OST-98-3713 / Predatory Practices / Comments of Allan Rossmore / April 12, 1998

Comments Regarding DOT's Proposed Guidelines on Unfair Pricing and Capacity Practices Against New Entrant Airlines.

Dear Secretary Slater;

I am Allan Rossmore, a Professor of Aviation at Miami-Dade Community College. I teach Airline Management, Airline Marketing, Aviation Law and Regulations, Flight Operations, and Aviation Industry Operations. I have also taught graduate and undergraduate management, operations and law courses for Embry Riddle Aeronautical University since 1978. 1 have over 23 years of airline experience, from the bottom up, from loading bags, to customer service, marketing, maintenance, strategic planning, flight operations and system operations, where I was a Director. I was a line employee, later a union officer and later a member of management. I have written several textbooks, used by major aviation universities/institutions, such as Embry Riddle Aeronautical University, Western Michigan University, San Jacinto Community College, Miami-Dade Community College, and others. I am an attorney as well, and have practiced aviation law. In addition, I have been an FAA designated examiner for some 17 years.

I have followed with great interest the events of the past week. It is true, as some say, that the airline industry works in cycles of 20 years. The CAA was created in 1938 after the Cutter crash and other incidents. The FAA was created in 1958, after a number of accidents, including the one over the Grand Canyon. Then, in 1978, the Airline Deregulation Act was passed. Now it is 1998, and other significant events are occurring with the new guidelines.

The intent of the new guidelines is laudatory, in that they seek to protect competition in the industry, particularly the new startups, of which there have been a dearth lately. But, I believe that the methods chosen are flawed, and I hope that you will see that there are better ways to address the same issues. I have no agenda here. I do not work for an airline at present. I do not work for the government. I do not work for a union. But I do fly on airplanes. And I have been lucky to have seen the industry from many perspectives. That is why I am sending these comments. I hope that you will find them helpful.

Thank You;

Allan Rossmore

If one thinks about what the drafters of the Airline Deregulation Act had in mind, I am sure that today's industry was not in their vision. I know that Alfred Kahn, for one, has been very concerned about what he sees.

In a nutshell, the real problem is that while the major segment of the industry is enjoying higher profits than ever before, we are seeing fewer startups. It would seem logical, that where significant profits exist, then more competitors should be willing to enter the market. But that is not the case. More specifically, the problem could be described as:

Why is this happening? Many things have changed since 1978. As carriers have had to adapt to their environment, the following characteristics of major carriers have emerged as barriers to any startup that tries to enter the airline business,

1. Size. There are carriers today that are larger than 500 aircraft, carrying millions of passengers to hundreds of destination in the U.S. and internationally. This gives them an inherent advantage against any newcomer. Just in terms of recognition and visibility alone, they have a major advantage.

2. Routes-Scope Advantage. These mega-carriers serve hundreds of different routes, blanketing the country, giving them access to many more markets, which multiplies their overall power.

3. Hubs. They connect these routes with mega-hubs with 300-600 flights per day from a single airport. These "fortress hubs" give the incumbent powerful leverage in origin and destination traffic, but they also serve as catchments for all of the feeder cities. But also, let us not forget, that many cities would have no service if it were not for these major hub systems, as smaller routes are cross subsidized by more lucrative ones.

4. Frequency. Each mega-carrier can have many frequencies in a particular route. In some, as many as 15-20 flights per day. This makes it very difficult for a new carrier to match with its smaller fleet. Market share can be directly related to the frequency of flights, Typically, a carrier with 80% of flights can expect an 85% market share, as passengers fly the carrier which offers them more choices.

5. CRS, Computer Reservation Systems. These systems give their owners access to the travel agent and corporate markets as well as integration with the Internet. Very powerful marketing tool. No startup has one, and must pay for access.

6. Frequent Flyer Programs. Every major air carrier has one of these systems which provide a measure of brand loyalty for the owners. Smaller startups have great difficulty with these, as it is more difficult to lure established carriers' passengers away from them when they are generally so small in comparison.

7. Airport/Facility Access. Mega carriers generally have control over the best facilities in their hubs, which limits the attractiveness of startups when they are in less desirable locations. In some cases, new carriers have had trouble getting any access at all.

8. Sophisticated Scheduling and Operational Systems. Major carriers have developed knowledge based systems which bring them greater scheduling and operational reliability and efficiencies.

9. Revenue Management Systems. The greatest advantage of all, which allows carriers that implement them to maximize revenue and utilize their capacity to its maximum. Mega-carriers have successfully used these systems to increase their revenue by hundreds of millions of dollars a year. Startups have impaled themselves on them. The industry has embraced the concept.

10. Financial Resources. Mega-carriers have significant resources, which they use at their discretion. This means aircraft, manpower, even political contributions. Small carriers entering a market find themselves competing with someone willing to offer high frequency capacity at below cost for a length of time, because the mega-carrier knows that they can maintain this situation longer than the startup. But it is also true that we must remember that major carriers discount irrationally against each other as well, as we have seen with many, many fare wars, where millions of dollars were lost. This is not unique to competing against just startups.

11. Information Systems Power. Mega-carriers enjoy first class resources in the information arena, and use them to advantage whenever possible. Startups must either buy from their competitors for less than equivalent systems or contract with third parties, which may or may not meet their particular needs appropriately.

12. FAA Relationship. All mega-carriers enjoy generally good relationships with the FAA. They have their own significant safety departments and are seldom in a situation where they are threatened operationally or maintenance wise. This doesn't mean that they don't need oversight, or that they are perfect, but they have many more resources and have long experience in dealing with the FAA and the issues which may arise. Conversely, startups now have, as a result of the Valujet situation, a minimum 5 year period of highly intensive special scrutiny by the FAA, which puts them at a disadvantage. Everyone should certainly comply with the rules, but the cost of compliance can vary.

If we combine all of these 12 factors, it can be seen by anyone that a startup has high barriers to overcome and has to be very good at swimming against the tide. But, there are some advantages that a startup still has, which existed from the early days of deregulation and have evolved. Here are some.

4. They have no fear of innovations. If one looks at the history of startups, from Southwest to People Express to Valujet, to Morris Air, to Legend, they have generally been a driving force in innovation, whether in management styles, marketing or operations.

6. Technology. Smaller carriers are able to take advantage of new technology which gives them advantages and tends to level certain parts of the playing field. They were the first to offer "ticketless ticketing" (Morris Air), and can use the Internet for marketing globally.

Look Back.

As we look at this situation, it is important to look at the past and see what has been true in this business and what has not. There are a number of airlines which are no longer around now for various reasons. Pan Am, which ordered the first Boeing 707 and the first Boeing 747, which offered its round the world service. Braniff, with its Flying Colors to South America and its Big Orange Boeing 747. Pacific Southwest Airlines, the model for Southwest, which is today's model. Eastern Airlines, which started the Air Shuttle in the Northeast, built System One, and ordered the first Boeing 757s. At one time, Eastern carried the most passengers in the Free World. That title has now gone to its fierce competitor, Delta Airlines. Or who could forget the Continental Airlines that Bob Six ran. An excellent airline. In fact, all of these airlines at one time or another were excellent in their own way. They were certainly great airlines with innovative ideas. But they are no longer with us. Because the market dictated their fates. And that was the intent of deregulation. I was an employee of one of these, Eastern. It succumbed to the pressures of the marketplace when management could not come up with workable solutions, primarily with labor. But the lessons learned in the early days of deregulation are still true today, and show why the proposed guidelines are unworkable. But the point is, we must remember that both large and small carriers have gone out of business in the deregulated environment. Both People Express and Pan Am are no longer with us. Being established or being new doesn't guarantee success. Only good management and a clear understanding of the market does. Let's now look at why the new guidelines won't work.

1. The airline market is extremely complex.

Each city pair is not just one market these days. Particularly with the advent of revenue management systems, each city pair is divided up into thousands of micro-markets. Each seat on each flight is potentially a distinct market as these sophisticated "bidding systems" adjust capacity of each fare to what will sell the most seats in each flight for the most revenue, including balancing traffic from upline legs, downline legs and competing legs within the same airline, as well as legs associated with alliance partners. For the government to try to insert itself into this process and set capacity and pricing would be an extremely complex affair. We are not dealing with monolithic markets.

Each flight on each city pair is re-evaluated by these revenue management systems on a continual basis. The market is a constantly changing amoebic like animal, which defies definition. One can take a snapshot in time, but cannot predict what it will do tomorrow. Prices must vary continuosly in order to match the value these micro-markets place on the product.

3. The guidelines would be too costly to enforce.

If we see that the market is both complex and dynamic, then we have to assume that to monitor it effectively, one must be able to match its complexity and dynamism. To do this would require something in technology tools which does not yet exist. It also would require a significant staff of specialists who could do objective analysis, while considering all of the variables in the market. This would require a budget in the DOT of major proportions, if we assume that it could be done effectively, which is unlikely. This would involve major expense for taxpayers for something that would only be of limited or no utility.

The fundamental nature of business is war. Just ask Robert Crandall at American. Or Herb Kelleher at Southwest. An open market is war. The competitor is the enemy, who is out to destroy your own company. This is true whether you are large or small. Frontier Airlines has been one of the major proponents of the new guidelines, as it has had to battle United Airlines in Denver. Yet, Frontier themselves have done everything possible to put the last nails in the coffin of Western Pacific. They were picking the bones before the flesh had stopped quivering. Now imagine, if the government had intervened on the side of Frontier, to protect it against United, when it itself was doing everything that it could to eliminate its competitor Western Pacific? What does one say to Western Pacific? The government would look absolutely ridiculous.

You see, the real truth is that Frontier is absolutely right. Do everything you can to compete, in every arena, against every competitor. American does the same. Look at its battle in Dallas with Legend. It is using every tactic it can to protect its franchise in DFW. And Legend is doing everything it can as well to startup. So it is not hypocritical for one airline to ask for government protection while it is trying its best to beat up on a weaker competitor. It is making war against all competitors. But it is ludicrous for the government to intervene on one's behalf in the marketplace itself. Because everyone, large, small, or whatever, deserves the chance to compete as they themselves see fit. That is what drives our productivity and efficency and innovation. Fear is the motivator. Fear of losing. If one takes that fear away, then you lose the rest.

The guidelines focus on the revenue that is forgone by a major carrier as it relates to the major offering a higher capacity of seats and low fares against a new entrant's capacity and the lower operating profits and higher losses incurred by a major that would result. This means that DOT would have to focus on costs and revenues, profits and losses. But costs, revenues, profits and losses don't mean anything in a market based system. Here is the test. When one buys something in a store, does one care about what it costs to the store? When a customer buys a McDonald's hamburger for 29 cents on a Wednesday, do they care about what it cost McDonalds? No. Do they care about what revenue it is producing or losing to McDonalds? No. Do they care about the effect of the sale on the sandwich shop across the street? No. But they do care about the value it provides to them, the customer. When low fares are offered by air carriers, for whatever reason, they are perceived as a value to the customer. The government should not intervene in any way in this process.

The business of profits and losses, revenues and costs, are purely the business of the company. The management is responsible to its board of directors and stockholders. If the business loses money, then they will either adjust or fail. But either way, it is their business. A company has to provide a value to a customer at the right time and place in order to stay in business. And every business deserves that right. As well as the right to fail. And they have the right to set their own prices. Successful companies control their prices, products and distribution. Unsuccessful ones allow their competition to control them.

For a free market to be successful it must be rational. When artificial constraints are introduced it always results in less efficiency, less competitiveness and less innovation. Prices go up. Choices go down. The guidelines are very vague. There is much room for interpretation. As a result, there is great uncertainty and this creates hesitation in management and reduces their willingness to take risks. Therefore many carriers will be hesitant to introduce low fares and increased service in situations which normally might justify it. This distorts the market and has a chilling effect on it. And the public pays the price. Prices go up. Choices go down. In addition, the behavior of those carriers who are protected will change as well. They will not have to compete as fiercely as they do now. They will not need to.

These guidelines penalize air carriers already in the marketplace, whose employees have collective bargaining agreements. They help and protect those carriers who are new entrants and are not unionized. Some would say that this amounts to an unfair labor practice. I am not pro nor anti-labor, and my experience has been both in labor and in management, but I can see that the effect of this is to penalize union workers.

Those of us who worked for the established carriers from the days prior to deregulation were told back in the 1980's that, as our jobs were threatened and the situation worsened for us, that this was the nature of the marketplace. That competition and the market would rule. As a result, tens of thousands of employees lost their jobs. There is no doubt that the Airline Deregulation Act was anti-labor. No labor protection provisions were ever instituted for all of those thousands of people. But that was ok, as that is what the market dictated. But now we have to ask ourselves if anyone in the marketplace deserves protection from competition. If large carriers have gone out of business, then why not small ones? If tens of thousands could lose their jobs without a hint of government intervention, then why should the government intervene when just hundreds may be involved? It defies logic. And is fundamentally unfair.

This new policy ignores the history of the airline industry and its present state. It was not that long ago that Pan Am and Eastern failed, Continental , TWA and America West were in bankruptcy, US Air was downsizing and Delta was losing hundreds of millions of dollars. Now that has changed, but the industry is a volatile one. It is blessed at present with a healthy economy and low oil prices. And let us not forget that another reason that carriers are making money now, is that employees, both new and old, have sacrificed over the years, by foregoing wages and benefits and changing work rules. Due to the good economy, there is a shortage of capacity at present, shown by the load factors of the majors in the mid seventies. That can easily change, if the economy goes south, or oil prices reverse again. Carriers can easily find themselves again with too much capacity. If that happens, then every single carrier could find itself violating the new guidelines as they discount to preserve market share in a declining market. Few carriers have the will to control their prices. Many overreact. Again, the guidelines don't make sense.

There is something else. Carriers in bankruptcy typically discount fares heavily in order to generate and preserve cash flow. Would this not violate the new guidelines as they do this against everyone? So do we then prohibit them from this? If we don't take action against their high capacity discounting, then don't we hurt everybody, including the new entrants? Then they will go out of business, exactly what the bankruptcy law had tried to prevent. If so, then those carriers which had gone through the bankruptcy process may not have survived. Yet here they are, back in the normal business environment again, competing effectively. Now, that doesn't mean that the bankruptcy laws don't favor weaker carriers unfairly, but that is an issue for another time.

By implementing these new guidelines, we are turning back the clock of deregulation in a way that is not in the public interest. We are getting the government involved in fares and capacity in a market by market basis. It is reminiscent of the CAB days.

The whole foundation of deregulation was that the more competition, then the more efficient and beneficial to the public the system would be. But this system has to allow those in business to compete with those who want to enter it. They have earned that right by adjusting to the very marketplace that the government mandated. We can see this with so many established major carriers starting up lower cost airlines within the existing airlines that they are very concerned with maintaining profitability and market share. Otherwise there would be no Shuttle by United, or Delta Express, or Metrojet by US Airways.

Also, there are enough examples to show that even smaller to medium size airlines can be successful. Obviously, the best example is Southwest. It has done well throughout the era of deregulation, against heavy competition, in good times and bad, growing from a small to medium and now large carrier. Alaska is doing well on the West Coast down to Mexico. Tower Air is very dynamic and is providing a lot of low fare seats. America West is doing better. Valujet, now Air Tran, is showing signs of increased market strength and predicts a profit for the year in spite of its historical difficulties and competing with perhaps the strongest of all of the "fortress hubs", Delta in Atlanta with its 600 flights a day. Even Kiwi and Vanguard are showing signs of more sophisticated management as they look for opportunities. Reno Air is adapting and making changes. Even more significant, we are seeing the former regionals move into markets with their regional jets that promise to fill in many opportunities. Atlantic Coast is starting Greenville to Dulles, Comair is going Dayton to New York. Even the turboprops are being used with imagination. Little Gulfstream International flies a Beech 1900 from Tampa to Nassau. The new regional jets and their soon to come smaller compatriates are fundamentally changing the airline market so that more competition and more service, not less, will result. Isn't that what we want?

The market has worked very well for the industry. We live in the day of the Internet, the regional jet, "ticketless ticketing", the Airbus A320 and Boeing 777. These were all market driven innovations, which brought benefits to the industry and the customer. Airlines do not order the Airbus A320 because of its fly by wire systems. They order it because of its efficiency and payload range capability.

Because the guidelines are inappropriate and really unworkable, does that mean that the system does not need some adjustment? No, as I said, they are laudatory in their intent. They intend to increase competition. But their effect would be completely counterproductive. But there are structural imbalances which the government can address while keeping the pure freedom of the marketplace and yet allow more new entrant carriers the chance of success.

In spite of one's beliefs in the free market system, however, there are times when adjustments need to made which ensure the health of the market. That is why anti-trust laws, or consumer protection laws exist, for example. But they need not interfere with the market. There need be no micromanagement. If one thinks of this as a football game, then the guidelines as proposed by DOT would have the following effect. We have two college teams, one a strong, experienced one, with big, talented players. The other team is new, with smaller, less talented players. Let's say the teams are playing in the stronger team's home town. What the guidelines suggest is that the playing field be leveled by the NCAA going in and tackling the players on the stronger team and interfering with the play itself. If this is done, where is the motivation of the smaller team to get better? And what is the bigger team going to do? Who knows, but one thing for sure, they are not going to appreciate the "neutral" NCAA getting involved in the play to help the other guy. But most importantly, what would the audience say who has paid for the tickets? They would most certainly be unhappy as this would only destroy the quality of the game itself'. Anyway, we will come back to this later. For now I will make the following alternative proposal.

The Rossmore Alternative /1

There is no doubt that the airline system in the U.S. is still facing the same issues that the DOT is trying to address. As described previously, they are:

Let's take them one at a time and I will provide suggestions for each.

We have to admit that there is a problem with concentration in this industry. When carriers get to the size that they are now, it clearly can be a dampening effect on competition. DOT is going to have to bite the bullet on this one. They have ignored the consequences of the mergers and takeovers of the past twenty years. They must now take a proper role and deny further major mega mergers, starting with Northwest/Continental. Although these two carriers do not overlap on many routes, their combination would be so strong that it could not fail to have detrimental consequences.

1/ Yes, I named it after myself Well I'm not famous, so forgive my little hubris here.

What matters is sheer size and power, not the routes that they do or do not overlap. We are already seeing the consequences of this with the reaction by United, Delta, and US Airways, as they discuss possible combinations. We need as many competitors as possible in the market, and the combination as proposed is more than an alliance, it is an equity swap with control of Continental being taken by Northwest, no matter how it is packaged. This must be denied to show the industry that each carrier must compete on its own merits. They can generate growth internally, as other carriers have done successfully.

We cannot say that there is a problem from major carriers on the one hand, with claims that they are predators of new entrants, and require new guidelines to prevent it, and then on the other hand grant mergers which make it easier for those same carriers to prey on the new entrants. Bottom line, stop the merger frenzy. This will allow the carriers to focus on the market itself and their own operations.

While we are at it, I must mention the increasing trend toward alliances. All major carriers have now entered these alliances and there are ramifications which have not been thought out very well.

First, they ignore the consequences of the international passenger and safety standards. We have the specter of US passengers being fed by code shares and alliances to foreign air carriers who even their own citizens won't fly due to safety concerns. I don't wan't to name names, but certainly some are in Asia, and others are in Latin America. Hull losses in some of these regions are up to 8 times worse than in the U.S. Even well respected foreign carriers do not meet US safety rules. One example is British Airways, which does not use licensed dispatchers and uses different fuel supply rules. Yet they are proposing a massive alliance with American Airlines. This issue needs to be addressed by the DOT. US passengers hold tickets which show a US carrier, but it does not meet US safety standards.

Also, these alliances confuse the passenger, and many times they don't really know who they may be flying on. They have the right to know this. I remember the passenger who told me that they came in on United to a United Express but it was really a Continental Connection which was a completely different situation than what they were expecting. They were totally confused. But their ticket said United. Anyway, I just thought that I would mention it.

Here is where the effort of the DOT has been focused. This is what the guidelines are intended to help. I would submit that we return to our example of the football game. If we have a team that is stronger and more experienced, playing on its own home field, then how do we help the smaller, younger team without destroying the game. Well what we do is give them the opportunity to improve. The NCAA provides a certain number of scholarships for each team, along with limits on those scholarships, to provide a fairness in the game. Then each team can go out and recruit players based on merit and competition. In the airline business we need to do something similar. In our present industry condition, the problem is not that the majors lower fares and increase capacity against their new entrant competitors. They know that it is going to cost them. In fact, they know that they take the risk of massive losses. So why do they do it? Because they can outlast the new entrant, that's why. The real problem is the mismatch in capital resources between the two. If the new entrants had greater capital available, then the majors would have to think twice about this tactic, and it would cost them much more. My proposal would provide a more secure source of capital for the new entrants. Simple. A loan guarantee program. Limited in time and scope, but nevertheless enough to level the playing field to some extent. And it would not interfere in the normal processes of the market.

Here is how the proposal would work.

These days a new entrant may need as much as $30 to $50 million to startup a viable operation. This proposal would still require a new entrant to get funds from private industry, but 30% of these funds would be guaranteed by the federal government to the banks/investors. The guarantee would be for a period of only two years.

The reason 30% is chosen is that one would still want the new entrant and the banks to make rational decisions, but also allow the new entrants to have access to more capital than they have now. The banks/investors will also have more incentive to lend the full amount under these circumstances.

The limit would be two years for several reasons. Most startups have their most difficult time in the first two years. Many fail before they can even get started. But this program would let them get started and yet they would be on notice that whatever they do, they will ultimately be responsible for their actions and subsequent success in the marketplace. Two years would be enough time for a new entrant to establish a presence in the market, as they ramp up their operations. Their operating plan would have to be sound. The two years time period would be counted from the date of start of scheduled operations. The guarantee would not be valid if the carrier does not startup. But the guarantee itself would be helpful in getting the carrier to the startup point, a goal, so to speak.

There is precedent for this type of program. When an entrepreneur wants to start a business, they can usually get assistance from the Small Business Administration. If we look at our McDonalds scenario again, there might be a sandwich shop right across from the McDonalds which got an SBA loan. They got that loan because the government knows that small business is the engine of the economy.

So the question is, where does the money come from?

First of all, the actual loan still comes from private sources, but there would be a need for a limited reserve fund. But no funds would need be disbursed unless a carrier actually failed in the first two years. And then the government is only exposed for the 30%. Many carriers have lasted far longer. There would also have to be a provision that the loan guarantee is only good so long as the carrier meets federal safety standards and violates no federal law. If the carrier was certified by the FAA to be safe at the time it ceases operations, then the program would be triggered. But if it is shut down by the FAA for safety reasons, then it is invalid.

As to where the funds come from, it is important that no carrier in the present market be penalized for the program. Their profits/losses must not be affected. The federal government receives taxes from the existing carriers, however and some of these could be used for the program. They may protest this, but this should be a much better alternative than government interference in how they do business. This should also be more palatable for the labor unions.

It would be important to note that the reserve fund should be invested at market rates in order to reduce the cost to the government. Also, it should be noted that if the program is successful, and the industry expands and becomes more productive at the same time, then many carriers will make more profits and the fund may pay for itself as a result. The new entrants themselves will be paying taxes as well such as fuel, and benefiting the economy, as their employees pay income taxes to the government in turn. If the industry has more employees as a whole, and carries more passengers and they all pay income taxes, the program will pay for itself, the government receiving back maybe more than it put in. If the industry grows, then revenues from all forms of taxes, such as fuel, and personal income will increase in total which will help the government funding.

But the real benefit is that the new entrants would be able to compete more effectively. And the whole market would still react rationally. The market choices would expand, the majors can still compete as they feel appropriate and everybody benefits. This program would allow more new entrants and greater financial strength of those that do enter the market. Yet they are only assisted for a very restricted amount and time, which limits any artificial deleterious effects on the incumbents.

So, if we can have a program that helps new entrants, avoids distortions in the markets, and potentially pays for itself, then maybe this is the way to go.

C. Medium to smaller size cities which are suffering less service and higher fares, with less competition.

Here, government should do no more than allow the market and technology to solve the problem. We are already seeing the regional jets moving into smaller and smaller markets. When there is money to be made, those routes will then attract new service. Also, as the new jets get smaller and smaller, the opportunities for this will increase. As the new equipment enters the market, service will increase and fares will drop accordingly.

There have been attempts to remedy this problem by local/state governments as they have offered incentives for service. The most glaring example is Air South, in South Carolina. It was backed by the state . It failed. It used B737 aircraft in markets that would not sustain those aircraft. By tying itself to the state conditional requirements, the airline allowed itself to have its strategy be coopted and as a result, could not find success. The difference between the loan guarantee program and what happened at Air South is that the airlines would not be tied to any particular market, but could offer service where the demand exists and they can match that demand.

Here we have a number of cities where one carrier controls a very high percentage of the market at that particular airport. Examples would be TWA at St. Louis, American at Dallas/Ft Worth and Miami, Delta at Atlanta, US Airways at Pittsburgh, Northwest at Minneapolis and Detroit, Continental at Houston and Newark, to name a few. I am sure the DOT knows the list. Many complaints have been made that passengers who live in these hub cities are subject to fewer choices and higher fares as a result. There is likely some truth to this. But there is also another factor at work here. Remember that the entire system is running at comparatively high load factors. So fares in general are up, even for the smaller carriers. Again, when the market allows, the seller will charge as much as possible. The question is if something should be done about this hub situation. I would make a suggestion. If new entrants are having trouble getting access to some of these airports, and I think about Kiwi at Newark, and Spirit has also apparently had problems at Detroit, then something should be done. There should be an open market, with access to anyone who would like to serve it. That is one of the basic precepts of deregulation.

Sometimes the problem is that of facilities, other times it is ATC capacity. Most often it is also an issue of peak demand times.

Obviously, the real answer here, as many have said, is to increase the capacity of the system, but that is not always possible or easy.

One suggestion would be, if a carrier has more than 50% of capacity at one airport, and there is a capacity problem of one type or another, it should receive no more than 1/2 of any new capacity unless no other carrier bids for new service, and then it should clearly default to the incumbent. This would also apply to capacity made available by someone who pulls out. This way, some capacity is offered to new entrants, yet the incumbent has the ability to grow and improve service as well. This whole situation, of course, would be alleviated somewhat if the system would allow higher capacity than it does.

There is clear proof that even though higher fares do exist at many hubs, there have been new entrants that were successful. Look at Morris Air at Salt Lake City against Delta. Or in turn, Air Tran is doing better at Atlanta.

It is also true that not every hub by a major is successful and that they do pull out when they are not making suitable profits. Look at what American did at Raleigh-Durham and Nashville, or Continental at Denver. Even now, American is pulling service and adjusting service at San Juan, where it enjoys very little competition. Note that Midway is now at Raleigh.

In addition, many passengers elect to use alternative service and fly out of nearby airports instead the hubs themselves. Examples would be Dallas Love Field for D/FW, and Ft. Lauderdale for Miami, or Providence for Boston. This is a common strategy for Southwest Airlines.

But we are also seeing some reverse effects of this. For example, Daytona Beach has lost much of its service to Orlando and Jacksonville, as Southwest, Delta Express and Air Tran have sucked up the regional traffic into those airports.

We also are seeing that regional jets are having an effect on some hubs, as some traffic is now overflying them.

So what can we conclude from this? Well, maybe "fortress hubs" sometimes have holes in their walls. They are not static. They may grow. And sometimes they fall of their own accord, as traffic bypasses them. But when this does not happen and there is more demand for service than there is capacity, then an equitable system has to be devised which allows both competition and recognition of the service that the incumbent has brought to that city.

Well, thank you for the opportunity to present these comments. The airline system is very important to me. I want it to grow and provide the most benefit to the most customers possible. The only way that this can happen is if the market allows everyone to compete freely. Then the total market grows as demand is stimulated. We need to maintain that edge of innovation and drive that competition brings. Price and capacity restrictions will never do that.

I hope that these proposals are helpful. If anyone would like to provide feedback it would be greatly appreciated. After all, free and open debate always results in a better system. And that is my goal here. The airline system we have today is too valuable to change it in ways that will make it less productive, or less oriented toward the customer. We cannot guarantee a level playing field, but we can give everyone a more equal opportunity to play at their best.

Thank You;

Allan R. Rossmore

12370 SW 22 Lane

Miami, FL 33175

Tel: 305-552-7414

Fax: 305-552-7414