[Congressional Record Volume 144, Number 136 (Friday, October 2, 1998)]
[House]
[Pages H9340-H9343]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
AN APPEAL FOR FAIRNESS IN AIRLINE COMPETITION
The SPEAKER pro tempore. Under the Speaker's announced policy of
January 7, 1997, the gentleman from Minnesota (Mr. Oberstar) is
recognized for 60 minutes as the designee of the minority leader.
Mr. OBERSTAR. Mr. Speaker, rarely, probably only one or two other
times in my 24 year service in this House, have I taken the time of
this body to address the House during special orders, but I do so today
to express my utter astonishment over a multimillion dollar advertising
campaign by the major airlines, designed to discredit a proposal by the
Department of Transportation to stop unfair competitive practices
against new low-fare airlines.
The ads seek to arouse public opinion by totally mischaracterizing
the Department's proposal. Unfortunately, consumer organizations and
new entrant carriers do not have the resources to respond by purchasing
a comparable amount of advertising.
Typical of the airline campaign is the Brian Olson ad which shows a
picture of a disappointed young man under the headline ``Vacation
Canceled--Due to Government Regulation.''
The text of the ad says:
Brian Olson was looking forward to the family vacation.
With so many cheap air fares available, his family was
planning the trip of a lifetime, but proposed Department of
Transportation regulations could keep Brian home. That's bad
news for Mrs. Olson.
The DOT has proposed new regulations that will eliminate
many discounted air fares and raise air fares for leisure
travel in a misguided effort to re-regulate the airline
industry.
The DOT proposal described in the ad bears flow resemblance to DOT's
actual proposal. Quite frankly, if the issues were not so important,
the ad is so ridiculous as to be laughable. The actual DOT proposal
does not contemplate any general limitations on discounted air fares.
The proposal is not designed to raise air fares, it is designed to
produce lower air fares by protecting the new low-fare service against
unfair competition, the purposes of which are
[[Page H9341]]
to drive the low-fare carrier out of the market and then raise fares to
their prior level. The purpose of the DOT regulation is to give the so-
called Brian Olson and his family more opportunities for a vacation at
affordable air fares, rather than fewer or higher costs.
The DOT proposal only covers those markets in which low-fare service
first becomes available because a new low-fare carrier enters the
market. The policy is designed to prevent the established carrier in
any given market from trying to drive the new carrier out with unfair
anticompetitive practices which are described in the proposed rule as
follows: The established carrier matches the fare and substantially
increases capacity to the point where the established carrier is losing
money on the route at issue. This type of so-called ``competition''
makes economic sense only if the established carrier expects to drive
the new carrier out of the market and then recover its losses by
raising air fares.
The DOT proposed policy declares that this type of competitive
response is an unfair competitive practice prohibited by 49 U.S. Code
41712.
I want to make it very clear that every carrier has a right to defend
its market, its route or its hub. Carriers do not have a right to do so
by unfair competitive practices in which they flood a market with
unprofitable service.
My years of experience in support of deregulation lead me to conclude
that DOT's proposed guidelines are directed at a serious problem that
has to be corrected if we are to continue to enjoy the low-fare
benefits of airline deregulation.
Further, the law and the legislative history of deregulation are
clear that DOT has the necessary authority to issue guidelines to deal
with the problem and that the type of guideline DOT has proposed is not
re-regulation, but it is consistent with the principles of airline
deregulation.
Attorneys General from 29 states, including Republican Attorneys
General from New York, Virginia, Wyoming, Arkansas and Kansas, agree.
They have written in support of the DOT guidelines saying:
The proposal of the Department of Transportation is not an
attempt to re-regulate the airline industry. It does not
propose to dictate routes or prices. It only sets out
guidelines for interpreting an existing statute, and it does
so in a rational way which seeks to prevent competitive
strategies designed to destroy competition, rather than
compete.
Predatory practices are not a theoretical problem. DOT investigations
and Congressional hearings have uncovered a number of instances in
which major airlines have adopted money-losing strategies to drive out
new entrants who have instituted low-fare service.
For example, during the time when I was Chairman of the Aviation
Subcommittee, in 1993, Reno Air entered the Minneapolis-Reno market.
Northwest Airlines, which had dropped out of this market in 1991,
apparently decided that any new Minneapolis competition was
intolerable. Northwest reinstituted Minneapolis-Reno service, matching
Reno's low fares and capacity, understandable, acceptable behavior up
to that point.
{time} 1700
Northwest went further. The carrier also announced that it would
inaugurate new low-fare service in several other markets served by Reno
Air, including Reno to Los Angeles, to Seattle and to San Diego.
The Department of Transportation began an investigation of
Northwest's actions with a view toward instituting an enforcement case.
Result: Northwest moderated its response. But the change came too late.
Northwest had achieved its objective of driving Reno Air out of
Minneapolis. After Reno left, Northwest raised its lowest refundable
daytime fare in the Minneapolis-Reno market from $136 to $454.
Northwest followed a similar strategy against Spirit Airlines. When
Spirit began offering a single daily round trip of low-fare service
between Detroit and Boston, Northwest matched Spirit's fares on every
coach seat on the 11 daily flights it operated. Northwest's average
fare was reduced from $259 to $100. After about half a year, Spirit was
driven out of the market. When Spirit left the market, Northwest raised
its fare to an average of $267, $12 higher than its previous number,
just about.
My distinguished Republican colleague, the gentleman from Iowa (Mr.
Ganske) cited the following example in a letter to the Wall Street
Journal: ``Predatory pricing does exist and can be a successful
strategy for a major carrier. In 1995, Vanguard Airlines entered the
Des Moines market. In response, the major carriers lowered fares from
Des Moines to Chicago to $79. After driving Vanguard out of the market,
the major carrier is now charging $800 for a business class round trip.
I dare say that not only has predatory pricing driven out the
competitor, but at $800 per round trip, the major airline long ago made
up its losses. For comparison, a round trip fare from Omaha to Chicago
is about $200.''
That major carrier was United Airlines, I might add.
DOD cites 4 additional examples, without naming the carriers
involved, and I will cite 2 of those cases. An established carrier
responded to new low-fare service in a market by increasing its service
from 41,000 seats in a quarter to 55,000 seats. The number of seats the
established carrier offered at low fares below $75 increased from
11,000 to 47,000. The new entrant was selling 9,000 low-fare seats a
quarter. As a result of this dumping of capacity, the established
carrier's revenue dropped from $7.6 million a quarter to $3.9 million
in that same period of time.
Second example: An established carrier responded to a new low-fare
entrant by increasing the number of seats it offered in the market from
44,000 in a quarter to 67,000. The number of seats offered at a low
fare of $50 to $75 was increased from 1,300 to 50,000. The established
carrier's revenues decreased from $9 million a quarter to $5.6 million.
When the new entrant was driven out of the market, the established
carrier reduced total capacity from 67,000 seats a quarter to 36,000
seats. Mr. Speaker, 15,000 of those seats were at a fare of over $325.
The result: Total revenues went back to $9 million.
Mr. Speaker, it is not surprising that Northwest Airlines has been a
leader in the practice of driving out new entrants by lowering fares
and dumping excess capacity. Michael Levine, now Northwest executive
vice president for marketing and international, is the same Michael
Levine who 10 years ago, when he was a law professor, conducted an in-
depth study of airline marketing strategies. Mr. Levine concluded after
an extensive analysis that a strategy of predatory pricing practices
was frequently employed by major airlines and was likely to be
effective. Levine found,
Economists committed to a high degree of airline market
contestability have historically maintained that predation is
doomed to failure and is therefore unlikely, because capital
assets involved in airline production are mobile.
Continuing quote,
This contestability analysis is unfortunately inconsistent
with much observed behavior since deregulation. Many new
entrant airlines such as People Express, for example, in
Newark, Minneapolis; Muse Air on its routes to Texas,
Oklahoma and Louisiana, and other points out of Love Field
and Hobby; Pacific Express in the Los Angeles-San Francisco
market and others, have been pressed and helped out of
business through aggressive pricing by incumbent rivals.
Continuing to quote,
New entrants are very vulnerable, both to predation and to
aggressive price competition between holdover incumbents and
new entrants. If circumstances, including the financial
condition of the new entrant, warrants, the incumbent can
flood the market with low-price seats, withdrawing them
almost invisibly at peak times or as competitive conditions
allow. Economies of scope and perhaps of scale in these
tactics allow large incumbents to use them more effectively
than the smaller, newer airlines. The economies of scope are
easily seen. An incumbent who uses such tactics a few times
quickly develops a reputation for fierce response to entry.
The smaller the route on which the predatory war takes place
as a percentage of the total operations of the airlines, the
more staying power the airline will have as cash is lost in
operations which do not cover incremental costs. In effect,
the airline lends itself money out of accounting reserves to
fight a war which drains cash. If the new entrant cannot find
a source of capital which will accept the information that
the temporary losses are a worthwhile investment, it will not
be able to sustain losses for as long a time as will the
large scale incumbent.
Source: Airline Competition, Competition in Deregulated Markets of
the Yale Journal on Regulation, Spring, 1987.
[[Page H9342]]
Well, Mr. Levine followed this blueprint to a tee when he became
executive in charge of pricing and marketing for Northwest Airlines.
The benefits of service by low-fare carriers go far beyond the service
they provided to their passengers. When a low-fare carrier is
successful, major carriers are forced to reduce their fares and their
passengers also benefit. The savings to travelers are truly
astonishing.
A DOT analysis concluded that for the year 1995, low-fare competition
saved more than 100 million travelers a total of $6.3 billion in air
fares. DOT studies also show that many passengers and markets which are
not served by low fare carriers do not receive the full benefits of
deregulation. DOT studied fares in all markets under 750 miles and
found that in markets served by low-fare carriers, fares had decreased
by 41 percent, adjusted for inflation, since deregulation in 1978. But,
for those markets not served by low-fare carriers, fares had increased
by 23 percent, adjusted for inflation.
The DOT study showed that average fares in markets served by low-fare
carriers were $70 to $90 lower than average fares in other markets. It
is very instructive that the higher fares prevailed in all markets not
served by low-fare carriers. Fares were high even in markets in which
established carriers competed.
Conclusion: It is the low-fare carriers, not the major carriers, who
drive prices down and benefit consumers.
DOT has given some specific examples of fare disparities related to
whether a market is served by a low-fare carrier. For example, Chicago-
Cincinnati, where United competes with a major carrier, Delta. The
average fare is $259. In Chicago-Louisville, a market of comparable
distance where United competes with a low-fare carrier, Southwest, the
average fare is $72. And there are many more such case example studies.
It is clear that the traveling public has a lot to lose if low-fare
carriers are driven out of the marketplace by unfair competitive
practices.
In competing with established carriers, low-fare carriers face
obstacles beyond price-cutting and capacity-dumping. Established
carriers control slots, gates, and computer reservation systems which
are essential to effective competition. Established carriers can also
use frequent flyer programs and travel commission overrides as
competitive weapons. I know of a number of cases in which major
airlines offer extra frequent flyer miles and give travel agents added
commissions for flights in markets in which the major carrier was faced
with low fare competition.
Even more disturbing are recent trends toward industry concentration.
As the number of established carriers is reduced, the surviving
carriers will become even more formidable, new threats to new entrants.
Furthermore, the reduction in the number of established carriers means
less competition within this group, and that means that the need for
competition from low-fare carriers will become even greater. When
markets are controlled by established carriers, the tendency is for the
carrier simply to follow each other's fare changes, with the result
that fares are identical and passenger choice is limited.
Since the early 1980s, there has been a long-term trend toward
industry concentration. In the past few months, there have been some
proposals which threaten to escalate the process dramatically to the
disadvantage of air travelers. During the 20 years of airline
deregulation, competition was reduced by a wave of mergers in the late
1980s, and by the bankruptcies of many established carriers and new
entrants. Although a few small carriers who started operation in the
post-deregulation era have survived, the new competition does not come
close to offsetting the loss of competition caused by mergers and
bankruptcies.
Very recently there has been an even greater threat to competition:
Global-straddling alliances. In the past few months, proposals have
surfaced for alliances between Northwest, with 9 percent of the
domestic market, and Continental, 8 percent of the market; between
American, 17 percent of the domestic market, and USAirways, 8 percent;
and between United Airlines, 17 percent of domestic market, and Delta,
with 18 percent, although it now appears that this latter proposal may
not be able to proceed because they do not seem to be able to come to
agreement on a code share alliance, for the time being. In addition,
there is an alliance already in place between America West with 4
percent of the domestic market and Continental at 8 percent.
If, as some have suggested, alliances are the equivalent of mergers,
these recent proposals indicate a very disturbing trend toward an
aviation sector worldwide consisting of 3 major carriers, which
Secretary of Transportation Sam Skinner warned us about in the early
1990s during hearings that I chaired at that time. The General
Accounting Office found that if all of the 3 alliances proposed a few
months ago were implemented, competition could be reduced for about 100
million passengers a year.
Alliances between major carriers pose an especially serious threat to
competition because many of these carriers are already in alliances
with major foreign airlines, such as Northwest-KLM, United-Lufthansa-
SAS-Air Canada, and Delta-Swiss Air-Sabena-Austrian-Virgin. America is
now trying to develop alliances with British Air, TACA, Canadian,
Quantas and Japan Airlines. Big powerful global-straddling carrier
alliances, reducing competition and increasing fares for air travelers.
These alliances have enormous market power. They control slots at the
major slot constrained airports of the world: O'Hare, Heathrow and
Narita. They operate in countries with which we have restrictive
bilaterals that limit competition: our bilaterals with the United
Kingdom and Japan. They control the major computer reservation systems
through which most airline travel is marketed. They control major
networks of domestic feeder airlines and some new entrants.
Experience has shown that when a U.S. carrier enters an alliance with
a foreign carrier, other U.S. carriers limit or terminate their service
to the foreign carrier's home market. If major U.S. carriers are added
to these already imposing alliances, there will be an irrevocable
change in worldwide airline competition.
{time} 1715
The Committee on Transportation and Infrastructure has reported
legislation to give the Department of Transportation an opportunity to
review the proposed alliances between major carriers before they are
implemented, very important legislation.
As Robert Crandall, former chairman and CEO of American Airlines said
shortly before he retired, ``The Department can promote competition by
preventing any further concentration in the domestic industry, and by
undoing the collusive alliances it has created in the international
marketplace. Doing so will offer the consumers more choices than they
have today.''
Regardless of whether our committee's alliance legislation passes,
the trend toward new alliances makes it even more important that DOT
ensure that new entrants are not driven out of the business by unfair
competitive practices.
The major airlines have tried to damn the DOT proposal by labeling it
with the pejorative term ``reregulation.'' This is a gross
mischaracterization. DOT is not proposing to add any new regulatory
requirements. DOT is only implementing its statutory responsibility
which predates the Deregulation Act of 1978 to prevent unfair
competitive practices.
To understand what ``reregulation'' means, we first need to
understand the meaning of ``deregulation.'' Before 1978, the airlines
were fully regulated. They needed authority from the Civil Aeronautics
Board to change the cities they served and the fares they charged.
In 1978, this regulatory regime was ended by the Airline Deregulation
Act, which gave airlines the same freedom as other industries to
establish their service and their fares. But deregulation did not mean
that there would be no limits on airlines' business decisions. All
American business is subject to controls to ensure that their products
are safe and that consumers are not deceived among other protections.
Some of these controls affect pricing decisions. For example, under
the antitrust laws, no American business is free to set its prices by
an agreement with its competitors. All businesses in
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America are prohibited from pricing practices which constitute unfair
competitive practices violating the letter or spirit of the antitrust
laws.
This prohibition is found in Section 5 of the Federal Trade
Commission Act, governing industry generally, and in former Section 411
of the Federal Aviation Act, which is now 49 U.S.C. 41712, which
applies specifically to airlines.
Since 1938 airlines have been exempt from Section 5 of the Federal
Trade Commission Act, and subject to a provision specifically
prohibiting unfair competitive practices by airlines administered by
CAB's predecessor, and then by CAB, and since 1985, by DOT. This is the
prohibition on which DOT's guidelines are based, historically
established in law for the benefit and protection of air travelers.
Congress has made it absolutely clear that we expect the U.S.
Department of Transportation to prohibit unfair competitive practices
by airlines. In 1984 when we passed legislation terminating the Civil
Aeronautics Board and giving its remaining responsibilities to the U.S.
Department of Transportation, we explained that, ``There is also a
strong need to preserve the Board's authority under Section 411 to
ensure fair competition in air transportation. Again, this is the same
authority which the Federal Trade Commission exercises over other
industries under Section 5 of the Federal Trade Commission Act.
Although the airline industry has been deregulated, this does not
mean that there are no limits to competitive practices. As in the case
with all industry, carriers must not engage in practices which would
destroy the framework under which fair competition operates.
Air carriers are prohibited, as are firms in other industries, from
practices which are inconsistent with the antitrust laws or the
somewhat broader prohibitions of Section 411 of the Federal Aviation
Act (corresponding to Section 5 of the Federal Trade Commission Act)
against unfair competitive practices. Source, House Committee Report on
CAB Sunset Act, H.R. 98-793, 98th Congress, Second Session.
I cite this to be perfectly precisely clear about the legal basis for
the authority that the DOT seeks now to exercise.
The principal architect of deregulation, Dr. Alfred Kahn, has
confirmed that the DOT proposal is not reregulation. Dr. Kahn said:
The entry of these new low-fare carriers keeps the industry
honest. I'm a strong advocate of competition and I don't want
to go back to regulation. But you've got to distinguish
legitimate competition from what is intended to drive
competitors out and exploit consumers.
That is Alfred Kahn, as quoted in USA Today, April 6, 1998.
Dr. Kahn further says, ``When I hear `vigorous competitive' responses
to describe a situation in which, within a space of a year, fares
started at $260, went down to $100 in two quarters, and then back up to
$270, I want to retch,'' said Dr. Kahn in the hearing on Aviation
Competition of the Subcommittee on Aviation, the Senate Committee on
Commerce, Science, and Transportation, April 23, 1998.
Strong language from a man who knows what ``deregulation'' means and
what ``fair competition'' is.
Two other issues need to be clarified. First, the prohibition against
unfair competitive practices is related to but is broader than the
prohibitions of the antitrust laws. As the court ruled in United
Airlines against CAB, 766 F.2nd 1107, 7th Circuit, 1985, ``We know from
many decisions under both this section, (Section 411 of the Federal
Aviation Act prohibiting unfair competitive practices),'' and its
progenitor, Section 5 of the Federal Trade Commission Act, ``that the
Board can forbid anticompetitive practices before they become serious
enough to violate the Sherman Act.''
Secondly, DOT has authority to issue general rules determining that
specific practices constitute unfair competitive practices. DOT is not
limited to enforcing the prohibition against unfair practices through a
case-by-case determination.
This was the issue in the 7th Circuit Court case of United Airlines
against CAB, in which United Airlines challenged the CAB's authority to
issue rules determining that various practices in the operation of
computer reservation systems would be unfair competitive practices.
After analyzing the background of the reenactment of Section 411 in
1984, the court concluded,
Congress, looking forward to the period after abolition of
the Board, was very concerned to preserve in the Department
of Transportation authority to enforce Section 411 . . . It
is too late to inquire whether, as an original matter of
interpretation of Sections 204(a) and 411, rulemaking can be
used to prevent unfair or deceptive practices or unfair
methods of competition. To hold that it cannot be so used
would pull the rug out from under Congress's restructuring of
airline regulation.
Wise words rightly said by the court.
There have been some proposals for legislation to stop the DOT
rulemaking. I am pleased that the Committee on Transportation and
Infrastructure has rejected these proposals, and instead has reported
legislation to ensure that the final guidelines will include a full
analysis of relevant issues, and that Congress will have an opportunity
to legislate before final guidelines become effective.
I agreed to this legislation as a compromise, making it clear that my
support should not be construed as indicating doubts about DOT's
proposal, but rather, as a means of moving the issue forward. The
Secretary of Transportation has pledged to give serious open-minded
consideration to all comments filed, and I am confident that final
guidelines will reflect any legitimate problems which may be raised.
I believe the basic approach proposed by DOT is sound. It is
inconsistent with deregulation for established airlines to respond to
low fare competition by adopting pricing and scheduling policies which
lose money, and then when the new entrant leaves the market, raising
fares to prior levels.
I respect the rights of established airlines to oppose the DOT
proposal, but I urge them to contest the proposal by responding to the
real issue with real case studies and honest facts, rather than using
their fictitious strawman claim of ``reregulation'' in their rush to
ban all low-fare service.
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