testimony

Before The Senate Committee on Commerce, Science and Transportation

Regarding The Status Of The Airline Industry; 'A Sense of the Customer'

January 9, 2003

Mr. Chairman, and Members of the Committee, thank you for inviting the Business Travel Coalition to this important hearing, and for your interest in the views of the customer of the commercial air transportation system.

The airline industry is in crisis, as is abundantly evident.  Major network airlines will transform themselves or go out of business.  The process is and will be painful for employees, their families and the communities in which they live and work.  However, major network airlines have the prospect of exiting this crucible more competitive, more responsive to customers and more able to solve their own problems.

There is a backlash among many individual business travelers and senior managers, who oversee corporate travel budgets, against major airlines’ policies, and the overall travel experience.  Specifically, sky-high business airfares, eroding customer service levels and aviation system gridlock converged during the late 1990s to greatly deepen and lengthen the falloff in business travel demand that airlines are facing today. 

However, BTC is optimistic.  Over the next eighteen or so months it is very likely that these three issues--pricing, service and aviation system reliability--will be largely addressed by an industry restructuring. Driving factors that are forcing major network airlines to restructure include recognition, as late as it might be, that the falloff in business travel demand is not 100% tied to the economy and that the business traveler now has an unprecedented range of alternatives to a seat on a major airline.  These alternatives—the automobile, train, bus, charter jet, fractional jet, video conferencing, web casting—to name just some, combine to form a powerful disciplining force on major airline pricing  In effect, they represent a proxy for the market contestability theory, upon which deregulation was premised.  

Of all the alternatives, though, it is the low-fare airline product that is disciplining the major airlines the most.  Low-fare airlines, as a segment, have nearly doubled their national market share since the last airline industry cyclical downturn in the early 1990s.  They now have seasoned management teams, more and newer aircraft, expanded route systems and an airfare structure that all consumers can understand and embrace.

Of particular importance to this hearing is that when low-fare competition and the consumer were threatened in the late 1990s by artificial barriers to market entry and, in some cases, alleged predatory competitive behaviors, this Committee's work was critical in drawing national attention to the problem and helping preserve competition.  

Importantly, were it not for a healthy low-fare airline segment, it is doubtful that major airline executives and airline union leaders would be taking restructuring so seriously right now.  Competition and the consumer will benefit greatly from successful major airline reforms; travelers owe this Committee a debt of gratitude.

As optimistic as I am, however, there are three serious threats to low-fare competition, and to successful major airline restructurings, that BTC hopes this Committee will seek to fully understand and influence through future Committee hearings.

1—Federal Taxes.  Taxes that are now baked into the price of an airline ticket can exceed a third of the ticket price.  This burden is threatening the continued democratization of air travel enabled by deregulation particularly as it disproportionally impacts low-fare airlines.  As important, these taxes weaken an industry, which represents a powerful economic engine and fulcrum across the U.S. economy.  This issue deserves a new and serious review.

2—National Security Costs.  The airline industry should, in BTC’s view, be provided some permanent relief from post 9/11 security and insurance-related costs.  BTC does not support the $4B in federal government support the airlines are requesting.  However, it is clear that the airline industry, and its customers, are shouldering a disproportionate burden in what is, in part, a national security budget.  Importantly, once a baseline financial responsibility were established for airlines for security, it should be codified in legislation that future increases in security fees would be paid for by U.S. citizens—through the federal government.  We all benefit from such a national security program.

3—Industry Consolidation. The proposed marketing alliance among Continental, Northwest and Delta—comprising close to forty percent of the marketplace--is bad for low-fare competition and would be harmful to consumers and the corporations that fund business travel activities.

The premise of this proposal—the United Airlines / US Airways alliance—is obsolete given their bankruptcies.  But, more importantly, the opportunity to abuse of the privilege to coordinate marketing opportunities is enormous.

One BTC participant—a very large buyer of air transportation services—wrote to BTC this week the following:

“Northwest, Continental and Delta currently say.... if you, the Buyer, tell us that... ‘it's ok to work a deal, via a percentage discount off published fares with all 3 of us acting as  1...’  then  ‘it is’ okay and ‘it is’ legal.  What these 3 airlines are saying ... is, just ‘say the word’ and we'll work as one airline and we can and will talk about discounts among all 3 of us, for you.”  

This kind of anti-competitive activity would effectively eliminate two competitors from the marketplace and would enables this alliance to force customers in a local market—who want to maintain some level of hub discount—to shift business in distant markets, including international markets, to alliance partners.  This would harm competition and artificially increase business airfare levels.  And if a Fortune 50 corporation is nervous—with its large purchasing volumes—the other 9 million U.S. businesses should be as well.

Senator McCain, you are a champion of free markets and the consumer.  I encourage you to hold additional hearings on these issues

I thank you again for the opportunity to speak here today.