<B> Buyers Should Push For DOT Competition Guidelines</B>
By Kevin P. Mitchell
Inadequate Industry Competition has become an important public policy issue. Congress and the U.S. Department of Transportation must now decide what to do, and customers must weigh in.
Congress recently received a vivid description of competition problems in air transport from the National Research Council's Transportation Research Board, which Congress had commissioned to update its 1991 report, "Winds of Change: Domestic Air Transport Since Deregulation," as an independent assessment of the health of industry competition. There were three main premises of deregulation: 1) that any airline willing, fit and able would be able to provide service at any airport in the country; 2) that the mere threat of entry, the contestibility theory, would be sufficient to discipline pricing; and 3) with DOT oversight of potential anticompetitive practices, U.S. citizens would enjoy affordable airfares.
The Transportation Research Board reviewed several competition issues directly related to these premises. The first issue, industry competitive structure, was significantly altered during the 1980s when DOT approved virtually every merger proposal before it. Today, we have so-called Fortress Hubs, excessive concentration at the majority of large hubs and supra premium pricing with respect to business airfares.
The second issue was airport access currently restricted by the High Density Rule, the Perimeter Rule, long-term exclusive gate leases and the sub-leasing of gates and other essential facilities to new entrants on non-competitive terms and conditions.
The third and most important issue is that of exclusionary competitive practices--or so-called strategies of predation. Such strategies quickly erode investor confidence. The reason the issue is so important is that slots and gates are of little value if we do not have new entrants in the pipeline at DOT to eventually use them. The Transportation Research Board did not reach consensus on the issue of predation and the efficacy of proposed DOT Competition Guidelines. Moreover, one view expressed on the Transportation Research Board was that DOT should not even involve itself in policing predation.
However, Alfred E. Kahn, Transportation Research Board member and "father of Deregulation," stated in a Sept. 2, Washington Post editorial, "Only some members of the study committee would prefer that the Department of Justice take the lead in enforcement. Other members judged the problem serious enough to warrant more active involvement by the Department of Transportation. They are optimistic DOT can do this without becoming overly regulatory and inhibiting the kind of competitive price cutting that provides lasting fare reductions."
Let's examine an example of anti-competitive responses to new entry DOT has published on its Internet site at http://ostpxweb.dot.gov/aviation/DomAv/example.pdf.
In 1Q 1996, an incumbent major airline had 1,220 seats priced at $75 or less in a particular city-pair market. During this same quarter, a new entrant implemented service with 11,770 seats priced at $75 or less. In 3Q 1996, the incumbent responded with 49,760 seats priced at $75 or less. The new entrant was shortly thereafter driven from the market and the incumbent reduced its low-fare offerings to 910 seats priced at $75 or less during 1Q 1997. The incumbent's strategy caused it to lose $3.5 million during this period in this market!
The modus operandi of such strategies of predation include: <ul><li>Preventing the new entrant from reaching its break-even load factor by flooding the market with thousands of cheap seats<li>Limiting financial investment; responding massively and avoiding a war of attrition <li>Running the new entrant from the market<li>Discouraging new entry throughout the incumbent's system<li>Raising airfares in order to recoup the investment.</ul>
In the DOT example above, the average fare prior to new entry was $190. During the new entry period it was $80, and after the new entrant was run from the market the average fare was $250. Key here is that prior to 1996, major airlines would heed DOT jawboning when such anticompetitive activity was observed. Since, some majors have resisted DOT, others have publicly rebuked DOT for even suggesting predation exists.
A few major airline executives acknowledge the existence of predation. And importantly, the draft DOT Guidelines--issued April 6, 1998--along with intensifying scrutiny from Congress, DOJ and the national media have moderated the most extreme competitive responses to new entry. Indeed, investor confidence in the low-fare sector of the industry is returning, financial and stock performance of the sector is rebounding and new entrant applications are once again flowing into DOT.
So why, as some suggest, shouldn't DOT declare victory, cede authority to DOJ to address predation and abandon the Guidelines? There are important reasons why DOT should stay its course and implement the Guidelines.
1. The U.S. Supreme Court has all but gutted the Sherman Act, rendering predatory pricing essentially impossible to prove. A DOJ action based upon antitrust law can take years to adjudicate. In contrast, DOT authority--based upon antitrust principles--can be used to act preemptively in the marketplace to prevent irreversible damage to competition. The combined efforts of DOT, DOJ and Congress are necessary to guarantee functioning competition over the long term.
2. DOT has pursued a highly collaborative process in drafting its Guidelines. It has received and analyzed thousands of comments. Every major concern raised likely will be addressed in DOT's final Guidelines when transmitted to Congress.
3. Many major airlines continue to vehemently deny that there are serious competition problems. Indeed, had airlines responded more responsibly to DOT concerns about exclusionary practices, it is likely the need for Guidelines would have been avoided. The airline industry's failing stewardship of billions of dollars of U.S. assets conveyed to it at deregulation has become an industry problem that only continued pressure can apparently ameliorate.
BTC recently wrote to DOT secretary Rodney Slater urging him to follow through on his commitment to protect the many benefits from deregulation and to guarantee a level competitive playing field for new entrants now and into the future.
It has been the customer's voice that has given the debate over industry competition real credibility in Washington and with the national media. It is time to consolidate progress and push to have DOT Guidelines implemented. Your customer advocacy on this issue is critically important right now!
Please consider e-mailing this op-ed along with a supportive cover letter to The Honorable Rodney Slater, secretary of Transportation, Senator John McCain, chairman of the Senate Commerce Committee and Representative Bud Shuster, chairman of the House Transportation Committee.
<I>Kevin P. Mitchell is chairman of the Business Travel Coalition in Lafayette Hill, Pa.