Domestic Aviation: Service Problems and Limited Competition Continue in
Some Markets (Testimony, 04/23/98, GAO/T-RCED-98-176).

GAO discussed its work on the effects of airline deregulation, focusing
on: (1) fare and service trends; (2) factors contributing to service
problems; and (3) the initiatives by the Department of Transportation
(DOT) and others to address these problems.

GAO noted that: (1) not all communities have benefited from airline
deregulation; (2) certain airports--particularly those serving small and
medium-sized communities in the East and upper Midwest--have experienced
higher fares or poorer service since deregulation; (3) there are several
reasons for the substantial regional differences in fare and service
trends, including the dominance of routes to and from these airports by
one or two traditional hub and spoke airlines and operating barriers,
such as long-term, exclusive-use gate leases at hub airports; (4) in
contrast, the more widespread entry of new airlines at airports in the
West and Southwest since deregulation--and the resulting geographic
differences in fare and service trends--has stemmed from the greater
economic growth in these regions as well as from the absence of dominant
market positions of incumbent airlines and barriers to entry; (5)
operating barriers--slot controls, restrictive gate leases, and
perimeter rules--continue to block entry at key airports and contribute
to fare and service problems in the East and upper Midwest; (6) to
minimize congestion and reduce flight delays, the Federal Aviation
Administration has set limits since 1969 on the number of takeoffs or
landings--referred to as slots--that can occur during certain periods of
the day at four congested airports--Chicago O'Hare, Ronald Reagan
Washington National, and New York's Kennedy and LaGuardia; (7) a few
airlines control most of the slots at these airports, which limits new
entrants; (8) these operating barriers, combined with certain marketing
strategies by established carriers, have deterred new entrant airlines
while fortifying established carriers' dominance at key hubs in the East
and upper Midwest; (9) similarly, marketing and business alliances
between major carriers may affect competition in markets where they
dominate; (10) increasing competition and improving air service at
airports serving communities that have not benefited from deregulation
will likely entail a range of federal, regional, local, and
private-sector initiatives; (11) DOT has recently undertaken several
efforts designed to enhance competition, such as granting slots to new
entrants at 2 airports with slot controls and issuing draft guidelines
that define anticompetitive behavior by airlines that could lead to an
investigation and possible fines by DOT; and (12) in addition, recently
propose legislation would seek to increase air service in underserved
markets and address barriers to competition and predatory behavior by
air carriers.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-98-176
     TITLE:  Domestic Aviation: Service Problems and Limited Competition 
             Continue in Some Markets
      DATE:  04/23/98
   SUBJECT:  Airline industry
             Airline regulation
             Competition
             Airports
             Air transportation operations
             Commercial aviation
             Proposed legislation
             Marketing
             Restrictive trade practices
IDENTIFIER:  Chicago-O'Hare International Airport (Chicago, IL)
             John F. Kennedy International Airport (NY)
             Ronald Reagan Washington National Airport (DC)
             LaGuardia International Airport (New York, NY)
             New York (NY)
             Cincinnati (OH)
             Charlotte (NC)
             Dallas (TX)
             Newark (NJ)
             Minneapolis (MN)
             Pittsburgh (PA)
             Detroit (MI)
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Before the Subcommittee on Aviation,
Committee on Transportation and Infrastructure,
House of Representatives

For Release
on Delivery
Expected at
9:30 a.m.  EDT
Thursday
April 23, 1998

DOMESTIC AVIATION - SERVICE
PROBLEMS AND LIMITED COMPETITION
CONTINUE IN SOME MARKETS

Statement of John H.  Anderson, Jr.,
Director, Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-176

GAO/RCED-98-176T


(348093)


Abbreviations
=============================================================== ABBREV

  AA - American Airlines
  BA - British Airways
  BTCC - Business Travel Contractors Corporation
  DOT - Department of Transportation
  FAA - Federal - Aviation Administration
  SPOKES - Special Places of Kindred Economic Situation

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify on the air service problems
that some communities have experienced since the deregulation of the
industry in 1978.  Airline deregulation has led to lower fares and
better service for most air travelers largely because of increased
competition spurred by the entry of new airlines into the industry
and established airlines into new markets.  However, as we reported
in 1996 and 1997, some airports have not experienced such entry and
thus have experienced higher fares and/or less convenient service
since deregulation.\1 Our testimony today summarizes the findings
from our prior work on these fare and service trends, factors
contributing to the problems, and the initiatives by the Department
of Transportation (DOT) and others to address these problems.  In
summary: 

  -- Not all communities have benefited from airline deregulation. 
     Certain airports--particularly those serving small and
     medium-sized communities in the East and upper Midwest--have
     experienced higher fares and/or poorer service since
     deregulation.  There are several reasons for the substantial
     regional differences in fare and service trends, including the
     dominance of routes to and from these airports by one or two
     traditional hub-and-spoke airlines\2 and operating barriers,
     such as long-term, exclusive-use gate leases at hub airports. 
     In contrast, the more widespread entry of new airlines at
     airports in the West and Southwest since deregulation--and the
     resulting geographic differences in fare and service trends--has
     stemmed largely from the greater economic growth in these
     regions as well as from the absence of dominant market positions
     of incumbent airlines and barriers to entry. 

  -- Operating barriers--slot controls, restrictive gate leases, and
     perimeter rules--continue to block entry at key airports and
     contribute to fare and service problems in the East and upper
     Midwest.  To minimize congestion and reduce flight delays, the
     Federal Aviation Administration has set limits since 1969 on the
     number of takeoffs or landings--referred to as "slots"--that can
     occur during certain periods of the day at four congested
     airports--Chicago O'Hare, Ronald Reagan Washington National, and
     New York's Kennedy and LaGuardia.  A few airlines control most
     of the slots at these airports, which limits new entrants.  In
     1996, we reported that the vast majority of gates at six
     airports in the East and upper Midwest were exclusively leased
     usually to one airline, making it very difficult to gain
     competitive access to these airports.  In addition, by
     prohibiting flights to and from LaGuardia and National airports
     that exceed certain distances, perimeter rules limit the ability
     of airlines based in the West to compete at these airports. 
     These operating barriers, combined with certain marketing
     strategies by established carriers, have deterred new entrant
     airlines while fortifying established carriers' dominance at key
     hubs in the East and upper Midwest.  Similarly, marketing and
     business alliances between major carriers may affect competition
     in markets where they dominate. 

  -- Increasing competition and improving air service at airports
     serving communities that have not benefited from deregulation
     will likely entail a range of federal, regional, local, and
     private-sector initiatives.  DOT has recently undertaken several
     efforts designed to enhance competition, such as granting slots
     to new entrants at two airports with slot controls and issuing
     draft guidelines that define anticompetitive behavior by
     airlines that could lead to an investigation and possible fines
     by DOT.  In addition, recently proposed legislation would seek
     to increase air service in underserved small or medium-sized
     markets and address barriers to competition and predatory
     behavior by air carriers.  Similarly, recent national and
     regional conferences exemplify efforts to pool available
     resources to focus on improving the airfares and quality of air
     service to such communities.  Other steps--such as improving the
     availability of gates--may also be needed to further ameliorate
     current problems with competition. 


--------------------
\1 Airline Deregulation:  Changes in Airfares, Service, and Safety at
Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr.  19,
1996), Airline Deregulation:  Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct.  18,
1996), Airline Deregulation:  Addressing the Air Service Problems of
Some Communities (GAO/T-RCED-97-187, June 25, 1997), and Domestic
Aviation:  Barriers to Entry Continue to Limit Benefits of Airline
Deregulation (GAO/T-RCED-97-120, May 13, 1997).  Related GAO products
are listed at the end of this statement. 

\2 These airlines include the nation's seven largest:  American
Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines,
TWA, United Airlines, and US Airways. 


   BENEFITS OF DEREGULATION HAVE
   BEEN UNEVEN
---------------------------------------------------------- Chapter 0:1

Our April 1996 report found that since deregulation, as expected,
fares had fallen and service had improved for most large-community
airports.  However, without the cross-subsidy that was present when
the industry was regulated, experts also expected fares to increase
somewhat at airports serving small and medium-sized communities and
expected service to decline.  We found, in fact, that since
deregulation, substantial regional differences had existed in fare
and service trends, particularly among small- and
medium-sized-community airports.  A primary reason for these
differences has been the greater degree of economic growth that has
occurred over the past two decades in the West and Southwest and in
larger communities nationwide.  In particular, we noted that most
low-fare airlines that began interstate air service after
deregulation, such as Southwest Airlines\3 and Reno Air, had decided
to enter airports serving communities of all sizes in the West and
Southwest because of these communities' robust economic growth.  By
contrast, low-fare airlines had generally avoided serving small- and
medium-sized-community airports in the East and upper Midwest, in
part because of the slower growth, harsher weather, and greater
airport congestion in these regions. 

Our review of the trends in fares between 1979 and 1994 for a sample
of 112 small-, medium-sized-, and large-community airports identified
15 airports where fares, adjusted for inflation, had declined by over
20 percent and 8 airports where fares had increased by over 20
percent.\4 Each of the 15 airports where fares had declined was
located in the West or Southwest, and low-fare airlines accounted for
at least 10 percent of the passenger boardings at all but one of
those airports in 1994.\5 On the other hand, each of the eight
airports where fares had increased by over 20 percent since
deregulation was located in the Southeast and the Appalachian region. 

Our April 1996 report also discussed similar trends in the quantity
and quality of air service since deregulation.  Large communities, in
general, and communities of all sizes in the West and Southwest had
experienced a substantial increase in the number of departures and
available seats as well as improvements in such service quality
indicators as the number of available nonstop destinations and the
amount of jet service.  Over time, however, small- and medium-sized
communities in the East and upper Midwest had generally experienced a
decline in the quantity and quality of air service.  In particular,
these communities had experienced a sharp decrease in the number of
available nonstop destinations and in the amount of jet service
relative to turboprop service.  This decrease occurred largely
because established airlines had reduced jet service from these
airports and deployed turboprops to link the communities to these
airlines' major hubs. 


--------------------
\3 Before deregulation, Southwest provided intrastate air service
within Texas. 

\4 Our sample of 112 airports included 49 airports serving small
communities, 38 serving medium-sized communities, and 25 serving
large communities.  In 1994, these airports accounted for about
two-thirds of all domestic airline departures and passenger
enplanements in the United States.  We defined small communities as
those with a metropolitan statistical area population of 300,000 or
less, medium-sized communities as those with a metropolitan
statistical area population of 300,001 to 600,000, and large
communities as those with a metropolitan statistical area population
of 1.5 million or more. 

\5 Of the 15 airports, 5 serve small communities, 5 serve
medium-sized communities, and 5 serve large communities. 


   AIRLINE BARRIERS TO ENTRY
   CONTINUE TO AFFECT COMPETITION
---------------------------------------------------------- Chapter 0:2

We reported in October 1996 that operating barriers at key hub
airports in the upper Midwest and the East, combined with certain
marketing strategies of the established carriers, had two effects on
competition.  The operating barriers and marketing strategies
deterred new entrant airlines and fortified established carriers'
dominance of those hub airports and routes linking those hubs with
nearby small- and medium-sized-community airports.  In the upper
Midwest, there is limited competition in part because two airlines
control over 80 percent of the takeoff and landing slots at O'Hare,
and one airline controls the vast majority of gates at the airports
in Minneapolis and Detroit under long-term, exclusive-use leases. 
Similarly, in the East, single airlines control the vast majority of
gates under exclusive-use leases at Cincinnati, Charlotte, and
Pittsburgh, and a few established airlines control most slots at
National, LaGuardia, and Kennedy.  Perimeter rules at LaGuardia and
National further limit the ability of airlines based in the West to
compete in those markets. 

Particularly for these key markets in the upper Midwest and East, the
relative significance of these barriers in limiting competition and
contributing to higher airfares has grown over time.  As a result,
our October 1996 report recommended that DOT take action to lower the
operating barriers and highlighted areas for potential congressional
action.  Our 1996 report also discussed the effects that some
marketing strategies by incumbent airlines have on competition. 


      SLOTS
-------------------------------------------------------- Chapter 0:2.1

To reduce congestion, the Federal Aviation Administration (FAA) has
limited since 1969 the number of takeoffs and landings that can occur
at O'Hare, National, LaGuardia, and Kennedy.  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.  To minimize the
government's role in the allocation of slots, in 1985 DOT began to
allow airlines to buy and sell them to one another.  Under this
"Buy/Sell Rule," DOT "grandfathered" slots to the holders of record
as of December 16, 1985.  Emphasizing that it still owned the slots,
however, DOT 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 1986 distributed them in a random
lottery to airlines having few or no slots at those airports. 

Even with the lottery, we found that the level of control over slots
by a few established airlines had increased over time.  By contrast,
the share held by the airlines that started after deregulation had
remained low.  (See app.  I.) To address this problem, in October
1996, we recommended that DOT redistribute some of the grandfathered
slots to increase competition, taking into account the investments
made by those airlines at each of the airports with slot controls. 
We were envisioning that a small percentage of slots would be
redistributed.  In response to our report, DOT has begun to use the
authority that the Congress gave it in 1994 to allow additional slots
for entry at O'Hare, LaGuardia, and Kennedy.\6 In October 1997, DOT
awarded Reno Air and Trans States Airlines exemptions from slot
limitations at O'Hare, while Frontier Airlines, ValuJet Airlines,\7
and AirTran Airways were granted exemptions at LaGuardia.  Earlier
this week, DOT granted additional slot exemptions at O'Hare and
LaGuardia.  These exemptions can help to enhance service in the East
and upper Midwest.  For example, Trans States Airlines received 16
exemptions to provide service between O'Hare and Chattanooga,
Tennessee; Roanoke, Virginia; and Tri-Cities, Tennessee/Virginia.\8


--------------------
\6 The FAA Authorization Act of 1994 (P.L.  103-305, section 206)
created an exemption provision to allow additional slots at O'Hare,
LaGuardia, and Kennedy when DOT "finds it to be in the public
interest and the circumstances to be exceptional." 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. 

\7 ValuJet is now AirTran Airlines. 

\8 Each exemption is one arrival or departure. 


      LONG-TERM, EXCLUSIVE-USE
      GATE LEASES
-------------------------------------------------------- Chapter 0:2.2

Our reports have also identified restrictive gate leases as a barrier
to establishing new or expanded service at some airports.  These
leases permit an airline to hold exclusive rights to use most of an
airport's gates over a long period of time, commonly 20 years.  Such
leases prevent nonincumbents from securing necessary airport
facilities on equal terms with incumbent airlines. 

While some airports, such as Los Angeles International, have
attempted to regain more control of their facilities by signing less
restrictive, shorter-term leases once the exclusive-use leases
expired, our October 1996 report identified several airports where
entry was still limited because of long-term, exclusive-use gate
leases with one airline.  The vast majority of gates at six
airports--Charlotte; Cincinnati; Detroit; Minneapolis; Newark, New
Jersey; and Pittsburgh--are exclusively leased, usually to one
established airline.  (See app.  II.) In particular, the airports in
Detroit, Minneapolis, and Newark were most frequently cited by the
airlines that started after deregulation as having competition
limited by gate constraints.  When nonincumbents have gained access
to airports by subleasing gates, the access has generally come at
less preferable times or at a high cost.  For example,
representatives from some 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.  However, Delta Airlines told us
that it currently has seven gates that are unused and available for
subleasing at Cincinnati.  In addition, no new entrant airlines have
requested to sublease US Airways' gates at the Charlotte airport
since 1991, according to the airline. 

Although the development, maintenance, and expansion of airport
facilities is essentially a local responsibility, most airports are
operated under federal restrictions that are tied to the receipt of
federal grant money from FAA.  To address the problems with gate
leases, we recommended that when disbursing airport improvement grant
moneys, FAA give priority to those airports that do not lease the
vast majority of their gates to one airline under long-term,
exclusive-use arrangements.  DOT did not concur with this
recommendation.  According to DOT, because the number of airports
that we identified as presenting problems with access to gates is
sufficiently small, the agency would prefer to address those problems
on a case-by-case basis.  DOT emphasized that in cases in which
incumbent airlines are alleged to have used their contractual
arrangements with local airport authorities to block new entry, the
Department will investigate to determine whether the behavior
constitutes an unfair or deceptive practice or an unfair method of
competition and take action as appropriate.  In March 1998, DOT noted
that it had received some complaints regarding access to gates and it
was considering whether it needed to do more in this area. 


      PERIMETER RULES
-------------------------------------------------------- Chapter 0:2.3

At LaGuardia and National airports, perimeter rules prohibit incoming
and outgoing flights that exceed 1,500 and 1,250 miles, respectively. 
The perimeter rules were designed to promote Kennedy and Dulles
airports as the long-haul airports for the New York and Washington
metropolitan areas.  However, the rules limit the ability of airlines
based in the West to compete because those airlines are not allowed
to serve LaGuardia and National airports from the markets where they
are strongest.  By contrast, because of their proximity to LaGuardia
and National, each of the seven largest established carriers is able
to serve those airports from its principal hub. 

While the limit at LaGuardia was established by the Port Authority of
New York & New Jersey, National's perimeter rule is federal law.\9
Thus, in our October 1996 report, we suggested that the Congress
consider granting DOT the authority to allow exemptions to the
perimeter rule at National when the proposed service will
substantially increase competition.  We did not recommend that the
rule be abolished because removing it could have unintended negative
consequences, such as reducing the amount of service to smaller
communities in the Northeast and Southeast, which could happen if
major slot holders at National were to shift their service from
smaller communities to take advantage of more profitable longer-haul
routes.  As a result, we concluded that a more prudent course to
increasing competition at National would be to examine proposed new
services on a case-by-case basis. 


--------------------
\9 The Metropolitan Washington Airports Act of 1986 (49 U.S.C.  Sec. 
49109). 


      MARKETING STRATEGIES
-------------------------------------------------------- Chapter 0:2.4

Our October 1996 report also emphasized that certain marketing
strategies of incumbent airlines, taken together, had created strong
loyalty among passengers and travel agents, making it difficult for
nonincumbents to enter markets dominated by an established airline. 
Two strategies in particular--booking incentives to travel agents and
frequent flier plans--have encouraged business flyers, who represent
the most profitable segment of the industry, to use the dominant
carrier in each market.  Because about 90 percent of business travel
is booked through travel agencies, airlines strive to influence the
agencies' booking patterns by offering special bonus commissions as a
reward for booking a targeted proportion of passengers on the
airlines.  Similarly, frequent flier programs have become an
increasingly effective tool to encourage customers' loyalty to a
particular airline.  As such, entry by new and established airlines
alike into a market dominated by one carrier is very difficult.  This
is particularly true given that to attract new customers a potential
entrant must announce its schedule and fares well in advance of
beginning service, thus giving the incumbent an opportunity to adjust
its marketing strategies.  In many cases, we found that airlines
chose not to enter or chose to quickly exit markets where they did
not believe they could overcome the combined effect of these
marketing strategies. 

In October 1996, we reported that the effect of these marketing
strategies tends to be the greatest--and fares the highest--in
markets where the dominant carrier's position is protected by
operating barriers.  However, we also noted that the marketing
strategies produced benefits for consumers, such as free frequent
flier trips, and concluded that short of an outright ban, few policy
options existed that would mitigate the marketing strategies'
negative impact on new entry. 


      MARKETING ALLIANCES AMONG
      MAJOR CARRIERS
-------------------------------------------------------- Chapter 0:2.5

Our work has also shown that alliances between major U.S.  and
foreign airlines that allow airlines to market each other's flights
as their own (called "code-sharing") have in several cases generated
large gains for partners in terms of passengers and revenues. 
Although consumers benefit from the conveniences that alliances
provide--such as decreased layover times--we have found that
insufficient data exist to determine what effect alliances have had
on fares in the short term and whether alliances will reduce or
increase competition in the long term and thereby lead to higher or
lower fares. 

We recently reported that the proposed alliance between American
Airlines (AA) and British Airways (BA) raises serious competition
issues in U.S.-United Kingdom markets.\10

Competition issues arise because, under the alliance, rather than
competing with each other, the two largest airlines in U.S.-United
Kingdom markets would in essence be operating as if they were one
airline.  AA and BA compete with one another from six U.S.  airports
to Heathrow and from Dallas to London's Gatwick airport.  At five of
the seven airports where the two airlines compete--Kennedy, Chicago,
Boston, Miami, and Dallas--these two airlines account for over 70
percent of the service.  Although access to slots, gates, and
facilities at Heathrow present the most important issues, experts and
some airline officials told us that AA's and BA's sales and marketing
practices may make competitive entry more difficult for other
airlines.  As a result, we expressed concern that approval of this
alliance could further reduce competition unless, as a condition of
the approval, other U.S.  airlines were able to obtain adequate
access to Heathrow airport.  Recently, several domestic airlines have
been discussing forming code-sharing marketing alliances with each
other that would allow them to act in some ways as a single carrier. 
Such alliances may raise similar competition issues if they result in
fewer airlines providing service on routes. 


--------------------
\10 Aviation Competition:  International Aviation Alliances and the
Influence of Airline Marketing Practices (GAO/T-RCED-98-131, Mar. 
19, 1998). 


   RANGE OF INITIATIVES WILL
   LIKELY BE NEEDED TO ADDRESS AIR
   SERVICE PROBLEMS
---------------------------------------------------------- Chapter 0:3

Because a variety of factors has contributed to the higher fares and
poorer service that some small and medium-sized communities in the
East and upper Midwest have experienced since deregulation, a
coordinated effort involving federal, regional, local, and
private-sector initiatives may be needed.  Recent efforts by DOT and
proposed legislation are aimed at enhancing competition.  Additional
public and private activities are currently under way to address
regional and local air service problems.  If successful, these
initiatives would complement, and potentially encourage, the
increasing use of small jets by the commuter affiliates of
established airlines--a trend that has the potential for increasing
competition and improving the quality of service for some
communities. 


      DOT HAS BEGUN EFFORTS TO
      INCREASE COMPETITION
-------------------------------------------------------- Chapter 0:3.1

In response to our October 1996 report, DOT stated in January 1997
that it shared our concerns that barriers to entry limit competition
in the airline industry.  As we mentioned earlier in this testimony,
in October 1997, DOT granted slots to two new entrants at O'Hare and
three new entrants at LaGuardia.  At the same time, DOT set forth its
new policy on slot exemptions, which has been expanded to take into
account the need for increased competition at the airports with slot
controls.  Earlier this week, DOT announced other slot exemptions but
acknowledged that there are only a limited number of opportunities
for them.  Because some in government and academia believe that slots
at some airports may be underutilized, DOT is also evaluating how
effectively slots are being used at these airports. 

In addition, DOT has expressed concern about potentially
overaggressive attempts by some established carriers to thwart new
entry.  According to DOT, over the past 2 years, there has been an
increasing number of alleged anticompetitive practices--such as
predatory conduct--aimed at new competition, particularly at major
hubs.  On April 6, 1998, DOT issued draft guidelines that define
anticompetitive behavior by major airlines in response to new entry
and could lead to an investigation and possible fines by DOT.\11


--------------------
\11 The draft guidelines state that a major airline will face
enforcement actions if (1) it adds capacity and sells so many seats
at very low fares that lower local revenue results than would result
from a reasonable alternative response; (2) the number of local
passengers that it carries at the low fares exceeds the new entrant's
total seating capacity, resulting in lower local revenue than a
reasonable alternative response would; or (3) the number of local
passengers that it carries at the low fares exceeds the number of
low-fare passengers carried by the new entrant, resulting in lower
local revenue than a reasonable alternative response would. 


      REGIONAL, STATE, AND LOCAL
      INITIATIVES UNDERTAKEN TO
      IMPROVE SERVICE
-------------------------------------------------------- Chapter 0:3.2

Recognizing that federal actions alone would not remedy their
regions' air service problems, several airport directors and
community chamber of commerce officials in the Southeast and
Appalachian regions have begun a coordinated effort to improve air
service in their regions.  As a result of this effort, several
Members of Congress from these regions in turn organized a bipartisan
caucus named "Special Places of Kindred Economic Situation" (SPOKES). 
Among other things, SPOKES is designed to ensure sustained consumer
education and coordinate federal, state, local, and private efforts
to address the air service problems of communities adversely affected
since deregulation.  Two SPOKES-led initiatives include establishing
a Website on the Internet and convening periodic "national air
service roundtables" to bring together federal, state, and local
officials and airline, airport, and business representatives to
explore potential solutions to air service problems. 

The first roundtable, held in Chattanooga in February 1997, concluded
that greater regional, state, and local efforts were needed to
promote economic growth and attract both established and new airlines
to serve small and medium-sized markets in the East and upper
Midwest.  Suggested initiatives included (1) creating regional trade
associations composed of state and local officials, airport
directors, and business executives; (2) offering local financial
incentives to nonincumbent airlines, such as guaranteeing a specified
amount of revenue or providing promotional support; and (3) targeting
marketing efforts by communities toward airlines to spur economic
growth.  A second roundtable was held in Jackson, Mississippi, in
January 1998. 

A regional conference, held in West Virginia in December 1997,
brought together federal and state officials, airport
representatives, and local businesses to discuss ways to restore
quality air service to small communities in the state.  In West
Virginia, Wheeling, Elkins, and Martinsburg, for example, have lost
all scheduled air service since deregulation.  Throughout the state,
communities have experienced declines in the number of nonstop
flights, the number of seats available, and the number of jet
flights.  Regional concerns about air service have extended to other
states, and conferences were recently held in Iowa, Arizona,
Massachusetts, Nevada, New York, Montana, and North Dakota. 

In addition, businesses located in the affected communities have
increasingly attempted to address their communities' air service
problems.  Perhaps the most visible of these efforts was the
formation of the Business Travel Contractors Corporation (BTCC) by 45
corporations, including Chrysler Motors, Procter & Gamble, and Black
& Decker.  These corporations formed BTCC because they were concerned
about the high fares they were paying in markets dominated by one
established airline.  BTCC held national conferences in Washington,
D.C., in April and October 1997 to examine this problem and explore
potential market-based initiatives.  Attendees at the October
conference endorsed concepts that included (1) holding periodic slot
lotteries to provide new entrant airlines with access to airports
with slot controls and (2) allowing new entrants and other small
airlines to serve points beyond the distance established by
National's perimeter rule.  While BTCC suspended operations in
January 1998, its lobbying arm--the Business Travel Coalition--plans
to continue efforts to increase competition. 


      AIRLINES' USE OF REGIONAL
      JETS IS IMPROVING SERVICE
-------------------------------------------------------- Chapter 0:3.3

The increasing use of 50- to 70-seat regional jets is improving the
quality of air service for a growing number of communities. 
Responding to consumers' preference to fly jets rather than
turboprops for greater comfort, convenience, and a perceived higher
level of safety, commuter affiliates of established airlines are
increasingly using regional jets to initiate nonstop service on
routes that are either uneconomical or too great a distance to serve
with slower, higher-cost, and shorter-range turboprops.  For example,
Comair--a commuter affiliate of Delta--initiated regional jet service
between Cincinnati and Des Moines, Iowa; Tulsa, Oklahoma; White
Plains, New York; and Manchester, New Hampshire.  In addition,
commuter carriers are using regional jets to replace turboprops on
existing routes serving small and medium-sized communities.  For
example, Atlantic Coast Airlines--a commuter affiliate of United--has
replaced turboprops with regional jets in markets serving
Raleigh-Durham and Charleston, South Carolina, and Portland, Maine. 

Although U.S.  regional carriers operated only 154 regional jets as
of March 1998, they had ordered more than 250 additional regional
jets and had options to order about 435 more.  Because regional jets
can generally fly several hundred miles farther than turboprops,
commuter carriers will be able to link more cities to established
airlines' hubs.  To the extent that this occurs, it could increase
competition in many small and medium-sized communities by providing
consumers with more service options. 


      PROPOSED LEGISLATION WOULD
      ADDRESS COMPETITION ISSUES
-------------------------------------------------------- Chapter 0:3.4

Over the past several months, a number of bills have been proposed to
promote aviation competition and address some of the problems we and
others have identified at small and medium-sized communities.\12 The
proposals include making additional slots available at National,
O'Hare, Kennedy, and LaGuardia airports to provide service to
underserved communities.  Because of concerns that additional slots
could negatively affect the noise, congestion, and safety at these
airports, the proposals specify that only stage 3 aircraft (aircraft
that meet FAA's most stringent noise standards) can be used, that no
more than six additional slots per day may be granted at National,
and that no more than two slots can be granted per hour at the other
airports.  Other proposals call for increasing access to the airports
with slot controls by periodically withdrawing a small portion of the
slots held by dominant airlines and redistributing them among new
entrant and limited incumbent airlines.  Although the proposals do
not specify how DOT should implement this process, we believe that
such reallocations should take into account the investments made by
the established airlines that would lose some slots and carefully
balance the goals of increasing competition with fair treatment of
the affected parties. 

The proposals also include enhancing air service to underserved areas
by providing up to $10 million each year in grants under certain
circumstances\13 to assist airlines in providing new service to small
underserved airports or setting up a federal loan guarantee for
carriers to purchase regional jet aircraft if they agree to provide
service to underserved communities for at least 2 years.  Some
proposals would require DOT to grant exemptions to the perimeter rule
at National under certain circumstances, limit the time that DOT has
to respond to complaints of predatory behavior, and ensure that all
airport facilities are available to new entrants at fees that are
comparable to the fees paid by incumbent airlines. 


--------------------
\12 For example, see H.R.  2748 (sponsored by Representative J. 
Duncan), H.R.  3160 (sponsored by Representative C.  Schumer), H.R. 
3179 (sponsored by Representative T.  Manton), S.  1331 (sponsored by
Senator J.  McCain), and S.  1353 (sponsored by Senator B.  Frist). 

\13 The funds will be designated if the Secretary of DOT determines
that money from the Essential Air Service Program will not be
obligated by the end of the fiscal year. 


-------------------------------------------------------- Chapter 0:3.5

In summary, a number of factors, including operating barriers and
marketing practices have limited competition at some airports and
adversely affected fares and service.  There are no simple solutions
to these problems.  However, the recent initiatives by DOT,
legislative proposals to remove some operating barriers and enhance
competition in underserved markets, as well as local efforts to
improve service provide steps toward increasing competition and
improving air service for some communities. 

Mr.  Chairman, this concludes our prepared statement.  We would be
glad to respond to any questions that you or any Members of the
Subcommittee may have. 


PERCENTAGE OF DOMESTIC AIR CARRIER
SLOTS HELD BY SELECTED GROUPS
=========================================================== Appendix I

Airport               Holding entity      1986    1991    1996    1998
--------------------  ----------------  ------  ------  ------  ------
O'Hare                American and          66      83      87      82
                       United
                      Other                 28      13       9      12
                       established
                       airlines
                      Financial              0       3       2       0
                       institutions
                      Postderegulation       6       1       1       7
                       airlines


----------------------------------------------------------------------
Kennedy               Shawmut Bank/         43      60      75     83\
                       First Security
                       Bank, American,
                       and Delta\a
                      Other                 49      18      13      14
                       established
                       airlines
                      Other financial        0      19       6       0
                       institutions
                      Postderegulation       9       3       7       3
                       airlines


----------------------------------------------------------------------
LaGuardia             American, Delta,      27      43      64      62
                       and
                       US Airways
                      Other                 58      39      14      28
                       established
                       airlines
                      Financial              0       7      20       5
                       institutions
                      Postderegulation      15      12       2       4
                       airlines


----------------------------------------------------------------------
National              American,             25      43      59      59
                       Delta,
                       and US Airways
                      Other                 58      42      20      32
                       established
                       airlines
                      Financial              0       7      19       5
                       institutions
                      Postderegulation      17       8       3       3
                       airlines
----------------------------------------------------------------------
Notes:  Numbers sometimes do not add to 100 percent because of
rounding. 

Some airlines that held slots have gone bankrupt, and as a result,
financial institutions have acquired slots. 

\a Shawmut Bank held slots as trustee for TWA until 1996; those slots
were held by First Security Bank as of March 1998. 

Source:  GAO's analysis of data from the Federal Aviation
Administration. 


AIRPORTS WHERE POST DEREGULATION
AIRLINES REPORTED DIFFICULTY
GAINING COMPETITIVE ACCESS TO
GATES, AND THE LEASING
ARRANGEMENTS AT THOSE AIRPORTS,
1998
========================================================== Appendix II

                        Total number  Gates under   Major leaseholders
                        of gates for  exclusive-    and dates of lease
Airport                         jets  use leases    expiration
----------------------  ------------  ------------  ------------------
Charlotte                         45  37 (82%)      37 gates leased to
                                                    US Airways until
                                                    2007

Cincinnati                        67  67 (100%)     50 gates leased to
                                                    Delta with 9
                                                    leases expiring in
                                                    2015 and 41
                                                    expiring in 2023\a

Detroit                           86  70 (81%)      59 gates leased to
                                                    Northwest until
                                                    2001

Minneapolis                       70  70 (100%)     22 gates leased to
                                                    Northwest until
                                                    2015,\b 31 gates
                                                    leased to
                                                    Northwest on a
                                                    month-to-month
                                                    basis, and the
                                                    remaining 17 gates
                                                    leased to other
                                                    carriers on a
                                                    month-to-month
                                                    basis

Newark                            94  79 (84%)      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 (88%)      50 gates leased to
                                                    US Airways until
                                                    2018
----------------------------------------------------------------------
\a Delta financed the construction of the 41 gates leased to the
airline until 2023. 

\b For the 22 gates, lobby space is exclusively leased to Northwest,
while use of the gate apron is "preferentially" leased to Northwest,
which would allow other carriers to use the space. 

Source:  GAO's presentation of the airports' data. 


RELATED GAO PRODUCTS
======================================================== Chapter 

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-RCED-98-32, Oct.  28, 1997). 

Airline Deregulation:  Addressing the Air Service Problems of Some
Communities (GAO/T-RCED-97-187, June 25, 1997). 

International Aviation:  Competition Issues in the U.S.-U.K.  Market
(GAO/T-RCED-97-103, June 4, 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). 

Domestic Aviation:  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). 

International Aviation:  Airline Alliances Produce Benefits, but
Effect on Competition Is Uncertain (GAO/RCED-95-99, Apr.  6, 1995). 

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, Sept.  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. ***