DOT Backs Off Air Comp. Rules - 2001-01-29

<B>DOT Backs Off Air Comp. Rules</B>

By Barbara Cook

<I>Washington - </I>Before leaving office this month, the Clinton Administration made it clear that major carriers "at times" have engaged in activities aimed at eliminating competition in certain markets from new entrant or low-fare carriers. To assist future administrations in evaluating the merits of such charges, the U.S. Department of Transportation issued three reports designed to provide an analytical basis for decisions.

DOT's proposed guidelines, issued in April 1998, attempted to define anticompetitive behavior by focusing on the practices of reducing fares below cost and dumping excess capacity in a market to drive out a competitor. DOT received more than 5,000 comments on its proposal and the debate over the guidelines reached Congress, which ordered studies to be conducted before any guidelines were made final. Further, new Bush Administration DOT secretary Norman Mineta took an early position against the proposed competition guidelines, arguing that they exceeded the department's authority.

In announcing that DOT wouldn't finalize the guidelines, former secretary Rodney Slsaid, "A one-size-fits-all approach won't work."

One source closely associated with the development of the guidelines said DOT achieved much of its purpose by putting the public spotlight on "egregious" airline behavior, which has since "moderated." He pointed to an antitrust suit lodged by the U.S. Department of Justice in 1999 against American Airlines, which charged that AA unfairly sought to drive Vanguard Airlines, Sun Jet International and Western Pacific Airlines out of the Dallas/Ft. Worth city pairs they served, and discourage other low-cost carriers from beginning service in those markets. Much of the evidence in that case was developed by DOT, he said, in the course of working on the guidelines. He speculated that this type of anticompetitive behavior likely won't recur while the DOJ lawsuit is active.

Ed Faberman, executive director of the Air Carrier Association of America, said the guidelines originally were requested by the large carriers, which then attacked the results. "It doesn't matter to us that DOT didn't put out the guidelines," he said. "DOT has ample authority to address these issues quickly. We would like DOT to address the complaints in front of them, and quickly."

Faberman forecast that DOT would stay focused on complaints involving fares and capacity, despite the fact that it raised a number of other issues, such as fare signaling, that also could be used to drive a competitor from a market. Further, he said the mergers involving United Airlines, US Airways, American and Trans World Airlines will heighten interest in the subject of competition, including the aspect of predation. "Mineta will have to jump on this," Faberman said.

One of the three competition reports issued by DOT--Predatory Practices in the U.S. Airline Industry--was authored by economists Clinton Oster Jr. of Indiana University and John Strong of the College of William and Mary. They developed two central themes: Predatory practices "may have occurred in the past and are a recurring possibility in the U.S. domestic airline industry," and antitrust laws may not be sufficient to identify some types of predatory practices. Due to this, competition policy must recognize the diverse nature of airline competition, taking into account pricing, capacity, service and related activities and constraints that affect airline travelers, they said.

The major carriers have multiple competitive tools. To focus on a single dimension "may miss the full range of the ways in which airlines can compete with one another, particularly if price and cost are narrowly defined," the report said. A major airline also may rely on its reputation as a hardball player to drive out competition, the authors maintained.

The authors found that when major network routes were subject to entry by Southwest Airlines or by another major carrier, the competitive response was typically a slight fare reduction with no significant increase in capacity. "We did not find any cases where the response was as aggressive as when a new-entrant, low-fare carrier entered a market," they said.

In the second study, DOT reaffirmed an earlier finding that fares in hub markets without low-fare competition are "substantially higher" than fares in comparable markets with price competition.

The department concluded:

<li>In hubs dominated by a single carrier, passengers pay an average 41 percent more than persons flying in hub markets with low-fare competition.

<li>Passengers in short-haul hub markets without a low-fare carrier pay 54 percent more on average than passengers in comparable markets with a low-fare competitor.

<li>Charlotte, Cincinnati, Minneapolis/St. Paul and Pittsburgh "have the highest overall fare differentials."

<li>The four rationales commonly used to explain away high fares in hub markets--passenger mix, operational cost, quality of service and the Southwest Airlines Effect--only apply if price competition is not present. It is the lack of price competition, not the rationales listed, that explain high prices at hub markets.

DOT also stated that the negative effects of high hub fares reach beyond hub cities. Spoke communities whose service is predominantly to network hubs by hub dominant carriers also may be subjected to high prices.

The department pointed to Buffalo, N.Y., as an example. Buffalo officials were successful in attracting low-fare service. Average fares declined by 36 percent, from $185 to $119, in the Atlanta-Buffalo market after AirTran Airways' entry, and the number of passengers in the market increased by 65 percent.

A third report outlined the reasons DOT declined to proceed with its proposed competition guidelines. The department concluded its role should be "to create a level playing field, not to protect any airline or class of airlines from legitimate competition.