OST-98-3713 / Predatory / Petition of ATA for Extension / Answer of The Air Carrier Association / May 18, 1998

Emergency Petition of the Air Transport Association of America for Extension of Time

ANSWER OF THE

AIR CARRIER ASSOCIATION OF AMERICA

IN OPPOSITION TO THE

EMERGENCY PETITION OF THE

AIR TRANSPORT ASSOCIATION OF AMERICA

On May 8, 1998, The Air Transport Association of America (ATA) asked the Department of Transportation, on an emergency basis, to extend by 120 days the time for filing comments to the proposed Statement of the Department of Transportation's Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transportation Industry, 63 Fed. Reg. 17,919 (1998) ("pro-competition guidelines"). The primary basis for the ATA filing is that "fewer than 30 days remain in the comment period," and that "the 60-day time period originally set does not give parties adequate time to prepare well-reasoned responses to the complex issues the Statement raises." The Air Carrier Association of America ("ACAA") /1 opposes ATA's request.

1/ The ACAA is an association of U.S. carriers and small/medium communities.

By filing the meritless motion, ATA members are not merely trying to extend a comment period: rather, they are seeking to extend their hunting season.

(1.) There is No Basis to Extend the Comment Period.

The ATA parties have been aware for months that DOT was in the process of issuing the pro-competition guidelines. Their last-minute delaying tactic does not qualify as an emergency. It is, instead, part of a planned process to perpetuate the large carriers' strategy of eliminating competition and raising fares.

The pro-competition guidelines were issued by the Department on April 6, 1998. It is difficult to believe that the multiple law firms, public relations firms, and analysts being used by ATA and its members were not able to promptly provide "reasoned" comments on the basic issues underlying DOT's pro-competition guidelines. All parties -- even ATA -- were aware that the Department would issue the pro-competition guidelines before April 6.

At a hearing before the Senate Transportation Appropriations Subcommittee on March 5, 1998, Patrick Murphy, Deputy Assistant Secretary for Aviation and International Affairs at the U.S. Department of Transportation, stated:

The Department has come to the view that the single most important impediment to new entry may be unfair actions taken by major airlines against new entrant airlines, particularly in markets that involve a major's hub airport. These actions typically involve fare cuts and capacity increases. Therefore, DOT has developed a competition policy statement that it plans to release in the near future.

The policy statement will set forth a proposal for a broad competition standard and proposed guidelines that will identify the types of behavior that are likely to cause DOT to initiate an enforcement proceeding. The guidelines are designed to allow normal competitive responses and only prohibit extreme exclusionary behavior.

I generally concur with the difficult time that the new entrant carriers have and that is why we have been active in developing these guidelines for unfair, exclusive that we hope to be issuing in the next two weeks.

As to why the Department was going to issue the pro-competition guidelines, At the March 5 hearing, Mr. Murphy stated:

In the last two years, our jawboning efforts have had much less success.

As a matter of fact, we conducted an investigation based on the complaints of two small carriers. We went out and received boxes of material from the large airlines. When the large airlines gave us that material, they took the view that it would be unfair for us to come down on top of them after we read this material, because we had never set any standards. They had been competing in a certain way for decades; and if we want to come down on them. we ought to set some guidelines. We looked at that material. We were somewhat surprised by what we saw. The intensity of what was going on was of concern. We decided to develop these guidelines.

At the request of some large carriers' we have developed these guidelines. Now we are hearing from some of these same large carriers that: 'This is reregulation.' 'You have no legal authority.' 'You have no authority at all on airline prices.'

Our role here, if any, is to protect competition, not to protect large companies.

The informal process is not as productive as it has been, so most of our effort of late has been on developing these guidelines after we conducted two very thorough investigations. [Emphasis added.]

Secretary Slater mentioned the guidelines at the American Bar Association Forum on Air and Space Law held on January 30, 1998. He stated that "some complaints by new entrants about anti-competitive practices by established airlines appear to has e merit." He went on to state:

Our responsibility at the Department of Transportation is to ensure that every airline -- large or small, new or established -- has the opportunity to compete freely. That is what deregulation is supposed to be all about -- a fair chance to compete.

. . . anti-competitive practices hurt consumers. And it is the Department of Transportation's job to vigilantly watch the market to protect them.

The Secretary then announced that he intended to engage in a dialogue on these issues and that the Department would issue draft guidelines. Is it possible that no representative of ATA or its members were present at any of these hearings, conferences and read none of the reports of DOT's decision to address anti-competitive behavior through guidelines?

The February ABA conference was not the first time that DOT officials announced their intent to address long-standing concerns about the anti-competitive behavior of large carriers. At various times during 1997, several senior Departmental officials mentioned the need to issue pro-competition guidelines to address anticompetitive behavior. During this entire period, the ATA parties engaged in an intense campaign /2 to stop the Department from issuing any such guidelines. Will ATA deny that, over the last several months, it or its members spoke to DOT officials or others in the Administration on this issue? Could it be that those who requested that DOT set "standards" have been replaced by a new army of lawyers, public relations firms, and consultants who are now opposing the very guidelines that their predecessors demanded?

2/ They are able to run full-page ads misrepresenting facts, but cannot submit comments.

Although the ATA parties now claim that they do not have time to submit comments within the comment period, the major carriers had in place a lobbying group, the Airline Competition Committee, ready to combat DOT's guidelines /3 before they were issued. The ATA parties were so determined to stop DOT from issuing guidelines that some started to attack DOT and certain DOT officials in order to dissuade the Department from fulfilling its responsibilities under the Deregulation Act. Among those claiming that DOT was attempting to re-regulate airline prices were CEO's of ATA's largest members.4 It is also clear that the ATA parties will take other actions, including instituting litigation, to prolong their attacks on those trying to bring affordable fares to the American traveler.

(2.) The Traveling Public Will Lose if Guidelines are Not Finalized and Enforced.

The ATA parties are seeking a delay in implementation of the pro-competition "guidelines" at a time when a Salomon Smith Barney study ("Airline Competition at the 50 Largest U.S. Airports -- Update," March 12, 1998) states:

Measures of concentration at the 50 largest airports show art unprecedented degree of concentration in the airline industry.

3/ "'Now that DOT has defined anti-competitive behavior for the industry, we will be seeing more lobbying activity this year,' said Tim Hannegan, a former General Accounting Office assistant director of aviation competition issues and now lobbyist for American Airlines [AMR]. . . Hannegan also helps coordinate activities for the Airline Competition Committee, an organization founded in January to help "educate the public and policymakers about the benefits of deregulation."' Airline Financial News, April 13, 1998, p. 8. On November 18, 1997, United Airlines CEO Gerald Greenwald, speaking at the Economic Strategy Institute, stated, "We're starting to hear criticism that U.S. airlines are price gouging...that they're keeping out new competition...and we're hearing about proposals to re-regulate our industry." Words and phrases that became part of ATA's campaign against DOT.

Concentration and domination continue to grow. In the absence of prompt and effective federal action to protect competition, the marketing practices and anti-competitive behavior of large carriers will continue. The large carriers will simply continue to make hay while the sun shines."

In February, 1998, state, local and federal of finials met at the National Air Service Roundtable, held in Jackson, Mississippi, to discuss solutions to air service problems. In 1997, a similar meeting was held in Tennessee. The genesis for the meeting was the need to finish "the unfinished business of the Airline Deregulation Act of 1978 by bringing a competitive mix of service to all communities," particularly those that lack adequate airline competition or service quality. The report issued at the end of the 1997 conference stated:

While conferees identified marketing steps that can be taken by communities and carriers, participants agreed that, "if local efforts to enhance competition are to succeed," the federal government must address "anti-competitive practices of larger airlines."

The end result of these practices, acknowledged by the federal government, is that fares are escalating and competition is decreasing, except in markets with affordable-fare earners.

DOT's "Domestic Airline Fares Consumer Report -- Fourth Report, Second Quarter 1997 Passenger and Fare Information/January, 1998" best demonstrates the impact on consumers when affordable-fare carriers are driven out of markets. Table 3 in that report lists the city-pair markets with the largest percentage fare increases -- second quarter 1997 versus 1996. Out of the four city-pairs with the largest percentage increase, three were markets in which an affordable-fare carrier was driven out of the market /5:

City-Pair	Carrier Driven Out	% Increase in Fares	Loss of # Passengers
Boston-Detroit	Spirit	128%	38,311
Chicago-Des Moines	Vanguard	127%	30,121
Dallas/Fort Worth - Wichita	Vanguard	84%	5.187

The loss of competitive affordable-fare services and resultant increase in fares have a significant impact on each of these communities. As DOT states in the report, "In most instances, large changes in average fares are directly attributable to entry or exit by a low cost carrier."

The need for the Department to issue and enforce pro-competition guidelines was best described by Alfred E. Kahn when he testified before the Subcommittee on Transportation of the Senate Appropriations Committee on May 5, 1998:

...what seems to have occurred time and again in recent years has been: unrestricted fares are jacked up and up; that induces entry of low-cost, more or less uniformly low-fare rivals, emulating Southwest, who can profitably serve those customers at much lower fares; the incumbents then cut their fares deeply and sharply increase the number of low-fare seats they offer on the routes -- and only on the routes -- on which they have been challenged; the new entrant departs; and fares immediately go right back up, with no further challenge. That is the kind of scenario that the Department of Transportation says it has seen played out many times in the last few years and that it sees as crying out for remedy.

I agree with it. Confronted with that kind of objective sequence of events, I am prepared to characterize the response of the

5/ Table 4 of the DOT report lists city-pair markets with the largest percentage decreases. Most of the markets listed on this chart benefited from entry by affordable fare carriers: Baltimore-Providence (Southwest); Kansas City-Minneapolis (Vanguard); and Akron Canton-Atlanta (AirTran).

incumbents -- if the Department has accurately described them -- as predatory: I see no reason to require any further demonstration. The most grievous governmental failure in recent years has in my opinion been the failure to prosecute a single case against what appear to have been just such cases of flagrantly predatory competition by incumbent major airlines against new competitors; and I applaud the apparent intention of the Department (to whose recent policy statement on the subject I made a modest contribution) now to undertake a vigorous enforcement effort.

The history of the airline industry over the last 20 years clearly demonstrates the great importance of entry by low-cost, uniformly (or much more uniformly than in the case of the major carriers) low-fare carriers in keeping the industry competitive -- so long as they survive. As I understand it, many if not most of the recent new entrants have either already been driven out of business or are in danger of being driven out, leaving the surviving major carriers with the power to raise prices once again after their departure. If that happens, I see no way in principle to oppose what I anticipate will be mounting pressure for reregulation.

If the Department does not move ahead with these guidelines and take quick enforcement action, the result described by Professor Kahn and the various DOT/GAO reports will escalate: affordable-fare carriers will be driven out of markets and the American traveler will see rapidly increasing fares that impact communities, businesses, and consumers. The effects of this reduction in competition are enormous. When there are few flights into a city or state, that state's economic development is jeopardized. We see less tourism and fewer companies expanding operations into communities. Conventions go elsewhere. Consumers drive hours to find more reasonable fares. Imagine having a loved one sick in a distant community and not being able to get a reasonable fare to visit that person or having to drive hours to catch a flight our of another airport.

There are steps that should be taken to ensure that these consequences do not occur, including the prevention of anti-competitive behavior that has strangled the competitive environment. Implementation of the DOT's pro-competition guidelines is an essential first step.

(3.) Conclusion

If we are going to have a deregulated system, it must be open for all who are willing to compete. Today, we have a system that does not allow each competitor to operate on a level playing field. As a result, consumers have fewer choices and, in many markets, no choices at all.

The ATA parties represent carriers controlling approximately 96% of the domestic passenger market share. These are the carriers that are seeking to delay and ultimately prevent the Department of Transportation from issuing these much-needed guidelines. There should be no mistake as to the objectives of the ATA parties -- to stop any oversight of anti-competitive behavior and to allow large carriers to go through another summer season by adding capacity, dumping fares, bracketing flights, and utilizing frequent-flier mileage and other marketing practices to eliminate competition and increase concentration.

DOT's April 1996 "Low-Cost Airline Service Revolution" best states why the Department must act quickly to implement and enforce the pro-competition guidelines. That study stated:

Virtually all domestic growth in recent years is attributable to the spread- of low-cost service.

The rapid expansion of low-cost, low-fare service in the United States by a growing cadre of carriers is a watershed development in domestic aviation that is having a profound effect on efficiency, competition, consumers and industry structure.

At network hub cities where low-cost carriers do not compete, fare premiums are quite high and are increasing.

The Department of Transportation, in cooperation with the Department of Justice, must ensure that market forces are allowed to play out freely, without the distorting effects of predatory or otherwise anti-competitive exclusionary activity by incumbent carriers against new entrants.

How many additional cities such as Des Moines and Wichita must lose service because of the behavior of large carriers? The choice is before the Department continued benefits from affordable-fare carriers or increased concentration /6 and higher fares. The Department must decide if it will allow the nation's large carriers to destroy the goals of the Deregulation Act or, consistent with that Act, permit the growth of affordable-fare airline service that will benefit communities, businesses, and families throughout this country.

It is in the public interest to leave the comment period unchanged and finalize the pro-competition guidelines. It is time to close the "hunting" season.

Respectfully submitted,

Edward P. Faberman

Executive Director

Air Carrier Association of America

Submitted May 18, 1998

6/ While DOT is reviewing these guidelines, it is essential that all proposed alliances -- domestic and international -- be put on hold. As Southwest Airlines Chairman Herbert Kelleher said, he found it inconsistent for the government to set guidelines to protect new entrants while advocating airline alliances. More consolidation, he said, makes it tougher for start-ups to compete with big carriers that can make enough in their monopoly markets to subsidize losses in competitive markets. The Wall Street Journal, April 7, 1998]