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Suggested Citation:"2. Preface." National Academies of Sciences, Engineering, and Medicine. 1999. Entry and Competition in the U.S. Airline Industry: Issues and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/25103.
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Page 7
Suggested Citation:"2. Preface." National Academies of Sciences, Engineering, and Medicine. 1999. Entry and Competition in the U.S. Airline Industry: Issues and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/25103.
×
Page 7
Page 8
Suggested Citation:"2. Preface." National Academies of Sciences, Engineering, and Medicine. 1999. Entry and Competition in the U.S. Airline Industry: Issues and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/25103.
×
Page 8
Page 9
Suggested Citation:"2. Preface." National Academies of Sciences, Engineering, and Medicine. 1999. Entry and Competition in the U.S. Airline Industry: Issues and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/25103.
×
Page 9
Page 10
Suggested Citation:"2. Preface." National Academies of Sciences, Engineering, and Medicine. 1999. Entry and Competition in the U.S. Airline Industry: Issues and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/25103.
×
Page 10

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Preface In the 1998 Omnibus Consolidated and Emergency Supplemental Appropriations Act for Fiscal Year 1999,1 Congress requested a 6-month study to update a 1991 report, Winds of Change: Domestic Air Transport Since Deregulation.2 The previous study had been completed over a 2.5- year period by a committee of experts operating under the auspices of the National Research Council's Transportation Research Board (TRB). In addition to reviewing the effects of deregulation on competition, fares, and service, the report included reviews of safety experience since dereg- ulation and presented options for reforming the Federal Aviation Administration. The request to update Winds of Change arose during debate over the U.S. Department of Transportation's (DOT's) proposed "Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transporta- tion Industry" (see Appendix A). This proposal responded to com- plaints from new airlines that large established carriers were engaging in highly aggressive pricing and other unfair practices, allegedly to sup- press low-fare competition. In its proposal, DOT explained its inten- tion to exercise its statutory authority to prohibit unfair competition (49 USC §41712, formerly section 411 of the Federal Aviation Act). This 1 Section 110(g)(1)(A) of Title I, Subdivision C (Other Matters), Public Law 105-277; October 21, 1998. 2 Speci al Report 230: Winds of Change: Domestic Air Transport Since Deregulation. TRB, National Research Council, Washington, D.C., 1991. 399 pp. V

vi ENTRY AND COMPETITION IN THE U.S. AIRLINE INDUSTRY authority was transferred to DOT when the Civil Aeronautics Board was abolished in 1984. Issued as a notice in the Federal Register on April 10, 1998, the draft proposal prompted criticism from the major airlines. Some raised concern that the policy would inhibit legitimate competition, and others ques- tioned DOT's statutory authority to enforce the policy. Most new entrants, however, responded positively, and many advocated comple- mentary changes—including measures easing access to major airports— to foster more competition and entry opportunities. In the 1998 act, Congress called on DOT to reexamine its proposed guidelines for 6 months before issuing the final version. It also requested an update of the 1991 study: The National Research Council of the National Academy of Sciences shall complete a comprehensive update of the 1991 study of airline deregulation prepared by the Transportation Research Board of the Council. The update shall include updated versions of the chapters contained in the study pertaining to competitive issues in the airline industry as well as recommendations for changes in the statutory framework under which the airline industry operates. To conduct the study, TRB convened an 11-member committee with expertise in economics, airline operations and management, law, and public policy. Following the tradition and policy of NRC, the commit- tee members served without compensation in the public interest. John R. Meyer, professor of economics (emeritus) at Harvard University, served as chairman. Professor Meyer also had served on the earlier Winds of Change committee. The committee interpreted its charge from Congress as assessing the current and emerging state of competi- tion in the domestic airline industry and making recommendations for further government action to promote competition. As indicated in the report, the committee did not believe that enhancing airline competition would require substantial changes in the general statutory framework under which the industry has operated. However, it did believe that some additional government action would be needed to curb unfair con- duct, eliminate opportunities for such conduct, and take positive steps to create an environment more conducive to airline entry and competi-

Preface vii tion. Because of the compressed time frame for the study, the commit- tee could not examine all the issues in equal depth. In examining effects on consumers, the committee chose to emphasize the trends in pricing and in flight offerings. In part because of inadequate data and in part because of the limitations of time and resources, the committee chose not to examine service quality issues such as lost baggage, overbooked flights, on-time performance, or other dimensions of customer service. The committee examined issues that, in its collective judgment, per- tained to its expertise and deserved priority attention. DOT funded the study in January 1999. The committee held three meetings between December 1998 and April 1999, followed by several committee conference calls. Two meetings included extensive sessions open to the public, during which experts from government, academia, and industry presented a variety of issues to the committee. Those who provided expert testimony included Frank Berardino, GRA, Inc; Severin Borenstein, University of California at Berkeley; Reid Detchon, Inter- active Travel Services Association; Edward Faberman, Air Carriers Asso- ciation of America; Richard Fahy, Trans World Airlines; Roger Fones, U.S. Department of Justice, Antitrust Division; Joseph Galloway, American Society of Travel Agents; Thorsten Hisem, Embry-Riddle University; Charles Hunnicutt, Assistant Secretary, DOT; Darryl Jenkins, George Washington University-,Mark Kahan, Spirit Airlines; Daniel Kasper, Law and Economics Consulting Group; Nancy McFadden, General Counsel, DOT; Jeff MacKinney, AirTran Airways; Thomas Miller, Iowa Attorney General; Kevin Mitchell, Business Travel Coalition; Patrick Murphy, Deputy Assistant Secretary, DOT; Clinton Oster, Indiana University; David Plavin, Airport Council International/North America; Douglas Parker, America West Airlines; Paul Ruden, American Society of Travel Agents; Donald Schenk, Air- line Capital Associates; Dick Spaulding, Spaulding Aviation; Bill Spitz, GRA, Inc.; John Strong, William and Mary College; and Clifford Winston, Brookings Institution. The committee also commissioned data analyses and papers to assist in its work. Professors Martin Dresner and Robert Windle of the Univer- sity of Maryland prepared a paper on resource availability and entry in the airline industry, cited and discussed in Chapter 1. DirectorJames Craun, Deputy Director Randall Bennett, and Anita Edwards of the DOT

viii ENTRY AND COMPETITION IN THE U.S. AIRLINE INDUSTRY Office of Aviation and International Economics provided data and analy- ses on passenger fares and traffic and performed regression analyses (dis- cussed in Chapter 2) according to instructions given by the committee. Many assisted the committee and staff during the course of the study. In addition to Craun, Deputy General Counsel Steven Okun, served as main DOT contact for the study, and responded to frequent inquiries from TRB staff and committee members. John M. Meenan of the Air Transport Association of America and Michelle M. Faust of the Air Carriers Association of America also fielded frequent questions from staff and assisted in arranging presentations before the committee from airline representatives. Earl Doolin of Database Products, Inc., Steven Casley of BACK Associates, and Fred Klein of GRA Aviation Special- ists, Inc., provided the committee with aviation data and analyses, often on short notice. The study was managed by Thomas R. Menzies, Jr., who drafted the report under the guidance of the committee and under the supervision of Stephen R. Godwin, Director of Studies and Information Services. Suzanne Schneider, Assistant Executive Director of TRB, managed the review process. The report was reviewed by individuals chosen for their diverse perspecti'.res and technical expertise, in accordance with proce- dures approved by the National Research Council's Report Review Com- mittee. The purpose of this independent review was to provide candid and critical comments to assist in making the published report as sound as pos- sible and to ensure that it has met institutional standards for objectivity, evidence, and responsiveness to its charge. The review comments and draft manuscript remain confidential to protect the integrity of the process. Thanks are due to the following individuals for their participa- tion in the review of this report: Robert W. Coggin, Alpine Marketing Consultants; Jeffrey H. Erickson, Scottsdale, Arizona; Alexander H. Flax, Potomac, Maryland; Lester A. Hoel, University of Virginia; Paul Joskow, Massachusetts Institute of Technology, Theodore E. Keeler, University of California, Berkeley, Edward L. Perkins, Ashland, Oregon; John E. Robson, Robertson Stephens; and Mark Schechter, Howrey & Simon. Although the reviewers have provided constructive comments and suggestions, responsibility for the content of this report rests with the authoring committee and the institution.

Preface ix The report was edited and prepared for publication under the super- vision of Nancy Ackerman, Director of Reports and Editorial Services. Javy Awan edited the report. Special thanks go to Marion Johnson for assistance with computer graphics and the extensive communications with committee members, and to Frances E. Holland for assistance with meeting arrangements and the word processing of the report manuscript.

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TRB Special Report 255 - Entry and Competition in the U.S. Airline Industry: Issues and Opportunities focuses on some well understood and recognized opportunities to encourage airline competition, especially in larger markets.

During the mid-1990s, new-entrant carriers filed formal complaints with USDOT, contending that large established airlines were engaging in predatory pricing (pricing below cost). Such strategies were alleged to include matching low fares and providing far more service than could a new entrant, but then raising fares and cutting service as soon as the new entrant failed or withdrew. USDOT contemplated writing regulations against such alleged practices, but the committee that studied entry and competition in the U.S. airline industry advised against doing so. Given the difficulties involved in defining fair and unfair competition, the proposed regulations could have proved as harmful as helpful. The committee noted that USDOT has other policy instruments that could be used to promote the entry of new carriers, such as supporting the development of additional gates and airports, eliminating service restrictions at some key airports, and ensuring that federal rules promote rather than hinder more open access to major airport facilities.

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