By Jack Riepe The Guideline Controversy Trenches are being dug and sandbags filled with bundles of press releases as the Department of Transportation's anticompetitive guidelines have become the most argued aviation-related issue of 1998. Lobbying groups are bellowing at each other across the "Beltway" morass (firm in their basic belief that the loudest voice always carries the most virtue) in a constant litany assuring that any position other than their own constitutes the end of the traveling American's carefree way of life. Groups like the Business Travel Coalition have taken up the cause for the corporate consumer, arguing that the DOT's proposed guidelines are essential for preserving the essence of competition as envisioned by the initial concept of deregulation. The other side of the argument is supported by organizations like the Air Transport Association, which contend that these guidelines constitute a return to the kind of industry regulation detrimental to lower airfares and service in smaller markets. Both sides have their share of influential followers. Looking back to a brief history of this affair, the Department of Transportation proposed new rules to eliminate anticompetitive practices by major airlines (against smaller carriers) on April 6, 1997. Despite the fact that there are several bills focusing on this issue before Congress, no new legislation is required. What are these anticompetitive practices? In a very small nutshell, the DOT's guidelines target three specific marketing practices allegedly designed to crush new entrants in the airline business. They are:
The Pro-Guideline Argument The most vocal supporter of the DOT's proposed anticompetitive guidelines is the Business Travel Coalition, headed by Kevin Mitchell. Mitchell has been spearheading radical movements to keep business travel cost manageable for years. Coalition members include the Association of Retail Travel Agents, the Commercial Travelers Association, Eastwind Airlines, Frontier Airlines, ITP/Corp-Net, the Lehigh Northampton Airport Authority, ProAir, Sun Pacific International, Inc., and Total Travel Management. In a BTC document submitted to the Department of Transportation on July 23, Mitchell emphasized that nearly all of the long-term success of the airline industry's deregulation stems from new entrant competition; and that in the opinion of his organization, these guidelines are a critical element in preserving a competitive environment. He offers some interesting statistics:
The Business Travel Coalition has advised the DOT to direct its policy toward the most extreme cases, where an incumbent airline loses millions of dollars by offering tens of thousands of seats at or below the new entrant's fare level. The BTC's statement also emphasizes that the DOT should not penalize a normal competitive response by a major carrier to match fares and increase capacity to reflect growth in a market. The Business Travel Coalition does not advocate a fare or capacity-freeze, nor does it suggest that major carriers be made to follow the lead of new entrants should they reduce capacity or raise fares. The BTC also outlined several other areas in which the organization claims anticompetitive practices prevail. These areas include "tying" arrangements of travel agency override commissions to particular CRS vendors, frequent flyer and agency override programs targeted against new entrants, exclusive corporate discount programs, using CRS to "test" pricing actions, long-term gate leases, and the locking up of positions on new aircraft. The Anti-Anticompetitive Policy Stance Daryll Jenkins, spokesman for George Washington University's Aviation Institute (and a consultant for American and United Airlines), claims the DOT's anticompetitive guidelines are a political issue and based on flawed economic principles. According to Jenkins, the routes alleged to be most affected by predatory pricing practices constitute less than 1/100 of one percent of the airlines' total capacity. "This is an issue of no substance," said Jenkins. "Smaller communities are using this issue to make the airlines improve service by switching from turboprops to jets, or to boost the frequency of flights. But this is not a valid economic issue." The Department of Transportation may also be overstepping its bounds. Jenkins explained that predatory pricing is covered under the antitrust laws. These laws determine whether a product or service is being dumped on a market below cost according to the Areeda-Turner test (named after the two economists who developed it). The effective use of this test also calls for defining the market. "In essence, the Department of Transportation is attempting to rewrite the antitrust laws," said Jenkins. "And the basis of their position is rooted in capacity not cost." Furthermore, markets are not defined by the guidelines. Jenkins stated the DOT has promulgated these rules by telling staffers on Capitol Hill that the major cause of airline failure is predation. Yet, out of 130 airline failures, Jenkins could only find predatory pricing mentioned in the case studies of three. Of those, only one quoted the pricing issue as the primary cause of failure. (This is alleged to have occurred on one route - Islip to Orlando.) Jenkins remarked that more carriers listed the policies of the DOT as contributing to their failures than did unfair exclusionary practices. "This is a highly emotional issue but hardly a substantive one," said Jenkins. "Real issues are falling by the wayside while valuable time is being wasted on this subject. The Nation's air transport infrastructure is long overdue for an overhaul. There are 30-year-old computers in the Leesburg Tracon Center (air traffic control) running on vacuum tubes. The people who repair them have begun to retire. Who is training technicians on vacuum tube technology these days? The computer I have on my desk is more powerful than the Federal Aviation Administration's mainframe. That's an issue of real concern." The Air Transport Association has repeatedly slammed the DOT's guidelines as an attempt by government to set fares and regulate airline service. Association President and CEO Carol B. Hallett flatly stated that this proposal will cripple competition and raise airfares. "No matter how they cut it, this policy puts government bureaucrats in the business of setting fares and determining the level of service in the market," said Hallett. "We simply do not believe that the government should be in the business of selecting certain companies, which are often under capitalized and lack adequate business plans, as deserving of its special protections." Hallett said the DOT guidelines are replete with imprecise and vague terms. According to the ATA, the following points are irrefutable:
The ATA has also referred to a report by the only economic authorities cited by the DOT when it issued its proposed rules. ATA has quoted Janusz A. Ordover, of New York University, and Robert D. Willig, of Princeton University, as saying that the guidelines are "a leap to judgment" and a "genuinely dangerous" step toward re-regulation.
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