News from the National Academies (fwd)

[Robert Weissman <rob@essential.org>]

To:  Reporters and Editors
From:  News Office, The National Academies
Re:  Immediate release of report on Airline Competition

Because of a news leak, our report on Airline Competition is for immediate
release.  The news
release follows.  To obtain a copy of the report or for more information, please
call (202) 334-2138.


Date:  July 30, 1999
Contacts:  Vanee Vines, Media Relations Associate
David Schneier, Media Relations Assistant
(202) 334-2138; e-mail <news@nas.edu>

FOR IMMEDIATE RELEASE

FEDERAL GOVERNMENT SHOULD TAKE ACTION TO INCREASE DOMESTIC AIRLINE COMPETITION

WASHINGTON -- The federal government should take decisive steps to boost
competition in the domestic airline industry, says a new report from a National
Research Council committee.  To that end, the U.S. Department of Transportation
(DOT) should do away with restrictions that keep new carriers out of some
airports, and should give airport operators more leeway to raise and spend money
for airport-gate construction.  In addition, the U.S. Department of Justice
(DOJ) should closely review proposed alliances and partnerships among large
airlines.

Committee members differed on the extent to which DOT should formally police
anti-competitive practices in the industry, a job perhaps more appropriately
handled by the Justice Department.  But all members agreed that the
transportation agency should do what it can to increase airline competition and
protect the gains that have been made by deregulating the industry two decades
ago.

"On the whole, we believe the Department of Transportation should concentrate on
building an environment where it's difficult to engage in anti-competitive
conduct because rivals can more easily enter markets," said committee chair John
R. Meyer, professor emeritus of economics and the James W. Harpel Professor of
Capital Formation and Economic Growth at Harvard University in Cambridge, Mass.
"Even with the many benefits brought about by deregulation, we noted some
alarming trends against healthy rivalry.  Specific action needs to be taken to
counter them."

For example, DOT should try to steer air traffic away from the nation's busiest
airports and toward secondary airports in major cities, the committee said.  A
recommended tool to achieve this is a system that would charge airlines fees for
using congested airports during peak periods.  "Congestion pricing" would
provide extra money for gate and terminal construction at key airports in cities
such as Chicago, New York, and Washington, D.C.  It also would decrease the
number of flight delays that occur when planes struggle to obtain the equivalent
of a parking space.

Some barriers to competition -- most notably "slot controls" and "perimeter
rules" - stem from long-standing policies that originally were enacted to ease
airport congestion.  Four of the country's largest and busiest airports --
O'Hare in Chicago, La Guardia and John F. Kennedy in New York City, and Reagan
National in Washington, D.C. -- operate under a 30-year-old slot or reservation
system that sets hourly quotas on the number of takeoffs and landings.
Perimeter rules, also approved about three decades ago, limit nonstop flights
that exceed a certain distance traveling to and from La Guardia, Reagan
National, and Love Field in Dallas.  The rules were intended to shift long-haul
traffic toward other nearby airports that could accommodate larger jet aircraft,
which were introduced in the 1960s.

Together, the regulations inadvertently make it difficult for new or low-fare
carriers to get into these airports.  Both slot controls and perimeter rules
should be replaced with pricing strategies such as congestion fees, the report
says.

Other barriers to competition resulted from federal-aid policies that have led
airport operators to rely, in part, on exclusive gate contracts with certain
airlines to raise money for construction needs.  Major carriers sometimes use
such contracts to suppress rivals.  But linking federal aid for airport
construction to airports' efforts to increase gate access could deter airports
from granting established airlines exclusive contracts, the report says.  Also,
ending federal restrictions against foreign investment in and ownership of
domestic airlines could result in more seed money for start-up carriers, putting
them in a stronger position to compete for customers.

Many new or low-fare carriers have complained that major airlines undermine
competition through "predatory" practices when a rival enters a market, the
committee noted.  New entrants argue that major airlines match or beat their
fares on specific routes, offer frequent-flier bonuses, and then schedule extra
planes to increase seating capacity.  They say an incumbent airline's goal is to
drive them out, setting the stage for subsequent fare increases because of
diminished competition.

Committee members disagreed over how DOT should respond to alleged
anti-competitive conduct, however.  All acknowledged that DOT's proposed
guidelines to determine when a carrier is unfairly excluding a competitor are
flawed.  The agency's proposal, introduced in April 1998, could lead to
regulations that would stifle competition more than encourage it.  Even so, some
committee members favored the idea of DOT taking a more active role in
enforcement - given heightened concerns about predatory conduct.  Others felt
that competitive practices within the industry did not warrant a stronger DOT
role in policing such conduct, and that the Justice Department was better suited
to investigate anti-competitive practices as part of its enforcement of
traditional antitrust laws.

AN EVOLVING INDUSTRY

The report highlights several other areas of concern.  Some airlines, for
instance, have aggressively sought to influence travel agents with bonus
commissions so that agents would, in turn, steer customers away from rivals.  To
combat this, DOT should more closely monitor the way airlines use travel-agent
incentive payments, the committee said.  The agency also should consider new
rules to govern the way flights are listed in automated computer-reservation
systems.  Through "code-sharing" agreements, one airline lists another's flights
as its own in reservation systems to boost market share.  Consumers may benefit
if code-sharing partners better coordinate baggage handling, flight schedules,
and other services.  But the practice also may dampen competition by shifting
consumer traffic away from carriers that don't have such agreements.

Both DOT and the Justice Department should more closely screen all proposed
alliances and partnerships between U.S.-based airlines, as well as between
domestic and international carriers, to ensure that they do not have lasting
adverse effects on competition or consumers, the committee said.  Furthermore,
international alliances should be more closely scrutinized before they receive
immunity from antitrust laws.  The report updates a 1991 National Research
Council study that documented lower airfares and better services among the
benefits of airline deregulation, which took effect in 1978.  Today, however,
serious competition barriers persist despite intense rivalries and the presence
of low-fare carriers in many markets.  In most cases, the barriers favor large,
established airlines.  Marketing devices such as frequent-flier programs, which
create brand loyalty, often strengthen that dominance.

Many constraints against competition date back to the 1960s, when the Federal
Aviation Administration and the former Civil Aeronautics Board enacted rules to
ease airport congestion.  Slot controls were designed to reduce air traffic, for
example.  In today's climate, however, they often restrain competition because
carriers without these reservations are blocked from expanding into major
business markets.

Perimeter rules remain in place primarily as a noise-control measure.  At the
same time, they allow policy-makers to delay the job of finding more direct ways
to resolve traffic congestion and noise concerns, the committee pointed out.
And like slots, the rules thwart competition:  Carriers with hubs located beyond
a pre-determined perimeter are limited in their ability to enter major markets.
Most established airlines are not similarly affected.

At many airports, large carriers also benefit from long-term leases that give
them preferred use of gates.  At certain hub airports, where one or two carriers
may control the majority of gates, often the only way rivals can gain access is
by subleasing gates from incumbent airlines -- sometimes at a premium.  In
addition, travelers in cities with major hub airports typically have fewer
airlines to choose from for short flights.  And fares for these flights often
are more expensive than fares for comparable trips in other markets.

The study was funded by the U.S. Department of Transportation.  A committee
roster follows.  The National Research Council is the principal operating arm of
the National Academy of Sciences and the National Academy of Engineering.  It is
a private, nonprofit organization that provides advice on science and technology
under a congressional charter.

Pre-publication copies of ENTRY AND COMPETITION IN THE U.S. AIRLINE INDUSTRY:
ISSUES AND OPPORTUNITIES (TRB Special Report 255) are available from the
Transportation Research Board for $22.00; tel. (202) 334-3213; fax (202)
334-2519; or e-mail <apenn@nas.edu>.  Reporters may obtain a copy from the
Office of News and Public Information at the letterhead address (contacts listed
above).


NATIONAL RESEARCH COUNCIL

Transportation Research Board

COMMITTEE FOR A STUDY OF COMPETITION IN THE U.S. AIRLINE INDUSTRY

JOHN R. MEYER (CHAIR)
Emeritus Professor of Economics,
James W. Harpel Professor of Capital Formation and Economic Growth
Harvard University
Cambridge, Mass.

ELIZABETH E. BAILEY
John C. Hower Professor and Chair
Public Policy and Management Department
University of Pennsylvania
Philadelphia

JONATHAN B. BAKER
Associate Professor of Law
Washington College of Law
American University
Washington, D.C.

RODEN A. BRANDT
Air Transportation Consultant
Palm Harbor, Fla.

DARIUS W. GASKINS JR.
Partner, Norbridge Inc., and
High Street Associates Inc.
Ipswich, Mass.

J

ÓSE A. GÓMEZ-IBÁÑEZ
Professor of Public Policy and Urban Planning
Graduate School of Design and John F. Kennedy School of Government
Harvard University
Cambridge, Mass.

CORNISH F. HITCHCOCK
Attorney
Washington, D.C.

ALFRED E. KAHN
Robert Julius Thorne Professor of Political Economy, Emeritus
Cornell University
Ithaca, N.Y.

RANDALL MALIN
Air Transportation Consultant
Los Gatos, Calif.

STEVEN A. MORRISON
Professor
Department of Economics
Northeastern University
Boston

SHERWIN ROSEN*
Edwin A. and Betty L. Bergman Distinquished Service Professor of Economics
University of Chicago
Chicago

RESEARCH COUNCIL STAFF

THOMAS R. MENZIES JR.
Study Director


* Member, National Academy of Sciences