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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GAO United States General Accounting Office

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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 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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Related GAO Products Page 61 GAO- 01- 831 Airline Ticketing Rules
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