Evening star., 1949-11-24

inquire no further into air policy than to
ask If they can walk into an airplane ticket
Office; plunk down cash; and get seat
on plane" It Is q crying shame that the
public interest cannot be piqued In this,
q matter which pours millions Of tax dollars
down the drain Of inefficient management.
And I am Of the opinion that the public
would get interested If 1t were told the
magnitude Of the waste.
Let us consider for a minute what q
mighty NAV this is that is devouring tax
funds, and how wide 1t has been permitted to
stay open by our free spending Civil Aero
nautics Board.
The policy which the board has been
following in awarding mail pay has been
one which makes it advantageous for the
carriers to rely on debt financing and en-
ables them to make profit running into
millions on this borrowing. To illustrate,
the board allows a carrier a return of Z
per cent, after theoretical taxes of 38 per
cent, on invested capital, including borrowed
money. Obviously this borrowed money does
not cost the carrier Z per cent, or anything
in the neighborhood of per cent. To the
extent that the airlines are receiving pay
ment on this borrowed invested capital at
this rate, and are paying interest at lower
rate, the Government Is allowing the equity
owners an effective rate Of return on their
invested capital very much In excess OF
7 per cent. The carriers have a funded
debt of over $270,000,0 900 as Of the end Of
1948. If we assume that the average cost of
this debt is per cent. certainly a high
estimate, then the Government has allowed
on this borrowed money, profits Of So. 100, 900
after taxes, or gross allowance in evcess Of
$13,000,000. All of which makes it very
good business for the. carrier to fatten its
capital by borrowing.
Investment CapitaP Wrongly Computed.
To give an idea of how this practice
works in the case Of a specific carrier, an
examination of the annual report of one
large airline for the year ended December 81.
1948. shows that the debt liability Of that
company as Of that time was in excess OF
Sc million dollars.
The net equity investment was only
$8,484,000. Seven per cent Of $56,000000
amounts to $3,920000. If the Board in
fixing the companys final mail pay follows
the procedure 1t has in other cases, this
Is the amount the Board will allow as
return on this borrowed money. Through
this artificial system Of computing invested
capital" the carrier would receive an un-
recognized profit Of $2,240,000, which has
the effect of making the return on It's actual
equity not per cent but nearer 33h per
cent.
I should make it clear that do not believe
that the borrowed money should be excluded
from consideration as invested capital, but
do believe that when it is widely known
that the cost Of such money is apt to aver
age only per cent an allowance OF a
Z per cent return on such borrowings is an
invitation to the carriers to wallow further
in the morass Of debt financing.
Other examples should be cited showing
such facts as: The Board has allowed $2.-
948,0 900 to carrier for the purpose Of pay
ing Federal income taxes. And this was
done in year when the airline involved
actually lost money from operations.
Such q system Of providing money to
airlines is in practice "cost-plus'' PROPOSE
ton: You operate; you lose money: the
Government makes up your loss plus .
reasonable proht-and then gives you money
to pay nonresident taxes Does this tend
to inspire airline executives to operate ef-
fciently? ,
I think 1t Is self evident that SUBJ
sidized industry is repugnant to our Amer
lean concept Of free enterprise. and that
everything possible should be done to the
end that subsidy payments should be elm
mated or at least made reasonable. This
will hardly be accomplished without the
interest Of the American people and how
can they become interested unless they
know the facts? r. C. PERRY.