[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

[[Page H9343]]

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.

                          ____________________