Airline Deregulation: Barriers to Entry Continue to Limit Competition in
Several Key Domestic Markets (Letter Report, 10/18/96, GAO/RCED-97-4).
Pursuant to a congressional request, GAO reviewed the impact of airline
deregulation on air service to certain communities, focusing on: (1)
whether barriers still exist that prevent airlines, particularly
post-deregulation airlines, from servicing new markets; and (2) how
these barriers have affected fares and service.
GAO found that: (1) federal limits on takeoff and landing slots at
certain major airports, long-term exclusive-use gate leases, and
perimeter rules prohibiting flights of certain distances at La Guardia
and Washington National Airport continue to impede new airlines' access
to airports; (2) these barriers primarily affect airlines started after
deregulation because the established airlines hold nearly all of the
slots, are usually the beneficiaries of exclusive-use gate leases, and
have their hubs located close enough to airports to avoid perimeter rule
limittaions; (3) newer airlines have particular difficulty in entering
key markets in the East and upper Midwest because several airports in
those regions have leased most of their gates to one airline; (4)
established airlines' marketing strategies such as bonus travel agent
commissions, frequent flier plans, airline-owned computer reservation
systems, and partnerships with commuter airlines make it extremely
difficult for other carriers to attract traffic; (5) such strategies can
lead to decreased competition and higher airfares, particularly in
markets where the dominant carrier's position is protected by operating
barriers; and (6) while barriers may reduce the number of competing
service options, consumers receive benefits in other ways, such as free
frequent flier trips.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-97-4
TITLE: Airline Deregulation: Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets
DATE: 10/18/96
SUBJECT: Airline industry
Airports
Competition limitation
Restrictive trade practices
Airline regulation
Air transportation operations
Travel agents
Transportation rates
Commercial aviation
Economic analysis
IDENTIFIER: Chicago (IL)
New York (NY)
John F. Kennedy International Airport (NY)
LaGuardia International Airport (New York, NY)
Washington National Airport (DC)
Charlotte (NC)
Cincinnati (OH)
Detroit (MI)
Minneapolis (MN)
Newark (NJ)
Pittsburgh (PA)
Boston (MA)
Logan International Airport (Boston, MA)
Midway International Airport (Chicago, IL)
Chicago-O'Hare International Airport (Chicago, IL)
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Cover
================================================================ COVER
Report to the Chairman, Committee on Commerce, Science, and
Transportation, U.S. Senate
October 1996
AIRLINE DEREGULATION - BARRIERS TO
ENTRY CONTINUE TO LIMIT
COMPETITION IN SEVERAL KEY
DOMESTIC MARKETS
GAO/RCED-97-4
Barriers to Entry in the Airline Industry
(341494)
Abbreviations
=============================================================== ABBREV
CEO - Chief Executive Officer
CRS - computer reservation system
DOT - Department of Transportation
FAA - Federal Aviation Administration
GAO - General Accounting Office
Letter
=============================================================== LETTER
B-272128
October 18, 1996
The Honorable Larry Pressler
Chairman, Committee on Commerce,
Science, and Transportation
United States Senate
Dear Mr. Chairman:
Earlier this year, in a report prepared at your request, we reported
that, overall, airfares have decreased and service has improved since
the deregulation of the airline industry in 1978.\1
A key factor contributing to this trend has been the increased
competition spurred by the entry of (1) new airlines into the
industry and (2) established airlines into new markets.
Nevertheless, we also found that a number of airports, primarily in
the Southeast and upper Midwest, have not experienced such entry and
therefore have not experienced the lower fares and improved service
that deregulation has brought to the rest of the nation.
Our April 1996 report was the latest in a series of studies over the
past decade in which we have examined competition in the deregulated
airline industry.\2 In August 1990, we reported that several
operating and marketing practices, such as incumbent airlines leasing
airport gates under long-term, exclusive-use terms, had begun to
restrict entry to an extent not fully anticipated by the Congress
when it deregulated the industry.\3 In 1991, we reported that many of
these barriers to entry contributed to higher fares.\4
Concerned about our finding earlier this year that some communities
have not shared in the economic benefits of deregulation, you asked
us to update our work on barriers to entry. Specifically, you asked
us to determine if barriers still exist that prevent
airlines--particularly those airlines that started after
deregulation--from serving new markets and, if so, how these barriers
have affected airfares and service.
--------------------
\1 Airline Deregulation: Changes in Airfares, Service, and Safety at
Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19,
1996).
\2 These products are listed at the end of this report.
\3 Airline Competition: Industry Operating and Marketing Practices
Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990).
\4 Airline Competition: Effects of Airline Market Concentration and
Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Barriers to entry persist in the airline industry. Access to
airports continues to be impeded by (1) federal limits on takeoff and
landing slots at the major airports in Chicago, New York, and
Washington;\5 (2) long-term, exclusive-use gate leases; and (3)
"perimeter rules" prohibiting flights at New York's LaGuardia and
Washington's National airports that exceed a certain distance. While
these operating barriers can potentially affect any airline, they
primarily affect airlines that were started after deregulation. The
newer airlines are affected the most because the established carriers
hold nearly all of the slots, are usually the beneficiaries of
exclusive-use gate leases, and have their hubs located close enough
to LaGuardia and National that their operations are not limited by
perimeter rules. These barriers particularly impede the entry of
newer airlines into key markets in the East and upper Midwest because
several airports in those regions have leased most of their gates to
one airline.
Even where airport access is not a problem, airlines sometimes choose
not to enter new markets because certain strategies of the
established airlines make it extremely difficult for other carriers
to attract traffic. These marketing strategies include bonus
commissions paid to travel agents, frequent flier plans, airline
ownership of the computer reservation systems used by travel agents,
and code-sharing partnerships with commuter carriers.\6 Taken
together, these marketing strategies deter new as well as established
airlines from entering those markets where an established airline is
dominant. As a result, competition suffers, leading to higher
airfares. The effect of these strategies tends to be the
greatest--and fares the highest--in markets where the dominant
carrier's position is protected by operating barriers. On the other
hand, measuring the effects of barriers to entry on the quality of
service is more difficult. While barriers reduce the number of
competing service options, consumers receive benefits in other ways,
such as free frequent flier trips.
--------------------
\5 To minimize flight delays, the Federal Aviation Administration
limits the number of operations (takeoffs and landings) that can
occur during certain periods of the day at four congested
airports--O'Hare in Chicago, National in Washington, D.C., and
Kennedy and LaGuardia in New York. The authority to conduct a single
operation during these periods at these four airports is commonly
referred to as a "slot."
\6 Code-sharing is the practice whereby one airline lists another
airline's flights as its own in computer reservation systems.
BACKGROUND
------------------------------------------------------------ Letter :2
Before 1978, the Civil Aeronautics Board controlled the number of
markets that established airlines could enter and prevented new
airlines from forming. Concerned that these practices had caused
fares to be too high and inhibited the industry's growth, the
Congress passed the Airline Deregulation Act of 1978. The act phased
out federal control of domestic air service and relied on market
forces to decide fares and levels of service.
Since deregulation, established airlines have expanded into many new
markets and numerous new airlines have started up. Many of these new
airlines began operations shortly after deregulation and have since
failed; some established carriers, such as Eastern and Pan Am, also
failed. Nevertheless, a few airlines that were formed during this
period still operate, including America West, Midwest Express, and
Southwest.\7 The majority of the airlines that have started service
since deregulation, however, have come into being in the past few
years, primarily as the result of a growing economy and large
supplies of less-expensive used airplanes and available pilots. As a
result, their cost structures tend to be lower than those of the
established airlines. In general, the 38 airlines that have started
up since deregulation, and which operated during 1995, are much
smaller in terms of the number of passengers, the size of their
fleets, and their financial resources than the 10 established
carriers, which include the 7 largest airlines--American,
Continental, Delta, Northwest, TWA, United, and USAir. (See app.
I.)
--------------------
\7 Although Southwest started in 1971, it provided air service only
within Texas. The airline did not provide interstate service until
after deregulation.
OPERATING BARRIERS CONTINUE TO
BLOCK THE ENTRY OF NEW
COMPETITORS IN EASTERN AND
UPPER MIDWESTERN MARKETS
------------------------------------------------------------ Letter :3
Operating barriers still limit entry at a number of important
airports, and in some cases they have grown worse since our report in
1990. For example, a few established airlines have further increased
their control over takeoff and landing slots at the slot-controlled
airports in Chicago, New York, and Washington. As a result, little
new entry has occurred at these airports. Opportunities for
establishing new or expanded service also continue to be limited at
other airports by long-term, exclusive-use gate leases that prevent
nonincumbents from securing the necessary airport facilities on equal
terms with the incumbent airlines. While such arrangements exist at
many airports across the country, their predominance at several
important airports in the East and upper Midwest exacerbates the
negative impact of slots on competition in those regions.
CONTROL OF SLOTS BY A FEW
AIRLINES GREATLY DETERS
ENTRY AT KEY AIRPORTS IN
CHICAGO, NEW YORK, AND
WASHINGTON
---------------------------------------------------------- Letter :3.1
To reduce congestion during peak traffic periods, FAA has since 1969
set limits on the number of takeoffs and landings that can occur at
four key airports--O'Hare, National, Kennedy, and LaGuardia. By
allowing new airlines to form and established airlines to enter new
markets, deregulation increased the demand for access to these
airports. Such increased demand complicated FAA's efforts to
allocate takeoff and landing slots equitably among the airlines. As
a result, to minimize the government's role in the allocation of
slots, the Department of Transportation (DOT) amended its rules in
1985 to allow airlines to buy and sell them to one another.
Under this "Buy/Sell Rule," DOT allocated slots to the holders of
record as of December 16, 1985--that is, the incumbents' allocations
were "grandfathered." Emphasizing that it still owned the slots,
however, DOT randomly assigned each slot a priority number and
reserved the right to withdraw slots from the incumbents at any time.
In addition, to mitigate the anticompetitive effects of
grandfathering, DOT retained about 5 percent of the slots at O'Hare,
National, and LaGuardia and in early 1986 distributed them in a
random lottery to airlines having few or no slots at those
airports.\8
In 1986, we expressed concern that allowing airlines to buy and sell
slots would reduce competition.\9 By the early 1990s, we found that a
few carriers had increased their control of slots to such an extent
that they could limit access to routes beginning or ending at any of
the slot-controlled airports--airports that are crucial to
establishing new service in the heavily traveled eastern and
midwestern markets.\10 We also reported that while the lottery was
successful in placing slots in the hands of some entrants and smaller
incumbents, the effect on entry over the long term was disappointing,
in part because many of the lottery winners subsequently went out of
business or merged with an established carrier.
Since the early 1990s, a few established carriers have continued to
build upon the favorable positions they inherited as a result of
grandfathering (see table 1). By contrast, the share held by the
airlines that started after deregulation has remained low.
Table 1
Percentage of Domestic Air Carrier Slots
Held by Selected Groups in 1986, 1991,
and 1996
Airport/holding entity 1/1/86 1/1/91 6/17/96
---------------------------------------- -------- -------- --------
O'Hare
----------------------------------------------------------------------
American and United 66 83 87
Other established airlines 28 13 9
Financial institutions 0 3 2
Post-deregulation airlines 6 1 1
Kennedy
----------------------------------------------------------------------
Shawmut Bank, American, and Delta 43 60 75
Other established airlines 49 18 13
Other financial institutions 0 19 6
Post-deregulation airlines 9 3 7
LaGuardia
----------------------------------------------------------------------
American, Delta, and USAir 27 43 64
Other established airlines 58 39 14
Financial institutions 0 7 20
Post-deregulation airlines 15 12 2
National
----------------------------------------------------------------------
American, Delta, and USAir 25 43 59
Other established airlines 58 42 20
Financial institutions 0 7 19
Post-deregulation airlines 17 8 3
----------------------------------------------------------------------
Note 1: Numbers may not add to 100 percent due to rounding.
Note 2: Several airlines that held slots have gone bankrupt, and in
part as a result of the bankruptcy proceedings, some financial
institutions have acquired slots. At Kennedy, for example, Shawmut
Bank holds the slots operated by TWA. Similarly, in addition to
purchasing slots, the incumbent airlines have built up their slot
holdings as a result of the bankruptcies of other airlines as well as
through mergers with other airlines.
Source: GAO's analysis of data from FAA's Slot Administration
Office.
Because the number of slots is largely fixed and the holding of those
slots is concentrated among a few established carriers, a seller's
market has emerged, and slots have become very expensive. FAA
officials and numerous airline representatives told us that the price
of a slot has risen sharply over the last decade; they estimated that
the price now exceeds $2 million for a peak-period slot and $500,000
for an off-peak slot. Moreover, in order to mount competitive
service in a market, an airline generally needs about six slots, with
at least three slots falling during the peak periods so that the
airline can offer a flight schedule that is attractive to business
travelers. As a result, for the airlines that started after
deregulation, the cost of purchasing the slots necessary to compete
effectively may be prohibitive.
Even if financing can be arranged, buying slots is extremely
difficult for newer airlines because the established carriers rarely
sell their slots, and when they do, the buyer is usually an airline
that already holds a large number of slots at the airport. United
Airlines' director of domestic schedules told us, for example, that
the airline has not sold a slot at O'Hare in the past 4 years.
Likewise, the airline last sold slots at LaGuardia and National in
1993. In the latter two sales, the purchaser was USAir--already a
major holder of slots at LaGuardia and National (see table 1).
Nevertheless, the airlines that hold most of the slots at the four
airports stressed to us that in building upon their grandfathered
positions, they have invested a large amount of money buying
additional slots and financing the development and expansion of those
airports. Both the chief executive officer (CEO) and the president
of American Airlines emphasized to us, for example, that American and
United have invested hundreds of millions of dollars in financing the
development and expansion of Chicago's O'Hare Airport.
The major holders of slots also noted that, as an alternative to
buying slots, an airline can lease them from another airline.
However, leasing places a nonowner at a competitive disadvantage for
two reasons. First, because the established airlines obtained most
of their slots directly from FAA in 1986 at no cost, the nonincumbent
incurs a cost that the established carrier has never incurred.\11
Second, leases are sometimes for only a short period of time. Under
the use-or-lose provision of the Buy/Sell Rule, airlines must use a
slot at least 80 percent of the time or it will be revoked by FAA.
Hence, to meet this requirement and still protect their slots, the
incumbent airlines lease unused slots to other airlines, but only on
a short-term basis. At our request, FAA reviewed the leases that
were in effect as of July 15, 1996, and found that about 10 percent
were for less than 30 days and that another 12 percent were for
between 31 and 89 days. While a carrier already operating at an
airport may be able to add flights using slots leased for a short
term, a new entrant can generally not justify the costs of starting
new service if its only access to an airport could be terminated on
short notice by a potential competitor.
In our August 1990 report, we suggested several options that could
open up the slot market and promote entry. These included (1)
replacing the Buy/Sell Rule with a system in which DOT leases slots
to the airlines or (2) retaining the Buy/Sell Rule but periodically
withdrawing a portion of slots from each carrier and reallocating
them by lottery. Many representatives of post-deregulation airlines
and airport and government officials that we interviewed--including
the manager of FAA's Airspace and Air Traffic Law Branch as well as
airport officials in Chicago and New York--expressed skepticism that
the Buy/Sell Rule was working as intended and commented that the
options we have suggested are still valid. In 1994, for example, the
Port Authority of New York & New Jersey reiterated to DOT its support
for a periodic slot lottery:
"As a means to improve access for new air carrier entrants, we
have previously proposed a modest withdrawal of air carrier
slots, not to exceed 3 percent on an annual basis, for
reallocation to new entrants and small incumbents by lottery. .
. . the FAA is urged to consider this option which would
improve the competitive environment, but would not seriously
compromise existing operations."
--------------------
\8 Kennedy airport was not included in the lottery because DOT
considered its slots already to be distributed equitably among the
airlines, thereby ensuring adequate competition.
\9 Airline Takeoff and Landing Slots: Department of Transportation's
Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986).
\10 Airline Competition: Industry Operating and Marketing Practices
Limit Market Entry (GAO/RCED-91-13, Aug. 29, 1990) and Airline
Competition: Effects of Airline Market Concentration and Barriers to
Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).
\11 In addition, because airlines are allowed to treat slots as
private assets, even though they are a public good, several
established airlines have used them as collateral in securing loans.
CONGRESSIONAL EFFORTS TO
SPUR ENTRY AT
SLOT-CONTROLLED AIRPORTS
HAVE HAD LIMITED SUCCESS
---------------------------------------------------------- Letter :3.2
Recognizing the need for new entry at the slot-controlled airports,
in 1994 the Congress directed DOT to (1) study whether slot controls
were still needed and (2) grant exemptions from those controls--in
effect, issue new slots--for new entrants seeking to serve either
O'Hare, LaGuardia, or Kennedy when DOT "finds it to be in the public
interest and the circumstances to be exceptional."\12
In part, the Congress was responding to the National Commission to
Ensure a Strong Competitive Airline Industry, which in 1993
recommended that the slot controls be reviewed "with the aim of
either removing these artificial limits or raising them to the
highest practical level consistent with safety requirements."\13
In its congressionally directed study, DOT found that eliminating
slots would not affect safety and would result in increased
competition, thereby lowering fares and expanding air service options
for consumers.\14 DOT estimated that the annual net benefit to
consumers from lower fares and new service--after accounting for the
costs to air travelers of increased delays--would be $626 million at
O'Hare, $89 million at LaGuardia, $26 million at National, and $7
million at Kennedy. Nevertheless, it concluded that eliminating
slots would not be in the public interest because the projected
benefits to consumers would be outweighed by the negative impacts on
the incumbent airlines in terms of flight delays and reduced profits
"when the fare premium presently charged at three of the four
airports (O'Hare, LaGuardia, and National) is lost due to increased
competition."
The Congress's direction to DOT that the agency grant exemptions from
the slot controls to new entrants when DOT finds it to be in the
public interest and the circumstances to be exceptional has resulted
in little new entry. Few new entries have occurred because DOT has
interpreted the "exceptional circumstances" criterion narrowly and
has rejected applications to provide service in those markets already
receiving nonstop service. As of October 1996, DOT had rejected two
of the four requests that it received, despite the competitive
benefits for consumers that would result from allowing a nonincumbent
to challenge an incumbent's monopoly in a market.
In rejecting a request by Western Pacific in 1995 for four slots to
start service between Colorado Springs and O'Hare, for example, DOT
emphasized that United Airlines already provided nonstop service.
Because of this existing service, the agency concluded that
exceptional circumstances did not exist. DOT officials told us that,
in their view, Chicago's Midway Airport provided Western Pacific an
adequate alternative to O'Hare. Western Pacific's CEO told us that
the airline strongly disagrees with DOT and has petitioned the agency
to reconsider its decision.
DOT also rejected a bid by Spirit Airlines in 1995 to fly between
Detroit and LaGuardia because Northwest already provided nonstop
service. DOT explained as follows:
"We have interpreted the intent of Congress narrowly because of
the exceptional circumstances criterion. If Congress had
intended that a less restrictive allocation process be
established, it would have mandated that the grant of exemptions
be based only on a public interest finding. . . . While we
recognize that Congress did not explicitly mandate that
exceptional circumstances be applied only in situations where no
nonstop service presently existed, it is clear from the
legislative background that the lack of nonstop service in
larger markets was clearly on the minds of several supporters
with regard to the exemption provisions."\15
In our review of the legislative history, however, we found no
congressional guidance on the interpretation of the exceptional
circumstances criterion. Moreover, by selecting a very narrow
interpretation, DOT has discouraged entry, according to senior
management at many airlines that started after deregulation. They
told us that DOT's narrow interpretation of the exceptional
circumstances criterion discouraged them from applying for slots.
Many noted, for example, that they would not "waste the time"
applying to DOT for slots in markets where an incumbent carrier
already provided nonstop service. They suggested that competition
could be substantially increased in some markets if the Congress
revised the exemption criteria so that applications resulting in
substantial competitive benefits are allowed. Officials from both
the Chicago Department of Aviation and the Port Authority of New York
& New Jersey stated that they strongly supported such a move.
--------------------
\12 FAA Reauthorization Act of 1994 (P.L. 103-305, sec. 206). The
number of flights at National Airport is further limited by federal
law to address local concerns about noise. As a result of these
additional limits, the Congress chose not to extend DOT's exemption
authority to include National.
\13 A Report to the President: Change, Challenge, and Competition,
The National Commission to Ensure a Strong Competitive Airline
Industry (Aug. 1993).
\14 Report to the Congress: A Study of the High Density Rule, DOT
(May 1995).
\15 Order Denying Request for Exemption, Application of Spirit
Airlines, Inc., DOT (OST-95-265, Aug. 24, 1995).
LONG-TERM, EXCLUSIVE-USE
GATE LEASES ALSO CONTINUE TO
HINDER AIRLINE ENTRY
---------------------------------------------------------- Letter :3.3
In 1990, our survey of the 66 largest U.S. airports revealed that 85
percent of their gates were leased to established airlines under
long-term, exclusive-use leases. At some airports, every gate was
under an exclusive-use lease. We concluded that such leases limited
entry because, in order to gain access to the airport, a nonincumbent
would generally have to sublease gates from the incumbent
airlines--often at less preferable times and at a higher cost than
the incumbent pays on the master lease. Since then, some airports,
such as Los Angeles International, have sought to regain more control
of their facilities by signing less restrictive, shorter-term leases
when the exclusive-use leases expire.
Nevertheless, senior management at many airlines that started after
deregulation told us that long-term, exclusive-use gate leases
continue to be a barrier to entry. They identified six airports in
particular where this occurs: Charlotte, Cincinnati, Detroit,
Minneapolis, Newark, and Pittsburgh. As table 2 shows, the vast
majority of gates at each airport are exclusively leased, usually to
one established airline. As a result, according to executives at
many airlines that started after deregulation, it is extremely
difficult to gain competitive access to these airports.
Table 2
Airports Where Post-Deregulation
Airlines Reported Difficulty Gaining
Competitive Access to Gates, and the
Leasing Arrangements at Those Airports
Gates
Total under
number exclusiv
of jet e-use Major lease holder and date
Airport gates leases of lease expirations
-------------------- -------- -------- ----------------------------
Charlotte 48 43 34 gates leased to USAir
until 2007
Cincinnati 67 67 50 gates leased to Delta
with 9 leases expiring in
2015 and 41 expiring in
2023
Detroit 86 76 64 gates leased to Northwest
until the end of 2008, with
all but 10 under exclusive-
use terms
Minneapolis 65 65 49 gates leased to Northwest
with 16 leases already
having expired and now on
month-to-month basis, and
remainder expiring at
various times ranging from
the end of 1997 to 2015
Newark 94 79 43 gates leased to
Continental until 2013, 36
gates leased to the other
established airlines until
2018, and 15 gates reserved
primarily for international
use
Pittsburgh 75 66 50 gates leased to USAir
until 2018
----------------------------------------------------------------------
Source: GAO's presentation of the airports' data.
The airports in Detroit, Newark, and Minneapolis were most frequently
cited by the airlines that started after deregulation as having
competition limited by constraints in gaining access to gates.
Officials at these three airports expressed their strong support of
efforts by nonincumbents to obtain gates. Officials at Detroit and
Newark told us that several low-fare airlines currently sublease
gates from incumbent carriers at their airports. Moreover,
acknowledging that competition has been very limited at his airport,
the director of the Minneapolis airport indicated that the airport
authority attempted in 1991 to take control of one gate left vacant
by the bankruptcy of Midway Airlines so that it could lease it to
nonincumbents on an as-needed basis. However, Northwest Airlines was
successful in gaining control of the gate. The federal courts held
that Northwest could be assigned the gate by the bankruptcy trustee,
despite the objections of the airport commission.\16 The airport
director also told us that Northwest's leases on 16 gates have
expired and that he has notified the airline of the airport
authority's right to reclaim the gates on a month's notice to
accommodate a new entrant. He also noted that over the next several
years, the airport will build 6 to 12 new gates, of which 3 to 5 will
be held for lease to nonincumbents.
Where nonincumbents have gained access to airports by subleasing
gates, the access has generally come at less preferable times or at a
high cost. The low-fare airline JetTrain, for example, was initially
able to secure access to gates at Newark only by subleasing gates
from United at times that usually did not conflict with United's
schedule. Effectively, this situation has meant that JetTrain has
often been compelled to operate at inconvenient, off-peak times, or
even not at all. In addition, JetTrain subsequently attempted to
lease at least three additional gates from United. Before JetTrain
could arrange the financing it needed, however, another established
carrier subleased the gates from United. According to JetTrain's
vice president of marketing and planning, the uncertainties
associated with adequate access to gates has seriously affected the
airline's ability to grow and compete at Newark. In other cases,
airlines that started after deregulation have subleased gates as part
of a broader, more costly arrangement with an established carrier.
The CEO of Vanguard Airlines noted, for example, that the airline
subleases a gate from TWA in Minneapolis. In turn, TWA performs
maintenance for Vanguard's aircraft.
Representatives from other airlines that started after deregulation
told us that they strongly prefer not to sublease gates because the
established airlines typically insist that the sublessee use the
established airlines' ground personnel, which artificially raises
costs and may reduce efficiency. The CEO of Southwest Airlines told
us that this was a key factor in his decision not to serve
Minneapolis. In part because airlines that sublease tend to operate
at a competitive disadvantage, new entries that depended on
subleasing gates have had mixed results. For example, JetTrain
recently decided to exit Newark completely, and Vanguard recently
stopped serving one of the two markets that it was serving from
Minneapolis.
Established airlines, on the other hand, stressed to us that they
have made substantial investments in the development of these
airports. Northwest Airlines' senior vice president for corporate
affairs commented, for example, that without established airlines'
investments, many airport expansion projects that benefit new and
established airlines alike would not be possible. He and executives
at other established airlines stated that signing long-term,
exclusive-use gate leases is a key element in their decisions to help
finance airport expansion projects. Similarly, several airport
directors noted that it would have been difficult to sell the revenue
bonds needed to finance development and expansion at their airports
without a clear, long-term financial commitment from at least one
established airline.
In our 1990 report, we noted that the development, maintenance, and
expansion of airport facilities is essentially a local
responsibility. We further noted, however, that most airports are
operated under restrictions tied to the receipt of federal grants
from FAA. We suggested that one way to alleviate the barrier created
by exclusive-use leases would be for FAA to add a grant restriction
that ensured that some gates at an airport would be available to
nonincumbents. During our current review, several airline and
airport representatives suggested that a more feasible alternative
would be for FAA, when disbursing grant monies for airport
improvements, to give priority for grants to those airports that do
not lease the vast majority of their gates to one airline under
long-term, exclusive-use terms or that at least set aside some
"entrepreneurial" gates to attract new entrants. Officials in FAA's
Airports Financial Assistance Division told us that they do not
consider airports' gate-leasing arrangements when making grant
decisions.
--------------------
\16 Matter of Midway Airlines, Inc., 6 F.3d 492 (7th Cir. 1993).
AIR TRAVEL IN THE EAST AND
UPPER MIDWEST IS MOST
AFFECTED BY SLOT CONTROLS
AND LACK OF ACCESS TO GATES
---------------------------------------------------------- Letter :3.4
Overall, the 10 airports where competition among airlines is limited
by slots and exclusive-use gate leases accounted for approximately
115 million (22 percent) of the 516 million scheduled airline
passenger enplanements last year. Moreover, because each of these
constrained airports is located in either the East or upper Midwest
(see fig. 1), the barriers to entry presented by slots and
exclusive-use gate leases disproportionately affect air travel in
those regions.
Figure 1: Airports Identified
as Having Limited Entry Due to
Slot Controls and Exclusive-Use
Gate Leases
(See figure in printed
edition.)
SPECIAL RULES AT LAGUARDIA
AND NATIONAL AND EMERGING
CAPACITY CONSTRAINTS
ELSEWHERE EXACERBATE
BARRIERS' IMPACTS
---------------------------------------------------------- Letter :3.5
Entry at LaGuardia and National, besides being limited by slots, is
further limited by rules that prohibit incoming and outgoing flights
that exceed a certain distance. These are commonly known as
"perimeter rules." At LaGuardia, under a rule established by the Port
Authority, nonstop flights exceeding 1,500 miles are prohibited. At
National, federal law limits the number of hourly operations and
prohibits nonstop flights exceeding 1,250 miles.\17
The perimeter rules are designed to promote Kennedy and Dulles
airports, respectively, as the designated long-haul airports for the
New York and Washington metropolitan areas. The practical effect,
however, is to limit entry and exacerbate the impact of slots.
Specifically, the rules keep the second largest airline started after
deregulation--America West--from serving LaGuardia and National via
nonstop flights from its hub in Phoenix. By contrast, all of the
seven largest established carriers are able to serve those airports
nonstop from their main hubs because of the hubs' proximity to
LaGuardia and National. While acknowledging that the perimeter rule
at National may put America West at a competitive disadvantage, the
CEO and general manager of the Metropolitan Washington Airports
Authority expressed concern that completely eliminating the perimeter
rule would, among other things, negatively affect air service to
smaller communities in the Northeast because the major slot holders
at National would likely shift much of their service to more
profitable long-haul routes.
Finally, numerous airline representatives expressed concern that
growing capacity constraints at several other airports, particularly
in the East and upper Midwest, are exacerbating the impacts of the
barriers to entry that we have identified. Two airports in
particular--Boston's Logan and Chicago's Midway--were frequently
cited. Several airlines noted that their ability to start or expand
services in the East was constrained by the congestion and limited
facilities at Logan. Likewise, numerous airlines that started after
deregulation told us that, along with gates, available counter and
office space at Midway Airport was becoming increasingly scarce,
thereby limiting their ability to serve new markets. The Chicago
Department of Aviation agreed with their assessment. The
department's marketing director noted that the demand for space,
particularly by low-fare airlines, was so great at Midway that
airlines must now meet a minimum threshold of six daily flights
before the department will lease facilities to them. As a result,
the extent to which Midway Airport can serve as an alternative for
airlines that are unable to obtain slots at O'Hare is becoming
increasingly limited.
--------------------
\17 The Metropolitan Washington Airports Act of 1986 (P.L. 99-591,
sec. 60). The rule is also included in federal regulations (14
C.F.R. sec. 93.253).
ENTRY ALSO CONTINUES TO BE
LIMITED BY THE COMBINATION OF
SEVERAL AIRLINE MARKETING
PRACTICES
------------------------------------------------------------ Letter :4
The marketing strategies that airlines developed following
deregulation have created strong loyalties among passengers and
travel agents and have greatly increased the cost of competing
airlines' entry into new markets. Two strategies in particular,
booking incentives for travel agents and frequent flier plans, are
targeted at business flyers and encourage them to use the dominant
carrier in each market. Because business travelers represent the
most profitable segment of the industry, airlines in many cases have
chosen not to enter, or quickly exit, markets where they do not
believe they can overcome these barriers and attract a sufficient
amount of business traffic.
BOOKING INCENTIVES FOR
TRAVEL AGENTS LIMIT
COMPETITION FOR BUSINESS
TRAFFIC
---------------------------------------------------------- Letter :4.1
Business passengers represent the most lucrative segment of the
domestic airline market. Many established airlines with whom we
spoke, for example, estimated that passengers traveling on business
represented less than 40 percent of their traffic but accounted for
between 50 and 70 percent of their revenues. Because about 90
percent of business travel is booked through travel agencies,
airlines strive to influence the agencies' booking patterns. For
established carriers, such efforts typically include the payment to
travel agencies of special bonus commissions--frequently referred to
as overrides--as a reward for booking a targeted proportion of
passengers on their airline.
While any airline can offer travel agencies these payments,
established carriers can make more effective use of this technique
than the smaller airlines because the extra commissions are often
based on the total volume of business that an agency books for the
airline. Moreover, according to many travel agencies and airlines
that started after deregulation, most established carriers have
greater resources available to purchase and analyze the data
generated by the computer reservation systems (CRS) that travel
agents use to book flights. As a result, the established carriers
can more easily monitor travel agents' booking patterns and target
their commission programs accordingly. The CEO of one established
airline noted, however, that the CRS data are available to any
airline that wishes to purchase them and is willing to invest the
resources necessary to analyze the data.
Concerned about the potential anticompetitive effects of overrides,
the Justice Department opened an investigation in 1994 to determine
if their use constitutes an antitrust violation--either the
monopolization of a relevant market or agreements in unreasonable
restraint of trade. As part of its investigation, the Justice
Department collected industrywide data on airline bookings and
override payments. However, the Department's analysis of the data
was unable to show that dominant carriers had been able to use
overrides to create a disadvantage for smaller carriers or to prevent
entry into domestic airline markets. The Justice Department
therefore closed its antitrust investigation in October 1996.
Even if the payment of overrides does not violate the antitrust laws,
the practice does discourage entry. Numerous airlines that started
after deregulation told us that they have discontinued certain routes
because the major travel agency in each market would book passengers
only on the dominant carrier, from which the agency receives
overrides. For example, Southwest Airlines' executive vice president
of corporate services, vice president of marketing, and general
counsel stated that the impact of overrides offered by Northwest on
travel agents' booking patterns was a key factor in Southwest's
decision to exit the Detroit-Indianapolis market.
Many of the airlines that started after deregulation noted that the
influence of overrides in a particular market is now a critical
factor for them in determining whether to enter a market, especially
those markets that have a relatively large proportion of higher
fare-paying business traffic. For example, Midwest Express, which
targets the business travel market, stated that the overrides offered
by Northwest in large part caused it to exit the Milwaukee-Detroit
market in 1991. Also, the senior vice president of marketing for
Midwest Express maintained that the overrides offered by American and
United forced the airline to discontinue service in 1995 between
Rockford, Illinois (via Milwaukee), and Boston, LaGuardia, Newark,
Philadelphia, and Washington National. In testimony for the Justice
Department, Midwest Express' national sales manager described the
impact of overrides on the airline's decision to enter new markets:
"Because of our experiences in the Detroit- Milwaukee and
Rockford-East Coast markets, when we consider entering a market
we first establish that we will not be foreclosed from a
substantial share of the market by the large important travel
agencies. For example, we recently analyzed the feasibility of
expanding to Omaha, Nebraska. As part of our analysis, we
included an investigation of the Omaha travel agency market and
determined that one travel agency sold approximately 62 percent
of the airline tickets sold in Omaha. We believed that it was
critical to our entry decision and ultimate success in the city
to determine whether this agency was willing to promote and sell
Midwest Express service to their customers. In fact, we did not
provide service to Omaha until we met with this dominant travel
agency and received some assurances that we would receive their
support."
Similarly, Air South, a low-fare airline headquartered in Columbia,
South Carolina, exited several southeastern markets because it was
not attracting a sufficient amount of business traffic. Concerned
that overrides were the cause of its inability to attract business
travelers, the airline in 1995 hired a private consultant to test the
extent to which agents might have been steering traffic away from Air
South. The consultant found that agents in some cities dominated by
one airline often did not provide Air South's competing flight
options in response to anonymous inquiries, even though those options
were listed in CRSs. In Miami, for example, travel agents did not
initially inform callers of available Air South flights 56 percent of
the time, and even after the lowest fare was requested, the agents
did not mention Air South 30 percent of the time. Instead, the
agents frequently recommended flights by American Airlines, the
largest carrier in Miami. Both the CEO and the president of American
Airlines emphasized to us that such agreements are standard marketing
tools that any airline can offer. Moreover, American Airlines' CEO
noted that it was simply good business practice for an airline to
encourage travel agents to steer traffic to it.
Representatives of several airlines that started after deregulation
told us that, in their view, the importance of overrides to travel
agencies has increased as a result of the initiative by most
established airlines in 1995 to lower base commissions from 10
percent to 8 percent and to cap the total amount of base commission
that they will pay. Many travel agencies we interviewed confirmed
this view. The CEO of Frontier Airlines told us that the increasing
importance of overrides to travel agents led earlier this year to
Frontier's exiting all four of the markets in North Dakota that it
was serving. Before exiting those markets, Frontier wrote DOT:
"With the cap on travel agent commissions, incentive overrides
have become dearly important to travel agents. One of our
competitors in North Dakota is telling agents they can only
receive overrides if they book more than 90 percent of their
flights on it. How can we compete when 90 percent of travel
agent customers are steered away from us?"
The existence of overrides also tends to limit the entry of
established carriers into new markets. Senior executives at one
major travel agency told us, for example, that when one established
airline attempted to enter a number of markets dominated by another
established airline, the nonincumbent complained that agents were not
booking passengers on its flights in those markets. The travel
agency, which has override agreements with both carriers, told the
nonincumbent that it could not "support" it in those markets because
it also had an override agreement with the incumbent carrier and that
those were key markets for the incumbent. As a result, according to
the travel agency's senior management, the nonincumbent later pulled
out of those markets.
Our discussions with representatives of 9 of the 10 largest U.S.
travel agencies, which in 1995 accounted for over one-third of all
ticket sales by travel agents, generally confirmed the importance of
overrides.\18 (App. II lists these 10 agencies and the percentage of
their sales resulting from business travel.) According to all of
these agencies, several other factors have more of an impact on
booking decisions than overrides. These factors include consumers'
desire to obtain the lowest available fare and to accumulate frequent
flier miles, scheduling convenience, and pre-existing contracts
between individual businesses and particular airlines. Nevertheless,
most estimated that about 25 percent of the time, the customer defers
to the travel agent, and in these cases overrides tend to be the
"tie-breaker." Most agencies with whom we spoke termed overrides
"very important." Representatives of one agency noted that because of
the commission caps imposed by most of the established airlines, its
entire profit last year was the result of overrides.
In our August 1990 report, we expressed concern that overrides had
the potential to influence a larger proportion of airline bookings
than the proportion estimated by travel agencies. We cited, for
example, a 1987 travel industry study which found that 51 percent of
the travel agents who were surveyed chose a particular airline
because of overrides at least some of the time.\19
However, we concluded that, short of an outright ban on overrides,
few policy options existed that would mitigate overrides' negative
impact on new entry.
--------------------
\18 The nation's second largest travel agency, Carlson Wagonlit,
declined to meet with us to discuss the topic of overrides. Carlson
is headquartered in Minneapolis.
\19 The 1987 Travel Agency Market (July 1988).
FREQUENT FLIER PLANS HAVE
INCREASED BUSINESS
PASSENGERS' LOYALTY TO
ESTABLISHED AIRLINES
---------------------------------------------------------- Letter :4.2
Since their inception in the early 1980s, frequent flier plans have
become an increasingly effective tool to encourage customers' loyalty
to particular airlines. Under these plans, passengers qualify for
awards by flying a certain number of miles with the sponsoring
airline. Thus, business passengers who travel frequently have a
greater incentive to fly that particular airline continuously in
order to build miles that may later be used for free trips. The
director of advertising and promotions at one established carrier
estimated that of the 20 million members of that airline's frequent
flier plan, nearly 1 million fly more than 25,000 miles a year, and
25,000 members fly more than 100,000 miles a year. While emphasizing
that other factors, such as the convenience of an airline's flight
schedule, are more important determinants in attracting the business
traveler, he characterized the frequent flier plan as "the icing on
the cake" in ensuring that the customers who travel the most, and who
usually pay the highest fares, fly on that airline. Recognizing the
effectiveness of frequent flier plans, the established airlines have
made it easier for passengers to accumulate miles. They now often
award miles, for example, for each dollar that a passenger spends
when using a particular credit card or for each night's stay at a
particular hotel chain.
The increasing use of frequent flier plans exacerbates the impact of
overrides and further solidifies the dominant carrier's position in a
market. As with overrides, however, we have reported that few policy
options exist, short of an outright ban, that would mitigate the
impact on entry of frequent flier plans. The travel agencies with
whom we spoke noted that business travelers often request to fly only
on the airline with which they have a frequent flier plan. They also
noted that they work with corporations to ensure that the travel
contracts that those companies have with the airlines will satisfy
the employees' desire to accumulate miles on the major airline in a
particular market as well as accommodate the agency's override
agreement with that airline. As a result, entry by new and
established airlines alike into a market dominated by one carrier is
very difficult.
OTHER MARKETING STRATEGIES
FURTHER STRENGTHEN
INCUMBENTS' POSITION AND
THWART ENTRY
---------------------------------------------------------- Letter :4.3
Other marketing strategies that we examined in 1990 also continue to
present barriers to entry. Code-sharing agreements between airlines
and commuter carriers, for example, work to eliminate potential
competitors by foreclosing connecting traffic from new airlines that
do not have such agreements. As a result, code-sharing allows an
incumbent to strengthen its position at a hub even further. In
August 1990, we reported that the airlines' ownership of the four
CRSs--Apollo, Sabre, System One, and Worldspan--raises the costs for
potential entrants.\20
Agents tend to prefer the airline whose CRS they use, which limits
the available market for the new entrant. In addition, ownership
affords established airlines more timely access to the booking data
generated by the CRS, which allows them to better monitor the booking
patterns of travel agents.
While these factors still exist and work to further an incumbent's
position in a market, they were cited less often by airlines as a
barrier to entry than overrides and frequent flier plans. In part,
these factors have become less important because DOT has sought to
eliminate any bias in the listing of flights on CRS screens that
would favor code-sharing flights or a particular airline. In August
1996, it proposed rules to ensure that connecting flights between
code-share partners are not listed ahead of other connecting flights
when the latter have a shorter total elapsed trip time. In addition,
the emergence of alternative means of booking flights, such as the
Internet, may be lessening the importance of CRSs.
--------------------
\20 As of August 1996, American owned 100 percent of the largest CRS
(Sabre); United and USAir owned 98 percent of the second largest
(Apollo); Delta, Northwest, and TWA owned 95 percent of the third
largest (Worldspan); and Continental owned 33 percent of the fourth
largest (System One).
BARRIERS TO ENTRY CONTRIBUTE TO
HIGHER AIRFARES, BUT EFFECT ON
QUALITY OF SERVICE IS MORE
DIFFICULT TO MEASURE
------------------------------------------------------------ Letter :5
While many factors, such as the relative amounts of business and
leisure travel, affect the average airfares at an airport, the
markets affected by operating barriers tend to have much higher
fares. Forty-three airports comprise FAA's large hub classification.
As figure 2 shows, the fares were generally much higher in 1995 at
the 10 airports in this group affected by operating barriers than at
the other 33 airports. On average, the fares, adjusted for flight
distances, were 31 percent higher at the airports having operating
barriers.\21 Likewise, fares are higher in markets where one airline
accounts for the vast majority of passenger enplanements. By
discouraging entry, the airlines' various marketing strategies
perpetuate such dominance. Five of the constrained airports shown in
figure 2--Cincinnati, Pittsburgh, Charlotte, Minneapolis, and
Detroit--also had one carrier in 1995 that accounted for over 75
percent of their enplanements. An analysis by DOT confirms this. In
April 1996, the agency reported that in 1995 fares at Cincinnati,
Charlotte, Minneapolis, and Pittsburgh were the highest among the
nation's largest 60 airports.\22
Figure 2: Percentage
Difference in Fares at Each of
the 10 Constrained Airports
Compared to Fares at the Other
33 Airports That Make Up FAA's
Large Hub Classification, 1995
(See figure in printed
edition.)
Source: GAO's analysis of DOT's data.
Measuring the effects of barriers to entry on the quality of service
in these markets, however, is more difficult. While barriers to
entry reduce the number of airline options available, consumers in
these markets receive benefits in other ways. At each of the
constrained airports identified above, an established airline has
made the airport a key hub in its hub-and-spoke route network. As a
result, these airports can offer consumers in those communities
nonstop flights to a large number of destinations. Because they are
hubs, these airports can also offer consumers in nearby communities
convenient one-stop service to those same destinations. In addition,
the frequency of flights from a hub is often substantially higher
than could be justified by local traffic because the majority of
travelers who fly from a spoke city to a hub travel beyond the hub on
another flight to a different spoke destination.
Likewise, the marketing strategies used by incumbents to fortify
their positions also produce benefits to consumers. For example,
consumers receive free trips as a result of frequent flier plans. In
addition, code-sharing partnerships between incumbents and commuter
carriers result in shorter layover times on connecting flights and in
more frequent flights than could otherwise be supported by local
traffic.
--------------------
\21 Because the data on fares are developed from DOT's statistical
sample of tickets, they have a measurable precision, or sampling
error. App. III provides the sampling errors for the data provided
in this section.
\22 The Low Cost Airline Service Revolution, DOT (Apr. 1996). DOT
obtained slightly different results than we did because it combined
data for Washington's National and Dulles airports; Newark,
LaGuardia, and Kennedy airports; and for Chicago's O'Hare and Midway
airports.
CONCLUSIONS
------------------------------------------------------------ Letter :6
As originally intended, the deregulation of the airline industry has
spurred new entry and intense competition in many domestic markets,
leading to lower fares and better service for most air travelers.
However, the full benefits of deregulation have yet to be realized
because of problems with access to certain airports and the
cumulative effect of certain marketing strategies employed by the
established airlines.
In particular, artificial constraints on entry, in the form of slots,
have combined with restrictive gate-leasing arrangements to limit
competition at key airports in the East and upper Midwest,
contributing to significantly higher fares at these airports.
Meanwhile, efforts by the Congress and several airport authorities to
spur entry at these airports have achieved little success. The
limits on flight distances to and from LaGuardia and National and
growing capacity constraints at Chicago's Midway Airport exacerbate
the problem and make it clear that in the absence of action to remove
or lower these barriers, consumers in these regions will continue to
pay higher airfares. However, any action to address these barriers
must take into account the substantial investments that established
airlines have made in these airports and in developing their service.
In this regard, we identified a number of policy options 6 years ago
that DOT could consider to lower these barriers and increase
competition. Since then, there has been little progress toward
reducing these barriers, and some, such as slots, have grown worse.
Therefore, we believe that DOT must now take positive steps to
address several of the most serious barriers. In addition,
congressional action would be required for two other areas affecting
the competitive environment--the standard governing the availability
of slots to new entrants and the perimeter rule at Washington
National Airport.
RECOMMENDATIONS
------------------------------------------------------------ Letter :7
To promote competition in regions that have not experienced lower
fares as a result of airline deregulation, we recommend that the
Secretary of Transportation:
-- create a pool of available slots by periodically withdrawing
some slots that were grandfathered to the major incumbents,
taking into account the investments made by those airlines at
each of the slot-controlled airports, and hold a lottery to
distribute them in a fashion that increases competition and
-- direct the Administrator, FAA, to make an airport's efforts to
have gates available to nonincumbents a factor in FAA's
decisions on federal grants to airports.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
------------------------------------------------------------ Letter :8
If DOT does not choose to create a slot pool, the Congress may wish
to revise the legislative standard governing DOT's granting of
additional slots to accommodate new entrants. Specifically, the
Congress may want to make the consideration of competitive benefits a
key criterion, taking into account the need to balance the benefits
of increased competition with the possible costs from increased
congestion and communities' concerns about aircraft noise. Finally,
the Congress may also wish to grant the Secretary of Transportation
the authority to allow exemptions to the perimeter rule at National
Airport when the proposed service will substantially increase
competition.
AGENCY COMMENTS
------------------------------------------------------------ Letter :9
We provided a copy of a draft of this report to DOT for review and
comment. We met with DOT officials, including the Deputy Assistant
Secretary for Aviation and International Affairs, the Assistant
General Counsel for Aviation Enforcement and Proceedings, and the
Director, Office of Aviation and International Economics, who
generally agreed with the report. DOT noted that if a slot lottery
was held, a number of factors, such as the overall impact on air
service at all affected communities, would have to be considered in
deciding how to reallocate any slots that are withdrawn.
Nevertheless, officials in FAA's Office of the Chief Counsel,
including the managers of the Air Space and Air Traffic Law Branch
and the Slot Administration Office, stated that such a lottery could
be implemented with little administrative difficulty. DOT also
suggested several revisions to the wording in our draft report, which
we have incorporated where appropriate. DOT chose not to comment on
our recommendations or matters for congressional consideration at
this time but noted that it would comment as part of the agency's
required response under 31 U.S.C. 720.
SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :10
To determine if barriers to entry exist and, if so, the extent to
which they prevent airlines from entering new markets, we interviewed
the senior management of all 10 established airlines and 26 of the 38
airlines that started after deregulation and that operated in 1995.
Taken together, the established airlines and those that started after
deregulation that we interviewed accounted for 98.5 percent of the
scheduled airline passenger enplanements in 1995. We also
interviewed executives of several airlines that began operations in
early 1996. In general, these interviews involved the vice
presidents of operations and marketing for an airline, and in many
cases, the CEO. We also interviewed officials at DOT, FAA, and the
Justice Department as well as representatives of 9 of the 10 largest
U.S. travel agencies and the 4 CRS vendors. Largely as a result of
the issues raised during these discussions, we conducted field work
in Atlanta, Georgia; Chicago, Illinois; Columbia, South Carolina;
Dallas, Texas; Detroit, Michigan; Minneapolis, Minnesota; New York,
New York; and Washington, D.C. (App. III provides additional
details on our scope and methodology.)
Our review was conducted from May through October 1996 in accordance
with generally accepted government auditing standards.
--------------------------------------------------------- Letter :10.1
As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter. At that time, we will
send copies to the Secretary of Transportation; the Administrator,
FAA; the Director, Office of Management and Budget; and other
interested parties. We will send copies to others upon request.
If you have any questions, please call me at (202) 512-2834. Major
contributors to this report are listed in appendix IV.
Sincerely yours,
John H. Anderson, Jr.
Director, Transportation and
Telecommunications Issues
U.S. SCHEDULED PASSENGER
AIRLINES, THEIR NUMBER OF
SCHEDULED PASSENGER ENPLANEMENTS,
FLEET SIZE, AND OPERATING RESULTS,
1995
=========================================================== Appendix I
Number of
passenger Operating profit
Airline enplanements Number of aircraft or (loss)
----------------------------- ------------------ ------------------ ------------------
Established
-----------------------------------------------------------------------------------------
Delta Air Lines 82,668,192 539 $1,038,427,000
United Airlines 71,962,701 558 831,937,000
American Airlines 71,077,340 635 967,588,000
USAir 55,737,601 394 234,651,000
Northwest Airlines 44,518,505 380 910,224,000
Continental Airlines 33,512,847 317 238,200,000
TWA 20,636,726 186 36,956,000
Alaska Air 9,795,941 74 72,424,000
Aloha 5,102,870 15 (7,962,000)
Hawaiian 4,764,992 21 (602,000)
=========================================================================================
Total 399,777,715 3,119 $4,321,843,000
Airlines started after deregulation
-----------------------------------------------------------------------------------------
Independent
Southwest Airlines 50,038,707 224 $308,548,000
America West 16,697,006 93 154,733,000
Valujet 5,137,432 51 107,676,374
Reno Air 3,816,289 21 3,856,946
American Trans Air 2,358,609 46 15,212,960
Kiwi Airlines 1,649,852 15 (757,519)
Carnival 1,527,861 22 7,292,764
Midwest Express 1,390,412 22 30,080,342
Midway 1,233,511 12 1,394,000
Air South 994,658 7 (13,490,782)
Markair 989,608 15 (10,530,869)
Tower 972,817 15 13,516,436
Vanguard 778,863 8 (11,405,321)
Western Pacific 731,198 15 (6,851,886)
Spirit Air 623,028 7 4,466,869
Frontier 611,257 9 (8,578,064)
Casino Express 205,300 2 (1,647,405)
AirTran Airways 146,633 10 (3,634,008)
Grand 137,830 2 (250,368)
Nations Air 134,822 2 (8,671,225)
Tristar 76,306 4 (6,962,799)
Reeve Aleutian 59,738 5 (2,868,000)
Eastwind 44,365 2 (2,707,441)
World 2,697 8 10,351,000
Prestige Airways 1,146 4 (437,804)
Great American 162 7 4,103,435
MGM Grand 36 6 (3,889,867)
=========================================================================================
Total 90,360,143 634 $578,548,768
Affiliates of established airlines
-----------------------------------------------------------------------------------------
Simmons 4,958,927 81 (35,379,863)
Horizon Air 3,629,281 65 4,323,000
Continental Express 3,655,730 79 17,255,799
Atlantic Southeast 3,066,897 84 75,875,107
Mesa 2,143,043 175 14,569,403
Trans States 1,725,412 53 12,584,273
Business Express 1,637,170 63 (9,823,191)
Air Wisconsin 1,619,807 13 3,502,076
USAir Shuttle 1,403,368 12 17,772,819
Executive Airlines 1,190,371 33 (7,252,135)
UFS 655,964 10 2,757,156
=========================================================================================
Total 25,685,970 668 $96,184,444
=========================================================================================
System total 515,823,828 4,421 $4,996,576,212
-----------------------------------------------------------------------------------------
Note 1: Markair went out of business in late 1995. In addition,
several airlines, including JetTrain, Air21, and the new Pan Am,
began operations in 1996 and therefore are not listed above.
Note 2: Because the number of aircraft in an airline's fleet
frequently changes, we updated, to the extent possible, the number of
aircraft to reflect operations in 1996 according to our discussions
with airline executives.
Source: DOT Form 41, the Air Transport Association, and GAO's
interviews with the airlines' executives.
THE TOP 10 U.S. TRAVEL AGENCIES
AND THE PERCENTAGE OF THEIR
BOOKINGS THAT CONSTITUTES BUSINESS
TRAVEL, 1995
========================================================== Appendix II
Percentage of
Total airline sales that are for
Travel agency Headquarters sales ($000) business travel
---------------------------- ------------------- ------------------ ------------------
American Express New York, NY $7,300,000 95
Carlson Wagonlit Minneapolis, MN 2,426,947 74
Rosenbluth Philadelphia, PA 1,800,000 97
BTI Americas Northbrook, IL 1,634,933 85
Sato Arlington, VA 1,107,141 80
Maritz Fenton, MO 1,001,000 98
WorldTravel Partners Atlanta, GA 505,000 95
Omega Fairfax, VA 413,000 75
Travel and Transport Omaha, NE 381,000 82
Travel One Mt. Laurel, NJ 355,000 95
=========================================================================================
Total for top 10 16,924,021
=========================================================================================
Other 23,668 agencies 44,269,598
=========================================================================================
Total $61,193,619
-----------------------------------------------------------------------------------------
Source: "Business Travel Survey," Business Travel News, May 1996,
and the Airlines Reporting Corporation.
SCOPE AND METHODOLOGY
========================================================= Appendix III
During our initial discussions with many airline executives, several
barriers to entry, including slots and the lack of competitive access
to gates at Detroit, Minneapolis, and Newark, were repeatedly cited.
As result of those discussions, we visited several locations to
further examine these issues. To the extent possible at each
location, we discussed whether barriers to entry existed with
representatives of the relevant airlines, airports, major travel
agency, and CRS vendor. Specifically, we met with representatives
of:
-- Delta Air Lines, Valujet Airlines, World Travel Partners, and
Worldspan in Atlanta;
-- United Airlines and the Chicago Department of Aviation in
Chicago;
-- Air South in Columbia, South Carolina;
-- American Airlines, Southwest Airlines, and Sabre in Dallas;
-- Detroit Metropolitan Airport and Detroit City Airport in
Detroit;
-- Minneapolis/St. Paul International Airport in Minneapolis;
-- Tower Air, USAir Shuttle, Kiwi International Airlines, the Port
Authority of New York & New Jersey, and American Express Travel
in New York; and
-- Continental Airlines, Northwest Airlines, TWA, USAir, Apollo,
and the Metropolitan Washington Airports Authority in
Washington, D.C.
Overall, we interviewed executives at all 10 established airlines and
at 26 airlines that started after deregulation and that operated in
1995. Of the 26 airlines, 19 were not affiliates of the established
carriers. These airlines were Southwest, America West, Valujet,
Reno, American Trans Air, Kiwi, Carnival, Midwest Express, Midway,
Air South, Tower, Vanguard, Western Pacific, Spirit, Frontier,
AirTran, Tristar, Eastwind, and Prestige Airways. The remaining
seven post-deregulation airlines that we interviewed--Simmons,
Horizon Air, Continental Express, Atlantic Southeast, Mesa, USAir
Shuttle, and Executive Airlines--were affiliates of the established
carriers.
In addition, we analyzed DOT's data on fares and service to determine
how the barriers that we identified affected the domestic market. To
examine the potential effects on fares, we compared yields at the 10
airports affected by operating barriers with yields at the other 33
airports that make up FAA's large hub airport classification. The
yields were based on fares from both enplaning and deplaning traffic
at the airport. Additionally, any routes that had fewer than 10
passengers per day were eliminated. Because each airport has a
different distribution of flight lengths, an overall yield for each
airport could be distorted by differences in route lengths among the
airports.\23 Therefore, we made the comparisons within each of nine
distance categories, in 250-mile increments, based on the one-way
straight-line miles between the origin and destination.
Within each distance category, we compared the yields at each of the
10 constrained airports with the overall yield for the remaining 33
airports and calculated the percentage differences. To obtain a
single measure for each of the 10 airports, we averaged the nine
calculated percentages for each airport, weighting them by the number
of passengers flying in each of the nine distance categories. The
resulting percentage differences are therefore adjusted for distance,
as well as for the particular passenger distributions at each airport
across the distance categories.
Because we analyzed data that were drawn from a statistical sample of
tickets purchased, each estimate developed from the sample has a
measurable precision, or sampling error. The sampling error is the
maximum amount by which the estimate obtained from a statistical
sample can be expected to differ from the true universe value.
Sampling errors are usually stated at a certain confidence level--in
this case, at a 95-percent level. This means that the chances are 19
out of 20 that if we reviewed all tickets purchased, the results
would differ from the estimates obtained from our sample by less than
the sampling errors of such estimates. Table III.1 provides the
sampling errors for the percentages that the fares at each of the 10
constrained airports were higher (or lower, in the case of Kennedy
airport) than the other 33 airports that make up FAA's large hub
classification.
Table III.1
Percentage Difference in Fares at Each
of the 10 Constrained Airports Compared
to Fares at the Other 33 Airports That
Make Up FAA's Large Hub Classification,
1995
Percentage
difference in Sampling error at
fares compared to 95-percent
other large confidence level
Constrained airport airports, 1995 (+ or -)
------------------------------ ------------------ ------------------
Charlotte + 87.81 1.43
Cincinnati + 84.47 1.60
Pittsburgh + 72.23 1.22
Washington National + 46.39 0.77
Minneapolis + 45.32 0.91
New York LaGuardia + 34.64 0.68
Detroit + 26.56 0.75
Newark + 24.26 0.63
Chicago O'Hare + 23.76 0.58
New York Kennedy -4.08 0.68
======================================================================
Overall + 31.06 0.40
----------------------------------------------------------------------
Source: GAO's analysis of DOT's data.
Finally, we analyzed data provided by FAA's Slot Administration
Office on slot holdings at O'Hare, Kennedy, LaGuardia, and National
to determine the extent to which the possession of slots had become
concentrated among a few incumbent airlines. We also received
assistance from a consultant, Mark R. Dayton, who was a Senior
Program Officer during the National Research Council's examination in
1991 of trends in fares, service, and safety since deregulation.\24
--------------------
\23 Because long distance routes have lower yields, an airport with a
preponderance of long distance routes would appear less expensive
than one with mostly short distance routes.
\24 Winds of Change: Domestic Air Transport Since Deregulation,
National Research Council, Special Report 230 (Washington, D.C.,
1991).
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C.
Gerald L. Dillingham, Associate Director
Francis P. Mulvey, Assistant Director
Timothy F. Hannegan
M. Aaron Casey
Julian L. King
Sara Ann W. Moessbauer
RELATED GAO PRODUCTS
============================================================ Chapter 0
Changes in Airfares, Service, and Safety Since Airline Deregulation
(GAO/T-RCED-96-126, Apr. 25, 1996).
Airline Deregulation: Changes in Airfares, Service, and Safety at
Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19,
1996).
Airline Competition: Essential Air Service Slots at O'Hare
International Airport (GAO/RCED-94-118FS, Mar. 4, 1994).
Airline Competition: Higher Fares and Less Competition Continue at
Concentrated Airports (GAO/RCED-93-171, July 15, 1993).
Airline Competition: Options for Addressing Financial and
Competition Problems, Testimony Before the National Commission to
Ensure a Strong Competitive Airline Industry (GAO/T-RCED-93-52, June
1, 1993).
Computer Reservation Systems: Action Needed to Better Monitor the
CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20,
1992).
Airline Competition: Effects of Airline Market Concentration and
Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).
Airline Competition: Weak Financial Structure Threatens Competition
(GAO/RCED-91-110, Apr. 15, 1991).
Airline Competition: Fares and Concentration at Small-City Airports
(GAO/RCED-91-51, Jan. 18, 1991).
Airline Deregulation: Trends in Airfares at Airports in Small and
Medium-Sized Communities (GAO/RCED-91-13, Nov. 8, 1990).
Airline Competition: Industry Operating and Marketing Practices
Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990).
Airline Competition: Higher Fares and Reduced Competition at
Concentrated Airports (GAO/RCED-90-102, July 11, 1990).
Airline Deregulation: Barriers to Competition in the Airline
Industry (GAO/T-RCED-89-65, Sep. 20, 1989).
Airline Competition: DOT's Implementation of Airline Regulatory
Authority (GAO/RCED-89-93, June 28, 1989).
Airline Service: Changes at Major Montana Airports Since
Deregulation (GAO/RCED-89-141FS, May 24, 1989).
Airline Competition: Fare and Service Changes at St. Louis Since
the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988).
Competition in the Airline Computerized Reservation Systems
(GAO/T-RCED-88-62, Sept. 14, 1988).
Airline Competition: Impact of Computerized Reservation Systems
(GAO/RCED-86-74, May 9, 1986).
Airline Takeoff and Landing Slots: Department of Transportation's
Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986).
Deregulation: Increased Competition Is Making Airlines More
Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov. 6,
1985).
*** End of document. ***