    Aviation Competition: Restricting Airline Ticketing Rules
    Unlikely to Help Consumers (31-JUL-01, GAO-01-831).

    Passengers on the same commercial airline flight may pay fares
    that vary widely. This fact has led to dissatisfaction by some
    passengers who believe their ticket prices are too high and that
    airline ticketing practices are unfair. In an effort to reduce
    their cost of flying, some passengers have attempted to use
    "hidden-city" and "back-to-back" ticketing opportunities.
    Hidden-city ticketing occurs when a passenger books a flight to
    one city but purposely deplanes at an intermediate city. Though
    never intending to make the last leg of the flight, the passenger
    purchases the ticket because it is cheaper than a ticket to the
    intermediate city. Back-to-back ticketing occurs when a passenger
    buys two round-trip tickets that include a Saturday night stay
    but either uses only half the ticket coupons or uses all the
    coupons out of sequence. This practice results in a lower price
    than would be possible by purchasing round-trip tickets that did
    not include a Saturday night stay. Most airlines expressly forbid
    the use of hidden-city and back-to-back ticketing. When
    passengers purchase tickets, they enter into a legally binding
    contract with the carrier to receive transportation between two
    locations at specified prices and to use tickets exactly as
    issued. In this report, GAO reviews (1) the factors that airlines
    consider when setting fares, (2) the factors that create
    hidden-city ticketing and the pricing practices that foster
    back-to-back ticketing practices, (3) the potential effects on
    airfares and service, especially to consumers in small
    communities, of a legislative requirement to permit hidden-city
    ticketing, and (4) the potential effects on airfares and service
    of a legislative requirement to permit back-to-back ticketing.
    GAO found that (1) when setting fares for each market, airlines
    consider the amount of competition from other airlines offering
    similar "products", (2) hidden-city opportunities may arise when
    a greater amount of competition exists for travel between spoke
    communities (i.e. destinations located "beyond" a hub airport)
    than on routes to and from hub communities, and where airfares in
    those markets reflect such competition, (3) back-to-back
    ticketing opportunities occur because airlines maximize their
    profits by setting higher fares for purchase by passengers who
    normally travel during peak times, generally during the week
    (business passengers), and lower fares for purchase by passengers
    who travel at off-peak times and stay at their destination over
    the weekend (leisure passengers). Passengers who would otherwise
    not qualify for discounted fares might be able to circumvent the
    airlines' Saturday night stay requirements to obtain lower fares,
    (4) if legislation required airlines to permit hidden-city
    ticketing, airfares in certain markets could increase
    immediately--especially in markets including smaller communities,
    and (5) if back-to-back ticketing were permitted, airlines would
    likely decrease the attractiveness of such fares to business
    travelers by increasing fares for tickets designed for leisure
    passengers, adding more restrictions to their use, and
    potentially reducing service in some markets.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-01-831
        ACCNO:   A01490
      TITLE:     Aviation Competition: Restricting Airline Ticketing Rules
                 Unlikely to Help Consumers
         DATE:   07/31/2001
      SUBJECT:   Airline industry
    	     Airline regulation
    	     Commercial aviation
    	     Competition
    	     Prices and pricing
    	     Travel costs
    	     Fare discounts

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    GAO-01-831

    A

    Report to Congressional Committees

    July 2001 AVIATION COMPETITION

    Restricting Airline Ticketing Rules Unlikely to Help Consumers

    GAO- 01- 831

    Letter 3 Results in Brief 5 Background 9 Airlines Base Fares Primarily on
    Competition in Distinct Markets 14 Airlines? Pricing Practices, Coupled With
    Varying Consumer Demand

    and Competition, Produce Hidden- City and Back- to- Back Ticketing
    Opportunities 25 Requiring Airlines to Allow Hidden- City Ticketing Could
    Result in Higher Fares and Possibly Decreased Service, Especially to Smaller

    Communities 32 Allowing Back- to- Back Ticketing Could Result In Higher
    Fares for Leisure Passengers 42 Conclusions 44 Comments 45

    Appendixes Appendix I: Scope and Methodology 48 Appendix II: Airline
    Inventory Management- Making Seats

    Available at Different Prices 45, 30, and 7 Days Before Departure and at
    Takeoff 54 Appendix III: Selected Bibliography 56 Appendix IV: GAO Contacts
    And Staff Acknowledgments 58

    Related GAO Products 59 Tables Table 1: Example of Fares Available for
    Passengers Booking Tickets With a Saturday Night Stay Restriction 13

    Table 2: Example of Using Back- to- Back Ticketing to Obtain Lower Fares on
    Two Trips 14 Table 3: Roundtrip Fares for Travel Between Atlanta and

    Dallas/ Fort Worth 28 Table 4: Roundtrip Fares for Travel Between Pittsburgh
    and

    Charlotte 29 Table 5: Size of Communities and Hidden- City Ticket
    Opportunities

    in Selected Markets 40

    Table 6: Size of Communities Producing Hidden- City Opportunities and Number
    of Competing Airlines Serving Those Communities 41 Table 7: Organizations We
    Contacted 48 Table 8: Routes Into Hubs and Number of Connecting Markets
    Analyzed for Each Major Carrier 51

    Figures Figure 1: Markets Served by United Airlines From Its Chicago O?Hare
    Hub 10 Figure 2: Example of How a Hidden- City Ticketing Opportunity

    Might Arise 12 Figure 3: Characteristics Associated With Business and
    Leisure

    Travelers 18 Figure 4: Characteristics of Full and Discounted Fares 20
    Figure 5: Example of How Competition to a Spoke Community

    May Create a Hidden- City Ticketing Opportunity 27 Figure 6: Hidden- City
    Ticketing Opportunities Available From

    Selected Markets for Six Major U. S. Passenger Airlines 34 Figure 7:
    Availability of Hidden- City Ticketing Opportunities to

    Total Markets Examined 35

    Abbreviations

    BACK Back Aviation Solutions DOJ Department of Justice DOT Department of
    Transportation FAA Federal Aviation Administration O& D Origin and
    Destination Survey TRB Transportation Research Board

    Lett er

    July 31, 2001 The Honorable Ernest F. Hollings Chairman The Honorable John
    McCain Ranking Minority Member Committee on Commerce, Science, and
    Transportation

    United States Senate The Honorable Don Young Chairman The Honorable James L.
    Oberstar Ranking Democratic Member Committee on Transportation

    and Infrastructure House of Representatives

    Passengers on the same commercial airline flight- sometimes even those in
    adjoining seats- may pay fares that vary widely. This fact has led to
    dissatisfaction by some passengers who believe their ticket prices are too

    high and that airline ticketing practices are unfair. In an effort to reduce
    their cost of flying, some passengers have attempted to use ?hidden- city?
    and ?back- to- back? ticketing opportunities. Hidden- city ticketing occurs

    when a passenger books a flight to one city but purposely deplanes at an
    intermediate city. Though never intending to make the last leg of the
    flight, the passenger purchases the ticket because it is cheaper than a
    ticket to the intermediate city. Back- to- back ticketing occurs when a
    passenger buys two round- trip discounted tickets that include a Saturday
    night stay but either uses only half the ticket coupons or uses all the
    coupons out of sequence. This practice results in a lower price than would
    be possible by

    purchasing round- trip tickets that did not include a Saturday night stay.
    Most airlines expressly forbid the use of hidden- city and back- to- back
    ticketing. When passengers purchase tickets, they enter into a legally
    binding contract with the carrier to receive transportation between two
    locations at specified prices and to use tickets exactly as issued. 1
    Tickets

    1 This agreement is referred to as the ?contract of carriage.? The terms of
    this contract between the passenger and airline are contained by reference
    in the ticket itself and in a separate document.

    contain a written reference to the terms and conditions set forth in this
    contract. The airlines view a failure to use tickets exactly as issued- such
    as by taking advantage of hidden- city and back- to- back opportunities- as
    a possible breach of contract for which the airlines can demand
    compensation. Members of Congress have proposed several bills that would
    eliminate the

    prohibition imposed by most U. S. passenger airlines against hidden- city
    and back- to- back ticketing. 2 The Wendell H. Ford Aviation Investment and
    Reform Act for the 21st Century (AIR- 21) required us to study the potential
    impact of legalizing these ticketing practices. 3 As agreed with your
    offices,

    in response, we assessed (1) the factors that airlines consider when setting
    fares; (2) the factors that create hidden- city ticketing and the pricing
    practices that foster back- to- back ticketing practices; (3) the potential
    effects on airfares and service, especially to consumers in small
    communities, of a legislative requirement to permit hidden- city ticketing;

    and (4) the potential effects on airfares and service of a legislative
    requirement to permit back- to- back ticketing. To address these objectives,
    we contacted consumer advocates, travel agency representatives, independent
    industry experts (e. g., academicians, financial analysts, and consultants),
    and airline officials. We reviewed relevant literature about airline pricing
    practices, and used this and other data to analyze how the airlines set
    prices, and evaluated the viewpoints of officials from major U. S. passenger
    airlines. 4 We analyzed fare data for selected markets for each airline to
    determine whether hidden- city

    2 Several bills proposed in the previous Congress, including H. R. 700, H.
    R. 2200, H. R. 5347, and S. 2891, included language that would prohibit
    airlines from penalizing passengers for back- to- back and hidden- city
    ticketing. These bills had language to the effect that airlines would not be
    allowed to prohibit a person who purchases air transportation from using
    only a portion of the air transportation purchased or assess an additional
    fee or charge to such person or any ticket agent that sold the air
    transportation to such person. Bills in the current Congress, including H.
    R. 332, H. R. 384, H. R. 907, and H. R. 1074, contain similar language. 3 P.
    L. 106- 181, Section 226.

    4 The Department of Transportation (DOT) generally groups airlines based on
    their total annual operating revenues. Major airlines are those with annual
    operating revenues of $1 billion or more. The six major airlines that were
    the focus of our study were American Airlines (American), Continental
    Airlines (Continental), Delta Air Lines (Delta), Northwest

    Airlines (Northwest), United Airlines (United), and US Airways. We also
    interviewed officials with Southwest Airlines (Southwest).

    ticketing opportunities exist. We also examined the size of communities
    where those opportunities existed. Because our fare data were not drawn from
    a statistical random sample, the results are not projectable to all markets.
    We did not conduct a similar analysis for back- to- back ticketing because
    the opportunity to use this practice exists in all markets. We provided a
    copy of our draft to industry experts for review and comment.

    Additional information on our scope and methodology can be found in appendix
    I.

    Results in Brief Airlines maximize profits by setting fares based on the
    supply of and demand for travel in each market (i. e., a specific origin and
    destination) by

    passengers with different travel objectives. When setting fares for each
    market, a key factor that airlines consider is the amount of competition
    from other airlines offering similar ?products?- scheduled air travel
    between two different points. Fares tend to be higher for travel to and from
    markets in which competition is limited, particularly those markets in which
    the origin or destination are major carriers? hubs. Conversely, fares tend
    to be lower in markets with more competition. Airlines also set fares that
    respond to passenger demand by differentiating among travelers with varying
    requirements. In general, airlines charge higher fares for tickets that
    allow travelers to fly on short notice and retain the flexibility to change
    or cancel their trip without penalty- generally business travelers.

    According to industry experts, airlines have economic justification for
    charging higher fares to these travelers, based on the costs of providing
    this type of product. In contrast, airlines often charge lower fares for
    tickets that require passengers to plan further in advance and meet various
    restrictions (e. g., Saturday night stay)- generally leisure travelers.
    According to airlines and expert sources, the relationship between fares and
    costs are complex because most of those costs (e. g., multiyear pilot

    labor contracts and the capital cost of aircraft) are largely fixed for
    multiyear periods. As a result, once the schedules are set, the airlines
    seek to maximize their profits by generating as much revenue as possible in
    each market and for each passenger.

    Hidden- city and back- to- back ticketing opportunities exist because of the
    way in which airlines maximize profits by setting fares that differ
    according to the market and type of passenger. Hidden- city opportunities
    may arise when a greater amount of competition exists for travel between
    spoke communities (i. e., destinations located ?beyond? a hub airport) than
    on routes to and from hub communities, and where airfares in those markets
    reflect such competition. As a result, passengers whose real destination is

    the hub airport may be able to save money by purchasing a ticket with a
    lower fare to a spoke community but deplaning at the hub airport. For
    example, because of the differences in airfares for nonstop travel between
    Chicago and Dallas and for connecting travel from Chicago to San Antonio, a
    possible hidden- city opportunity existed for travel to Dallas. The fares
    for nonstop travel between Chicago and Dallas (available on two airlines)

    were approximately $1, 085. Five other airlines offered travel from Chicago
    to San Antonio, connecting at cities other than Dallas, that ranged from
    $439 to $1,108. 5 To compete with those prices, the fare from Chicago to San
    Antonio on one of the two airlines that connected at Dallas was $904.

    Because of the fares and services other competing airlines offered between
    Chicago and San Antonio, a hidden- city ticketing opportunity existed for
    travelers between Chicago and Dallas that could allow passengers to save
    $181 by purchasing tickets to San Antonio but deplaning in Dallas. Airlines
    we interviewed could not provide us estimates as to how frequently

    passengers use hidden- city ticketing but believe that few passengers use
    this practice because of the measures that airlines have taken to prevent
    its use.

    Back- to- back ticketing opportunities occur because airlines maximize their
    profits by setting higher fares for purchase by passengers who normally
    travel during peak times, generally during the week (business passengers),
    and lower fares for purchase by passengers who travel at off- peak times and
    stay at their destination over the weekend (leisure passengers). Passengers
    who would otherwise not qualify for discounted fares may be able to
    circumvent the airlines? Saturday night stay requirement to obtain lower
    fares. For example, rather than paying $1,490 for a ticket purchased 14 days
    in advance of a flight for a trip that began on a Monday and returned on
    Friday, a passenger might purchase 2 roundtrip tickets, each of which
    includes a Saturday night stay for $580 and use half of one ticket to depart
    and half of the other ticket to return. In this case, the passenger 5 Fare
    data obtained on May 30, 2001, for travel beginning May 31, 2001, and
    returning June 1,

    2001, from Expedia. com.

    might be able to save $910. However, airlines prohibit both back- to- back
    and hidden- city practices because they consider each travel itinerary sold
    as a separate product that they have priced according to a variety of
    factors. Thus, their officials reported that they take various measures to
    prevent their use. These measures include requiring travel agents who
    violated their contractual agreement with the airlines by selling tickets
    that were used by passengers to circumvent airline ticketing rules to
    compensate them for lost revenue or enforcing the terms of the contract of

    carriage by requiring reimbursement or confiscating the ticket from the
    passenger. Some airlines also said that they were working to improve their
    capacity to detect improper ticketing practices by deploying more
    sophisticated systems. However, these airlines could not provide us

    estimates that describe how frequently passengers use these practices.
    According to industry experts and airline officials, if legislation required
    airlines to permit hidden- city ticketing, airfares in certain markets (i.
    e., for travel between certain spoke communities connecting over a hub)
    could increase immediately- especially in markets including some smaller
    communities. Airlines would take these actions to protect their revenues.
    Our analysis of hidden- city opportunities within selected markets found

    that the availability of hidden- city ticketing opportunities varied among
    airlines. However, our analysis indicates that business travelers tend to
    have a greater opportunity to acquire hidden- city tickets than leisure
    travelers. For instance, of the markets that we examined, hidden- city
    ticketing opportunities existed for 16 percent of business markets but only
    1 percent of leisure markets. If demand for travel to and from these spoke

    communities eventually decreased in response to possible higher fares,
    airlines said that they would consider reducing or eliminating service to
    these markets. Industry experts agreed that such a reduction in service
    would be the airlines? likely response to a decrease in demand. While our
    analysis indicated that hidden- city opportunities existed in communities of
    all sizes, they were statistically more likely to exist in markets that
    included smaller communities. Because smaller communities generate
    relatively less passenger traffic and generally have fewer airlines
    providing them services, these smaller cities could be more vulnerable to
    potential service

    reductions, and possible further fare increases, than larger ones. Some
    airlines suggested that because permitting this practice would undermine the
    efficiencies of their hub- and- spoke networks, they would choose to
    concentrate on providing service on more heavily traveled routes.

    Numerous variables- including the difficulty in using back- to- back
    ticketing and how competition could affect airlines? reaction in individual

    markets- make it difficult to predict the extent to which airlines would or
    would not increase fares in individual markets. Nevertheless, our
    discussions with industry experts and airline officials indicate that if
    backto- back ticketing were permitted, airlines would likely decrease the
    attractiveness of such fares to business travelers by increasing fares for
    tickets designed for leisure passengers, adding more restrictions to their
    use, and potentially reducing service in some markets. Fares purchased by

    business travelers are important to airlines because they provide the
    majority of their revenue. Therefore, there is consensus among experts as
    well as airline officials that airlines are likely to take actions to reduce

    potential losses by making discounted fares more difficult for business
    passengers to obtain. This action could also have the effect of raising
    fares for leisure passengers, possibly reducing air travel by these price-
    sensitive passengers. As a result, should the number of leisure travelers
    decrease, airline officials and industry experts indicated that airlines
    might reduce

    capacity (e. g., by operating smaller aircraft or making fewer flights) in
    markets experiencing a notable decline in passengers. However, the number of
    leisure passengers who might seek alternative means of transportation would
    likely depend on the amount of the fare increase and perhaps the willingness
    of these passengers to plan further ahead to obtain fare discounts.

    Based on our analysis of how airlines could react to permitting hidden- city
    and back- to- back ticketing, we believe that allowing these practices could
    have unintended consequences, including higher air fares and decreased
    service, for consumers. Nevertheless, consumer advocates and passengers have
    legitimate concerns that some fares are higher than what might be expected
    in a more competitive market. Thus, actions that promote competition would
    seem to offer long- term promise in assuring that fares reflect competitive
    pricing and provide some measure of relief from unduly high air fares for
    some consumers- primarily business consumers.

    Background Deregulation of the airline industry in 1978 ushered in an era of
    intense competition and resulted in a wide variety of fares, including
    discount

    fares, and flight options for passengers. 6 The variety of prices was made
    possible because deregulation allowed airlines to set fares for what
    airlines consider being distinct ?products? (e. g., scheduled air
    transportation between two locations). For example, airlines consider a
    last- minute ticket that is available for nonstop jet travel between New
    York and Chicago to be a different product than a discounted ticket
    purchased weeks in advance for a flight between those same cities that makes
    multiple stops and includes turboprop service. Deregulation also brought
    about unanticipated changes, including the importance of hub- and- spoke
    networks by major carriers and the increased dominance of individual
    airlines at some hub airports.

    Given the freedom to choose their own route structure and prices after
    deregulation, most major U. S. passenger airlines began to consolidate
    further their operations at airports, forming what are known as ?hubs.? 7
    Today, of the largest U. S. airlines, only Southwest Airlines (Southwest)

    does not use the hub- and- spoke model. With a hub- and- spoke network,
    carriers can combine ?local? passengers (those originating at or destined to
    the hub) with ?connecting? passengers (those not originating at or destined
    to the hub but traveling via the hub) on the same flight. In this manner,

    carriers can serve more cities and offer greater frequency of service with
    their fleet of aircraft than is possible with point- to- point service. 8 6
    See, for example, Airline Deregulation: Changes in Airfares, Service
    Quality, and Barriers to Entry (GAO/ RCED- 99- 92, Mar. 4, 1999) and Special
    Report 230: Winds of Change: Domestic Air Transport Since Deregulation,
    Transportation Research Board, National Research Council, Washington, D. C.,
    1991. (See the attached list of related GAO products and selected
    bibliography.) 7 For the purposes of this report, we are defining ?hub?
    airport in terms of how airlines utilize airports to distribute passengers
    within their service network. In contrast, the Federal Aviation
    Administration (FAA) uses the term hub to refer to geographical areas that
    are based on the percentage of total passengers enplaned (boarded) in the
    area. For FAA purposes, a hub could include several airports. 8 See, for
    example, Alfred E. Kahn, ?The Competitive Consequences of Hub Dominance: A
    Case Study,? Review of Industrial Organization, Vol: 8. No. 4 (1993). Kahn
    developed an example illustrating that an airline with 10 aircraft serving
    10 cities can serve 10 routes offering point- to- point service. He noted
    that if the airline operated flights to and from an intermediate hub, those
    same aircraft could serve 70 markets- 5 destinations for each of the 10
    cities plus 20 (in both directions) between each of the spoke cities and the
    hub.

    Major U. S. airlines generally operate hubs in several airports. For
    example, United has hubs in Chicago (at O?Hare International Airport),
    Denver, Los Angeles, San Francisco, and Washington, D. C. (at Dulles
    International Airport). As shown in figure 1, as of May 2001, United
    provided scheduled nonstop service from Chicago O?Hare to 115 destinations
    throughout the continental United States.

    Figure 1: Markets Served by United Airlines From Its Chicago O?Hare Hub
    Source: GAO?s presentation of data from the Kiehl Hendrickson Group.

    Airlines operating hub- and- spoke networks use comprehensive systems to set
    a wide variety of fares for each market (i. e., a specific origin and
    destination). 9 For each market, airlines might offer 25 or more different
    fare classes representing a variety of full- fare and discount tickets.
    Tickets within each fare class, especially discounted tickets, may be
    subject to different purchase requirements, such as requiring that a
    passenger buy a ticket a certain number of days before the departure date 10
    and requiring

    travelers to stay at their destination over Saturday night. Airlines use
    their systems to determine the mix of full- fare and discounted fares that
    will produce the most revenue. Likewise, because many flights carry both
    local and connecting passengers, airlines use these systems to determine the
    mix of passengers that will generate the most revenue.

    Hidden- city ticketing occurs when passengers purchase tickets with
    stopovers or connecting flights at a hub airport, intending to begin or end
    their travel at the hub airport and not the origin or final destination
    listed on the ticket. The hidden city is the hub airport. There are many
    ways in how passengers may attempt to use hidden- city ticketing. For
    example,

    passengers may attempt to use this ticketing practice when fares to a spoke
    community beyond the hidden city cost less than travel to the hidden city
    itself. A hidden- city opportunity exists, as illustrated in figure 2, if
    the fare between origin airport A and hub airport B is $1, 000 and the fare
    between airport A and airport C with a stop at hub airport B is $800. In
    this case, a passenger could attempt to reduce the cost of travel from A to
    B by booking a ticket to airport C but departing the flight at hub airport
    B.

    9 This definition is consistent with that applied in analyses of the airline
    industry. For example, the Department of Justice (DOJ), in its analyses of
    the possible effects of proposed mergers in the airline industry, defines
    the relevant market as scheduled airline service

    between a point of origin and a point of destination. This is often, but not
    always, defined as a city- pair. In addition, DOJ recognizes that nonstop
    service between cities is important because business travelers are less
    likely to regard connecting service as a reasonable alternative. 10 The
    number of days prior to a flight that a passenger must purchase a ticket to
    obtain a discount is known as an ?advance purchase requirement.?

    Figure 2: Example of How a Hidden- City Ticketing Opportunity Might Arise

    Source: GAO?s presentation. Passengers use back- to- back ticketing to
    circumvent the airline?s practice of limiting the availability of more
    deeply discounted fares to passengers who stay at their destination on
    Saturday nights. Airlines normally offer passengers who make advance
    purchases and stay on Saturday nights discounts off of the full fare.
    Smaller discounts are generally available to passengers who purchase tickets
    in advance but who do not remain through Saturday night. As indicated in
    table 1, a passenger who purchases a ticket 28 days in advance could save
    $1,240 by staying over on Saturday night.

    Table 1: Example of Fares Available for Passengers Booking Tickets With a
    Saturday Night Stay Restriction Advance purchase requirement to obtain a
    round- trip fare

    between Dallas/ Fort Worth and Los Angeles 1- day 7- day 14- day 21- day 28-
    day

    Fare without a $2, 006 $1, 490 $1,490 $1, 490 $1, 490

    Saturday night stay restriction

    Fare with a $2, 006 $1, 490 $290 $250 $250 Saturday night stay restriction

    Difference $0 $0 $1,200 $1, 240 $1, 240

    Source: American Airline?s Internet Web site. Fares obtained on April 24,
    2001, for travel departing on April 25, May 1, May 8, May 15, and May 22,
    2001. Numerous variations exist for using back- to- back ticketing. For
    instance,

    passengers who need to travel to the same location on consecutive weeks
    could purchase two discounted round- trip tickets that meet airlines?
    requirements for a Saturday night stay. These passengers could then save
    money by using the departure and return portions of both round- trip
    tickets, provided they use the ticket coupons out of sequence. To do so,

    one round- trip ticket must have as its origin the passenger?s real point of
    origin, and the other round- trip ticket must have as its origin the
    passenger?s real point of return. As shown in table 2, a passenger could
    purchase two 14- day advance tickets for $580 and save $1,200 on each trip,
    or $2,400 in total.

    Table 2: Example of Using Back- to- Back Ticketing to Obtain Lower Fares on
    Two Trips 14- day advance

    14- day advance purchase fares

    purchase fares (with Saturday stay

    (without Saturday Departure Return

    over) stay over)

    Real ticket itineraries

    A to B to A Mon. May 7, begin trip #1 Fri. May 11, return trip #1 N/ A $1,
    490 A to B to A Mon. May 14, begin trip #2 Fri. May 18, return trip #2 N/ A
    $1, 490

    Purchased ticket itineraries A to B to A Mon. May 7, begin trip #1 Fri. May
    18, return trip #2 $290 N/ A B to A to B Fri. May 11, return trip #1 Mon.
    May, 14 begin trip #2 $290 N/ A

    Total $580 $2, 980

    Legend: N/ A= not applicable Source: American Airlines? Internet Web site.
    Fares obtained on April 24, 2001.

    Another variation could be where a passenger uses only the departure coupons
    of each round- trip and throws away the unused coupons. For example, this
    same passenger could purchase two 14- day advance tickets for $290 each ($
    580 total), discard the unused portions, and still save $910 from the $1,490
    14- day advance purchase fare.

    Airlines Base Fares Airlines set their fares in individual markets based on
    a complex mix of

    Primarily on economic and financial factors, but primarily on the supply of
    and demand for air transportation by passengers with different travel
    requirements. For Competition in Distinct each market, competition from
    other airlines is an important factor Markets

    affecting fare levels. Airlines generally charge higher fares to business
    passengers and lower fares to leisure passengers based on their differing
    travel needs, along with passengers? differing abilities and willingness to
    pay for travel. Airlines do not directly set fares based on the costs of
    providing individual flights. Because most of the costs of operating an

    airline are fixed, an airline?s ability to earn profits depends on its
    ability to maximize passenger ticket revenues. Major Airlines Assess the

    Airlines set fares for travel between specific origins and destinations
    based Supply of Air Travel in largely on the competitive amount of
    transportation services from other Setting Fares

    airlines offering similar services. Different airlines may supply
    transportation services in a given market, although the service they provide

    can vary (e. g., nonstop as opposed to connecting flights). Passenger demand
    for those products likewise varies, depending on a traveler?s particular
    objectives.

    Airlines may compete for passengers in a market through various ways- for
    example, through price and service quality. Service quality may differ
    according to various dimensions, but can generally be expressed in terms of
    the type of aircraft used (jet or turboprop), connections made on a flight
    (nonstop or connecting), and service quantity. 11 The quantity of service

    supplied is a reflection of the number of seats available for purchase in a
    market, which depends both on the size of the aircraft operated and how
    frequently service is provided in the market. The amount of competition from
    other airlines supplying similar service is a key factor in determining the
    price of an airline ticket. Markets where

    competition is limited tend to have higher fares than markets with more
    competition. Many markets to and from airlines? hubs- which are usually
    dominated by those airlines- often have relatively little nonstop
    competition. 12 This is especially true in markets between a carrier?s hubs.
    Some research has shown that fares in those markets tend to be relatively

    higher than fares in other markets. For example, in January 2001, DOT
    concluded that market power exercised by major airlines at their hubs led

    11 We have traditionally measured service quality using these criteria. See,
    for example, Airline Deregulation: Changes in Airfares, Service Quality, and
    Barriers to Entry (GAO/ RCED- 99- 92, Mar. 4, 1999). That report noted that
    there are other measures of service quality as well, such as on- time
    performance. 12 Following definitions applied by us in earlier reports, an
    airport is considered ?dominated? if a single airline carries more than 50
    percent of passenger enplanements there. For example, in 2000, US Airways
    dominated Pittsburgh International Airport, as it carried about 86 percent
    of passenger enplanements there. Passenger enplanements represent the total
    number of passengers boarding an aircraft.

    to high fares at those dominated hub airports. 13 In addition, we reported
    earlier this year that major airlines dominated 16 of the 31 largest U. S.
    airports, at which about 260 million passengers traveled in 1999. Many of
    these airports also serve as airline hubs. Low- fare airlines competed at
    less than one- fourth of these airports. 14 Conversely, airfares tend to be
    lower in markets where more airlines compete. Thus, airlines operating hub-
    andspoke

    networks compete directly with one another for passengers flying between
    spoke communities, but connecting over their own hubs. 15 For example, nine
    airlines provide competing service between Baltimore,

    Maryland, and Portland, Oregon, via hubs such as Dallas/ Fort Worth, Texas
    and Atlanta, Georgia.

    Airlines also set fares based on the advantage of maintaining or increasing
    a flow of passengers through their hub airports. Consolidating a greater
    number of passengers on individual flights at hub airports reduces an
    airline?s costs of serving each passenger. This practice also helps make
    possible more frequent departures to a large number of cities, thereby

    making the airline?s services more attractive to travelers. 16 The
    Transportation Research Board (TRB), in its 1999 report on competition in
    the airline industry, observed that flight frequency is especially important

    13 Domestic Aviation Competition Series: Dominated Hub Fares, U. S.
    Department of Transportation, Office of the Assistant Secretary for Aviation
    and International Affairs, (Jan. 2001). Based on a comparison of fares at 10
    dominated hub airports, DOT estimated that 24. 7 million passengers in hub
    markets with no low- fare competitor paid on average 41 percent more than
    those flying in hub markets with low- fare competitors. DOT concluded

    that lack of low- fare price competition, not other factors such as a
    concentration of highfare business travelers, resulted in these higher
    prices. The Transportation Research Board noted that relatively higher fares
    at hubs may also reflect the costs of serving larger

    numbers of business passengers, including those costs associated with
    schedule frequency, but that the higher proportion of business passengers
    may also provide hubbing airlines the opportunity to raise fares above the
    cost of efficiently providing frequent service. 14 See Aviation Competition:
    Challenges in Enhancing Competition in Dominated Markets (GAO- 01- 518T,
    Mar. 13, 2001). 15 Anming Zhang, ?An Analysis of Fortress Hubs in Airline
    Networks,? Journal of Transport Economics and Policy, Vol. 30, No. 3 (1996),
    pp. 293- 308. 16 Oum, Tae Hoon, and others, ?Airline Network Rivalry,?
    Canadian Journal of Economics,

    Vol. 28, No. 4a (1995).

    to business travelers because many fly rather than drive to save time. 17
    Thus, airlines may set fares in some markets at levels designed to stimulate
    passenger traffic into their hubs, thereby benefiting their network as a
    whole, as well as many passengers and communities. Airlines Assess the
    Demand Airlines also take into account passengers? demands for their
    different for Travel by Passengers

    products when setting fares. The prices of airline tickets reflect not just
    With Different Needs When differences in the type of service provided, as
    discussed above, but also Setting Fares

    various conditions or restrictions that reflect different passengers? travel
    requirements. For example, some tickets allow passengers to obtain a full
    refund or to make changes to their itinerary without penalty, while other
    tickets include more restrictions on their use. The prices that airlines
    charge for such different tickets vary accordingly. The industry generally
    segments potential passengers into two

    categories- those traveling for business purposes and those traveling for
    leisure purposes. These groups of passengers have different travel
    requirements. For instance, because business travelers must often make

    travel arrangements at the last minute, they value the ability to purchase
    tickets on short notice, make changes to their itineraries, and cancel
    reservations. Conversely, because leisure passengers are traveling for
    personal reasons, they tend to make reservations further in advance and keep
    such plans fixed. Leisure travelers also tend to be more sensitive to the
    cost of travel and are more likely to forego travel that does not fit in
    their budgets. Figure 3 identifies some of the assumptions that airlines
    make when distinguishing between types of passengers.

    17 Special Report 255: Entry and Competition in the U. S. Airline Industry:
    Issues and Opportunities, Transportation Research Board, National Research
    Council, Washington, D. C., 1999.

    Figure 3: Characteristics Associated With Business and Leisure Travelers

    Source: GAO?s summary of information provided by major airlines and economic
    literature.

    In general, business travelers tend to place greater value on tickets that
    (1) can be bought at the last minute to meet urgent needs, (2) entitle them
    to nonstop travel to their destination at the times they want or need to
    arrive,

    and (3) can be exchanged or cancelled without penalty. 18 These
    characteristics are typical of those demanded by business travelers, who
    tend to be less sensitive to airfare costs. Conversely, a ticket that allows
    a

    passenger to travel between two points but on connecting flights at offpeak
    times represents a different product for which airlines may charge a lower
    price. Airlines price the fares for tickets with these different features
    accordingly- setting higher fares for tickets with no restrictions, which

    they consider more valuable to business travelers and providing discounts on
    tickets that carry other restrictions or conditions, which are designed to
    appeal to leisure travelers. Figure 4 identifies the different
    characteristics of full- fare and discounted tickets.

    18 TRB?s 1999 report noted that fares paid by travelers in the same market
    can vary widely because of differences in the cost of traveling at different
    times of the day or week. Higher fares should be expected for travel during
    peak times when demand is greatest and resources are tight. Special Report
    255: Entry and Competition in the U. S. Airline Industry: Issues and
    Opportunities, Transportation Research Board, National Research Council,
    Washington, D. C., 1999.

    Figure 4: Characteristics of Full and Discounted Fares TICKET

    OF CO

    N

    DATE BOAR

    CONDITIONS TO CLASS

    SMOKE PASSENGER

    TO FLIGHT OF PASSENGER SUBJECT CARRIER

    SEAT

    CHECK

    SIDE NAME BAGGAGE ON REVERSE Chicago

    York

    GATE

    AND CONTRACT FROM

    New TIME

    AIRLINES TICKET OF DATE

    ABC CONDITIONS TO CLASS

    SMO

    PASSENGER TO FLIGHT PASSENGER

    SUBJECT CARRIER SEAT

    NAME OF Chicago

    FROM

    New York AIRLINES

    GATE

    ABC TO

    fare

    PASSENGER RE

    Full NAME OF Chicago

    FA X

    FROM

    York

    TA

    New fare

    TAX

    $1,420

    TO TOTAL

    Discount FA R

    E TA

    X TA

    X

    $191

    TOTAL

    Full Fare: Chicago- New York = $1,420 Discount Fare: Chicago- New York =
    $191

     No advance purchase requirements

     14- day advance purchase requirement

     Last seat availability on all flights

     Good, but limited, availability

     No minimum stay requirements

     Minimum stay requirement (Saturday night)

     Fully refundable and exchangeable

     Nonrefundable and nonexchangeable

     No travel restrictions

     Fee required to change travel times Source: GAO?s summary of information
    provided by major airlines and economic literature. Fares and fare rules
    obtained through Expedia. com on April 2, 2000.

    Because business travelers do not want to stay at a business destination
    over a weekend, airlines generally use a Saturday- night stay requirement to
    distinguish them from leisure travelers. According to some airline
    officials, airlines consider this distinction to be a more powerful tool
    than the advance purchase requirement to segment the market between business

    and leisure travelers. Given the requirements of business travel, business
    passengers often have no choice but to pay the fares set by the airlines.
    Business passengers generate a high percentage of the airlines? revenue.
    Estimates vary, but industry experts generally estimate that business
    travelers account for 30 to 50 percent of the passenger traffic and between
    60 to 80 percent of industry revenue. Airlines Have Some Since airlines
    primarily account for the supply of and demand for air

    Economic Justification for transportation services when setting fares, the
    relationship between fares Charging Higher Fares to

    and the cost that an airline may incur to operate a particular flight is
    Some Passengers complex. This relationship depends upon (1) consumer demand
    for different types of air service, (2) the cost of providing these
    services, and (3) the level of competition for these services in each
    market.

    A large portion of airlines? costs are fixed in advance, varying relatively
    little by flight or by the total distance flown. As a result, airlines can
    maximize profits best by maximizing the total amount of revenue they
    generate through each passenger ticket. For airlines, this also means
    charging higher airfares for products they consider more expensive to
    supply.

    Experts generally agree that there are economic justifications for airlines
    to charge higher fares for tickets that permit travelers to fly at the last
    minute, receive a refund for unused tickets, and change reservations without
    penalty. To keep seats available for passengers who book seats at the last
    minute, generally business travelers, airlines may limit the availability of
    discount fares for passengers who may have wanted to buy those seats several
    weeks before the flight?s departure. At the same time, however, the airlines
    risk not selling these seats at all. 19 Thus, when airlines price full- fare
    tickets, they take into consideration the high ?opportunity cost? of not
    selling those seats. Simply put, then, airlines may

    charge business passengers higher fares, in part, because they are more
    expensive to serve.

    19 For this reason, airlines view seats as perishable products-- that is, a
    product that loses all of its value, if it remains unused. An airline cannot
    sell unfilled seats once an aircraft pushes back from the gate. Other
    businesses, such as hotels, sell products with similar characteristics.

    From an airline?s perspective, this approach makes sense because of the
    relationship between fares and their costs. According to industry experts
    and airline officials, a high percentage of airline costs are fixed in
    advance of a flight?s departure. 20 Some of these fixed costs include
    capital costs

    (e. g., purchasing aircraft and operating airport facilities), labor costs
    (e. g., multiyear pilot contracts), and overhead. These costs change little,
    regardless of whether an aircraft is flying with a full load of high- fare
    passengers during peak business times or flying nearly empty late at night
    with leisure passengers. Because airline costs are largely predetermined,
    once schedules are set, airlines focus on generating as much revenue as

    possible from each passenger in each market rather than trying to cover
    these costs.

    TRB?s 1999 report on competition in the airline industry also stated that
    airlines may not be able to cover the total cost of providing frequent
    service without the ability to charge different fares to different
    passengers, particularly higher fares to business passengers. 21 In
    industries such as commercial aviation, which is characterized by relatively
    high fixed costs and low marginal costs, uniform prices set at marginal
    costs may not recover an airline?s total costs unless it is able to charge
    different prices to different buyers (an economic action known as ?market
    segmentation?),

    reflecting those passengers? different sensitivities to airfare costs. If an
    airline were not able to use market segmentation (i. e., differentiating
    between business and leisure passengers), it might not be able to cover the
    total cost of providing frequent and extensive service. As a result, certain
    groups of passengers- whether business, leisure, some combination of both,
    or those in particular communities- who valued the service would

    not, for instance, be able to fly as frequently. Thus, the ability of
    airlines to use market segmentation may be advantageous to airlines and some
    consumers. 22 However, there is debate among experts about the extent to 20
    These estimates vary. For instance, as indicated by one set of experts,
    approximately 80 to 90 percent of total airline costs may be fixed far in
    advance of individual flights. See Paul Stephen Dempsey and Laurence E.
    Gesell, Airline Management: Strategies for the 21 st Century (Chandler
    [Ariz.]: Coast Aire Publications, 1997). 21 Special Report 255: Entry and
    Competition in the U. S. Airline Industry: Issues and Opportunities.
    Transportation Research Board, National Research Council, Washington, D. C.,
    1999. 22 TRB?s 1999 report notes that price discrimination in the airline
    industry might not be particularly desirable in the long term unless it can
    be tested by open entry and competition.

    which such price differentiation is beneficial to consumers, and whether
    less price dispersion would be more beneficial.

    At the same time, however, TRB?s 1999 report noted that airlines may have
    become too skilled at identifying passengers who are less sensitive to
    paying high prices-- business passengers-- and too eager to charge them

    ?excessive? fares above the level necessary to provide service. The report
    also notes that a protection against an airline?s ability to charge
    excessive fares is the ability of new airlines to enter those markets and
    compete.

    Challenges Remain to Relatively high airfares are a reflection, in part, of
    how individual airlines

    Effectively Oversee and dominate airports and markets. As noted earlier, in
    1999, major airlines Promote Competition

    dominated 16 of the 31 largest U. S. airports, facing low- fare competition
    at just 3 airports. 23 Although dominance at an airport, in and of itself,
    is not anticompetitive, research has shown that routes to and from dominated
    airports tend to have higher airfares than routes to and from airports that
    have more competition from other airlines. In addition, dominant carriers
    often have exclusive access to essential facilities at airports, as well as
    sales and marketing practices, which combine to limit the ability of new
    entry carriers to enter markets and compete with them.

    23 Consistent with previous reports on airline competition, we adopted DOT?s
    definition of a competing airline as one with a market share of 10 percent
    or more. See, for example, Aviation Competition: Issues Related to the
    Proposed United Airlines- US Airways Merger (GAO- 01- 212, Dec. 15, 2000).
    In this report, we adapted that definition to include only airlines with 10
    percent or more of available scheduled seating capacity.

    As we reported in March 2001, the federal government faces significant
    challenges in enhancing competition, particularly in dominated markets. In a
    recent case involving alleged predatory practices, DOJ exercised its
    authority under the Sherman Antitrust Act to prevent monopolization by
    filing a complaint against American Airlines. DOJ alleged that American

    violated the Sherman Act by attempting to monopolize service out of Dallas-
    Fort Worth by increasing capacity and reducing fares "well beyond what makes
    business sense,? to drive new competitors, such as Vanguard and Western
    Pacific Airlines, out of the market. However, in April 2001, the federal
    district court in Kansas granted summary judgment for American. 24 DOJ has
    since announced that it is appealing that ruling.

    DOT generally has not taken enforcement action against airlines for alleged
    anticompetitive behavior concerning airline mergers and predatory practices.
    25 This includes the period during the 1980s when DOT approved a wave of
    mergers, such as Trans World Airline?s (TWA?s) acquisition of Ozark, as well
    as more recently, with respect to DOT?s authority to prohibit unfair methods
    of competition (e. g., predatory practices). While DOT is not required to
    take action to ensure or enhance competition, it has taken

    some actions more recently to enhance competition, such as using its
    authority to grant more slots to new entrants. DOT has used this authority
    to investigate several complaints of predatory practices by major air

    carriers against new entrants. Based on these complaints, in April 1998, DOT
    proposed guidelines for the use of DOT authority over predatory practices.
    However, DOT did not finalize or implement those guidelines, since the DOT
    Secretary decided that DOT should adopt standards through

    24 In another case dealing with an airline merger, DOJ successfully opposed
    the proposed Northwest- Continental merger using its authority under the
    Sherman and Clayton Antitrust Acts and the Hart- Scott- Rodino Act to review
    airline mergers and prohibit anticompetitive behavior. Proposed in 1998,
    this acquisition would have given Northwest 51 percent of the voting rights
    in Continental. In January 2001, DOJ withdrew its lawsuit when Northwest
    agreed to divest all but 7 percent of its voting interest in Continental.
    However, according to Continental officials, Northwest still retains the
    right to block certain change of control

    transactions. 25 DOT has no current authority to approve mergers, but it
    does have general authority under 49 USC 41712 to act against what it
    considers to be an unfair or deceptive practice or an unfair method of
    competition in air transportation.

    a case- by- case approach. 26 The extent to which DOT?s authority under
    section 41712 applies to predatory practices is unclear. 27 Because DOT has
    not exercised its authority in the area of predatory practices, the way in
    which this provision will be interpreted and applied is unclear.

    Airlines? Pricing Hidden- city and back- to- back ticketing opportunities
    exist because of the Practices, Coupled

    way in which airlines maximize revenue by setting fares that vary according
    to market and type of passenger. Hidden- city opportunities may With Varying
    occur when airfares in markets between spoke communities are less than
    Consumer Demand and in markets to and from airline hub airports. Differences
    in the amount and Competition, Produce

    type of competition from other airlines often explain variations in fares.
    In turn, back- to- back ticketing opportunities occur because airlines are
    able Hidden- City and Backto- to charge different fares to business and
    leisure passengers. The contract Back Ticketing of carriage allows the
    airlines to prohibit certain uses of tickets, thus letting the airlines
    differentiate between types of passengers. Opportunities

    Limited Competition From The extent and type of competition in various
    markets- and particularly Other Airlines Into Hub the differences in fares
    that result from that competition- help create the

    Airports Contributes to the conditions under which hidden- city ticketing
    opportunities may occur. If Creation of Hidden- City an airline faces little
    or no competition for nonstop service in markets to or from one of its hubs,
    especially from low- fare carriers, it may set airfares in Opportunities

    that market at high levels. As noted earlier, many markets to and from
    airlines? hubs often have relatively little nonstop competition. Conversely,
    in markets between spoke cities, where more competition exists from other
    carriers for connecting service, fares may be relatively lower. As a result,
    the combination of competition in two markets- first, to an airline?s

    26 The Secretary stated in January that DOT?s review of the TRB report on
    the proposed guidelines, along with additional analyses, confirmed that
    airlines engage at times in unfair competitive practices designed to
    eliminate or reduce competition and that it should take action to prevent
    such practices. 27 Under 49 U. S. C. 41712, DOT has the authority and the
    responsibility to prohibit an unfair or deceptive practice or an unfair
    method of competition in the airline industry, which allows DOT to block
    anticompetitive practices that violate antitrust principles. This authority
    was intended to protect consumers from trade practices, which are unfair,
    misleading, contrary to recognized public policy, or a violation of
    antitrust laws or principles. Acting under this authority, DOT has
    promulgated regulations and taken enforcement actions in such areas as
    computer reservation systems, airline advertising, and the notice that
    airlines must give passengers of contractual terms between the passenger and
    the carrier.

    hub where less competition may exist for nonstop service and second, to
    another location that may be served by numerous airlines with competing
    service- can create a hidden- city ticketing opportunity at an airline?s
    hub.

    Figure 5 illustrates that the degree to which competition exists in
    different markets can create a hidden- city ticketing opportunity. It shows
    the various routes through which passengers could have traveled from Chicago
    (O?Hare) to Dallas/ Fort Worth, and from Chicago (O?Hare) to San Antonio
    that connected at Dallas/ Fort Worth and other airlines? hubs. Because of
    the differences in airfares for nonstop travel between Chicago and Dallas
    and for connecting travel from Chicago to San Antonio, a hidden- city
    opportunity may exist for travel to Dallas. The fares for nonstop travel

    between Chicago and Dallas (available on two airlines) were $1,085. Five
    other airlines offered travel from Chicago to San Antonio, connecting at
    cities other than Dallas, that had fares ranging from $739 to $1, 108. 28 To
    compete with those prices, the fare from Chicago to San Antonio on an

    airline that connects at Dallas was $904. (Southwest also provided
    connecting service to San Antonio, but its flights originated at Chicago?s
    Midway Airport. 29 ) Because of the fares and services other competing
    airlines offered between Chicago and San Antonio, a hidden- city ticketing
    opportunity exists for travelers on one air carrier between Chicago and
    Dallas.

    28 Fare data obtained on May 30, 2001, for travel beginning May 31, 2001,
    and returning June 1, 2001, from Expedia. com. 29 Not all travelers may
    regard alternative airports in the same metropolitan area as substitutes for
    one another. This is particularly true for more time- sensitive business
    travelers, who may consider alternative airports to be less convenient for
    the purposes of their trip. See, for example, Reagan National Airport:
    Capacity to Handle Additional Flights and Impact on Other Area Airports
    (GAO/ RCED- 99- 234, Sept. 17, 1999).

    Figure 5: Example of How Competition to a Spoke Community May Create a
    Hidden- City Ticketing Opportunity

    Source: GAO?s presentation of May 2001 schedule data from the Kiehl
    Hendrickson Group.

    Back- to- Back Ticketing The potential for back- to- back ticketing is
    created by the ability of airlines Opportunities Result From

    to maximize their profits by charging different fares to different consumers
    Airlines? Pricing Practices on the same flight. More specifically, this
    opportunity exists because and Ticketing Restrictions, airlines use the
    Saturday night stay requirement to prevent business passengers from
    obtaining fare discounts typically reserved for leisure Which Vary by Market

    passengers. Because major network airlines can use this requirement to
    differentiate their fares in all markets, this ticketing opportunity
    potentially exists in all markets. The savings that a passenger could
    realize by using back- to- back ticketing

    varies by market and by airline. Table 3 shows that passengers traveling
    between Atlanta, Georgia and Dallas/ Fort Worth, Texas who booked tickets
    less than 6 days in advance of travel could have saved $368 by booking a
    ticket with a Saturday night stay requirement. The amount of potential
    savings generally increases the further in advance of the travel that a

    passenger purchases the ticket. Table 4 shows that a passenger traveling
    between Pittsburgh, Pennsylvania, and Charlotte, North Carolina, who booked
    tickets 1 day in advance would have saved nothing. On the other hand,
    travelers who booked 2 weeks in advance could have saved $253, and

    those who booked 4 weeks in advance could have saved $645.

    Table 3: Roundtrip Fares for Travel Between Atlanta and Dallas/ Fort Worth
    Advance purchase requirement to obtain discount round- trip fares

    for nonstop service between Atlanta and Dallas/ Fort Worth 1- day 7- day 14-
    day 21- day 28- day

    Fare without a $775 $625 $625 $625 $625

    Saturday night stay over

    Fare with a $407 $309 $203 $203 $203 Saturday night stay over

    Difference $368 $316 $422 $422 $422

    Source: These data were obtained from the Delta?s Web site on May 31, 2001,
    for departures on June 4, June 11, June 18, June 25, and July 2, 2001. These
    fares reflect those available to passengers willing to purchase fares at
    various time intervals (e. g., 14 days) prior to departure and

    may be subject to various other restrictions (e. g., nonrefundable). The
    time intervals represent full business days, not calendar days.

    Table 4: Roundtrip Fares for Travel Between Pittsburgh and Charlotte Advance
    purchase requirement to obtain discount round- trip fares for nonstop
    service between Pittsburgh and Charlotte

    1- day 7- day 14- day 21- day 28- day

    Fare without a $902 $902 $902 $902 $902

    Saturday night stay restriction

    Fare with a $902 $902 $649 $257 $257 Saturday night stay restriction

    Difference $0 $0 $253 $645 $645

    Source: These data were obtained from the US Airways? Web site on May 31,
    2001, for departures on June 4, June 11, June 18, June 25, and July 2, 2001.
    These fares reflect those available to passengers willing to purchase fares
    at various time intervals (e. g., 14 days) prior to departure and

    may be subject to various other restrictions (e. g., nonrefundable). The
    time intervals represent full business days, not calendar days.

    These tables also illustrate that, because of differences in the amount of
    potential savings, a traveler?s ability to circumvent the Saturday night
    requirement can be more difficult in one market than in another because of
    the need to book tickets further in advance.

    Enforceable Fare Rules Most major airlines attempt to restrict passengers
    from using hidden- city

    Allow Airlines to Prevent and back- to- back ticketing. Southwest, however,
    does not prohibit or Passengers From Using penalize passengers from using
    back- to- back and hidden- city ticketing. Hidden- City and Back- toBack

    According to Southwest officials, because it largely prices its tickets
    based on travel between two points, and it is a carrier that seeks to use
    its low Ticketing

    fares to stimulate travel by people who might not otherwise fly, Southwest?s
    fares are more closely aligned with the distance traveled by a passenger.
    Thus, the fare differentials that could motivate passengers to use
    hiddencity and back- to- back ticketing on other major airlines are less
    likely to exist on Southwest.

    The six airlines that are the focus of our data analysis prohibit the use of
    hidden- city and back- to- back opportunities and told us that they take
    actions to discourage passengers from using them. These airlines prohibit
    the use of such practices in their contracts of carriage. These contracts
    set out the terms and conditions that passengers must follow when they
    purchase a ticket, which incorporates the terms of these contracts by
    reference. 30 The contract also establishes the terms under which the
    airlines must transport the passenger. For example, these contracts include
    provisions that establish liability limits for lost baggage, passenger
    entitlements when flights are delayed or canceled, and prohibitions against
    back- to- back and hidden- city ticketing practices. Terms and conditions of
    this contract are legally binding on both the airline and the passenger and
    may be enforced by either party in court. Therefore, if a passenger fails to

    comply with these restrictions on how a ticket may be used, the airline has
    the right to cancel or confiscate the unused portion of the passenger?s
    ticket or demand the passenger or the travel agent who sold the ticket to
    pay the difference in value- that is, airlines have the right to receive the

    full- fare cost of the ticket. 30 For example, United?s Rule 100 indicates
    that valid tickets entitle a passenger to transportation only between the
    points of origin and destination specified by the ticket, via the designated
    routing, and that flight coupons will be honored only in the order in which
    they are issued and only if all unused flight coupons and the passenger?s
    coupons are presented together.

    Airline officials told us that they use various systems to detect hidden-
    city and back- to- back ticketing but most could not supply us with
    estimates describing how often passengers have used such opportunities.
    Although they did not provide us estimates, airline officials believe that
    few passengers use hidden- city opportunities because most airlines
    automatically cancel the balance of a passenger?s reservation whenever a
    passenger fails to use one portion of a ticket. For example, if a passenger
    flies round- trip from the East Coast to Los Angeles via Pittsburgh and

    deplanes at Pittsburgh rather than Los Angeles, an airline would cancel the
    balance of the passenger?s reservation because it considers that passenger a
    ?no- show.? While most airlines did not provide data on the extent to which
    back- to- back ticketing occurs, five airlines appeared to have or

    referred to some data on the extent to which this ticketing practice was
    occurring. 31 Officials representing airlines that could detect the use of
    this practice reported that they had or were willing to take measures to
    obtain revenue lost due to use of this practice. For example, these
    officials reported that they would require travel agents who violated their
    contractual agreement with the airlines by selling tickets that were used by
    passengers to circumvent airline ticketing rules to compensate them for
    revenue lost due to these practices. Airlines, however, did not have data to
    show us how often this was done. Some airlines also reported that they were
    in the process of developing technology that would allow them to more
    rigorously monitor the use of back- to- back ticketing.

    Various consumer advocates recognize that passengers who use back- toback
    and hidden- city ticketing can be potentially identified and penalized by
    the airlines. While these advocates generally believe that consumers should
    be able to use these practices, none recommended that passengers

    attempt to circumvent the current fare rules. 31 This information was not
    available for us to report because the airlines considered these data to be
    proprietary. See app. I for additional information on the agreements that we
    made with airlines pertaining to the use of information considered to be
    ?business confidential.?

    Requiring Airlines to According to industry experts and airline officials,
    if legislation required Allow Hidden- City airlines to permit hidden- city
    ticketing, airfares in certain markets could

    increase immediately-- especially those to and from some smaller Ticketing
    Could Result communities. Our analysis of hidden- city opportunities within
    selected in Higher Fares and markets found that the availability of those
    opportunities varied among

    Possibly Decreased airlines. However, our analysis indicates that business
    travelers tend to

    have a greater opportunity to acquire hidden- city tickets than leisure
    Service, Especially to travelers. Furthermore, more markets between
    communities of all sizes Smaller Communities could offer hidden- city
    ticketing opportunities, but those markets with smaller communities were
    more likely to offer such fares. According to industry experts, if passenger
    traffic subsequently fell because of higher airfares, carriers could
    decrease or eliminate service from some or all of those smaller community
    markets. Our analysis suggests that because

    smaller communities generally have fewer airlines than larger communities,
    they could be more vulnerable to decreased or lost air service.

    Hidden- City Opportunities Both industry and airline officials acknowledged
    that hidden- city ticketing Vary Among Carriers and opportunities exist
    throughout each carriers? network. These officials also Markets

    noted that business travelers might find saving money through the use of
    hidden- city ticketing attractive to them. Even business travelers who have
    corporate rates with a particular carrier might use these opportunities. 32
    32 Airlines sometimes enter into agreements with corporate clients (known as
    corporate incentive agreements) that represent offers by airlines for fares
    that are discounted from the prices that are otherwise applicable. They may
    be stated as percentage discounts from specified published fares.

    Our analysis of fare data on selected markets for six major U. S. passenger
    airlines supported what both industry and those airline officials stated
    about the availability of hidden- city opportunities. Of the 2,302 markets
    we examined, 398 (17 percent) provided such opportunities. 33 We found that
    hidden- city fares existed on each airline?s network, although the number

    varied widely among carriers. As figure 6 illustrates, the number of
    hiddencity ticketing opportunities ranged from 140 (nearly 35 percent) for
    one carrier to 9 (about 2 percent) for another. 33 Our review was evenly
    divided between business and leisure travelers with 1,151 markets

    examined for each type of traveler. We defined a hidden- city ticketing
    opportunity to exist for business travelers if the difference in airfares
    between the hub market and the spoke airport was $100 or more. For leisure
    passengers, we defined a hidden- city ticketing opportunity to exist if the
    difference in airfares was $50 or more. See app. I for further details on
    the methodology used for this review.

    Figure 6: Hidden- City Ticketing Opportunities Available From Selected
    Markets for Six Major U. S. Passenger Airlines

    Source: GAO?s analysis of airline fare data collected during January and
    February 2001. The majority of hidden- city ticketing opportunities existed
    for business fares. 34 Of the 398 markets in which we found such
    opportunities, 364 (91 percent) existed only for business travelers and 34
    (9 percent) existed for leisure travelers. Figure 7 shows the distribution
    of the number of hiddencity ticketing opportunities between the 2,302
    markets that we reviewed.

    34 For purposes of our analysis, we defined business fares as those
    purchased for travel beginning the next business day and returning at least
    1 day later, but prior to a Saturday. We defined a leisure fare as that
    purchased at least 21 days in advance and including a Saturday night stay.

    Figure 7: Availability of Hidden- City Ticketing Opportunities to Total
    Markets Examined

    Source: GAO?s analysis of airline data.

    Analysis of Airfare Data As noted earlier, economic literature, industry
    experts, and airline officials

    Supports Theory That suggested that hidden- city ticketing opportunities
    existed, primarily

    because of how competition affected airfares in different markets. 35 We
    Competition Creates statistically analyzed a variety of data for the 2, 302
    markets to determine Hidden- City Opportunities

    whether these explanations were valid and whether other factors might
    explain the existence of hidden- city opportunities. 36 We found that the
    extent these factors influenced hidden- city opportunities not only varied
    among different airlines, but also varied within individual airlines?
    networks. Our analysis revealed that the amount and type of competition

    in hub markets, along with the amount and type of competition from other
    airlines into the spoke markets, were statistically significant for the
    major carriers we examined. 37 That is, our analysis supported the theory
    that competition creates the conditions that foster hidden- city
    opportunities. For each airline, we analyzed all possible markets to which
    passengers

    could connect at the airline?s busiest hub airport from the three most
    heavily traveled inbound routes in 2000. We examined airfares in the markets
    to the airline?s hubs and to the spoke markets. We also examined

    the competition (in terms of the percentage of capacity scheduled) by all
    airlines that operated in those markets. Our analysis of data on each
    airline found that the relationship between competition from other airlines
    and the existence of hidden- city ticketing opportunities was statistically
    significant. That is, with each airline, we found that hidden- city
    opportunities were created by the combination of (a) the lack of competition
    from other carriers (either other major network airlines or low- fare
    airlines) into the airline?s hub and (b) greater competition from

    other airlines offering connecting service to the spoke communities. We 35
    Airline officials also indicated that some other factors independent of
    competition might cause an airline to price service to a spoke airport less
    than that to a hub. Those factors include changes in equipment type (e. g.,
    passengers traveling to smaller communities beyond the hub may have to fly
    on small turboprop aircraft, a perceived inconvenience for which the airline
    may extend a fare discount) and relatively high degrees of circuity (i. e.,
    forcing a traveler to double- back on a route to reach a destination, such
    as flying from Albany, New York, to Norfolk, Virginia, but connecting in
    Atlanta).

    36 We included several different factors in our analysis. These factors
    included a flight?s origin, the population of the destination city, the
    number of stops on a flight, the dominance of any one carrier on a route,
    and the competition between major and low- cost carriers between the origin,
    hub, and final destination of the flight. See app. I for additional

    information on our methodology. 37 We excluded one air carrier from this
    analysis because of the 266 business markets we examined for that airline,
    hidden- city opportunities existed in only 6.

    also found that for one airline, relatively high levels of competition from
    a low- fare carrier on one of its three most heavily traveled routes
    effectively eliminated the existence of hidden- city opportunities by
    restraining fares in that market. Because competition held down fares in the
    market to the

    hub, fares to spoke communities beyond that hub were higher. Yet we also
    found situations in which the analysis did not clearly support the theory
    that competition was responsible for creating hidden- city opportunities.
    For one airline, for example, we found that low- fare competition into the
    airline?s hub did not have the restraining influence on fares by the hub
    carrier that economic theory would have predicted. Despite the presence of a
    low- fare competitor, fares to the hub were still relatively high, thereby
    creating a situation in which the hub airline?s markets beyond the hub still
    presented large numbers of hidden- city opportunities. For another airline,
    we found large differences in the

    number of hidden- city ticketing opportunities potentially available beyond
    two different hub markets. However, the two hub markets were similar in
    terms of the competition that the airline faced from low- fare carriers and
    other major carriers. Thus, competition from low- fare airlines to that
    carrier?s hub did not explain whether the hub airline?s pricing strategy

    presented hidden- city opportunities or not. Airline and Industry

    Airline officials stated that requiring carriers to permit hidden- city
    ticketing Officials Indicate That could produce broad changes throughout
    their networks. Independent Airlines May Raise Fares

    industry experts (financial analysts, academics, and consultants) and
    Decrease Service, concurred, noting that requiring airlines to permit
    hidden- city ticketing could cause airlines to lose revenue, if they did not
    alter their fares or Especially to Small pricing strategies. However, these
    same officials stated that the airlines

    Communities, If Hidden- City would likely make immediate changes to their
    pricing strategies, raising Ticketing Is Permitted

    fares in markets that now have hidden- city opportunities. If passenger
    traffic eventually declined in those markets in response to the increased
    airfares, airlines might decrease or eliminate service to minimize their
    losses. Our analysis indicated that a disproportionate percentage of cities

    that might be affected would be small communities. According to airline and
    other industry officials, requiring airlines to permit hidden- city
    opportunities would cause them to lose revenue in two ways. First, it would
    allow passengers to obtain seats costing less than what the airline intended
    for a given product. An airline?s potential loss of revenue from hidden-
    city ticketing on business fares could be considerable. For the 398 markets
    that we identified in which potential hidden- city opportunities

    existed, we found that the difference between the fares for travel to the
    hidden- city hub airport and fares for travel to the spoke city ranged from
    a low of $103 to a high of $1,954. That is, for each passenger that was able
    to take advantage of a particular hidden- city opportunity, the airline
    could lose between approximately $100 to $2000, depending on the route and

    hidden city traveled. Second, the airline may not have sold tickets for
    flights from the hub to the connecting city because the airline would not be
    aware of travelers? intentions to deplane at the hidden city. Consequently,
    the airline may have foregone revenue that it otherwise could have earned
    because seats that it potentially could have sold for more money to other

    passengers went vacant. For example, a flight from Chicago to San Antonio
    with a connection in Dallas could cost $904, as opposed to $1, 085 from
    Chicago to Dallas. If the passenger deplanes in Dallas, the hidden city, and
    the seat is vacant from Dallas to San Antonio, the airline potentially lost
    about $594- the fare for travel between Dallas (the hub) and San Antonio
    (the spoke city)-- assuming that the flight otherwise was

    full- plus another $181 for the difference between the hidden ticket and the
    cost of a ticket between Chicago and Dallas. Industry and airline officials
    believe that, besides causing potential revenue losses by airlines,
    permitting hidden- city ticketing would also hinder the airlines? ability to
    manage their operations, at least in the near term. Until

    such time as they are able to acquire sufficient data on the extent to which
    passengers use only part of their tickets, airlines could have problems
    determining the optimal capacity (i. e., size of aircraft and flight
    frequency) to schedule in specific markets. To reconcile its capacity with
    actual passenger traffic in those markets, airlines may change the extent to
    which they overbook those markets. If unusual numbers of passengers did not
    deplane at the hidden city on a given flight, then the airline could incur
    some passengers? dissatisfaction from being denied boarding on the last
    flight segment. Furthermore, a requirement permitting hidden- city ticketing
    could also prevent airlines from pricing tickets based, at least in part, on
    the real demand for travel between specific locations, thereby

    undermining the airlines? ability to manage their networks profitably.

    To reduce potential losses, airline officials and industry experts stated
    that airlines would, in all likelihood, immediately increase fares for
    travelers in markets that formerly presented hidden- city ticketing to
    eliminate those opportunities. Based on our analysis, we believe that
    business travelers could be those facing these fare increases. As a result
    of these fare increases, some travelers, including price- sensitive leisure
    travelers, might choose not to fly. Thus, in the long term, with less
    passenger flow to the hub, airline officials told us that they would likely
    decrease or eliminate the level of service provided to communities with
    relatively little passenger traffic, opting instead to concentrate on
    maintaining service to more heavily traveled and profitable markets. 38 Both
    industry and airline

    officials concurred that smaller communities would be most likely to
    experience decreases in service.

    Our analysis tends to support the hypothesis that smaller communities would
    be at risk for decreased air service or might possibly lose service
    entirely.  First, while communities of all sizes presented hidden- city

    opportunities, the relationship between hidden- city opportunities and
    community size was statistically significant. Our analysis indicates that
    smaller- city markets were statistically more likely than larger- city
    markets to present hidden- city ticketing opportunities. 39 This was true
    for four of the five air carriers analyzed. 40 Table 5 shows the
    distribution of markets analyzed, by size of spoke communities.

    38 One expert observed that additional analysis would be necessary to
    conclusively determine whether service reductions would occur in specific
    markets. He noted that this determination would require an analysis of
    flight profitability reports (e. g., reflecting the amount of revenue from
    nonstop and connecting passengers) for each market. 39 For presentational
    purposes, we collapsed the communities into four categories but these
    categories mask the full range of community sizes that were captured by our
    statistical analysis. We performed our analysis, and thus our test of
    statistical significance, prior to collapsing the communities into four
    categories. We did so to capture the entire variation of community sizes
    relative to the presence of a hidden- city opportunity. Therefore, while the

    table may suggest that small communities were not more likely to have a
    hidden- city opportunity than medium- large ones, we did in fact find a
    statistically significant relationship when examining this association
    across the full range of community sizes. 40 We excluded one air carrier
    from this analysis because of the 266 business markets we

    examined for that airline, hidden- city opportunities existed in only 6
    markets. See app. I for additional information on how we determined
    statistical significance.

    Table 5: Size of Communities and Hidden- City Ticket Opportunities in
    Selected Markets Hidden- city No hidden- city Community ticket

    ticket size Measure

    opportunity opportunity Total

    Large Number 122 314 436 Row percent 28% 72% 100% Medium- large Number 129
    258 387

    Row percent 33% 67% 100% Medium Number 73 133 206

    Row percent 35% 65% 100% Small Number 40 82 122

    Row percent 33% 67% 100%

    Total Number 364 787 1, 151 Row percent 32% 68% 100%

    Source: GAO?s analysis of data from the airlines? Internet Web sites and the
    U. S. Bureau of the Census.

     Second, smaller communities generally have fewer airlines providing
    service than larger communities. If an airline that operates to a smaller
    community would decide to decrease or discontinue its flights, the community
    would be more vulnerable to monopolized air service.

    The 364 business hidden- city ticketing markets represented service to 172
    different communities. 41 For 36 of those 172 communities, air service is
    provided by only 1 air carrier. That is, one airline effectively monopolized

    service to and from these communities. (No other airline offered 10 percent
    or more of scheduled capacity.) For the 136 remaining communities, more than
    one airline provided service. If one of the airlines decided to discontinue
    service, an additional 49 of those 136 communities would have virtually no
    airline competition, and another 45 communities would have service from only
    2 competitors. (See table 6.) In other words, if one airline eliminated
    service to those communities, nearly half of them

    would receive only monopoly air service. 41 A single community can present
    multiple hidden- city opportunities, as different airlines can serve the
    same community over different hubs.

    Table 6: Size of Communities Producing Hidden- City Opportunities and Number
    of Competing Airlines Serving Those Communities Number of airlines at those
    communities Population category of communities presenting hidden- city
    opportunities 4 or more 3 2 1 Total

    Large 13 17 13 1255 Medium- large 24 15 11 5 55 Medium 4 9 18 3 34 Small 1 4
    7 16 28

    Total 42 45 49 36172

    Source: GAO analysis of data from airline Internet Web sites and the U. S.
    Bureau of the Census.

    Because small and medium- sized communities generally have fewer airlines
    providing air service, those communities would be more vulnerable to a loss
    of service. Of the 62 small- and medium- sized communities, 19 receive
    service from only one airline. Thus, for those medium and small communities
    currently with air service provided by 2 air carriers, if one of these
    competing airlines discontinued service, the total number of

    communities with air service by one carrier would increase by 25. Those
    communities would thus be more vulnerable to potential fare increases and/
    or capacity reductions (decreases in service through some combination of a
    drop in flight frequency and/ or the use of smaller aircraft in the market)
    associated with the exercise of market power, due to the lack of
    competition. 42 For example, Dubuque, Iowa- a small community- could be
    adversely affected by a loss of service if hidden- city ticketing were
    allowed. Three major carriers provide service to Dubuque. A business
    traveler flying from Los Angeles to Chicago could book a flight to Dubuque
    and take advantage of a hidden- city opportunity that could save a traveler
    $286. Should any one of the three carriers decide to eliminate the hidden-
    city opportunity and thus lose passengers on the route, it might discontinue
    service to 42 This would appear to illustrate the ?other side? of hidden-
    city ticketing- that it provides some lower airfare benefits to consumers,
    particularly those in small- and medium- sized spoke cities, relative to
    those in larger communities for travel to other communities beyond the hub.

    Dubuque because of the lower passenger traffic, leaving Dubuque with only
    two carriers.

    Allowing Back- to- Back Requiring airlines to allow back- to- back ticketing
    would, in effect, prevent Ticketing Could Result

    them from using the Saturday night stay requirement to segment their market
    between business and leisure passengers. Because business In Higher Fares
    for

    passengers- according to the airlines? assessment- prefer to return home
    Leisure Passengers

    before the weekend, airlines use this restriction to reserve more steeply
    discounted fares for leisure passengers. Thus, by design, the desired
    outcome of permitting back- to- back ticketing would be to allow those
    business passengers who can purchase tickets in advance and use them out of
    sequence to take advantage of the reduced fares typically accessible to
    leisure passengers.

    In theory, permitting the use of back- to- back ticketing would appear to
    allow some business passengers to save money when purchasing tickets.
    However, according to some airlines, most of their full- fare passengers (e.
    g., about 70 percent) tend to buy their tickets within 6 days of travel.
    Thus, use of back- to- back ticketing may only benefit those passengers who
    can purchase tickets a week or more in advance of travel. For example,
    business travelers who use this practice for a flight between Atlanta and
    Dallas/ Fort Worth, as shown earlier in table 3, could save money ($ 368)
    without purchasing a ticket in advance. However, in other markets, a

    business passenger would need to purchase tickets weeks in advance to use
    this opportunity. For example, passengers traveling between Charlotte and
    Pittsburgh, as shown earlier in table 4, would have to purchase tickets at
    least 14 days in advance to save money ($ 253). In addition, some business
    passengers could be dissuaded from using this practice because the tickets
    they would purchase would not convey all the benefits of a fullfare

    ticket, such as last- seat availability or the ability to change
    reservations without a penalty.

    However, if back- to- back ticketing were permitted, those business
    passengers who could, theoretically, benefit from this practice might not
    realize these potential savings because airlines would likely respond to
    their anticipated losses by making discounted fares more difficult to
    obtain. They might require, for instance, that their more deeply discounted

    fares be purchased further in advance. Airline officials proposed to us, and
    industry experts agreed, that airlines would probably increase advance
    purchase fares or make these fares more difficult for business passengers

    (and others) to obtain. The officials and experts agreed that allowing
    backto- back ticketing could result in an increase in fares for leisure
    passengers and that such an increase would likely discourage some price-
    sensitive

    passengers from flying with these airlines. Should the number of leisure
    passengers decline sufficiently, some airlines would consider decreasing
    capacity (e. g., by operating smaller aircraft or making fewer flights) in
    some markets. 43 Thus, potentially, airlines could lose revenue from two

    different sources: (1) from business passengers who would benefit from lower
    fares though the use of back- to- back ticketing and (2) from leisure
    passengers, because increased fares might prevent these price- sensitive
    passengers from flying.

    For example, one airline estimated that it might lose between $150 to $180
    million annually if back- to- back ticketing were permitted. These
    projections were based on two different ways in which the airline could
    respond. If the airline did not adjust its fare structure, it anticipated
    losing about $180 million annually. However, the airline projected that it
    could lose $150 million annually, if it increased its advance purchase fares
    and required that its more deeply discounted fares be purchased further in
    advance. In response to this hypothetical decision, the airline predicted

    that these changes would not only be likely to discourage some business
    passengers from using back- to- back ticketing but would also be likely to
    discourage price- sensitive leisure passengers from flying with this
    airline. While we did not have access to the data to verify the legitimacy
    of these estimates, and thus cannot endorse them, we think that these
    estimates demonstrate the concerns and options that airlines would consider
    should

    back- to- back ticketing be permitted. 43 One expert observed that
    additional analysis would be necessary to conclusively determine whether
    service reductions would occur in specific markets. He noted that this
    determination would require an analysis of flight profitability reports (e.
    g., reflecting the amount of revenue from nonstop and connecting passengers)
    for each market.

    It is nevertheless difficult to forecast the extent to which permitting
    backto- back ticketing would increase fares and potentially discourage
    leisure passengers from flying. First, as previously discussed, this
    practice is not easy to use and, in some markets, only business passengers
    who can purchase their fares in advance would be able to take advantage of
    this opportunity. For instance, the airline providing the example above

    estimated that about 70 percent of their full- fare passengers purchase
    their tickets within 6 days of departure and most would still choose to
    purchase full- fare products. Second, while airlines advised us that they
    would

    increase fares, some also advised us that they would make their decisions on
    a market- by- market basis, depending on the impact that change had on the
    demand for air transportation services in a given market. Third, the number
    of leisure passengers who would seek alternative means of transportation, or
    not travel at all, would depend on the amount of the fare

    increase and perhaps the willingness of these passengers to plan further
    ahead to obtain fare discounts. Numerous variables, therefore, make it
    difficult to predict how airlines might respond if back- to- back ticketing
    were permitted. Still, based on our analysis of how airlines price their
    products and interviews with industry experts, we believe that airlines
    would, as their officials indicated, increase fares to some extent in
    markets where they anticipated losses. We would expect that potential fare
    increases would be market- specific because

    airlines would still take into consideration the amount of competition and
    demand for travel existing in individual markets when they set fares.
    Airlines did not specify the markets in which these increases would most
    likely occur. We believe, however, that these airlines would most likely
    reduce the availability of discount fares in major business markets (e. g.,
    New York- Los Angeles) because business passengers have the greatest
    incentive to use back- to- back ticketing. In the long run, if revenue

    decreased for the airlines, they might also decrease the number of flights
    to some locations experiencing a notable decline in passengers.

    Conclusions Restricting the ability of airlines to forbid hidden- city and
    back- to- back ticketing is unlikely to help consumers. Independent industry
    experts, along with airline officials, believe that legislating restrictions
    on airline pricing practices could lead airlines to take action-- such as
    raising airfares and decreasing service-- to reduce losses they would be
    likely to incur. Based on our analyses of fare data and economic literature,
    we believe that these positions are credible. While the extent of these
    potential losses would vary by market and airline, permitting passengers to
    use back- to-

    back and hidden- city ticketing would likely have unintended consequences
    that could hurt some consumers. Nevertheless, consumer advocates and
    passengers have legitimate concerns that some fares are higher than what
    might be expected in a more competitive market. Actions that promote
    competition would seem to offer more promise than

    imposing restrictions in assuring that fares reflect competitive pricing. As
    has been shown over time with research in the industry, and as is indicated
    by our analysis here, greater competition drives airfares lower. Research
    also demonstrated that dominated airports tend to have higher airfares than
    airports that have more competition from other airlines. These higher
    airfares provide business passengers the incentive to circumvent the fare
    rules of major carriers. Our analysis confirms the long- recognized

    significance of competition in controlling fares and accounting largely for
    the fare differentiation that gives rise to hidden- city opportunities.

    Comments We provided industry experts from the Brookings Institute, College
    of William and Mary, and Northeastern University and one consulting firm
    (Microeconomic Consulting & Research Associates, Inc.) the opportunity

    to review the analysis presented in our draft report. In addition, we
    provided our draft for evaluation to representatives from the Consumers
    Union and the American Society of Travel Agents- both of which had
    previously stated that the use of hidden- city and back- to- back ticketing
    should be permitted.

    The industry experts who reviewed our draft generally agreed with our
    conclusion that permitting back- to- back and hidden- city ticketing would
    not help consumers. They also agreed that the most important way to mitigate
    consumer incentives to use these practices would be to increase

    competition, especially at dominated hub airports. Where these individuals
    made comments, they tended to suggest that we revise our discussion of
    pricing. For example, one expert observed that airlines have a fundamental
    economic justification for using differential pricing (e. g., setting higher
    fares for passengers who purchase tickets at the last minute), which
    benefits both airline efficiency and overall consumer welfare. This expert
    emphasized that TRB reached the same conclusion. In response to this comment
    and others, we expanded the report?s description of ticket pricing. A
    representative from Consumers Union, while not supporting the current way in
    which airlines price tickets, likewise found credible our conclusion that
    legalizing hidden- city and back- to- back ticketing would be unlikely to
    help consumers. In contrast, a representative from the

    American Society of Travel Agents said that airlines could take actions to
    mitigate losses that might occur, in some markets, but that airline actions
    cannot be predicted at this time. This representative was not aware of any
    other studies that make such predictions. After incorporating the views of
    these experts, we provided copies of sections of our draft report for
    technical comment to the six major carriers (i. e., American, Continental,
    Delta, Northwest, United, and U. S. Airways) that we interviewed as part of
    our study. We also provided DOT with a copy of our draft report for its
    review and comment. Representatives of the airlines and officials from DOT
    offered technical comments, which we incorporated into the report as
    appropriate.

    If you or your staff have any questions about this report, please call me or
    Steve Martin at (202) 512- 2834. Other key contributors to this report are
    listed in appendix IV.

    JayEtta Z. Hecker Director, Physical Infrastructure Issues

    Appendi Appendi xes x I

    Scope and Methodology The Wendell H. Ford Aviation Investment and Reform Act
    for the 21 st Century mandated that we study the potential effects on
    consumers, especially those in small communities, of a requirement that air
    carriers permit passengers to use any portion of an airline ticket
    independently of the other without penalty. As agreed with the staffs of the
    aviation subcommittees, we assessed (1) the factors that airlines consider
    when setting fares; (2) the factors that create hidden- city ticketing and
    the

    pricing practices that foster back- to- back ticketing practices; (3) the
    potential effects on airfares and service, especially to consumers in small
    communities, of a legislative requirement to permit hidden- city ticketing;

    and (4) the potential effects on airfares and service of a legislative
    requirement to permit back- to- back ticketing. To assess the factors that
    airlines consider when setting fares, we reviewed relevant economic and
    other literature on competition within the aviation network, airline pricing
    practices, and the use of hub- and- spoke networks by air carriers. (App. 3
    contains a selected bibliography of the literature reviewed.) We also
    interviewed a broad range of independent industry

    experts (e. g., academicians and consultants), along with officials from the
    seven largest U. S. passenger airlines. See table 7 for additional
    information. Table 7: Organizations We Contacted

    Organizations interviewed

    Airlines American Airlines (American), Continental Airlines (Continental),
    Delta Air Lines (Delta), Northwest Airlines (Northwest), Southwest Airlines
    (Southwest), United Airlines (United), US Airways Academicians Northeastern
    University, Massachusetts Institute of

    Technology, Harvard Law School, the College of William and Mary Consultants
    Charles River Associates, LECG, Microeconomic

    Consulting & Research Associates, Inc. Consumer advocates Consumers Union,
    Business Travel Coalition, OneTravel. com Industry experts UBS Warberg, CIBC
    Oppenheimer, The Brookings Institution

    Travel agents American Express, Expedia. com, Trade organizations Air
    Transport Association, American Society of

    Travel Agents

    To assess the factors that create hidden- city and the pricing practices
    that foster back- to- back ticketing opportunities, we reviewed relevant
    economic literature, particularly literature containing analyses of airline
    hub- and- spoke networks, airline pricing, and revenue management systems.
    We also interviewed industry experts and officials from the seven largest U.
    S. passenger airlines. To assess how fares and service could be affected
    should hidden- city ticketing be allowed, we interviewed industry experts
    and officials from

    each of the seven identified airlines. We also analyzed airfare and service
    data on air traffic markets for six of the seven carriers. 1 We were unable
    to draw a random sample of market data from industry sources because we

    could not obtain sufficiently detailed data to perform the type of analyses
    needed.

    We analyzed data for a selected number of markets instead. Consequently, our
    results are not statistically generalizable to the universe of airline
    markets. To generate a relatively large data set for analytic purposes, we
    built our analysis around possible connecting markets for the three most
    heavily traveled markets for each of the airline's networks. 2 We first

    identified for each of the airlines the hub facility through which most
    passengers enplaned. 3 We then identified the three markets in which the
    largest number of passengers traveled. These markets are the ?hub routes?
    used in our analysis. In some cases, we selected a different hub route to
    provide greater possible geographic dispersion. Our passenger enplanement
    data covered the 4 quarters between the fourth quarter of 1999 and the third
    quarter of 2000-- the latest data available at the time of our analysis. 1
    In the airline industry, a market is generally defined as scheduled airline
    service between a point of origin and a point of destination. This is often,
    but not always, defined as a city pair. Some cities are served by more than
    one commercial airport. These cities include Los Angeles, San Francisco,
    Chicago, New York, and Washington, D. C. In these cases, the relevant market
    may be what is termed as an airport pair. 2 We did not analyze fare data
    from Southwest because it does not operate a hub- and- spoke

    network and because it explicitly does not prohibit passengers from using
    either back- toback or hidden- city ticketing.

    3 Passenger ?enplanements? represent the total number of passengers boarding
    an aircraft. Thus, for example, a passenger that must make a single
    connection between his or her origin and destination counts as two enplaned
    passengers because he or she boarded two separate flights.

    To obtain data on passenger traffic for this report, we contracted with BACK
    Aviation Solutions (BACK), an aviation consulting firm, which obtains
    operational and financial information submitted by all U. S. airlines to
    DOT. These data include the Origin and Destination Survey (O& D) based on a
    10- percent sample of tickets containing itinerary and pricing information;
    T- 100 on- flight data; 4 and 298C T- 1 data, which supplement the T- 100
    data with data on commuter and small certified air carriers. BACK makes
    certain adjustments to these data, such as correcting recognized
    deficiencies in the air carriers' O& D data submissions, which have not met

    DOT's standard of 95- percent accuracy. We did not independently assess the
    reliability of BACK's data.

    We then identified the number of U. S. domestic communities to which
    passengers could connect at those airports from each of the hub routes. We
    identified those communities using airline flight schedule information
    submitted by all U. S. airlines for November 2000 that we purchased from the
    Kiehl Hendrickson Group, an aviation consulting firm. We did not
    independently assess the reliability of the Kiehl Hendrickson Group's
    original data. Finally, to categorize spoke communities by size, we used
    data from the U. S. Bureau of the Census. These categories are: large

    communities with a population of 1 million or greater; medium- large
    communities that ranged from 250,000 to 999,999; medium communities that
    ranged from 100,000 to 249,999; and small communities with populations of
    less than 100,000. Table 7 summarizes the markets analyzed for the six major
    U. S. network airlines.

    4 14 C. F. R. 241 prescribes the collection of scheduled and nonscheduled
    service traffic data from the domestic and international operations of U. S.
    air carriers. The schedules submitted by the air carriers to DOT under this
    requirement collect nonstop segment data and on- flight market information
    by aircraft type and by service class. This report is known as the ?T- 100?
    report.

    Table 8: Routes Into Hubs and Number of Connecting Markets Analyzed for Each
    Major Carrier Number of ?beyond? points Airline Hub airport Origin of hub
    routes analyzed (spoke routes) identified

    American Dallas- Ft. Worth Los Angeles 225

    New York (LaGuardia) Miami

    Continental Houston Bush Intercontinental Newark 225

    New Orleans Los Angeles

    Delta Atlanta Hartsfield New York (LaGuardia) 296

    Orlando Dallas- Ft. Worth

    Northwest Minneapolis- St. Paul Detroit 222

    Boston Seattle

    United Chicago O'Hare San Francisco 262

    Denver New York (LaGuardia)

    US Airways Charlotte Douglas Boston 199

    Philadelphia Orlando

    Total 1,429

    To determine whether hidden- city ticketing opportunities were more
    available to business or leisure passengers, we attempted to obtain
    representative airfares for each of the 1,429 markets from each airline's
    Internet Web sites. We defined a hidden- city ticketing opportunity to exist
    for business travelers if the difference in airfares between the hub market
    and the beyond city was $100 or more and for leisure passengers, if the
    difference in airfares was $50 or more. Of the total 2,858 markets (1, 429
    for

    business travelers and 1,429 for leisure travelers), we were only able to
    acquire fare data for 2,302 markets- 1,151 for each type of traveler. To
    approximate business airfares, we obtained fare data for travel scheduled
    the next day and chose a return date falling before the upcoming Saturday.
    To approximate airfares for leisure passengers, we selected fares that the

    airlines posted for travel beginning at least 21 days in advance and
    requiring a Saturday night stay. We recognize that this approximation of
    business and leisure travel is relatively coarse: some business passengers
    may purchase travel weeks in advance of their scheduled trip and stay over
    on a Saturday night. Similarly, some passengers traveling solely for leisure
    purposes may purchase their tickets on the day of the flight and return

    prior to a Saturday. Nonetheless, we believe that our method represents a
    reasonable estimate of business and leisure fares. To identify the amount of
    competition that each airline had in each of its hub- route markets and
    related spoke markets, we analyzed the capacity

    that other airlines made available in each market. DOT defines an airline

    ?competitor? as one that has a market share of at least 10 percent, and we
    adopted that definition. Rather than using passenger enplanements as the
    basis for this calculation, we used scheduled capacity in a market (i. e.,
    the total number of seats available for purchase).

    Our analysis of hidden- city ticketing opportunities included data on each
    flight's origin, the population of the destination city, number of stops on
    a flight, dominance of any one carrier on a route (i. e., where an airline
    may offer more than 50 percent of the scheduled capacity in a market) and
    competition between major and low- cost carriers on both major flight
    segments to hub cities and on total city- pair markets. We conducted both

    bi- variate analyses and multiple regressions on these data, excluding
    records where any data element was missing. Our analysis of data for 1,151
    business markets and 1, 151 leisure markets identified 364 hidden- city
    ticketing opportunities for business travelers and 34 for leisure travelers.
    We defined statistical significance at the 0. 05 level. We also interviewed
    officials with each of the seven identified airlines to obtain their views
    on how their airlines would react if a law required them to permit hidden-
    city ticketing. We then evaluated their responses in light of generally
    accepted airline economic theory and the results of our analysis.

    To assess how fares and service could be affected should back- to- back
    ticketing be allowed, we interviewed industry experts and officials from
    each of the seven identified airlines. We evaluated their responses in light
    of generally accepted airline economic theory. Because back- to- back
    ticketing opportunities are available for use in virtually all markets, and
    because no data are available on the extent that passengers already engage
    in this practice- or might do so if it were allowable- we conducted no data
    analysis of the extent to which the practice could occur, the financial
    implications for the airlines or passengers, and which size cities could be

    most affected. To increase the candidness with which airline officials would
    discuss these issues and the quantity of information they would be willing
    to provide, we

    provided the airlines with letters pledging confidentiality from relevant
    committee chairs and ranking members. These letters stated that these
    members and their staff would not seek to review any confidential business
    information provided by the airlines. Thus, throughout this report we do not
    refer to airlines directly by name when presenting information subject

    to this agreement. We conducted our work from July 2000 through July 2001 in
    Washington, D. C., in accordance with generally accepted government auditing
    standards.

    Airline Inventory Management- Making Seats Available at Different Prices 45,
    30, and 7 Days

    Appendi x II

    Before Departure and at Takeoff Legend: N/ A= not applicable

    Source: These booking and fare data were provided by an airline that we have
    not identified at the airline's request. These data reflect travel on a
    particular day.

    Note: The fares paid at departure represent the average one- way fare for
    each class of ticket purchased. Calculation of the average fare was based on
    local fares for local passengers (i. e., those traveling only between the
    origin and destination of this flight) and prorated fares for passengers
    connecting to other flights. For this particular flight, on this day, all
    the 21- day advance purchase fares were purchased by passengers traveling
    locally, while almost all the 7- day advance purchase fares were purchased
    by passengers connecting to other flights. Consequently, the passengers who
    purchased their fares 7 days in advance, because their fares were prorated,
    seem to have paid higher fares than the passengers who paid their fares 21
    days in advance. However, had all the fares for this flight been based on
    published fares for travel in the local market, the 7- day advance purchase
    fares would have exceeded the 21- day advance purchase fares.

    Appendi x II I Selected Bibliography Brueckner, J. K., and others. ?Fare
    Determination in Airline Hub- and- Spoke Networks.? The Rand Journal of
    Economics, Vol. 23, No. 3 (1992), pp. 309- 333. Butler, Gail F., and Martin
    R. Keller, Executive Editors. Handbook of Airline Finance. New York: The
    McGraw- Hill Companies, 1999.

    Dempsey, Paul Stephen and Laurence E. Gesell. Airline Management: Strategies
    for the 21 st Century. Chandler (Ariz.): Coast Aire Publications, 1997.
    Dresner, Martin and Robert Windle. ?Airport Dominance and Yields in the U.
    S. Airline Industry.? The Logistics and Transportation Review, Vol. 28, No.
    4 (1992), pp. 319- 340. Hendricks, Ken, and others. ?Equilibria in
    Networks.? Econometrica, Vol. 67, No. 6 (1999), pp. 1407- 1434.

    Jenkins, Darryl, Executive Editor. Handbook of Airline Economics. New York:
    The McGraw- Hill Companies, 1995.

    Kahn, Afred E. ?The Competitive Consequences of Hub Dominance: A Case
    Study.? Review of Industrial Organization, Vol. 8, No. 4 (1993), pp. 381-
    405. Nero, Giovanni. ?A Note on the Competitive Advantage of Large Hub-
    andSpoke Networks.? Transportation Research, Part E, 35 (1999), pp. 225-
    239.

    Oum, Tae Hoon, and others. ?A Note on Optimal Airport Pricing in a HubAnd-
    Spoke System.? Transportation Research, Part B, Vol. 30, No. 1 (1996), pp.
    11- 18.

    -. ?Airline Network Rivalry.? Canadian Journal of Economics, Vol. 28, No. 4a
    (1995), pp. 836- 857.

    Transportation Research Board, Special Report 230: Winds of Change: Domestic
    Air Transport Since Deregulation, National Research Council, Washington, D.
    C., 1991. Transportation Research Board, Special Report 255: Entry and
    Competition in the U. S. Airline Industry: Issues and Opportunities,
    National Research Council, Washington, D. C., 1999.

    Saunders, Lisa F., and William G. Shepherd. ?Airlines: Setting Constraints
    on Hub Dominance.? The Logistics and Transportation Review, Vol. 29, No. 3
    (1993), pp. 201- 220.

    Zhang, Anming. ?An Analysis of Fortress Hubs in Airline Networks.? Journal
    of Transport Economics and Policy, Vol. 30, No. 3 (1996), pp. 293- 308.

    Appendi x V I GAO Contacts And Staff Acknowledgments GAO Contacts JayEtta Z.
    Hecker (202) 512- 2834 Steven C. Martin (202) 512- 2834 Staff

    In addition to those named above, Sonja Bensen, Michael Bollinger, Colin
    Acknowledgments

    Fallon, David Hooper, Joseph Kile, and Sara Ann Moessbauer made key
    contributions to this report.

    Related GAO Products

    Aviation Competition: Challenges in Enhancing Competition in Dominated
    Markets (GAO- 01- 518T, Mar. 13, 2001).

    Airline Competition: Issues Raised by Consolidation Proposals (GAO- 01370T,
    Feb. 1, 2001).

    Aviation Competition: Issues Related to the Proposed United Airlines- US
    Airways Merger (GAO- 01- 212, Dec. 15, 2000).

    Airline Deregulation: Changes in Airfares, Service Quality, and Barriers to
    Entry (GAO/ RCED- 99- 92, Mar. 4, 1999).

    Domestic Aviation: Service Problems and Limited Competition Continue in Some
    Markets (GAO/ T- RCED- 98- 176, Apr. 23, 1998).

    Aviation Competition: International Aviation Alliances and the Influence of
    Airline Marketing Practices (GAO/ T- RCED- 98- 131, Mar. 19, 1998).

    Airline Competition: Barriers to Entry Continue in Some Domestic Markets

    (GAO/ T- RCED- 98- 112, Mar. 5, 1998).

    Domestic Aviation: Barriers Continue to Limit Competition (GAO/ T- RCED98-
    32, Oct. 28, 1997).

    Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline
    Deregulation (GAO/ T- RCED- 97- 120, May 13, 1997).

    Airline Deregulation: Barriers to Entry Continue to Limit Competition in
    Several Key Domestic Markets (GAO/ RCED- 97- 4, Oct. 18, 1996).

    Airline Competition: Higher Fares and Less Competition Continue at
    Concentrated Airports (GAO/ RCED- 93- 171, July 15, 1993).

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    Page 1 GAO- 01- 831 Airline Ticketing Rules

    Contents

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    Page 3 GAO- 01- 831 Airline Ticketing Rules United States General Accounting
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    Appendix I

    Appendix I Scope and Methodology

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    Appendix I Scope and Methodology

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    Appendix I Scope and Methodology

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    Appendix I Scope and Methodology

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    Appendix II

    Appendix II Airline Inventory Management- Making Seats Available at
    Different Prices 45, 30, and 7 Days Before Departure and at Takeoff

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    Appendix III

    Appendix III Selected Bibliography

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    Appendix IV

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