testimony

Before The American Bar Association Forum On Air And Space Law

January 22, 1999

Good afternoon.  I wish to thank Forum Chairman Jeffrey Shane for requesting the corporate customer’s perspective today regarding domestic U.S. competition issues. 

The Business Travel Coalition was formed in 1996 to raise awareness of air transport competition issues with government authorities and to support initiatives to protect and increase competition levels.

In our view, the heart of the competition debate largely centers on a simple problem.  In markets of under 750 miles distance, there is a 62% pricing gap between markets with low-fare competitors and those with only major network carriers.  What this means is that, adjusted for inflation since 1978, average airfares in markets with low-fare competitors decreased 36% while fares in markets without low-fare competitors increased 26%.  Indeed, this is the only market situation where inflation-adjusted average fares have actually risen since 1978.

The underlying causes of this problem include:  a) intensifying industry concentration stemming in part from swiftly approved mergers in the 1980’s;  b)  inadequate access to airports for new entrants; and c)  a number of exclusionary marketing practices such as the targeted use of frequent flyer, exclusive corporate discount and travel agency override programs—to mention a few.

However, of all entry barriers, the number one problem is extreme pricing and capacity responses to new entry.  Investor intimidation stemming from scorched earth policies has lead to a dearth of new entrant applications to DOT, and indeed, threatens current and future consumer gains from a deregulated air transport market.  Without new entrants, competition languishes. 

In fact, recent DOT analysis has shown that there is virtually no pricing difference between, where major network carriers share a route, and routes where a major airline enjoys a monopoly position.  The implication is that major airlines have largely stopped competing with one another.

Is competition important?  Not according to some who have spoken out in the press during the past two years.

Delta Air Lines’ CEO Leo Mullin suggests there is no competition problem.

John Dasburg, Northwest’s leader, counsels us not to waste time worrying about “thinly capitalized” start-ups.

And, of course, Continental’s chief Gordon Bethune assures us, that in any event, the game is over—the country is already carved up.

Well others think competition does matter.

Today, ProAir is announcing that it saved Detroit-area consumers $180 million dollars in 1998.  Little, four airplane ProAir offers important lessons.  ProAir disciplines prices on routes it serves; it prevents the misuse of yield management and discriminatory practices against business travelers; and it breathes new life into the theory of contestibility.  Let me explain.

Prior to ProAir’s entry, the round trip walk-up fare from Detroit to Baltimore was $1,147.00.  If you called ProAir this morning for round trip travel today, the fare would be $205.00.  If you then called Northwest Airlines, you would be quoted $208.00!  Importantly, if you also inquired about round trip travel on February 22—thirty days out--the fares would be exactly the same.  ProAir’s presence has neutralized the discriminatory Saturday night stay over requirement.  And, when I called Northwest this morning to check on these fares, I asked if it would cost me anything should I need to change my ticket.  The reservationist checked and said, “Sir, I don’t understand this, it’s $25.00 and it’s usually $75.00!”

You know, there is this myth that all business travel is last minute; that business travelers cannot plan ahead; and that were it not for yield management, the business traveler would not find a seat available on the day of departure.  Well, that’s not really true.  For example, the average advance booking time-frame for many BTC participants—who collectively spend some $1 billion dollars on annual air transport purchases—is approximately 16 days. And that’s without any real airline-offered incentive to push advance purchases further out.  

So, ProAir disciplines prices and prevents the misuse of yield management.  But, it also validates the theory of contestibility—that the mere threat of new entry is sufficient to discipline prices.  Network airlines that serve Detroit from their hubs have offered Detroit-area corporations better discounts to discourage their support of ProAir’s expansion into these major airlines’ markets.  And, if that’s not sufficient proof of the importance of competition, these same airlines have improved the contracts of Fortune 50 corporations headquartered in other cities in an attempt to dissuade them from investigating the efficacy of the ProAir model.

Well, there is a competition problem and we do need to “waste” time worrying about these thinly capitalized start-ups--the game is not over!  But, the ProAir model is not a “Silver Bullet” solution.  There are only so many DaimlerChryslers and General Motors in the marketplace, and the need for true competition is enormous.  In 1998 alone, some 250 frustrated communities visited Southwest Airlines, Frontier and others seeking low-fare competition for their airports. 

Moreover, 20 years into deregulation, it shouldn’t be necessary for corporations to take the extraordinary step of intervening in the supply side of the market to create competitive alternatives.  And, I assure you, you will not find that kind of leadership in many companies. 

Accordingly, State Attorneys General, local communities, travel agencies, airport authorities, elected officials and federal agencies will continue to work toward ensuring a functioning competition in air transport, even if it takes the next ten years to dig out of the hole we are in.

For its part, BTC’s efforts in the next 24 months will focus on three areas.

1. DOT Competition Guidelines.  BTC believes the guidelines, once implemented, will deter the most extreme responses to new entry thereby renewing investor confidence in the low-fare segment of the industry.

2. U.S. Airport Access.  Once new entrant applicants re-fill the DOT pipeline, the next order of business is to ensure access to airports, and their essential facilities on competitive terms and conditions. 

3. Opening The U.S. Market.  BTC will vigorously work in support of initiatives to eliminate foreign ownership and Cabotage restrictions in the U.S.  BTC will formulate and advance a concrete business proposal based upon a business community and foreign airline partnership model.

This concludes my remarks.  Thank you for the opportunity to share a customer perspective with you today.