testimony
Before the Subcommittee on Antitrust, Business Rights and Competition of the Senate Judiciary Committee
Regarding Airline Competition
April 1, 1998
Introduction
Mr. Chairman, and members of the subcommittee, thank you for scheduling a hearing regarding airline industry predatory competitive practices. My name is Kevin P. Mitchell and I am Chairman of the Business Travel Coalition, an organization which advocates increased airline industry competition on behalf of the customer of the air transportation system.
Businesses alone spend in excess of thirty billion dollars on annual air transportation purchases and are deeply concerned stakeholders in the current debate regarding the level of industry competition. Given the enormous economic stakes for consumers, we are encouraged that competition barriers, whether restrictive federal policies or airline business practices, have attracted the concern of this subcommittee, other members of Congress, the U.S. DOT and DOJ and government officials on the state and local levels.
Summary
Airlines are run by decent people. It's not that we have a Northwest problem at Detroit or a United problem at Denver. Rather, many experts believe we have a systemic problem rooted in the exercise of monopoly power. The debate is about competitive structure and practices and the need to maintain a level competitive playing field and open markets.
There has been a sea change in thinking about how deregulation is working. Indeed, Alfred Kahn, the father of deregulation, is on the record as being significantly concerned. Two principles of deregulation were: 1) that any airline that is willing, fit and able would be allowed to offer services at any airport; and 2) that through the contestable markets theory, the mere threat of new entry would be sufficient to discipline pricing. We have succeeded in making somewhat of a mockery of these principles at the twentieth anniversary of deregulation.
Consider that because of the predatory practices of some incumbent airlines at hub airports, potential investors in start-up airlines have often chosen to dedicate their resources to other business opportunities leaving consumers with less choice and marketplace innovation. Moreover, some incumbent airlines have abused their market power by reportedly refusing to sell or lease takeoff and landing slots to new entrants at the country's four High Density airports. Likewise, some incumbents at other hub airports control essential facilities on a long term lease basis such as gates and counter space and use this control to frustrate new entrant competition.
The DOT must issue a strong and effective policy regarding predatory, anti-competitive practices. Importantly, the Congress must maintain vigilant oversight of the status of airline industry competition because of the magnitude of what is at stake for consumers and entire communities. Moreover, as the DOJ reviews proposed airline combinations, approvals need to be considered in the context of airlines' use of current market power and the increasing concentration at the nation's major airports.
Problem Statement
U.S. GAO, DOT and other studies have verified deregulation of the airline industry was a good decision in as much as it has provided consumer benefits as measured by increased air transportation alternatives and lower airfares. However, benefits have been distributed unevenly on a geographic and end-user basis. Some communities in the West, Southwest and Eastern U.S. have benefited greatly while other regions such as the Upper Mid-West, Southeast and Northeast have not. Likewise, the leisure versus the business traveler, has especially benefited from lower prices, due to a number of competitive structure and airline policy factors.
However, even in U.S. markets where data demonstrate consumer benefits, high business airfares are often masked due to the averaging of leisure and business airfare classification data. Business airfares have recently risen at double digit rates, especially at so-called Fortress Hubs, at a time of historically low general inflation. At the 20th year anniversary of airline industry deregulation, benefits from price competition were expected to be reaching all consumers and communities.
When most stakeholders of an industry are frustrated, it can be assumed that something is not working as intended. In this case, independent business travelers, last minute discretionary travelers, travel agents, large and small corporations, airport authorities, federal and state elected and regulatory officials, local community leaders, new entrant airlines and numerous travel industry organizations have all voiced an unprecedented level of concern. Indeed, some 550 of these representatives traveled to Washington, DC from 35 states to attend two Airline Competition Summits hosted by the Business Travel Coalition during 1997.
Predatory and Anti-competitive Practices
The combination of exclusive corporate discount, frequent flyer and travel agency override commission programs create a formidable barrier to entry and can effectively lock a new entrant out of the corporate customer market. However, when the scope of these programs is temporarily increased, the new entrant can be blocked from penetrating other customer market segments and the impact on competition can be disastrous. For example, an incumbent airline can double or triple frequent flyer points, or increase agency override commissions for booking away from the new entrant.
You will likely receive abundant testimony regarding these serious anti-competitive practices as well as others such as capacity dumping, below cost pricing, biased CRS displays and refusals to interline. I would like to explore, however, three areas where airlines' exercise of market dominance directly impacts the consumer in the short-term and erodes prospects for open markets and greater competition over the long-term.
Refusal to Negotiate. In 1994, with hundreds of millions of dollars in annual air transportation purchases IBM, was spurned when it asked its airline suppliers to remove frequent flyer program points and costs from the price of IBM's tickets. It is difficult to conceive of another industry where a buyer with such volume cannot purchase a product with the features it determines meets its needs.
Likewise, major corporations are unable to secure a simplified airfare structure to help lower process and administrative costs born of unnecessary complexity. Nor can they acquire guaranteed pricing for the term of a contract, even when willing to compensate airlines for fuel price spikes.
If corporations had more choices and alternatives they would have more influence at the negotiating table on a variety of issues. And if the Fortune 50 corporations feel held hostage to airlines, imagine the frustration of the other nine million U.S. businesses.
The small business is especially hard hit by skyrocketing business airfares as it generally does not have large purchasing volumes or centralized travel management expertise. Small businesses in non-competitive markets suffer in as much as: 1) high airfares put them at a cost disadvantage vis-à-vis competitors in other markets; 2) productivity is reduced as personnel often must travel several hours by car or train to alternate airports in search of an affordable airfare; and 3) they cannot afford the extra air travel required to grow their businesses.
All U.S. citizens are stakeholders in the economic success of the small business sector of our economy. As reported in USA Today on February 3, 1998, "Virtually all growth in this economy is attributable to small business…About 276,000 companies account for 70% of all job growth. That's just 3% of all U.S. companies. And of those companies, 97% have 100 or fewer people working for them when they start growing."
The short-term consumer impact from airline market domination, and subsequent refusal to negotiate, is higher prices and lost productivity for businesses of all sizes, and little innovative pressure from new entrants. The longer-term implications for competition include the inability of the corporate consumer to drive efficiencies in the marketplace through purchasing decisions, and the ability of incumbent airlines to drive up the cost and risk for new entrants by maintaining artificial barriers to entry.
Discriminatory and Complex Pricing. Airline pricing practices for business travelers can be discriminatory. For example, business travelers who could plan a percentage of their trips well in advance cannot qualify for discount fares available to other travelers without incurring the burden of staying away from their families over a Saturday night. The lack of competitive alternatives encourages airlines to maintain airfare restrictions, increase airfare structure complexity and keep pricing levels high.
Whether leisure or business travelers, the consumer is bewildered by the complexity of an airfare structure that generates an average of 250,000 fare changes daily, and 1,000,000 on some days. Similarly, sixty-five different airfares, with varying rules and restrictions, between Cincinnati and Atlanta alone, does not represent consumer choice. Rather, it represents true consumer confusion.
In markets with more competitive alternatives, business travelers have access to affordable airfares. Indeed, it is the competitive response to new entrant airlines that has led to the offerings of Delta Express, Shuttle by United and the proposed US Airways Metrojet. All these products have everyday low prices within a simplified airfare structure that can be understood and embraced by the consumer. But we need to finish the job of deregulation and provide true choice for consumers through increased competition.
The short-term consumer impact from market domination, and self-serving airfare structure complexity, is higher prices and personal sacrifice when a business traveler must stay away from home over a Saturday night. The longer-term consequence is the inability of consumers to power innovation through their purchasing decisions.
Intimidation. Some incumbent airlines do not hesitate in utilizing their market power to muscle corporations for exclusive arrangements wherein discounts in a non-competitive market are tied to market share commitments in competitive markets. Or, where international system discounts are tied to domestic U.S. purchases. Moreover, corporations, travel agents and airports can be intimidated, through a variety of measures, into not supporting a new entrant airline.
The near-term consumer consequence is higher prices, and over the longer-term, an incumbent airline can strengthen its fortress-like hubs and block new entrant competitors from having the opportunity to compete.
Conclusion
Mr. Chairman, some major airlines will label those concerned with current competition levels re-regulators and further argue that the government should stay out of the picture and allow free market forces decide winners and losers. Let market forces determine winners and losers, yes. Have the government stay out of the picture, absolutely no. The government has a role in ensuring that antitrust laws are observed and that markets are accessible to all firms on an level playing field basis.
Thank you for the opportunity to provide testimony.