Opinion ID: 296613
Heading Depth: 1
Heading Rank: 3

Heading: Metamorphosis of the Board's Financial Data

Text: Southern's Earning Capacity 14 The original idea of the Board was that an extension of Southern's system to Orlando and Miami would be profitable and would therefore reduce Southern's subsidy requirements, an estimable objective. However, these predictions of profitability were not borne out in the hearing before the Examiner. He found that the Atlanta-Miami route would increase Southern's subsidy need by $425,000 and logically he denied this route to Southern. 14 He also found that the Birmingham-Miami route would create an operating loss of $29,000 and require even more subsidy, hence he conditioned his award of this on Southern also obtaining the Miami-Key West route. 15 The Examiner found that the unrestricted Mashville-Chattanooga-Atlanta route would increase Southern's operating profit by $200,000. 16 15 In argument before the Board, various parties challenged the figures as erroneous. Southern in its brief to the Board recomputed its traffic forecast on the basis of estimates for the year 1970, figures for a period which had not been used by the Examiner and which were available for use comparatively by no other party. One airline, Southeast, moved to strike the 1970 estimated data or alternatively to remand the case for reopening of the record, a position supported by Delta. 17 Delta argued that at least four adjustments must be made to the Examiner's 1969 review forecast for Southern, any of which would have eliminated operating profit. 18 The Board never ruled on Southeast's motion, nor did it specifically meet Delta's and the other parties' challenge to the accuracy of the Examiner's prophecy of Southern profits. 16 The Board started afresh, and first it cast aside one reed of support the Examiner did have. The Examiner had stated: 17 The prior conclusion that Southern could operate at a modest profit between Birmingham and Key West is predicated on the assumption that it would be the sole certificated carrier operating in the Miami-Key West market. 19 18 The Board gave Southeast the Miami-Key West operating authority, 20 and then rejected the Examiner's conclusion that Southern would incur a loss: 19 We do not accept this conclusion, nor the financial forecasts upon which it was based. Instead, we have reviewed the markets concerned and find that Southern can achieve an operating profit of over $700,000 and a subsidy need reduction of approximately $50,000 in 1970. As indicated in detail in Appendix A, we have used 1970 as the forecast year, increased revenues by 15 per cent for on-line connecting traffic, and employed various standard techniques to determine stimulation and participation. 21 20 The source and reliability of the calculations used by the Board were nowhere demonstrated.
21 The questionable accuracy of the 1970 data figures in Appendix A to the Board's September 1969 order was not long in being revealed. Two months later came the Board's Order on Reconsideration, wherein the Board admitted that Appendix A contained errors of about one-half million dollars. 22 The Board then proceeded to make a new 1970 forecast, employing forecasting techniques that had not been employed by either the parties or the Examiner. The calculations made by the Board on the basis of 1970 estimates in Appendix A were never subjected to examination or cross-examination in any administrative proceeding. They were challenged by several parties-- successfully, as shown above-- after the Board's order in September 1969. The validity of all awards of new routes to Southern and the denial of any routes to Delta rests upon the Board's 1970 forecast figures supplied in its Order on Reconsideration, which is challenged for the first time in this judicial review. 22 The Board urged strenuously at oral argument that the Board and its processes were not subject to cross-examination by the interested parties. With this we can agree, but the financial data and the method of calculation or financial forecasting employed by the Board should be subject to examination and cross-examination by the adversary parties. It is for this reason that, if the Board is to rely on its wholly new 1970 forecast, it is required to hold a hearing as contemplated by the Administrative Procedure Act: 23 A party is entitled to present his case    by oral or documentary evidence, to submit rebuttal evidence, and to conduct such cross-examination as may be required for full and true disclosure of the facts. 23 24 The questionable reliability of this 1970 forecast is indicated by the admitted fact that it involves a 1970 forecast of operating revenues for Southern, while the 1970 cost figures compared by the Board were not an estimate of 1970 costs but were an extrapolation of previous cost experience of Southern and other airlines for the year ended March 1969. 25 Appendix A (Revised) to the Board's Order on Reconsideration of November 1969 used average Local Service Air Carriers' Unit costs for indirect costs and Southern's costs for direct costs. For the year ended March 1969 these costs were stated as lower than the costs for the similar period ended March 1968, relied on by the Board in its Appendix A to its original Final Order of September 1969. Hence, although the Board's 1970 forecast of Southern's revenue (having been challenged by the other parties) was actually lower in Appendix A (Revised) than it had been two months earlier, yet the Board could still predict an operating profit of about $650,000 and a consequent $20,000 subsidy reduction for Southern because of lower costs. 24 We are extremely dubious that airline cost figures can be simply extended from the past to provide a worthwhile forecast for the future with no allowance made for an upswing in airline costs in 1970. Whether this doubt is proved right or wrong, the other parties to this comparative proceeding to determine the award of new airline routes are entitled to an open adversary hearing to disprove their accuracy. 26 We have alluded above to the lack of opportunity for the other parties to challenge the 1970 figures in relation to Southern. But another flaw in the Board's procedure in using these 1970 forecasts is that no other party put in, or indeed had an opportunity to utilize, 1970 forecast figures for its own operations on these routes. We were told at oral argument that updating of figures is frequently indulged in by the Board or the Examiner after the evidence is closed, otherwise the final decision may come out based on stale statistics. But surely such updating can only be justified if done on a comparative basis, i.e., updating the forecasts for all parties. 25 It can hardly be termed a 'comparative proceeding' if the financial forecast for one applicant, Southern, is based on 1970 data, while the forecasts for all the other competing applicants for the same routes are pegged to 1969 estimates. 26 As we said in a previous CAB case: 'The requirement for a comparative proceeding means all the give-and-take of contesting parties, including cross examination, rebuttal, participation in rehearing proceedings, objections, briefs and arguments as contesting parties.' 27 27 What was done here was not sufficient to meet that standard of an adversary proceeding; the Board's initial computations were too cryptic, had large errors and undisclosed premises, thus precluding adequate challenge. The later figures are, again, cryptic and contain untested premises. 28 The Board complains that it would defer proceedings interminably if there had to be a new hearing every time a new forecast year is used. There are acceptable alternative solutions, three of which are; one, the Board can work out, in advance, with all the airlines, general formulas for updating which can be applied mechanically in all (or almost all) cases, instead of depending on ad hoc computations in particular cases which are subject to attack and criticism; or, Two, the further hearing on updating can be limited to that issue alone and can be given special priority so that it need not delay proceedings unduly; or, Three, perhaps the Board can work out some procedure for an exchange of written views in advance of decision (e.g., a tentative recomputation offered for criticism to the parties), which will give all parties an adequate understanding of the underpinnings and the details of the computations as well as an opportunity to point out errors and alternatives and to answer opposing presentations (akin to exchanges of proposed detailed findings of facts and objections to the others' findings). 29 The time lag created by this appeal may make all three solutions inapplicable to this case, on remand the Board may choose other procedures; nor do we imply that in other future cases the three suggested solutions are the only acceptable. 30
31 In its estimates presented to the Board, Southern used a figure of 1.5 percent for its on-line connecting traffic forecast. 28 This may have been modest, but since it definitely was to Southern's advantage to show as high a figure as was reasonable for this on-line connecting traffic forecast, we assume that it was not excessively modest. But as quoted above, the Board's first opinion stated: 'we have used 1970 as the forecast year, increased revenues by 15 per cent for on-line connecting traffic.   ' /29/ The Board gave no explanation or justification for multiplying tenfold the on-line traffic possibilities as estimated by Southern itself, only saying that it had been used without objection in a number of recent cases, and conceding that its use was a novel technique. Of course this figure was never subject to cross-examination or exploration as to its foundation by any party. 32 This 15 percent increase was not unimportant. According to the Board's Appendix A to its order of September 1969, it accounted for $666,000 of the passenger revenue. 30 Added to other revenue increase of 10.52 percent, this multiplication miracle produced $736,000, more than Southern's entire $717,467 operating profit, and without it Southern's subsidy need would have increased proportionately. 31 33 When Delta pointed out what a miracle the Board had wrought, in its Opinion on Reconsideration the Board took refuge in 'recognition of these factors is admittedly a matter of expert judgment,' and unashamedly asserted that 'Delta has made no showing that our estimate here is unreasonable.' 32 Of course no party had had an opportunity to show that the estimate of 15 percent was unreasonable, as the record was closed. Southern had relied on an estimate of 1.5 percent, the motion of Southeast to strike these new figures or to remand the case for reopening of the record was never passed on by the Board, and there is nothing in the record up to now to justify it. When challenged, this can hardly be sustained as in accord with due process. 33 34 This case is illustrative of the errors into which an administrative agency may fall when it does not keep distinct and separate its tripartite functions and powers-- executive, legislative, and judicial. When the Board began this Investigation, it was exercising what was primarily an executive or administrative function in realigning the segments of the existing routes of Southern Airways. To this there was no opposition by other interested parties, and the job the Board was called upon to do was apparently performed in a workmanlike manner. 34 However, when the Board shifted to the consideration of awards on comparative applications for new routes, this, under its own statute, the Administrative Procedure Act, and relevant case law, called for adversary proceedings to take into account the perhaps conflicting public interests of the different communities involved and the certainly conflicting interests of the competing airlines seeking these new routes. In deciding this phase of the case the Board was clearly exercising a judicial function. 35 35 In summary, the use by the Board of untested and unsupported 1970 revenue forecasts for Southern, unmatched by comparative Southern cost figures, and unmatched by 1970 forecasts of any other carriers' revenue and cost figures, the astonishing escalation of the on-line traffic figure tenfold, none of which was subject to cross-examination or other challenge-- these are illustrative of the Board's failure to accord due process to Delta and the other competing applicants in exercising its judicial function. 36 The Board's Final Order 69-9-132 of 24 September 1969 and its Order on Reconsideration 69-11-94 of 21 November 1969 are hereby set aside and the case remanded to the Board for further proceedings in light of this opinion.