Presumably, in these cases, and certainly in many possible cases in the future, and, indeed, in many cases of existing services, there is every economic justification for a passenger business or an express business between particular points. If, in each such case, the Commission had to determine, prior to authorizing such a service, that a mail service between those points would also be justified, this would place a serious brake upon the industry's development, and might very well result in monopoly. The example I might suggest is that of a situation which is quite possible between points in an area where population is not heavy but where the needs of a particular industry might be such as to call for a large amount of freight or express service. This might be notably true in certain mining regions. I have no doubt whatever that with the development of transportation of property by air there may be many cases where it would be not only possible, but highly desisirable, that an existing carrier, which had built up a modest passenger service, as well as a considerable express and freight service, would be subjected to competition of another carrier in the transportation of property. However, in such a region it is obvious that the mail traffic would not be a large item, and if it were spread between two carriers a serious crippling of the first might result. In that event, if the first of the three alternatives which I have suggested were to be adopted, the Commission could not authorize the additional carrier to inaugurate a property service despite the justification of such a service, because the insufficiency of the mail traffic would not justify an additional mail carrier and would result either in a serious dilution of the mail appropriation or necessitate its increase. In short, it seems quite evident from every point of view-from the point of view of the Postal Service as well as of the industrythat carriers should be permitted in certain cases to carry passengers or express, even where the amount of available mail traffic would not justify an additional mail carrier. In order to attain this end, the problem of authorizing mail service must, of course, be separated from the problem of authorizing other classes of service. Provision should be made for the development of the industry in each class of service as each class of traffic may justify that develop. ment. We should be careful to avoid gearing the entire industry to any particular class of traffic. So long as mail bears its present relationship to other classes of traffic, the authority to carry mail must depend upon a consideration of mail needs, and the authority to carry passengers or property, as the case may be, must depend upon consideration of the needs for such classes of service, and such classes alone. The second method for determining who shall be authorized to carry the mail is (a) that existing carriers shall be granted authority under a "grandfather" clause, and (b) when any additional service is needed the Postmaster General shall certify the fact, and then it shall be authorized. This is the method which is adopted in the proposed bill, as an examination of section 305 (d), (f), (j), and (m) will disclose. Paragraph (d) of this section 305 contains the "grandfather" clause which I shall discuss in more detail a little later. For the moment, it is enough to point out that every air line authorized to carry mail when the act is adopted would receive in its certificate, by virtue of this clause, authority to carry mail. In this way there would be turned over to the new regime the airmail system exactly as it stands. As I understand the bill, any authorization of new mail service, beyond that given by virtue of the grandfather clause in paragraph (d), will be made by the Commission pursuant to paragraph (m) of the section 305. This section provides that whenever the Postmaster General finds that mail service is required in addition to service already authorized, he may certify that fact to the Commission. This, of course, refers not only to service to new points but also to service by additional carriers between points already served. When the Postmaster General makes his certification, he files a statement showing the service required and the facilities necessary therefor. The Commission is then directed to issue a certificate authorizing the service requested, either by amending a certificate already outstanding so as to include in it authority to transport mail, or by granting the authority in some new certificate which may be applied for either by an entirely new carrier, not theretofore engaged in business, or by a carrier already in business, but not theretofore serving the points in question. The Commission is not given the power in any sense to review the determination of the Postmaster General. All it may do upon receiving the Postmaster General's certification is to inquire into the purely economic phase of the matter in order to determine whether the authorization of the new service would endanger the ability of an existing carrier to continue to engage in business. This, of course, means that in any case where the Postmaster General had certified the need of a service between points not theretofore served, the Commission would be required to grant the authorization. Only when a new service was proposed under circumstances which might spread the mail traffic too thin among two or more carriers, would the Commission have the power to refuse to issue the authori zation. Thus, mail is treated as a problem in itself. The transportation of other classes of traffic may develop quite independently of the development of the mail service; and the difficulties I have suggested heretofore would be avoided. Full initiative is given the Postmaster General in securing additional service. He, of course, is the customer, and he is best equipped to consider the problem from the standpoint of the Postal Service itself. At the same time, provision is made for a consideration by the Commission of the economic effects upon existing carriers which might ensue from authorizing a new mail carrier. In this way, each problem is met by the agency suited to deal with it, full initiative in the Postmaster General is recognized, provision is made for the indefinite expansion of the Postal Service as mail traffic grows, and an orderly scheme for dealing with the question from every angle is provided. In his testimony, Commissioner Eastman suggested that paragraph (m) might lead to some conflict or confusion as between the Postmaster General and the Commission. Since the Commission merely determines whether a new mail service would impair the ability of an existing carrier to continue in business, and does not pass upon the problems having to do exclusively with the needs of the Postal Service, I do not quite see how there can be any particular conflict. The Postmaster General is the customer and determines the question of the need of new mail service from the standpoint of the customer. The Commission looks merely to the economic consequences upon the industry, and so long as those consequences would not be disastrous to an existing carrier, then it must see to it that the service sought by the Postmaster General is authorized. What Mr. Eastman suggested was the possibility that paragraph (m) of section 305 might be eliminated. In his letter to the committee, he pointed out that without this paragraph the bill permits any air carrier to apply at any time for a new certificate, or an amendment to an existing certificate, authorizing a new mail service, and the suggestion was that this is sufficient to the needs of the Postal Service. Such a change would amount to an adoption of what I have described as the third possible method of dealing with the question of authorizing mail carriers. Mr. MARTIN. You are arriving now at the third method? Mr. GORRELL. Yes, sir. Mr. MARTIN. I would like to ask a question before you proceed with that. As I understand, the first method would be that all carriers receiving certificates would be thereby qualified for the carriage of the mails. Mr. GORRELL. Yes, sir. Mr. MARTIN. The second is the "grandfather clause." Mr. GORRELL. Yes, sir. Mr. MARTIN. That would give advantage to existing carriers now in the mail service, would it not? Mr. GORRELL. I would not call it an advantage; I would call it continuing the rights that they now have. For example, at the present time they have indefinite contracts, which they would have canceled if this bill becomes law. Mr. MARTIN. Well, this is a question somewhat analogous to the question I asked yesterday about the apparent interest of your association in and for legislation which would create competition. It appears that the same situation would be presented in your favoring the first method. That is, that all carriers who are granted certificates are to be thereby qualified to carry the mail, and it looks to me, if the grandfather clause is adopted, the air interests that you represent would have the advantage. They already have it, and their monopoly of the air Mail Service would be perpetuated. Mr. GORRELL. Sir, I did not favor the first method. I gave certain objections to the first method. expressed a preference for the second method for a number of reasons which I expect to cover when I come to the question of the "grandfather" clause. The first is a constitutional reason. There is, I suppose, a legal reason for a grandfather clause. It avoids, I suppose, constitutional doubts. If a carrier has invested large sums and has built up a going business, it is at least questionable how far that business and investment may be disrupted by a new law providing for certificates where none were required before. To avoid that question, a grandfather clause takes the existing business and transposes it to the new system by certificates which automatically authorize a continuance of what was done in the past. I doubt very much if the Congress could take the contracts away from the existing contractors and not give anything in return for them. Second, there is the moral and economical side. Air contractors have invested approximately $125,000,000 and lost about $60,000,000 of it in building up the business. They are in existence at this particular minute, to a certain degree, because of the mail. Just because it is proposed to turn over the economic regulation of the air lines to another governmental department, would seem to be no reason for destroying their present status as mail carriers. The disastrous effect upon their investment would be almost immeasurable. Such a policy would, in effect, penalize a carrier for having pioneered a service. The very fact that the service has been established should be enough guaranty of the public convenience and necessity to warrant its continuance. Mr. ELLENBOGEN. Mr. Chairman The CHAIRMAN. Mr. Ellenbogen. Mr. ELLENBOGEN. The contracts now in question are continuous, are they not? Mr. GORRELL. They are. Mr. ELLENBOGEN. The Post Office Department has authority to cancel them. Mr. GORRELL. They do, for certain reasons of cause. Mr. ELLENBOGEN. Well, they have the power to terminate them. Mr. GORRELL. For reasons of cause; yes. Mr. ELLENBOGEN. I do not see how you can bring in the Constitutional question. The Government surely has the right to discontinue the contracts. The contracts are not perpetual. Mr. GORRELL. That is perfectly true, and for certain reasons they can discontinue them; but if you are going to continue the type of service, the persons with whom the contracts now exist are understood by the contractors to be the ones to carry on that service. For cause, the Government could terminate the domestic contracts and give the service to somebody else. That was done once before with domestic air-mail contracts. Mr. ELLENBOGEN. You do not mean to say that the Post Office Department could not at any time terminate those contracts? Mr. GORRELL. They could under certain conditions; yes, sir. Mr. ELLENBOGEN. So the constitutional question does not arise, does it? Mr. GORRELL. I think it does. I think that if the air-mail service to the public were discontinued, if you were to have no more air-mail service in the United States, that the Government could cancel the domestic contracts, or if some carrier violated its contract, the Government could cancel it, as was the case in 1934, when there were allegation of collusion and fraud. The Government canceled them then. Mr. ELLENBOGEN. Do you mean to say that the Government has perpetually tied its hands to continue these contracts? Mr. GORRELL. No, sir; not by any means. Mr. ELLENBOGEN. Without cause, the Government can change its policy? Mr. GORRELL. It could, sir. Mr. ELLENBOGEN. I think, Mr. Chairman, that is very important. If you claim that the carriers now carrying the mail have a perpetual franchise Mr. GORRELL. That is quite a different question. Mr. ELLENBOGEN. You do not claim that? Mr. GORRELL. No, sir. They have an indefinite contract. Mr. GORRELL. But, for reasons I have given-in the contract, sir. The contract specifiies, within itself, reasons for cancelation. Mr. ELLENBOGEN. Well, are they not renewable from time to time? Mr. GORRELL. There are two types of domestic contracts. One is the type of contract that had an initial period of 1 year, and another is the type of contract that had an initial period of 3 years. At the end of that period of time, the mail rates specified in the contract, are superseded by rates to be fixed by the Interstate Commerce Commission instead of the actual bid rate. Mr. ELLENBOGEN. The contract does not specify the price of the contract? Mr. GORRELL, Sir? Mr. ELLENBOGEN. The contract does not specify the price in the contract; then, it is not a contract, because it lacks one of the essential elements of a contract. STATEMENT OF HOWARD C. WESTWOOD, COUNSEL, AIR TRANSPORT ASSOCIATION OF AMERICA, WASHINGTON, D. C. Mr. WESTWOOD. May I possibly clear up one point there, Mr. Congressman? Mr. ELLENBOGEN: Yes. Mr. WESTWOOD. In the Air Mail Act, as amended by the 1935 amendment The CHAIRMAN. Will you state your name? Mr. WESTWOOD. Howard C. Westwood. I am acting as counsel to the Air Transport Association. In the amendment it was provided, in the 1935 amendment, that all contracts entered into either under the 1934 act itself or under the act as thereafter amended by the 1935 act-might be indefinitely extended after the expiration of the initial period that Colonel Gorrell has mentioned. That is, the period of 1 year, or the period of 3 years, as the case might be. Now, there was no obligation upon the Postmaster General, by virtue of that statute, to extend any contracts, as I understand it. Nevertheless, it was provided that if service during the initial period had been satisfactory, the contract might be indefinitely extended. Then, as I understand the law, it was provided that, by mutual agreement between the carrier and the Postmaster General, the con |