testimony
Before the U.S. House of Representatives Committee On Transportation And Infrastructure Aviation Subcommitte
Regarding The State Of Airline Competition
October 21, 1999
Mr. Chairman and Members of the Committee, my name is Kevin Mitchell. I am chairman of the Business Travel Coalition (BTC). BTC represents the business travel interests of major buyers of air transport services such as Black & Decker, DaimlerChrysler, General Motors, Procter & Gamble and Zeneca as well as 21,000 independent business travelers who are members of the Commercial Travelers Association.
In October, 1998 Congress commissioned the National Research Council's Transportation Research Board (TRB) to update its 1991 report, Winds of Change: Domestic Air Transport Since Deregulation. The report, transmitted to Congress on July 30, 1999 vividly describes competition problems in air transport and underscores why inadequate industry competition has become an important public policy issue.
There were three main premises of deregulation: 1) that any airline willing fit and able would be able to provide service at any airport in the country; 2) that the mere threat of entry, the contestibility theory, would be sufficient to discipline pricing; and 3) with DOT oversight of potential anti-competitive practices, that U.S. citizens would enjoy affordable airfares.
The TRB reviewed several competition issues directly related to these premises. The first issue was industry competitive structure which was significantly altered during the 1980's when DOT approved virtually every merger proposal before it such as TWA/Ozark, Northwest/Republic and USAir/Piedmont. Today, we have so-called Fortress Hubs, excessive concentration at the majority of large hubs and supra premium pricing with respect to business airfares.
The second issue was airport access currently restricted by the High Density Rule, the Perimeter Rule, long-term exclusive gate leases and the sub-leasing of gates and other essential facilities to new entrants on non-competitive terms and conditions. Similar to corporate travel executives who were not at the "public policy table" for the first twenty years of deregulation, airport executives have gradually ceded control over important business decisions to airlines.
The third and most important issue is that of exclusionary competitive practices--or so-called strategies of predation. Such strategies quickly erode investor confidence. The reason the issue is so important is that slots and gates are of little value if we do not have new entrants in the pipeline at DOT to eventually use them. The TRB Committee did not reach consensus on the issue of predation and the efficacy of proposed DOT Competition Guidelines. Moreover, one view expressed on the TRB Committee was that DOT should not even involve itself in policing predation.
However, Alfred E. Kahn, TRB Committee Member and acknowledged "Father of Deregulation" stated in a September 2, 1999 Washington Post editorial, "While our executive summary noted…'the potential for undesirable consequences [from DOT Guidelines],' only some members of the study committee would prefer that the Department of Justice take the lead in enforcement. Other members judged the problem 'serious enough to warrant the more active involvement of the Department of Transportation.' Those members 'are optimistic that DOT can do this without becoming overly regulatory and without inhibiting the kind of competitive price cutting that provides lasting fare reductions.'"
Let's examine one of several documented examples of anti-competitive responses to new entry that DOT has published on its Internet site at http://ostpxweb.dot.gov/aviation/DomAv/example.pdf.
In 1Q, 1996 an incumbent major airline had 1,220 seats priced at $75 or less in a particular city-pair market. During this same quarter a new entrant implemented service with 11,770 seats priced at $75 or less. In 3Q, 1996 the incumbent responded with 49,760 seats priced at $75 or less. The new entrant was shortly thereafter driven from the market and the incumbent reduced its low fare offerings to 910 seats priced at $75 or less during 1Q, 1997. The incumbent's strategy caused it to lose $3.5 million dollars during this period in this market.
The Modus Operandi of such strategies of predation includes:
- preventing the new entrant from reaching its break-even load factor by flooding the market with thousands of cheap seats;
- limiting financial investment; responding massively avoiding a "war of attrition;"
- running the new entrant from the market;
- discouraging new entry throughout the incumbent's entire system; and
- raising fares to recoup the investment.
In the DOT example above, the average fare prior to new entry was $190.00, during the new entry period it was $80.00 and after the new entrant was run from the market the average fare was $250.00. A key point here is that prior to 1996, major airlines would heed DOT jawboning when such anti-competitive activity was observed. Since, some majors have resisted DOT, others have publicly rebuked DOT for even suggesting predation exists.
A few major airline executives, however, do acknowledge the existence of predation. And importantly, the draft DOT Guidelines--issued April 6, 1998--along with intensifying scrutiny from Congress, DOJ and the national media have actually moderated the most extreme competitive responses to new entry. Indeed, investor confidence in the low-fare sector of the industry is returning, financial and stock performance of the sector is rebounding and new entrant applications are once again flowing into DOT.
So why, as some suggest, shouldn't DOT declare victory, cede authority to DOJ to address predation and abandon the Guidelines? There are important reasons why DOT should stay its course and implement the Guidelines.
1. The U.S. Supreme Court has all but gutted the Sherman Act, rendering predatory pricing essentially impossible to prove. A DOJ action-based upon antitrust law--can take years to adjudicate. In contrast, DOT authority--based upon antitrust principles--can be used to act preemptively in the marketplace to prevent irreversible damage to competition. The real point is that the problem is large enough that the combined efforts of DOT, DOJ and Congress are necessary to guarantee functioning competition over the long-term.
2. To argue, as some do, that DOT Guidelines can turn into regulation is like claiming rocks can fall. Even a central recommendation in the NRC report, "congestion pricing" at major airports, can evolve into complex regulation. What's important is that DOT has pursued a highly collaborative process concerning its draft Guidelines. It has received and analyzed thousands of comments. Every major concern raised will likely be addressed in DOT's final Guidelines when transmitted to Congress.
3. Many major airlines continue to vehemently deny that there are serious competition problems. Indeed, had airlines responded more responsibly to DOT concerns about exclusionary practices, it is likely the need for Guidelines would have been avoided. The airline industry's failing stewardship of billions of dollars of U.S. citizen-owned assets conveyed to it at deregulation has become an industry problem that only continued pressure can apparently ameliorate.
Proposed DOT Competition Guidelines represent the least intrusive, most effective step government can take to outline what it considers unfair and exclusionary behavior in air transport.
Mr. Chairman, I urge this Committee to take the necessary steps to ensure that DOT Guidelines are implemented. Thank you for your interest in the customer’s perspective on this critical issue.