Plane Deal

Small airlines--and a few politicians--try to again put Washington behind the ticket counter.

Carolyn Lochhead from the July 1998 issue

If you had booked a last-minute flight from Los Angeles to Denver on United Airlines last February, it would have cost you $622. But on the same day, you could have booked the same flight on Frontier Airlines, which was trying to lure passengers away from United, and spent only $189, saving yourself 70 percent.

It's been 20 years since Jimmy Carter deregulated the airline industry, and by any measure the experiment has been a huge success. Since 1978, fares have dropped by 40 percent in real terms, while the number of flights has increased by 50 percent. Passenger boardings have soared, from 275 million to 581 million. Jet travel, once limited to those with expense accounts or a lot of money, has become accessible to ordinary people. Consumers have saved billions of dollars.

Naturally, the federal government is preparing to intervene. Small airlines like Frontier, which fear that the large carriers are using unfair practices to crush them, and business travelers, who pay high fares when they book flights at the last minute, want to put Washington back behind the ticket counter. The Justice Department, the Transportation Department, and the chairman of the Senate Commerce Committee all appear to agree that a renewed federal presence is warranted there.

With the recently announced proposals by six of the nation's biggest airlines to consolidate their marketing operations, a regulatory crackdown on airlines--building in Washington for months--is now a certainty. The only remaining question about reregulation is what form it will take--and whether federal intervention will help or make matters worse.

The proposed marketing consolidations announced in April between Delta and United (the nation's biggest carrier), and between American and USAirways, stop short of outright mergers. But like the similar proposed agreement announced last January between Northwest and Continental, these marketing partnerships would involve sharing passengers and frequent flier programs, and achieve much the same results that mergers would.

What's the problem? Government officials contend that the big carriers have entrenched themselves at "fortress hubs"--United in Denver, Northwest in Detroit and Minneapolis, and Delta in Atlanta--where they dominate 80 percent or more of all flights. From these hubs, critics say, the big airlines can attack anyone who dares enter "their" airports to compete. The big airlines can flood the routes of upstart rivals with rock-bottom fares--but just long enough to kill the intruder. After that, the big airlines can jack up their prices again.

Such "predatory pricing," officials say, has caused business fares (typically booked at the last minute) to soar, low-cost airlines to disappear, and small cities, especially in the Southeast, to lose service. Critics, including government officials, representatives of smaller airlines, and some economists, claim that unless the new ticketing and marketing arrangements are stopped by federal intervention, the major airlines and their hubs will become ever more forbidding to competition.

Even the architect of deregulation, economist Alfred Kahn, believes that airline monopolies now are driving out competitors with unfair practices. After a big carrier destroys a competitor, Kahn says, "it puts up a no trespassing sign" that scares off any potential new ones. The number of new carriers has dropped sharply since peaking in the mid-1980s, he notes. Kahn and many other airline deregulators assumed in 1978 that the government would prevent direct competitors such as Republic and Northwest, and TWA and Ozark, from merging. But it didn't.

Critics of the airlines point to other competitive problems. One is that hub dominance is reinforced by such marketing strategies as frequent flier programs and special commissions to travel agents. Another involves the bottlenecks at airports left over from the pre-1978 regulatory regime: At many airports, airlines hold exclusive-use gate leases for as long as 20 years, effectively locking out competitors.

A further complicating factor is that the federal government restricts entry to four highly congested airports--Chicago's O'Hare, Washington National, and New York's LaGuardia and Kennedy. The number of landings and takeoffs, known as "slots," was fixed in 1969 and awarded to a handful of major carriers. Despite two modest expansions of these slots since then, it has remained nearly impossible for competing airlines to fly into those four airports.

There is a trade-off in the hub-based flight system. While it fosters airline dominance at certain airports, it has proven extremely efficient. By routing passengers through a connecting hub, airlines have been able to slash costs and vastly increase the number of flights available to travelers, especially in smaller cities. The challenge facing would-be reregulators is how to aid small airlines without hurting passengers.

The government may end up undoing the benefits of deregulation, prompted by small airlines screaming foul. Frontier Vice Chairman Paul Dempsey told Congress in March that United is on a "homicidal mission" to eliminate his airline. This sort of rhetoric has caught the attention of politicians, and federal action is possible on several fronts:

* The Justice Department this spring opened an antitrust investigation of possible "predatory pricing" by big airlines. The department will also be investigating the Delta-United and American-USAirways alliances.

* The Transportation Department has issued proposed rules calling for steep fines against any airline engaging in predatory pricing, although for legal reasons it does not use that term.

* The DOT also granted slot exemptions at Chicago's O'Hare airport and New York's LaGuardia to six small carriers.