Domestic Aviation: Barriers Continue to Limit Competition
Released: 1997-10-28T00:00:00

Letter

Airline Barriers to Entry Persist and Predominantly Affect Competition in the East and Upper Midwest

Our April 1996 report found that since deregulation, fares have fallen and service has improved for most large-community airports. Our report also found that substantial regional differences exist in fare and service trends, particularly among small- and medium-sized community airports. A primary reason for these differences has been the greater degree of economic growth that has occurred over the past two decades in larger communities and in the West and Southwest. In particular, we noted that most low-fare airlines that began interstate air service after deregulation, such as Southwest Airlines and America West, had decided to enter airports serving communities of all sizes in the West and Southwest because of those communities’ robust economic growth. By contrast, low-fare carriers had generally avoided serving small- and medium-sized-community airports in the East and upper Midwest, in part because of the slower growth, harsher weather, and greater airport congestion in those regions.

Our review of the trends in fares between 1979 and 1994 for a sample of 112 small-, medium-sized, and large-community airports identified 15 airports at which fares, adjusted for inflation, had declined by over 20 percent and 8 airports at which fares had increased by over 20 percent. Each of the 15 airports where fares declined was located in the West or Southwest, and low-fare airlines accounted for at least 10 percent of the passenger boardings at all but one of those airports in 1994. On the other hand, each of the eight airports where fares had increased by over 20 percent since deregulation was located in the Southeast and Appalachia.

Our April 1996 report also revealed similar findings concerning the trends in service quantity and quality at the 112 airports. Large communities in general, and communities of all sizes in the West and Southwest, had experienced a substantial increase in the number of departures and available seats as well as improvements in such service quality indicators as the number of available nonstop destinations and the amount of jet service. However, without the cross-subsidy present under regulation, fares were expected to increase somewhat at airports serving small and medium-sized communities, and carriers were expected to substitute turboprop service for jet. Over time, smaller and medium-sized communities in the East and upper Midwest had generally experienced a decline in the quantity and quality of air service. In particular, these communities had experienced a sharp decrease in the number of available nonstop destinations and in the amount of jet service relative to turboprop service. This decrease occurred largely because established airlines had reduced jet service from these airports since deregulation and deployed turboprops to link the communities to those airlines’ major hubs.

We subsequently reported in October 1996 that operating barriers at key hub airports in the East and upper Midwest, combined with certain marketing strategies of the established carriers, fortified established carriers’ dominance of those hub airports and routes linking those hubs with nearby small- and medium-sized-community airports. In the upper Midwest, there is limited competition in part because two airlines control nearly 90 percent of the takeoff and landing slots at O’Hare, and one airline controls the vast majority of gates at the airports in Minneapolis and Detroit under long-term, exclusive-use leases. Similarly, in the Southeast and Appalachia, one airline controls the vast majority of gates under exclusive-use leases at Cincinnati, Charlotte, and Pittsburgh. Finally, in the Northeast, a few established airlines control most of the slots at National, LaGuardia, and Kennedy. As a result, the ability of nonincumbents to enter these key airports and serve nearby small and medium-sized communities is very limited.

Particularly for several key markets in the upper Midwest and East, the relative significance of those operating barriers in limiting competition and contributing to higher airfares has grown over time. As a result, our October 1996 report, which specifically addressed the effects of slot and perimeter rules, recommended that DOT take action to lower those barriers, and highlighted areas for potential congressional action.

Slots

To reduce congestion, FAA has since 1969 limited the number of takeoffs and landings that can occur at O’Hare, National, LaGuardia, and Kennedy.

By allowing new airlines to form and established airlines to enter new markets, deregulation increased the demand for access to these airports. Such increased demand complicated FAA’s efforts to allocate takeoff and landing slots equitably among the airlines. To minimize the government’s role in the allocation of slots, DOT in 1985 began to allow airlines to buy and sell them to one another. Under this “Buy/Sell Rule,” DOT “grandfathered” slots to the holders of record as of December 16, 1985. Emphasizing that it still owned the slots, however, DOT randomly assigned each slot a priority number and reserved the right to withdraw slots from the incumbents at any time. In addition, to mitigate the anticompetitive effects of grandfathering, DOT retained about 5 percent of the slots at O’Hare, National, and LaGuardia and in early 1986 distributed them in a random lottery to airlines having few or no slots at those airports.

In August 1990, we reported that a few established carriers had built upon the favorable positions they inherited as a result of grandfathering to such an extent that they could limit access to routes beginning or ending at any of the slot-controlled airports. We also reported that while the lottery was successful in placing slots in the hands of some entrants and smaller incumbents, the effect on entry over the long term was disappointing, in part because many of the lottery winners subsequently went out of business or merged with an established carrier.

Recognizing the need for new entry at the slot-controlled airports, the Congress in 1994 created an exemption provision to allow additional slots for entry at O’Hare, LaGuardia, and Kennedy when DOT “finds it to be in the public interest and the circumstances to be exceptional.” In October 1996, we reported that the level of control over slots by a few established airlines had increased even further (see app. I). We found that the exemption authority, which in effect allows DOT to issue new slots, resulted in little new entry because DOT had interpreted the “exceptional circumstances” criterion very narrowly. DOT had approved applications only to provide service in markets not receiving nonstop service. We found no congressional guidance, however, to support this interpretation. As a result, little new entry occurred at these airports, which is crucial to establishing new service in the heavily traveled eastern and midwestern markets.

In our 1990 report, we outlined the pros and cons of various policy options to promote airline competition. These options included keeping the Buy/Sell Rule but periodically withdrawing a portion of slots that were grandfathered to the major incumbents and reallocating them by lottery. Because the situation had continued to worsen, we recommended in our October 1996 report that DOT redistribute some of the grandfathered slots to increase competition, taking into account the investments made by those airlines at each of the slot-controlled airports. We also said that if DOT did not choose to do so, the Congress may wish to consider revising the legislative criteria that govern DOT’s exceptional circumstances provision so that DOT could consider competitive benefits as a key criterion in deciding whether or not to grant slots to new entrants.

Perimeter Rules

At LaGuardia and National airports, perimeter rules prohibit incoming and outgoing flights that exceed 1,500 and 1,250 miles, respectively. The perimeter rules were designed to promote Kennedy and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. However, the rules limit the ability of airlines based in the West to compete because those airlines are not allowed to serve LaGuardia and National airports from markets where they are strongest. By contrast, because of their proximity to LaGuardia and National, each of the seven largest established carriers is able to serve those airports from its principal hub.

While the limit at LaGuardia was established by the Port Authority of New York & New Jersey, National’s perimeter rule is federal law. Thus, in our October 1996 report, we suggested that the Congress consider granting DOT the authority to allow exemptions to the perimeter rule at National when proposed service will substantially increase competition. We did not recommend that the rule be abolished because removing it could have unintended negative consequences, such as reducing the amount of service to smaller communities in the Northeast and Southeast. This could happen if major slot holders at National were to shift their service from smaller communities to take advantage of more profitable, longer-haul routes. As a result, we concluded that a more prudent course to increasing competition at National would be to examine proposed new services on a case-by-case basis.

Long-Term, Exclusive-Use Gate Leases

Our reports have also identified restrictive gate leases as another barrier to establishing new or expanded service at some airports. These leases permit an airline to hold exclusive rights to use most of an airport’s gates over a long period of time, commonly 20 years. Such long-term, exclusive-use gate leases prevent nonincumbents from securing necessary airport facilities on equal terms with incumbent airlines. To gain access to an airport in which most gates are exclusively leased, a nonincumbent must sublet gates from the incumbent airlines—often at nonpreferred times and at a higher cost than the incumbent pays. Since our 1990 report, some airports, such as Los Angeles International, have attempted to regain more control of their facilities by signing less restrictive, shorter-term leases once the exclusive-use leases expired. Nevertheless, our October 1996 report identified several airports in which entry was limited because most of the gates were under long-term, exclusive-use leases with one airline.

Although the development, maintenance, and expansion of airport facilities is essentially a local responsibility, most airports are operated under federal restrictions that are tied to the receipt of federal grant money from FAA. In our 1990 report, we suggested that one way to alleviate the barrier created by exclusive-use gate leases would be for FAA to add a grant restriction that ensures that some gates at an airport would be available to nonincumbents. Because many airports have taken steps since then to sign less restrictive gate leases, we concluded in our 1996 report that such a broad grant restriction was not necessary. However, to address the remaining problem areas, we recommended that when disbursing airport improvement grant moneys, FAA give priority to those airports that do not lease the vast majority of their gates to one airline under long-term, exclusive-use terms.

DOT’s Recent Announcements Indicate Willingness to Increase Competition

In response to our October 1996 report, DOT stated in January of this year that it shared our concerns that barriers to entry limit competition in the airline industry. The agency indicated that it would include competitive benefits as a factor when determining whether to grant slots to new entrants under the exceptional circumstances criterion. DOT also committed to giving careful consideration to our recommendation that it create a pool of available slots and periodically reallocate them, but that it might choose to pursue alternative means to enhancing competition. On October 3, 1997, DOT announced that it would soon publicly issue a number of initiatives aimed at enhancing competition. Two of those initiatives related to identified problems: providing access to high-density airports through slot exemptions and investigating allegations of anticompetitive behavior.

As of mid-October, DOT had 174 requests for slot exemptions, most of which were for slots at O’Hare and LaGuardia airports. On Friday, October 24, 1997, DOT issued its decision on some of the requests for slot exemptions and set forth its new policy on slot exemptions, which has been expanded to take into account the need for increased competition at the slot controlled airports. Because some in government and academia believe that slots at some airports may be underutilized, DOT is also evaluating how effectively slots are being used at these airports.

Finally, DOT has expressed concern about potentially over-aggressive attempts by some established carriers to thwart new entry. According to DOT, over the past 16 months, there has been an increasing number of allegations of anticompetitive practices, such as predatory conduct, aimed at new competition, particularly at major network hubs. DOT is formulating a policy that will more clearly delineate what is acceptable and unacceptable behavior in the area of competition between major carriers at their hubs and smaller, low-cost competitors. This policy is to indicate those factors DOT will consider in pursuing remedies through formal enforcement actions.

Aviation Competition Enhancement Act of 1997 Would Address Identified Issues

The proposed Aviation Competition Enhancement Act of 1997 has been drafted to promote domestic competition. The legislation targets three of the barriers to competition: slot controls, the perimeter rule, and predatory behavior by air carriers.

The bill would create a mechanism by which DOT would increase access to the slot-controlled airports. Under the draft legislation, where slots are not available from DOT, the Department would be required to periodically withdraw a small portion of the slots that were grandfathered to incumbent airlines and reallocate them among new entrant and limited incumbent air carriers. Slots would not be withdrawn if they were already being used to serve certain small or medium-sized airports. This provision of the proposed bill is consistent with the spirit of our recommendation on slots and provides a good starting point for the debate about how such a process should be used and its potential impact. Our recommendation recognized the sensitivities with withdrawing and reallocating slots from one airline to another by stating that such a process should take into account the investments made by the established airlines. The proposed bill does not specify details about how DOT should implement this process. Because of the sensitivities in making any reallocations, DOT would need to carefully consider balancing the goals of increasing competition with fair treatment of affected parties.

The bill also addresses the perimeter rule by requiring the Secretary of Transportation to grant exemptions to the existing 1,250 mile limit at Washington National Airport under certain circumstances. There are legitimate concerns about whether or not exemptions to the rule would negatively affect the noise, congestion, and safety at Washington National, as well as air service to and from different communities within the perimeter. The bill addresses these concerns by specifying that only stage 3 aircraft (aircraft that meet FAA’s most stringent noise standards) can be used and that exemptions would not be allowed to affect the number of hourly commercial operations at National Airport. The bill further specifies that the Secretary certify that whenever exemptions to the rule are granted, noise, congestion, and safety will not deteriorate relative to their 1997 levels. The Secretary must similarly certify that air service to communities within the existing perimeter will not worsen.

Finally, the bill also contains a provision intended to limit the time that DOT has to respond to complaints of predatory behavior. As we noted previously, because of its concerns in this area, DOT plans to announce a policy that will more clearly delineate the factors it will consider in pursuing remedies through formal enforcement actions.

Range of Initiatives Will Likely Be Needed to Address Air Service Problems

Because a variety of factors has contributed to higher fares and poorer service that some small and medium-sized communities in the East and upper Midwest have experienced since deregulation, a coordinated effort involving federal, regional, local, and private-sector initiatives may be needed. In addition to DOT’s planned actions and the proposed legislation, several public and private initiatives that are currently under way, as well as other potential options, are discussed below. If successful, these initiatives would complement, and potentially encourage, the increasing use of small jets by the commuter affiliates of established airlines—a trend that has the potential for increasing competition and improving the quality of service for some communities.

Regional, State, and Local Initiatives

Recognizing that federal actions alone would not remedy their regions’ air service problems, several airport directors and community chamber of commerce officials in the Southeast and Appalachian regions recently initiated a coordinated effort to improve air service in their regions. As a result of this effort, several members of Congress from the Southeast and Appalachian regions in turn organized a bipartisan caucus named “Special Places of Kindred Economic Situation” (SPOKES). Among other things, SPOKES is designed to ensure sustained consumer education and coordinate federal, state, local, and private efforts to address the air service problems of communities adversely affected since deregulation. Two SPOKES-led initiatives under way include establishing and developing a Website on the Internet and convening periodic “national air service roundtables” to bring together federal, state, and local officials and airline, airport, and business representatives to explore potential solutions to air service problems. On February 7, 1997, the first roundtable was held in Chattanooga.

A key conclusion of the February 1997 roundtable was that greater regional, state, and local efforts were needed to promote economic growth and attract established and new airlines alike to serve small and medium-sized markets in the East and upper Midwest. Suggested initiatives included (1) creating regional trade associations composed of state and local officials, airport directors, and business executives; (2) offering local financial incentives to nonincumbents, such as guaranteeing a specified amount of revenue or providing promotional support; and (3) communities’ aggressive marketing efforts to airlines to spur economic growth.

Private-Sector Initiatives

To grow and prosper, businesses need convenient, affordable air service. As a result, businesses located in the affected communities have increasingly attempted to address their communities’ air service problems. Perhaps the most visible of these efforts has been the formation of the Business Travel Contractors Corporation (BTCC) by 45 corporations, including Chrysler Motors, Procter & Gamble, and Black & Decker. These corporations formed BTCC because they were concerned about the high fares they were paying in markets dominated by one established airline. BTCC held national conferences in Washington, D.C., in April and October 1997 to examine this problem and explore potential market-based initiatives. At BTCC’s October conference, attendees endorsed the concepts of (1) holding periodic slot lotteries to provide new entrant carriers with access to slot controlled airports, (2) allowing new entrants and other small carriers to serve points beyond Washington National’s perimeter rule, and (3) requiring DOT to issue a policy addressing anticompetitive practices, and specifying the time frames within which all complaints will be acted upon.

Regional Jets

In addition to public and private-sector initiatives, the increasing use of 50- to 70-seat regional jets is improving the quality of air service for a growing number of communities. Responding to consumers’ preference to fly jets rather than turboprops for greater comfort, convenience, and a perceived higher level of safety, commuter affiliates of established airlines are increasingly using regional jets to (1) replace turboprops on routes between established airlines’ hubs and small and medium-sized communities and (2) initiate nonstop service on routes that are either uneconomical or too great a distance for commuter carriers to serve with slower, higher-cost, and shorter-range turboprops.

Because regional jets can generally fly several hundred miles farther than turboprops, commuter carriers will be able to link more cities to established airlines’ hubs. To the extent that this occurs, it could increase competition in many small and medium-sized communities by providing consumers with more service options.

Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any member of the Subcommittee may have.

Percentage of Domestic Air Carrier Slots Held by Selected Groups

Related GAO Products

Airline Deregulation: Addressing the Air Service Problems of Some Communities (GAO/T-RCED-97-187, June 25, 1997).

Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation (GAO/T-RCED-97-120, May 13, 1997).

Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18, 1996).

Changes in Airfares, Service, and Safety Since Airline Deregulation (GAO/T-RCED-96-126, Apr. 25, 1996).

Airline Deregulation: Changes in Airfares, Service, and Safety at Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19, 1996).

Airline Competition: Essential Air Service Slots at O’Hare International Airport (GAO/RCED-94-118FS, Mar. 4, 1994).

Airline Competition: Higher Fares and Less Competition Continue at Concentrated Airports (GAO/RCED-93-171, July 15, 1993).

Airline Competition: Options for Addressing Financial and Competition Problems, Testimony Before the National Commission to Ensure a Strong Competitive Airline Industry (GAO/T-RCED-93-52, June 1, 1993).

Computer Reservation Systems: Action Needed to Better Monitor the CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20, 1992).

Airline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).

Airline Competition: Weak Financial Structure Threatens Competition (GAO/RCED-91-110, Apr. 15, 1991).

Airline Competition: Fares and Concentration at Small-City Airports (GAO/RCED-91-51, Jan. 18, 1991).

Airline Deregulation: Trends in Airfares at Airports in Small and Medium-Sized Communities (GAO/RCED-91-13, Nov. 8, 1990).

Airline Competition: Industry Operating and Marketing Practices Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990).

Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/RCED-90-102, July 11, 1990).

Airline Deregulation: Barriers to Competition in the Airline Industry (GAO/T-RCED-89-65, Sept. 20, 1989).

Airline Competition: DOT’s Implementation of Airline Regulatory Authority (GAO/RCED-89-93, June 28, 1989).

Airline Service: Changes at Major Montana Airports Since Deregulation (GAO/RCED-89-141FS, May 24, 1989).

Airline Competition: Fare and Service Changes at St. Louis Since the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988).

Competition in the Airline Computerized Reservation Systems (GAO/T-RCED-88-62, Sept. 14, 1988).

Airline Competition: Impact of Computerized Reservation Systems (GAO/RCED-86-74, May 9, 1986).

Airline Takeoff and Landing Slots: Department of Transportation’s Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986).

Deregulation: Increased Competition Is Making Airlines More Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov. 6, 1985).

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