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. 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. 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. 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.