May 23 - BTC Letter To Congress Re Airline Pricing 


Dear Members of Congress,  

The Business Travel Coalition (BTC) has been an outspoken opponent of Delta Air Lines, American Airlines and United Airlines’ (Big 3) disingenuous political campaign to thwart much-needed competition by Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers). As emphasized by the recent high profile and deeply troubling customer service meltdowns by the Big 3, now more than ever, consumers need and deserve greater competitive choice in air service, and support from the U.S. Congress. 

As a critic of the Big 3’s anti-Open Skies campaign, surprisingly BTC agrees with them on an issue they recently have emphasized. Specifically, they are right that Congress and the Trump Administration should take a hard look at airline ticket pricing. However, the focus of that review should not be the market-based pricing of Gulf Carriers but rather the artificially high oligopoly pricing of the Big 3, which is permitted by anti-consumer grants of antitrust immunity (ATI).

The Big 3 are increasingly desperate in their fight against Open Skies and Gulf Carrier competition. Nearing its two and a half-year anniversary, all they have to show for their protectionist efforts is the waste of tens of millions of dollars of shareholder money. So, oddly at a time policymakers and passengers alike are increasingly concerned about soaring airfares, the Big 3 now protest that the Gulf Carriers charge market-based prices lower than the Big 3’s artificially fixed high fares. Competitive market-based fares obviously are worrisome for the Big 3 cartel. But, for consumers, they are a very welcome breath of fresh air.

In July 2015, the US Government sent written questions to the Big 3. One question specifically sought to get at which sections of the US-United Arab Emirates and US-Qatar Open Skies agreements were purportedly being violated. The Big 3 could not answer and did not even try. Of course, that is because there is no violation of either Open Skies agreement, especially in the area of government subsidies. 

The only place in either agreement where the word subsidy appears is Article 12, Pricing. Namely, it recognizes that subsidies can be evidenced in below cost, artificially low prices that distort competition and the section establishes a process to address it when proven. Significantly, the Big 3 never alleged a violation of Article 12. Nor did they even try, much less succeed, in providing data to the Obama Administration proving below-cost pricing.

It is hard to keep-up with just which version of their anti-Gulf Carrier argument the Big 3 cartel is on – 7.0, 8.0 etc. No sooner does one version understandably fail than that they rollout a new one with revised “facts” to support it. The flavor of the month seems to be Gulf Carrier airfares are too low. But, what exactly do they mean by this given, by silence, they conceded to the US Government they do not allege nor believe there has been an Article 12 pricing violation?

Simply put, the Big 3’s complaint is that the Gulf Carriers charge market-based prices. They don’t collude through ATI with one another to set fares artificially high. They set prices the old-fashioned way. In stark contrast, the Big 3 and their foreign joint venture (JV) partners charge oligopoly-immunized fares. Shielded from competition oversight by government grants of ATI, the Big 3 jointly set prices, as well as coordinate capacity and schedules, with their JV partners. Once one JV sets its artificial fares, the others tacitly follow. The result is two sets of fares for international travelers; one determined by the marketplace and the other by executives at Delta, American and United.

It is easy to see why the Big 3 are so obsessed with Gulf Carriers. They don’t play ball in gouging consumers with artificially high, immunized airfares. Worse yet, they are the polar opposite of the Big 3. While the Big 3 offer lowest-common-denominator service for artificially high fares, the Gulf Carriers offer high service and an excellent value proposition at market-based airfares.

The Big 3’s fixation on Emirates’ two daily Fifth Freedom flights in the US-Europe market underscores this point (*). Today, over 80 percent of the seats in the US-Europe market are controlled by the Big 3’s JV oligopoly. Their vision of “competitive choice” in that market: consumers have the “choice” of being overcharged by artificially high immunized fares offered either by Door No. 1 -- a Delta JV, Door No. 2 – an American JV or Door No. 3 -- the United JV. Then, along came Emirates, which isn’t a member of their immunity club and has the audacity to charge market-based airfares. Blasphemy! 

The construct of antitrust immunity is that the connectivity and consumer benefits of fully integrated alliances and JVs, and robust new airline entry, outweigh the threat to consumers presented by blank-check permission to jointly fix prices, schedules and coordinate capacity. Wisely, ATI grants contain a five-year review provision to ensure that, in fact, real world experience shows that the service benefits to consumers outweigh the inherent risk of higher fares. Sadly, however, there is no evidence those five-year reviews have ever been meaningfully conducted. 

It is time for that to change. Congress and the Trump Administration should correct the mistake of prior Administrations. It is a vastly different market today with considerably less competition than when many of those JVs were first granted ATI. The combination of industry consolidation and ATI has significantly increased the risk of higher prices versus consumer benefits. That balance is way out of kilter today with the downside of higher fares swamping any upside benefit. It is time for a meaningful review of existing grants of ATI, and a reevaluation of ATI policy generally, and with U.S. Department of Justice participation and a public docket.

So, the Big 3 are right. Congress and the Trump Administration should take a hard and critical look at airline pricing. It is long overdue. The focus of that review should be the artificially high, immunized fares the Big 3 cartel jointly sets with its JV partners. Ironically, the Big 3 may not have too much to fear from such a review. After all, if they get their way and the Trump Administration abandons Open Skies policy, as they are demanding, they will lose ATI and their fully integrated alliances and JVs will unwind as a result because Open Skies is a predicate for ATI, and the absence of Open Skies means the loss of ATI.

We look forward to seeing proposals in this and other areas of concern during the U.S. Federal Aviation Administration reauthorization process this summer.

Sincerely,
 
Kevin Mitchell
Chairman
Business Travel Coalition

COPIES

President Donald Trump

Vice President Mike Pence

Secretary of Commerce Wilbur Ross

Secretary of Transportation Elaine Chao

Secretary of State Rex Tillerson

White House Chief Strategist Stephen Bannon

Senior Advisor to the President Jared Kushner

White House Press Secretary Sean Spicer

White House Chief of Staff Reince Priebus

Senior White House Adviser Stephen Miller

Counselor to the President Kellyanne Conway

Special Assistant to the President D.J. Gribbin

 

(*) A Fifth Freedom allows a carrier to transport revenue traffic from its home country to a second country and onto a third country.

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