[Congressional Record Volume 146, Number 99 (Wednesday, July 26, 2000)]
[House]
[Pages H7068-H7070]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ENSURING A COMPETITIVE AIRLINE INDUSTRY
The SPEAKER pro tempore (Mr. LaTourette). Under a previous order of
the House, the gentleman from Minnesota (Mr. Oberstar) is recognized
for 5 minutes.
Mr. OBERSTAR. Mr. Speaker, I am deeply troubled over the possibility
of mergers of major domestic airlines. Many observers have predicted
that if the proposed merger of United Airlines and US Airways is
allowed to proceed, it will be followed by mergers of other major
carriers, and soon we will have an industry dominated by three mega-
carriers. This would be devastating to consumers.
The father of deregulation, Alfred Kahn, observed ``Because of the
United-US Airways threatening to set off a series of imitative mergers
that would substantially increase the concentration of the domestic
industry, there is a possible jeopardy here to the many billions of
dollars that consumers have been saving each year because of the
competition set off by deregulation.''
I am strongly opposed to the United-US merger and other mergers that
likely will follow. I have asked the Department of Justice and
Transportation to use all available authority to stop the mergers under
the antitrust laws, and many Members have indicated they share those
concerns.
At hearings held in several House and Senate committees there was
little support for the United-US merger. Members raised concerns about
the impact of the merger on service to the areas they represent as well
as to the Nation at large. As one Member in our hearing in our
Committee on Transportation and Infrastructure observed, ``I don't
think the merger is a win-win for the consumer. As a matter of fact, it
might be a lose-lose look for the consumer.'' A number of Members
expressed the sentiment that if Congress were to vote on the proposed
United-US merger, it would fail.
I hope and expect that the Department of Justice will heed those
strongly-held views. At the same time, however, I believe we have to
begin thinking about steps we would take to protect consumers if
competition in the industry is reduced to a point where it is no longer
an affective check on monopolistic behavior. I must emphasize that this
type of legislation is not my preference. I would greatly prefer an
environment in which consumers are protected by adequate competition in
a free market.
The legislation I am introducing will give the Department of
Transportation extended authority to protect the American consumer
should a series of mergers or acquisitions be approved, leaving our
domestic market with three or fewer carriers, who would account for
over 70 percent of scheduled revenue passenger miles. The authority
that I would extend to the Department of Transportation in this
legislation will include oversight of air carrier pricing, anti-
competitive responses to new entrant competition, and other unfair
competitive practices.
This is not reregulation. Airlines will remain free to set prices and
enter or leave markets without prior government approval. But the bill
will give DOT authority to intervene if the airlines take unfair
advantage of the absence of sufficient competition.
I just want to cite the highlights of this legislation. The bill
would take effect when, as a result of mergers between two or more of
the top seven carriers, three or fewer carriers control more than 70
percent of domestic revenue passenger miles.
Monopolistic fares. The Secretary of Transportation is authorized to
require reduction in fares that are unreasonably high. When the
Secretary finds that a fare is unreasonably high, he may order that it
be reduced and that the reduced fare be offered for a specified number
of seats and that rebates be offered.
Preventing unfair practices against low-fare new entrants. If a
dominant incumbent carrier responds to low-fare service by a new
entrant, and matches that low fare, and offers two or more times the
low-fare seats as the new entrant, the dominant carrier must continue
to offer the fare for 2 years, for at least 80 percent of the highest
level of low-fare seats it offered.
Increasing competition at hubs. If a dominant carrier at a hub
airport takes advantage of its monopoly power by offering fares 5
percent or more above industry averages in more than 20 percent of hub
markets, DOT may take steps to facilitate added competition at the hub.
And, finally, the measures to encourage competition may include
measures relating to the dominant carrier's gates, slots, or other
airport facilities, to travel agent commissions, frequent flyer
programs and corporate discount programs.
I hope we do not ever have to come to a point where this legislation
must be enacted and must take effect. I hope that the Justice
Department will disapprove the United-US merger and discourage all
other mergers that are likely to follow this one. If not, and if the
domestic airspace and the world airspace is reduced to three globe-
straddling mega-carriers, then we will need this legislation in place
to protect competition and protect consumers.
Mr. Speaker, I want to go into a little more detail about some of the
problems my legislation seeks to address.
monopolistic fares
If the airline sector is reduced to three major carriers the
remaining mega-carriers could substantially reduce competition and
raise fares. The way airline competition works today, when established
carriers control markets, the tendency is for the carriers to follow
each other's fare changes so that the fares are identical, and the
passenger choice is limited. These tendencies would be magnified if
there were only a few major airlines. There would be enormous
incentives for each carrier to avoid competing with the others at their
strong hubs and routes. This strategy would likely lead to the greatest
mutual profitability, while strong competition across the board could
prove suicidal. As the DOT aptly stated, ``[e]conomic theory teaches
that the competitive outcome of a duopoly is indeterminate: the result
could be either intense rivalry or comfortable accommodation, if not
collusion, between the duopolists.'' Collusion to fix prices is not new
to the airline industry--in 1992 it was caught red-handed in an
elaborate price-fixing scheme using computer reservations software.
The impact of mergers on fares goes beyond the effects of having only
three major competitors. Each merger by itself eliminates competition
between the parties to the merger; history shows that this reduction in
competition will lead to higher fares. The General Accounting Office,
in a 1988 report, found that after TWA bought Ozark, it raised
roundtrip fares 13 to 18 percent on 67 routes serving St. Louis. An
October 1989 report by the Economic Analysis Group, a DOJ research arm,
noted that: ``The merger of Northwest and Republic appears to have
caused a significant increase in fares [5.6 percent] and a significant
reduction in overall service on city pairs out of Minneapolis-St.
Paul.'' That happened despite the fact the number of cities served from
Minneapolis-St. Paul increased after Northwest/Republic merger.
My bill will give DOT authority to intervene if carriers take
advantage of the absence of competition by raising fares above
competitive levels. The bill gives DOT authority to require
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reductions in fares which it finds to be unreasonably high. The bill
gives examples of situations in which a fare might be found to be
unreasonably high: if the fare in a particular market is higher than
the fare the carrier charges in other markets with similar
characteristics, or if the fare in a market is increased beyond
increases in costs. The bill provides that if DOT finds that a fare is
excessively high it may order that the far be reduced, specify the
number of seats at which the reduced fare must be offered, and order
rebates.
unfair competitive practices against low fare carriers
A second problem that my bill deals with is unfair competitive
practices against new entrants.
New entrants providing low fare service have been a critical element
in airline competition under deregulation. In fact, history has shown
that the public experiences real competition only when low far carriers
like Southwest Airlines enters a market. DOT called it the ``Southwest
effect.'' Studies have shown that when Southwest begins service to a
new city, competitors tend to lower their fares and more people start
flying. DOT studies show that average fares in markets served by low-
fare carriers were $70-$90 lower than average fares in other markets.
On the other hand, fares were higher in markets not served by a low-
fare carrier, even when these markets had competition from several
established carriers. New entrants with low fare service will be even
more important in an industry dominated by three large carriers.
In recent years, low fare carriers have faced great difficulty in
establishing their services. Last year on the House floor, I expressed
my concern over unfair competitive practices that incumbent airlines
have used when new entrant low fare carriers try to compete. In the
typical scenario, the low fare carrier enters a market with a limited
amount of low fare service. The incumbent carrier responds by matching
the low fare and adding service so that the low fare will be available
on many times the number of seats offered by the low fare carrier. This
flooding of the market frequently drives the low fare carrier out, and
permits the incumbent to raise its fare to the prior level.
The adverse effect of these practices on competition does not end
with the particular challenger. Once it becomes known in the industry
that an incumbent will respond aggressively to a challenge by a low
fare carrier, other prospective competitors will also be deterred in
the future. This is 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 at the major carrier's
hub airports.
The Transportation Research Board (TRB), in its 1999 study Entry and
Competition in the U.S. Airline Industry, examined 32 complaints of
unfair competition on file with the DOT, concluding that ``it is
apparent that some of the actions described are difficult to reconcile
with fair and efficient competition.'' The TRB reported that one-half
of the cases involved sharp price cutting and excessive increases in
capacity. In fact, last year the DOJ filed suit against American
Airlines to enforce the antitrust laws against alleged predatory
practices by American Airlines to drive new entrants out of its Dallas/
Ft. Worth hub.
If the industry is reduced to three mega-carriers, these carriers
will have greater financial resources and general freedom from
competition. This will enhance their ability to eliminate new entrants
by unfair practices.
To deal with this problem, my bill adopts a concept suggested by Dr.
Kahn and others to discourage unfair tactics against new entrants. In
cases where a dominant carrier at a hub airport meets new low fare
competition by reducing its fares and offering the new low fare on more
than twice the number of seats as the new entrant carrier on that
route, the bill requires the dominant carrier to continue to offer the
new low fares for two years. During this two year period, the low fares
must be made available on at least 80 percent of the highest number of
seats per week for which that fare has been offered. This will ensure
that a dominant carrier's efforts to defend its market, route or hub
will be a truly competitive response, not one designed only to drive a
new competitor out of business and then recoup reduced profits or
losses by raising fares.
monopolistic abuses at hub airports
Another major problem that my bill addresses is monopolistic
practices at hub airports dominated by a single airline. Several
studies have shown that fares for hub airports are higher than fares in
markets where there is more competition. The recent TRB study concluded
that ``the consistency with which hub markets appear among the highest-
free markets is noteworthy and raises the possibility that the hub
carriers are exploiting market powers in ways that would not be
sustained if they were subject to more competition.''
In an environment of less competition, the hub problem can be
expected to grow worse. My bill addresses this problem in several ways.
First, as I have previously discussed, the bill gives the Secretary
authority to require that fares at hub airports be reduced if they are
higher than fares elsewhere.
Secondly, the bill includes provisions to encourage more competition
at hubs. The bill provides that, upon a finding that a dominant carrier
is exploiting its position at a hub airport by offering unreasonably
high fares in more than 20 percent of the hub's markets, the Secretary
may require the dominant air carrier to make gates, slots, and other
airport facilities reasonably available to other carriers. We have
often heard of dominant air carriers that refuse to give to other
carriers, especially new entrants, access to key airport facilities.
The ability to prevent other air carriers from competing effectively
at hub airports will only be magnified if the industry is reduced to
three major carriers.
My bill would also give the Secretary the authority to require that
the air carrier exploiting a hub monopoly make adjustments in
commissions paid to travel agents, in frequent flyer programs, and in
corporate discount arrangements. Each of these marketing programs has
served, in the past, to make it nearly impossible for new entrants to
gain a foothold in a dominant hub market. The recent TRB report noted
that use of these programs to drive out competition ``merits further
investigation by DOT.''
unreasonably high fares for business passengers
A final problem the bill addresses is excessibly high fares for
business travelers and others who cannot meet the conditions on
discount tickets. In the last several years, airlines have been
charging increasingly higher airfares to business travelers who do not
qualify for discount tickets. The TRB noted that the: ``higher-fare
travelers . . . are now paying 5 to 25 percent more. Also evident is
that these travelers are paying fares much higher than the median, at
least in comparison with earlier periods (1995 to 1992). For instance,
travelers paying the highest fares in 1992 paid 2 to 2.1 times the
median fare. In 1998, these travelers paid 2.7 to 2.9 times the
median.'' If the aviation industry were to consolidate to just three
globe-straddling mega-carriers, the business traveler is the one who
would bear the brunt of the super-premium airfares that are sure to be
charged in those monopoly power airport markets.
My bill would give the Secretary power to require reductions in fares
that are unreasonably high, either in and of themselves, or by
comparison to the lower fares offered other passengers.
Mr. Speaker, I believe that we are at a critical point for the future
of a competitive airline industry. The inescapable lesson of 22 years
of deregulation is that mergers and a reduction in competition often
lead to higher fares for the American traveling public. We cannot stand
idly by and allow the benefits of deregulation to be derailed by a wave
of mergers. If these mergers are approved, we will need a new
legislative framework to give the Secretary of Transportation
appropriate authority to combat anti-competitive practices by the new
line-up of powerhouse mega carriers, to preserve competition in the
public interest, and ensure the widest range of travel options at the
lowest possible prices for air travel.
If the mergers proceed without the competitive protections I am
proposing, then the ultimate irony of deregulation will be that we will
have traded government control in the public interest, for private
monopoly control in the interests of the industry.
Mr. Speaker, I submit for the Record herewith a section-by-section
summary of my legislation:
Airline Competition Preservation Act--Section-by-Section Summary
section 1--short title
This section provides that the Act may be cited as the
``Airline Competition Preservation Act of 2000.''
section 2--oversight of air carrier pricing
Subsection (a)(1) provides that the Act takes effect
immediately upon a determination by the Secretary of the
Department of Transportation that, as a result of
consolidation or mergers between two or more of the top 7 air
carriers, three or fewer of those air carriers control more
than 70 percent of scheduled revenue passenger miles in
interstate air transportation.
Subsection (a)(2) states that the Secretary shall, in
determining the number of scheduled revenue passenger miles
under subsection (a)(1), use data from the latest year for
which complete data is filed. In addition, subsection (a)(3)
provides that the Secretary in making the concentration
determination in (a)(1) should attribute to the remaining
airline those routes acquired from the air carrier with which
it has merged or consolidated.
Subsections (b)(1) and (b)(2) give the Secretary the
authority to investigate whether an air carrier is charging a
fare or an average fare on a route that is unreasonably high.
The factors in making this determination include whether the
fare or average fare
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in question: is higher than fares charged in similar markets;
has been increased in excess of cost increases; and strikes a
reasonable relationship between fares charged to passengers
who are price sensitive and those charged to passengers who
are time sensitive.
Under subsection (b)(3), if a fare is found to be
unreasonably high, the Secretary may order, after providing
the air carrier with an opportunity for a hearing, that it be
reduced, that the reduced fare be offered for a specified
number of seats and that rebates be offered.
Subsection (c) provides that if a dominant air carrier, on
any route in interstate transportation to or from a hub
airport, responds to low fare service by a new entrant by
matching the low fare, and offering two or more times the low
fare seats as the new entrant, the dominant carrier must
continue to offer the low fare for two years, for at least 80
percent of the highest level of low fare seats it offered.
Subsection (d)(1) authorizes the Secretary to investigate
whether a dominant carrier at a hub airport is charging
higher than average fares at that airport. Subsection (d)(2)
provides that the Secretary may determine that higher than
average fares are being charged where an air carrier is
offering fares that are 5 percent or more above industry
average fares, in more than 20 percent of its routes that
begin or end in its hub market. If higher than average fares
are being charged, the DOT may, after providing the air
carrier with an opportunity for a hearing, take steps to
facilitate added competition at the hub, including measures
to relating to the dominant carrier's gate, slots, and other
airport facilities, travel agent commissions, frequent flyer
programs and corporate discount programs.
Subsection (e) defines the terms ``dominant air carrier,''
``hub airport,'' ``interstate air transportation,'' and ``new
entrant air carrier.'' ``Dominant air carrier'' is defined,
with respect to a hub airport, as an air carrier that
accounts for more than 50 percent of the total annual
boardings at the airport in the preceding 2-year period or a
shorter period as specified by the Secretary. A ``hub
airport'' means an airport that each year has at least .25
percent of the total annual boardings in the United States.
``Interstate air transportation'' is defined as including
intrastate air transportation. A ``new entrant air carrier,''
with respect to a hub airport, is defined as an air carrier
that accounts for less than 5 percent in the preceding 2-year
period or a shorter period as specified by the Secretary.
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