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All right, Mr. Chairman. You have a statement. It will be incorporated in full in the record later. (See p. 100.)

ACCOMPLISHMENTS AND ANTICIPATED NEEDS

Mr. BOYD. Thank you, Mr. Chairman and members of the committee.

I might say by way of introduction that we have a somewhat different type of statement this year which I hope you will find both relevant and interesting. I believe our budget justifications which you have provide you with a detailed picture of our requirements. Therefore, I will cover highlights of our accomplishment and future needs. First, I would like to bring you up to date on the status of the industry the board is charged with regulating and promoting.

STATUS OF AIR CARRIER INDUSTRY

Six charts, attached to this statement as exhibit 1, show the tremendous growth of the air carrier industry for the period 1947-63, and the comparative size and scope of today's air transport industry. The operating statistics for 1963 also represent a substantial growth over the preceding year.

PASSENGER TRAFFIC INCREASES

For example, passenger traffic was 15 percent higher for the calendar year 1963 than for the preceding year. Some 15 percent more seatmiles were offered in 1963 than in the preceding year. It is interesting to note that the increased volume of operations was performed with a smaller total aircraft fleet-1,910 aircraft at September 30, 1963, compared with 2,033 a year earlier. However, this fleet includes a greater number of the highly productive and larger capacity turbinepowered aircraft.

CONVERSION FROM PISTON TO TURBINE-POWERED AIRCRAFT

The industry has progressed substantially in its historical conversion from piston to turbine-powered aircraft by the end of 1963. The cumulative effect of the conversion, which started in late 1958, shows the certificated route industry with 683 turbine-powered aircraft, of which 415 are large turbojet and turbofans, in its total fleet of 1,910. Eighty-three percent of domestic and 94 percent of international mainline passengers now are being carried in turbinepowered aircraft.

FINANCIAL CONDITION OF THE INDUSTRY

Last year and the year before I reported to the committee that the industry profit picture was not impressive compared to the growth in traffic and capacity.

This year the financial picture of the carriers is pretty good. The domestic trunks had a net operating income of $75 million in 1962. That is the operating profit before interest, income taxes and other below-the-line items. They had a net operating income of $145 million in 1963. Their net income in 1962 was $8 million, and jumped to $17 million in 1963. The nine trunks, excluding Eastern and Northeast, reported net income of $63.4 million. We hope and expect to see better figures for 1964.

RETURN ON INVESTMENT

Industrywide, the return on investment for 1958 was 5.5 percent. It then slumped. The industry earned only 3.2 percent in 1960 and 2.1 percent in 1961. The turning point came in 1962 when the industry realized a 5.7-percent return on investment. The recovery continued during 1963 with the result that the 12 months ended September 30, 1963, was 6.8 percent, significantly above the 1958 level of 5.5 percent which preceded the aircraft conversion period.

The international and territorial carriers, particularly, have shown a sharp improvement in return on investment. In 1958, it was 3.2 percent. Last year it was 13.2 percent.

FUTURE PROFITABILITY

Prospects are bright for future profitability of the certificated industry as a whole. This is primarily due to the marked improvement in the economics of the turbine-powered aircraft over pistonpowered aircraft.

PROSPECT OF LOWER FARES

With a better adjustment between capacity and traffic to permit an improvement over present load factors there is every likelihood that the industry can look forward to continued improvement in profitability while at the same time holding out the prospect of lower fares to the public.

Average domestic trunkline fares yield per passenger mile-both first class and coach-turned downward last year for the first time since 1957. The lower yields result from the various special fares and fare changes introduced by the carriers which I will discuss later.

NET INCOME OF TRUNKLINE CARRIERS

Senator MAGNUSON. Right there, Mr. Chairman, if the committee wants to ask any questions on this general statement, on the general financial condition of the airlines, we might as well do so here.

I want to ask one question to clarify. You say net operating income of $145 million. That is all airlines, isn't it?

Mr. BOYD. That is the trunkline industry.

Senator MAGNUSON. Yes. Whereas the trunklines report a net income of you say nine trunks, excluding Eastern and Northeast,

reported a net income of $63.4 million. What is the difference between that and $145 million? One is net and one is net operating, is that right?

Mr. BOYD. The big figure is net operating income and after interest, taxes, and other below the line items, you come down to net income, and had it not been for the losses of Eastern and Northeast, the figure would have been-the figure was for the other trunks $63.4 million net income.

CARRIER INDEBTEDNESS

Senator MAGNUSON. Now, an airline I suppose this is true with all of them-they have an indebtedness for the purchase of planes, all of them, do they not?

Mr. BOYD. Yes, sir.

Senator MAGNUSON. But most of them are in debt for the purchase of new planes. Now, they service that debt yearly by certain x number of dollars, a fixed amount. Is that correct?

Mr. BOYD. Yes, sir. It is on a schedule.

Senator MAGNUSON. Yes. It is on a regular-like paying on a mortgage or something like that. So when they get $63.4 million net, they are only deducting the yearly obligation for servicing that debt, is that right?

You see,

Mr. BOYD. Well, just the interest comes out of that.
the payment on principal does not affect net operating income.
Senator MAGNUSON. Well, that is a yearly fixed amount.
Senator ALLOTT. Wait a minute. That is not so.

Senator MAGNUSON. Well, maybe I can put this clearer. This is off the record.

(Discussion off the record.)

Mr. BOYD. The response to your question is "No," they could not, but that is not an unusual situation.

Senator MAGNUSON. No. I am not suggesting that, but I am suggesting sometimes you might have a mortgage on your house, and your payments are $1,000 a year, so one year you make $2,000 net, but you still owe $7,000 or $8,000 on that that you can pick up. You do not have a net worth that amounts to anything.

Mr. BOYD. Let me make sure we are all on the same track.
Senator MAGNUSON. This is what I am trying to find out.

DEBT SERVICING

Mr. BOYD. The way the debt is serviced, the principal paid primarily comes through what is called cash flow-actually it tends to equate the amount of depreciation that is charged on equipment. This is the way the bulk of the financing is done, the repayment schedules equal approximately the depreciation schedules of the

carrier.

Senator MAGNUSON. And it is over a period of time.

Mr. BOYD. Yes, sir.

DEPRECIATION PERIOD

Senator MONRONEY. What is the number of years now for the depreciation?

Mr. BOYD. They are using a round figure of 12, Senator Monroney. Some of them have 10 and some of them have 14, but it works out to about 12 depending on the residual values.

Senator MAGNUSON. And then out of the net income, out of the net operating income, comes the servicing of that debt.

Mr. BOYD. Yes, sir.

Senator MAGNUSON. That is the interest. That is a fixed amount per year.

Mr. BOYD. Yes, sir.

Senator MAGNUSON. Because actually

Mr. BOYD. Well, now, it is not the servicing. It is the interest. Senator MAGNUSON. Well, that is servicing the debt.

Senator ALLOTT. It is not out of the net either.

Senator MAGNUSON. Well, I do not know.

Senator ALLOTT. The net is what you have left, net operating income is what you have left after you have paid the interest on it.

ARRIVAL AT NET INCOME FIGURE

Mr. BOYD. No, sir. The net income is what you have left. You subtract these charges, taxes and interest, from net operating income to get net income.

Senator MAGNUSON. Taxes and interest.

Senator ALLOTT. So that I understand this, you are testifying here, then, that if you have a $6 million jet, the capital investment on the amortization of that debt each year-while this is a capital investment-roughly equals the depreciation and obsolescence which they can take on their tax statements.

Mr. BOYD. That is right.

Senator ALLOTT. So that while one goes in on one side of the ledger, the other goes in on the other, they roughly equal each other.

Mr. BOYD. That is right. Now, of course, the carrier has made— just as in buying a house, the carrier has made a downpayment out of something so that you do not get 100 percent.

DEPRECIATION RATE

Senator MONRONEY. Is the depreciation that you allow which you say runs about on a 10-year basis, it is not a level depreciation, is it? In other words, the first year on a $6 million plane you figure perhaps $600,000 and so on, and it would be on a declining basis on the plane's depreciation value.

What I am trying to get to, as they pay down on the planes, then their depreciation charge becomes less.

Mr. BOYD. That is right.

Senator MONRONEY. So there is more of a flow into profit and less into writeoff of their capital assets.

RATE OF RETURN

Mr. BOYD. The way it works for our purposes at the CAB, for figuring rate of return, we use straight line depreciation which is an equal amount each year over the depreciable life of the property. We are unable to control the depreciation practices of the carriers, and on a tax basis it is my understanding that they use either the

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