RECENT COURT DECISIONS

JAMES F. BROMLEY, Editor

Court of Appeals Overturns Civil Aeronautics Board Order Authorizing Four Long-Haul Motor Carriers to Act as Air Freight Forwarders

ABC Air Freight Company, Inc., et al. v. Civil Aeronautics Board, U. S. Court of Appeals for the Second Circuit, No. 281, Sept. Term 1967, decided March 13, 1968.

In this case, included here because it is of interest to ICC practitioners, a division of three judges of the United States Court of Appeals for the Second Circuit (embracing New York and Connecticut) vacated and remanded an order of the Civil Aeronautics Board authorizing four long-haul motor carriers, directly or through subsidiary companies, to act as air freight forwarders. The court's opinion was written by Judge Friendly and a concurring opinion was given by Judge Moore. Both opinions are set forth here:

Friendly, Circuit Judge:

Under 296.11 of the Civil Aeronautics Board's Economic Regulations, effective October 15, 1948, as amended, air freight forwarders are exempted from the certificate provisions of § 401 of the Federal Aviation Act (other than subdivision (k) (3) ), see § 101(3), but must obtain letters of registration. While these are normally issued, under delegated power, by the Bureau of Operating Rights, 14 C. F. R. § 385.13 (d) (1967), without a hearing,1 the Board's policy, as we shall later develop in some detail, had been to deny such letters to motor carriers or subsidiaries of motor carriers significantly competing with air carriers.

In January 1966 the Board began a proceeding known as the Motor Carrier-Air Freight Forwarder Investigation, noting that "The fundamental question posed is whether long-haul motor carriers of general commodities should be allowed to participate in air transportation, either in their own right or through the device of acquiring an air freight forwarder." Various applications for approval of acquisitions of air freight forwarders were consolidated.

1 The Board will review decisions by the staff under such delegation only if two or more of its members believe this desirable. 14 C. F. R. 8385.54(b) (1967).

These applications had somewhat altered their aspect by the time Examiner Ruhlen rendered his initial decision. Two long-haul truckers, D. C. International, Inc. and Navajo Freight Lines, Inc., sought authority to act as air freight forwarders in their own right. Consolidated Freightways, Inc., the nation's largest long-distance trucker, which had initially sought approval of its acquisition of control of an existing domestic and international air freight forwarder, applied for a letter of registration for its wholly-owned subsidiary, CF Air Freight, Inc., and for the necessary ancillary approvals under § § 408 and 409. Pacific Intermountain Express Company, which also had initially sought approval only of its acquisition of control of an international air freight forwarder, applied both for this and for letters of registration for its subsidiary, P. I. E. Air Freight Forwarding, Inc., and related relief. The applications were opposed by eight scheduled airlines including the six largest domestic operators, by all-cargo air carriers, and by air freight forwarders and their association, most of whom have joined in the instant petition for review. They were opposed also by the Board's Bureau of Operating Rights.

The Examiner rendered an Initial Decision in April 1967. He began by saying that:

The immediate issue is whether the four applicants should be authorized to operate as air freight forwarders, but the Board, in instituting this proceeding, stated that the fundamental question is whether long-haul motor carriers of general commodities should be allowed to act as air freight forwarders.

He considered that the issue must be resolved against the background of "free entry" into air freight forwarding which he regarded as established in the Air Freight Forwarder Case, 9 C. A. B. 473 (1948). Reviewing various contentions of the applicants as to what their position as motor carriers would enable them to contribute to air transportation, he found these claims of special advantages were not made out, save only that "use of the sophisticated accounting, billing, and reporting systems which only a large organization can afford should assist the applicants in providing a convenient service to the public." Nevertheless he concluded that "the applicants, by providing sophisticated management, personnel, and equipment and devoting their well-financed experienced organization to the generation and transportation of cargo by air, will contribute a substantial benefit to the public." Turning to the effect on existing air freight forwarders, he thought "the strong and efficient forwarders will suffer only minor losses with the entry of the applicants into competition," although "the demise of some of the weaker air freight forwarders may be hastened by the competition provided by the applicants." Believing that "If the applicants are to be successful, they will have to rely on newly generated traffic," the Examiner dismissed the arguments based on their conflict of interest primarily on the basis that "although in some circumstances for short periods of time an energetic and clever promoter may be able to persuade shippers to

use modes of transportation adverse to their economic interests, in the long run, the shipper will choose that form of transportation which best meets his needs." Finally, following a previous Board ruling that the second proviso to § 408(b) 2 was inapplicable to "indirect air carriers," Air Freight Forwarder Case, supra, 9 C. A. B. at 503, reaffirmed in Airfreight Forwarder Investigation, 21 C. A. B. 536, 544-5, (1955), he held there was no legal barrier to the applications, and proposed that all should be granted for an experimental period of five years.

The Board, over a dissent by Vice Chairman Murphy, followed the Examiner's recommendations except in a minor respect not here material.3 However, the Board exhibited markedly greater enthusiasm over the new departure than had the Examiner. Apparently dissatisfied with the Examiner's theory that the conflict of interest arising from authorizing long distance truckers to act as air freight forwarders should be disregarded because it would not be effective in the long run, the Board decided that the double role would lessen conflict rather than increase it. Whereas the Examiner seemed to have thought that generation of new air freight by the truckers would be only of the same sort that any vigorous sales effort would engender, the Board found a particularized source in the "large proportion of the truckers' present surface traffic comprised of shipments weighing less than 200 pounds," which they now transport "at a loss or minimal gain,” and whence they "could earn more as forwarders by shipping such packages by air." It concluded also that authorizing the truckers to act as air freight forwarders "should increase the intermodal carriage of freight by air and truck;" indeed, it regarded its decision "as a real breakthrough in opening up the most hopeful avenue for increasing intermodal transportation of freight by surface and air.” It thought also that "The participation . . . of motor carriers like the applicants may well be necessary to achieve the full promise of air cargo," emphasizing especially the role they could play in areas outside the ten cities in which the traffic is most developed. For these reasons, as well as those urged by the Examiner, it was "convinced that a new policy towards motor carriers like the applicants deserves a trial."

2 "Provided further, That if the applicant is a carrier other than an air carrier, or a person controlled by a carrier other than an air carrier or affiliated therewith within the meaning of section 5(8) of the Interstate Commerce Act, as amended, such applicant shall for the purpose of this section be considered an air carrier and the Board shall not enter such an order of approval unless it finds that the transaction proposed will promote the public interest by enabling such carrier other than an air carrier to use aircraft to public advantage in its operation and will not restrain competition:

8 This related to D. C. International, Inc., which has come under the control of National City Lines, Inc., a motor carrier holding company. The Board deferred issuance of D. C. International's letter of registration until an application by National for its control could be passed upon.

I.

The Board's decision does not measure up to the standards required by § 8(b) of the APA, as recently applied in Northeast Airlines, Inc. v. CAB, 331 F. 2d 579 (1 Cir. 1964), see especially Judge Aldrich's concurring opinion, 331 F. 2d at 589. The most serious deficiency lies in the ambiguity whether the Board has established a policy of entry for all truckers who want to act as air freight forwarders or has merely granted the four applications that were before it, and the inadequacy of its consideration of effect on the existing forwarders if the former is the right interpretation as we strongly suspect.

Certainly the Examiner thought, as instanced by our first quotation, that the decision would have general applicability. That also would be the natural inference from such statements by the Board as that "Our purpose in instituting this investigation was to determine whether our traditional restrictions on surface carriers have become outmoded for motor carriers like the applicants," that it regarded its decision "as a real breakthrough" in stimulating intermodal transportation, and that it was establishing "a new policy towards motor carriers like the applicants." Indeed the Board's brief in this court concedes that "its findings and pronouncements also were such as to indicate that it may be expected to grant future applications by other long-haul motor carriers to engage in air freight forwarding activities"-which, as indicated, is normally done by its staff and without a hearing.

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On the other hand, the agency almost completely failed to examine the effect that entry of large numbers of motor carriers will have upon the structure of the air freight forwarding industry. The Board's opinion does not really consider this question at all-its finding that "motor carriers like the applicants" would stimulate the development of air cargo is based entirely upon a review of the operational plans submitted by the four carriers in the instant proceeding and no attempt is made to assess the effect of a general motor carrier invasion. Examiner's analysis is only slightly less scanty. At one point the possibility of adverse effect upon the industry is discounted on the ground that "the independent freight forwarders" are in an "impregnable" competitive position at the present time. But to evidence this conclusion, the Examiner pointed only to the increasing profitability of the top ten forwarders. As we have already noted, other parts of his opinion recognize that "the demise of some of the weaker air freight forwarders may be hastened by the competition provided by the applicants." If "some" of the existing forwarders will succumb to the challenge of these four motor carriers, the impact of a general policy admitting all long-haul truckers will be much more severe, and the danger is enhanced by the probability, hereafter developed, that the truckers would bend their efforts primarily to forwarding freight now moving by air rather than to diverting freight now moving by truck.

The record shows that air freight forwarding industry is now very much divided between the haves and have-nots. Of the 120 forwarders the ten largest accounted for 72.8% of total revenue and earned 7.2 million dollars in pre-tax profits in 1965; the remaining 110 suffered a net operating deficit of 1.1 million dollars. Seventy percent of the domestic forwarders earned less than $25,000 in 1964; one-third operated at a loss. Indeed, even the aggregate figure representing the profitability of the "impregnable" top ten is quite deceiving of the 7.2 million dollars earned by these forwarders, 5.2 was garnered by Emery Air Freight, which has consistently captured 30% of the market. Taken as a whole the industry would thus seem highly vulnerable to the effect of entry by many well-financed competitors.

As to the number of truckers that might take advantage of the Board's new policy, the Bureau of Operating Rights presented figures that reveal the dimension of the problem:

The dangers seem even greater than this chart reveals. There are 50 truckers with gross revenue exceeding $25,000,000 and 20 with gross revenue of some $40,000,000 or more-a level attained in air freight forwarding only by Emery Air Freight, with 30% of the market, even when Emery's thriving international forwarding operations are included. Indeed, three of the four instant applicants have revenues larger than even Emery-Consolidated Freightways being three times as large. Only three other air freight forwarders who are members of the forwarders' association, one of them predominantly international, have gross revenues of $10,000,000 or more, as against over a hundred truckers with revenues exceeding that amount. In this context, the Examiner's confidence in the ability of even the stronger independent forwarders to withstand a massive invasion of motor carriers is without substantial evidentiary support.4

4 While the Examiner's confident assessment was based in part upon the testimony of the nineteen shippers the applicants called as witnesses, their inconclusive testimony is far from indicating that the truckers will not divert substantial quantities of cargo from the independents, even the stronger ones. Although all the shippers said they would use the services provided by one or more of the applicants, five denied that their use of air freight would increase as a result, while only four testified with any clarity that they would ship more by air domestically if the applications were approved. The remaining ten were ambiguous.