OP-ED: Buyers Should Be At DOT's Policy Table

<B> OP-ED: Buyers Should Be At DOT's Policy Table</B>

By Kevin P. Mitchell

<i>Kevin P. Mitchell is chairman of the Business Travel Coalition, P.O. Box 634, Lafayette Hill, PA 19444.</i>

<center><FONT COLOR="#2D6E33">Click here to respond to the following editorial on the BTNOnline Bulletin Board

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On April 6, 1998, the U.S. Department of Transportation proposed a policy regarding unfair, exclusionary conduct in the air transportation industry. As a travel manager you should be concerned that you are paying unnecessarily high prices in many markets and that the problem will worsen unless it is addressed.

The purpose of this op-ed is to provide analysis of the DOT policy and to urge you to participate in the process through: 1) writing to DOT; 2) engaging your travel management company's support; and 3) involving your senior management.

A critical assumption of the Deregulation Act of 1978 is that new entrant competitors would discipline fare levels. Indeed, practically all benefits from deregulation in the 1990s came from low-fare and new entrant carriers. The benefits included competitive responses such as Delta Express and Shuttle By United. But where there had been a new entrant application every six weeks in the early 1990s, there have been virtually none in the past two years. Intimidated investors fled to other industries as airlines pursued "scorched earth" policies against new entrants.

And while DOT jawboning of major airlines did work at one time, in 1997 these airlines complained that without guidelines to clarify unfair competitive practices, such DOT pressure was unjust.

To encourage new entry, the Business Travel Coalition advocated such guidelines during its Airline Competition Summit in April 1997. Congress likewise mandated in the Appropriations Act of 1997 that DOT enforce article 41712 of title 49 U.S.C., which deals with unfair and deceptive practices and methods of competition. DOT responded.

There are numerous anticompetitive practices, such as commission bonuses targeted against new entrants. However, the proposed DOT policy focuses on the most important competition problem: an incumbent airline dumping massive numbers of cheap seats into a market in order to intentionally run a new entrant out.

The objective of this predation is to prevent a new entrant from reaching its 60 percent breakeven load factor by starving it of traffic through adding capacity. If an incumbent carrier were to match a new entrant seat for seat, a typical response to entry by Southwest Airlines, the entrant would do just fine because market size can triple in response to affordable fares.

Yet, when an incumbent that previously had 1,000 seats in a market at $75 responds to a new entrant by adding 50,000 seats at $75, it erodes its own revenues by millions of dollars. This is predation.

The only rational explanations to lose such sums of money are if: 1) an incumbent's purpose is to run a competitor away from a market and then recoup losses through fare increases to previous or higher levels; and 2) if the predation serves to discourage future entry into markets dominated by the incumbent.

This category of extreme competitive response is DOT's concern. Contrary to some press reports, there will be nothing complicated about identifying, investigating and adjudicating this kind of predation. DOT collaborated with the Justice Department and private sector economists on policy development for almost a year. The fare data already are reported to DOT. And no airline will be constrained in its normal pricing or practices.

The policy objective is deterrence, the benefits many. Benefits are:

<ul><li><B>1.</B> Increased investor confidence in DOT's commitment to exercise its authorities under the Deregulation Act.

<li><B>2.</B> Elevated scrutiny of competitive practices to the highest corporate legal and management levels within the airlines.

<li><B>3.</B> Illustrative federal policy statement for local officials' use in discussions with incumbent and prospective entrant airlines.

<li><B>4.</B> Increased media, government, competitor and customer focus on anticompetitive practices--a new level of jawboning.

<li><B>5.</B> Established evidence for civil cases regarding antitrust law violations (treble damages) if policy enforcement action is adjudicated before a federal administrative law judge.</ul>

DOT's role is appropriate and necessary. But your participation is critical.

As purchasers of $30 billion of annual air transportation services, corporations need to exercise proportionate influence in the formation of government policy and industry structure and practices. Corporations need to be at the "table" during the next 20 years of deregulation--beginning right now.

DOT wants your comments by June 7. Instructions for comment are posted at http://dms.dot.gov/ost/aviation/. Comments can be as simple as a one-page summary of your views. Send comments to BTC by June 5, and we will file the eight copies the DOT requires for you.

Leverage your relationship with your travel management company. Tell them to show its sincerity about "strategic customer partnering" by filing with DOT.

Third, inform your senior management of the issues and your personal involvement.