board could consider that. That is a provision in the bill which requires that the Board must find first, and the carrier must establish, that it cannot finance on reasonable terms by ordinary methods of financing before the Board can extend the guaranty.

.. Senator SCHOEPPEL. That is the reason I was asking the question, because we are breaking new ground on this type of legislation now. That is one of the criteria that they would have to establish before the Board before they would be eligible?

Mr. DURFEE. Yes, sir.

Senator SCHOEPPEL. Therefore, my query was as to those that have already made the loans and the loan has expired and would have to be renewed, as to the quaranty in here under the conditions that you have testified to, which seem reasonable to me, has the Board taken any position or can you state any position that the Board would like to get into the record at this time?