[Congressional Record (Bound Edition), Volume 146 (2000), Part 11]
[House]
[Pages 16489-16491]
[From the U.S. 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

[[Page 16490]]

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 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

[[Page 16491]]

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 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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