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on this. When the SST is operated subsonically, the number of passenger miles traveled by the SST is cut by a factor of three. The capital invested in the SST is amortized by the number of passenger miles. It has been indicated in previous testimony that capital investment is double per plane for carrying fewer passengers. If the latter is cut by a factor of three, the operating costs increase by a factor of three. In other words, if the SST can cover its capital charges at a cent and onehalf per seat-mile traveling at supersonic speed, it would seem to me it would have to charge four and one-half cents per seat-mile to cover the same capital charges when flying at subsonic speed. This pushes SST costs way ahead of subsonic plane costs for similar levels of service.
Is there anything wrong in this reasoning? Is it perfectly obvious that we are going to have to charge more per seat for supersonic travel?
Mr. Okun. It is certainly true for the capital costs, and as I think about it it has to be true for manpower costs as well. You are taking up three times as much time of a pilot and engineer and stewardesses in going at one-third speed. I suppose there are some issues, like landing costs, which would not go up proportionately. But certainly, if it is not three times as much, the evidence you are presenting suggests that it would be much larger. Whether twice or three times as much, I don't know.
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ECONOMIC STATUS AND PURCHASING CAPACITY OF AIRLINES
Senator Percy. I would like to quote President T. A. Wilson, of Boeing & Co. He said: "The domestic airlines are in a hell of a shape to be buying new equipment."
I wonder if you could comment on what kind of shape the airlines are in and what you think their capacity is to buy planes at $50 million a copy.
Mr. OKUN. They certainly have a tremendous amount of excess capacity today. They certainly overbuilt relative to demand in recent years. But at the same time, they will be in the market for more. I think a lot depends upon the overall performance of the economy.
It is quite understandable why they cut back. I think the most recent investment figures show that the airlines cut back their investments 26_percent in 1971.
I suspect that is going to go on for awhile.
Again, I would say that that is just the kind of issue of commercial viability that would make this unattractive in the financial markets, and it is a completely relevant consideration.
RECOMMENDATION OF BROKERS TO CUSTOMERS TO BUY BOEING STOCK
Senator Percy. Lastly, I wonder if you could tell as as an economist why you think brokers are recommending that customers buy Boeing stock if Congress cancels the SST?
Mr. OKUN. I am not aware of that recommendation, and I don't think I could throw much light on it.
Senator Percy. I would like to quote again Boeing President T. A. Wilson, who has conceded that brokers are making this recommendation. The obvious reason is the very high risk the company will be experiencing.
Senator MAGNUSON. Brokers are usually wrong, aren't they?
AVOIDANCE OF MISTAKE REQUISITE
Senator PERCY. Not all of them, because they have for the most part, stayed in business and continued to make money. Most of them must have been right. Those that aren't right over a period of time go broke and fail, such as the companies that have made mistakes in judgments.
What I am trying to prevent is a huge mistake by the Federal Government, by the airline industry, the aircraft industry and the banks, all of whom will be sucked into this. But I tend to think it is going to be the taxpayer who is going to end up being the biggest sucker of the whole bunch, because of the Federal Government's willingness today to pay for this.
I think your testimony is certainly right on the beam so far as proving that the marketplace ought to be the litmus test as to whether There is a real commercial need. This is a commercial plane.
I thank you very much, Mr. Chairman.
EFFECT ON AIRCRAFT MARKET ABILITY OF OVERLAND RESTRICTIONS
Senator Case. Mr. Chairman, I have a question on that point.
Senator Case. Will there be a substantial reduction in the demand for these planes? Will we sell 500 or a smaller number on account of restrictions on the use of them over the continent? There is the requirement, for example, that they operate only subsonically. Have you any judgment as to the accuracy of the projection, the projected demand, with all the circumstances you can foresee?
Mr. Okun. I would certainly think it would work strongly in that direction. Just how much, I couldn't imagine. The basic advantage of this aircraft is supersonic speed. There is no one who would want an SST to fly at subsonic speed.
If a substantial portion of its flight has to be at subsonic speed, that certainly reduces the marketability of the product.
Senator CASE. Thank you.
FOREIGN PRIMARY MULTIPLIER EFFECT ON IMPORTS
Senator MAGNUSON. Economists use a term “multiplier effect," do
Mr. OKUN. Yes.
Senator MAGNUSON. I will just ask this simple question: If the SST's were bought abroad, for which there are many orders and airlines have positions on Concorde already, would the multiplier effect take hold? That is, where you spend a dollar, there are 3 more that go into the economy, or 4, or 5, I should say would it, the multiplier exist? That is what I mean.
Mr. Okun. It is quite clear that in the case of imports the multiplier effect is primarily abroad rather than at home.
Senator MAGNUSON. You answered it.
BALANCING OF IMPORTS WITH EXPORTS
Mr. Okux. May I add two more sentences?
Senator MAGNUSON. That is the trouble. You fellows go on so long you confuse me.
Mr. OKUN. One needs to take into account, first of all, the opportunities for getting other investment in other industry, and the opportunities for selling more of our goods to other countries, insofar as they are selling more to us.
Senator Magnuson. Let's get a simple answer. If we spent « billion dollars abroad to buy supersonics, which everybody says we will if we don't build one, would the multiplier effect take over?
Mr. Okun. The trouble with simple answers, Senator, is that you have to tell me what else is happening in the system. It is perfectly true that if we didn't sell a dollar more to other countries as a result of buying more from them, and that if nothing was done if we had exactly the same monetary policy which lets investments on domestic products be smaller-yes; we would lose something. There would be a multiplier effect elsewhere. That I find to be not a very good or realistic comparison. I would say if we buy more we will sell more.
If we invest less in airlines, we will have the kinds of financial conditions that will lead to more investments by other industries just because the people who read the dials are in a position to adjust. The only thing that prevents us from having more jobs in the United States is the concern of public policy about overheating the economy and creating inflation. If that wasn't there, we could have all the jobs we wanted, no matter how large our imports were. I think if we start on that premise, that we always have the tools to get full employment, it is just a question of where we use it. That is the very simple first approximation.
Senator MAGNUSON. So the answer is no, after all.
PROGRAM INVESTMENTS BY AIRLINES AND AIRPLANE AND ENGINE
Senator Young. I have one question, Doctor. Mr. Halaby was testifying this morning for the major airlines and he this:
As evidence of our faith in the American supersonic, 13 airlines have invested $81 million in the program, $18 million for Pan Am alone, paid into the U.S. Treasury 5 years ago. Airplane and engine manufacturers have put up $206 million and are pledged to put in further as the program progresses.
Do you think all of these people used poor judgment?
STATEMENT OF E. R. QUESADA, DIRECTOR OF AMERICAN AIRLINES
SUBSONIC AND SUPERSONIC TRANSPORT PROGRAMS: INITIATION
Chairman ELLENDER. Have you a prepared statement, General?
Chairman ELLENDER. You may proceed.
Mr. QUESADA. My name is E. R. Quesada. I am here speaking on behalf of myself. I represent no one. I want to make it clear to the committee that I am a director of American Airlines, but I do not speak for them.
I am the former Administrator of the Federal Aviation Agency, in fact its first Administrator and, as such, I am often given credit for is having initiated the subsonic transport program.
I think it is perhaps more accurate to say the supersonic transport program was initiated while I was the Administrator of the Federal Aviation Agency.
B-50 PROGRAM My remarks I hope will be brief, and they are confined to two areas: One, the economics of the program; and
the other, the ecology. I have always felt, and I felt when I headed the Federal Aviation Agency when this program was initiated, that it would be helpful to the country and aviation, in particular, if the B-50 program which was then in existence could have some spinoff, hopefully a helpful one, to generate a new cycle of transport aircraft for the transportation industry, which would obviously
be a supersonic transport. The B-70 program was an Air Force program, a very large supersonic bomber and, as was the custom, military programs were exploited—I use the word “exploited” in the constructive and better sense to develop commercial products. This is one of the keystones of progress in our air transportation industry.
As all of us know, we have had many large military programs at great expense to the taxpayer, and they have served a very useful commercial purpose for which I commend the military services and the industry. This is as it should be, and it has been very rewarding to us as a country.
SUPERSONIC TRANSPORT PROGRAM
With this in mind, the supersonic transport program was initiated, admittedly at a very low key. The military services were extremely cooperative. They spent a great deal of effort and some money to declassify many of the things they had learned in their B-70 program so that it could be used by the commercial industries.
It was not my intention then that a supersonic transport would be developed as with the Government being the major equity participant, or whatever you wish to call it. The idea was that the Government was going to be a helpful participant and provide, where necessary, knowhow that couldn't otherwise be derived.
As time went on, and unfortunately, the B-70 program was initiated, As a result, the supersonic program was not able to achieve the benefits that the B-70 program would in future development. Of course, the benefits that the B-70 program had already generated were available to the industry. But, nevertheless, the program moved on, and it has been, to a large extent, moved on under an atmosphere and with the philosophy of the principal funding being provided by the Federal Government.
TRANSPORTATION AND AIRCRAFT INDUSTRY: CONTRIBUTION OF PRIVATE
For what it is worth to the committee, I will give you my reactions to that. I must predicate them by saying that in my opinion the transportation and aircraft industry of this country, which exceeds all others—there is really no second—is one of the prime examples and good examples of the competitive free enterprise system. We hold our dominant position, and it is a dominant position, due primarily to the dynamic forces of our private industry. No better example of this could be cited than the Boeing Company, The Boeing Company has generated two of the finest products for the air transportation industry that anyone could ever conceive of.
Specifically, the 707 generation of aircraft and equally specifically the 747. The 707 was a real revolution in air transportation, and the Boeing Company, with great credit to itself, has given to this Nation one of the finest airplanes that has ever been built any place in the world-until the 747 came along. The 747 is, in my opinion, the most ingenious, the most efficient
, extraordinarily fine piece of transportation equipment. It was dereloped, to a large extent, under the competitive free enterprise system, admittedly gaining great benefits from military programs.
Contrary to the opinion of most, the development of an engine is just as complicated and just as costly as the development of the air frame. Very few people realize that.
I seem to emphasize that point at this time, and if I do I want to make it clear that the military establishment in respect to the 707 made a great contribution to that airplane by the development of the engine, and also by the development of the air frame. After all, the KC-135, to an unusual extent, is almost identical to the 707.
PROGRAM DEVELOPMENT AND RISK
But that doesn't suggest, nor do I wish it to suggest, that the 707 isn't a product of the ability of the Boeing Company to assume great risk. When it went into the air transportation field by offering to the airlines a 707, it then and there assumed a great deal of risk for which it deserves a great deal of credit.
It went further. It then developed the 747, and it got from the 747 a great deal less benefit from the military establishment programs, or for military programs, I suppose I should say, than it did the 707
It is, Mr. Chairman, an incredible product of American ingenuity and American free enterprise. In due course, it will give to Boeing and to the country, and to the airlines, all the benefits to which they are entitled, economic benefits.
SUPERSONIC TRANSPORT PROGRAM
Moving to the supersonic transport, I feel, and this is my own conviction—it is perhaps derived from my training as a kid, derived from