March 3 - PFCs, Airport Utilization and Open Skies Policy Under Attack


U.S. Legacy Airlines Seek to Block Competition, Preserve Monopoly Market Positions and Keep Fares and Fees High 

Blocking competition a common theme

What theme do the following have in common: (1) some major airlines’ rejection of an increase in the passenger facility charge (PFC) proposed by Representatives Peter DeFazio (D-OR) and Thomas Massie (R-KY), (2) the underutilization of slots at Ronald Reagan Washington National Airport (DCA) and LaGuardia Airport (LGA) and (3) the continued attack on U.S. Open Skies policy? They reflect a nefarious legacy airline strategy to block competition, preserve monopoly market positions and wield control to manage capacity thereby keeping fares at supra competitive levels. Let’s explore.

PASSENGER FACILITY CHARGES

There is always more than meets the eye when it comes to interpreting airlines’ arguments in Washington debates. But, self-interest, not the best interest of travelers, generally emerges as the core motivation. Airlines argue that increasing the $4.50 PFC by a few dollars - the first increase since 2000 - would materially dampen demand for travel. However, when airlines state: “saddling passengers with more taxes is not the solution” that’s when one really needs to pay attention.

Indeed, airlines are not concerned about an impact of PFCs on demand or their customers. If they were then they would have endeavored to stimulate demand in 2011 when the federal ticket tax lapsed and turn it into a teachable moment for lawmakers. Instead, they raised base fares and pocketed a $28.5 million dollar windfall per day.

Likewise, notwithstanding the extraordinary increases in ancillary fees - up to $200.00 - passenger demand remains at record levels and airlines keep expanding and increasing those charges. A small increase in the PFC pails in comparison to the average $16.00 in fees that airlines charge per passenger. 

The PFC was created to be an independent source of capital that could enhance airline competition. PFC-funded investments in airports can add capacity and first-rate facilities attracting new domestic and foreign airlines. This, in turn, increases both competition and consumer choice while lowering airfares.

Without the PFC, however, large hub airports have to rely on funds from the dominant carrier to pay for infrastructure projects. But because of Majority in Interest agreements between most airports and incumbent hub carriers, the airline gets to choose which projects are funded and how revenue is spent.

Problematically, at many medium, small or non-hub airports the airlines want to exercise control to defer capital projects, which can result in a sub-standard passenger experience for that community and an effective subsidy of the larger airports where the airlines are willing to spend money to build fortresses against competition.

Airlines would never agree to fund projects that enhance competition or benefit other airlines. These airlines want none of this and will fight hammer and tongs to stop it. Their goal is maximum control over domestic and foreign competition.

AIRPORT SLOT UNDERUTILIZATION

In 2000 at LGA 24% of aircraft had 76 or fewer seats. In 2016 some 73% of aircraft had 76 or fewer seats at LGA. The same is true of DCA. This so-called “slot-sitting” with small aircraft that keeps competitors out is clearly not in the public interest; however, the U.S. Department of Transportation (DOT) and the U.S. Federal aviation administration (FAA) have been unwilling in the past to address this egregious abuse. Given the hundreds of millions of dollars in public funding that pours into these airports, one would think consumer interest in fully utilized public assets would be paramount, rather than permitting them to be turned into airline moneyboxes.

The excessive use of small aircraft represents an enormous, self-serving waste of scarce resources that locks out new competitors, enables monopoly airfare levels, and over time effectively provides the major U.S. network airlines with billions of dollars in government-endorsed subsidies on the backs of consumers. (See LGA and DCA utilization charts at http://btcnews.Co/2m0zeia.)

The dominant LGA carriers Delta Air Lines and American Airlines, which together hold 77% of the slots, make unwarranted use of small aircraft preventing other carriers from expanding at LGA and making better use of the slots, which would provide more competition and options for consumers.  Moreover, the problem is aggravated by the fact that those dominant carriers use the great majority of their small aircraft (75 or fewer seats) to serve medium or large hub airports from LGA. They do not, as they like to assert, use small aircraft just to serve small communities - not even close to that.

ATTACK ON U.S. OPEN SKIES POLICY

Our country’s pro-competition, pro-consumer, pro-growth Open Skies policy is a Made-in-America success story, representing the Gold Standard for bilateral trade agreements. Nevertheless, Open Skies has been under vicious attack by Delta Air Lines, American Airlines and United Airlines (Big 3). As one example, those airlines claim that Emirates Airline, Etihad Airways and Qatar Airways (“Gulf Carriers”) are subsidized and price their products below competitive levels.

The Big 3, having benefited from massive consolidation in the U.S. airline industry, and also having secured antitrust immunity allowing them to set prices and capacity jointly with foreign airlines that were once independent competitors, now seek to preserve their dominant market positions by enlisting the federal government to protect them from competition at the expense of consumers, U.S. communities, the American travel and tourism industry and our country’s aerospace manufacturers.  

Inescapably, what the Big 3 are anti-competitively seeking is an end to the Open Skies agreements with the UAE and Qatar. If they truly believe that the Open Skies agreements have been violated, they are authorized by statute to file a complaint with DOT under the International Air Transportation Fair Competitive Practices Act (IATFCPA). Or, if the alleged violations pertain to the pricing articles in the Open Skies agreements, they could provide the evidence and pursue the specific procedure set out in the those articles to resolve pricing disputes.

The truth is that the Big 3 are not pursuing these established avenues for redress of alleged grievances because they know that they can demonstrate neither a legal violation nor meaningful harm. Lacking a legal basis for an IATFCPA complaint, and facts that support it, the Big 3 have launched a loud political campaign with soaring but hollow rhetoric. 

These behaviors are sadly ironic given that the record profits of the Big 3 have positioned them to competitively respond in the marketplace but instead they have chosen to seek to block increased PFCs, sit on scarce slots with small aircraft and secure government protection while weakening U.S. Open Skies policy. Shameful.

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