Plane Deal

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

Carolyn Lochhead from the July 1998 issue

(Page 2 of 3)

* Arizona Republican John McCain, chairman of the Senate Commerce Committee, introduced a bill to sell off landing slots at the four federally restricted airports. These slots would be available only to start-up or low-fare airlines, and only if they use the slots for flights to "underserved" destinations. McCain would also require the Transportation Department to act on predatory pricing complaints within 60 days. A similar bill has been introduced by House Democrats.

* Two Tennessee Republicans, Rep. John Duncan, chairman of the House Aviation Subcommittee, and Sen. Bill Frist, have introduced a similar bill that would guarantee aircraft loans to airlines serving "underserved" airports. It would also give $10 million a year to help small airports market themselves.

The Transportation Department's proposals identify several actions that would trigger government intervention: if a carrier offered "very low fares" that return less revenue to the airline than "a reasonable alternative response," for example. The department's rules would also prohibit an established carrier from selling more seats at low fares than a competing carrier offers. But the department does not attempt to define such key terms as "very low fares" or "reasonable alternative response." Many analysts believe the rules are so vague as to be unenforceable.

Does the airline industry need such federal fixes? Some economists think so. Irwin Steltzer, head of regulatory policy for the American Enterprise Institute, says, "[T]here is something called predation out there, no matter what the Chicago economists tell you. The major airlines are capable of it, and [the Transportation Department proposals], while not easy to apply, certainly make sense."

Others are not so sure. Michael Boyd, a Denver aviation consultant, agrees that the big airlines engage in predatory pricing (and even uses that term), but warns that the proposed remedies, "aside from making....Transportation look foolish, will do very little." In fact, he says, most of the proposals will end up raising fares and reducing flight availability.

The major airlines vow a fight. "All of these in some form or another are attempts at reregulating the pricing structure of the industry," says David Fuscus, spokesman for the Air Transport Association, an industry trade group.

Transportation Secretary Rodney Slater denies that. "This is not an effort to reregulate commercial aviation" he says, but rather an effort to preserve competition.

Whether the Transportation Department's proposed rules "preserve competition" or are "attempts at reregulating" may turn on the issue of fare competition. Industry experts say that the rules could actually prohibit fare wars. If an established airline meets a competitor's fares on too many seats, the airline would be fined by the government. "The way those rules are written," says consultant Boyd, "immediately Northwest is guilty of predatory actions because it has more seats than the smaller carrier does at low fares. That's anti-consumer."

Jim Burnley, a former secretary of transportation whose law firm represents American Airlines, adds, "The most amazing thing of all is they're going to use administrative law judges to investigate airlines for setting low fares. There is something very wrong with that scenario."

By design the rules would shield new airlines from competition, critics say, probably leading to higher, not lower, fares. "This is a fare-floor proposal," says Northeastern University economist Stephen Morrison. "The problem is, can you fix what looks to be broken without breaking what is not broken?"

The Supreme Court thinks not. "The mechanism by which a firm engages in predatory pricing--lowering prices--is the same mechanism by which a firm stimulates competition," the Court wrote in 1986. Unsuccessful predatory pricing--fare wars that do not drive out competitors--are "a boon to consumers," the Court said, and the government must be very careful not to "chill the very conduct the antitrust laws are designed to protect."

McCain's bill is subject to similar charges of reregulation. The Arizona senator says he is "amused" by charges that his bill would reregulate the airlines. "The whole purpose of our bill is to increase competition," he says.

But critics say his legislation could also backfire. "Senator McCain might want to learn about the airline business before he starts to try to fix it," Boyd says.

The problem with the McCain legislation is that selling slots will mean taking them away from existing routes that are popular and profitable--say, from Syracuse to New York City--and awarding them instead to less popular routes--say, from Knoxville to New York--that most likely cannot generate the revenue that the low-cost airlines will need to stay in business. One result could be reduced access to four of the most popular airports in the country. Moreover, the new flights from supposedly "underserved" cities will not connect to anywhere else.

"For all those folks in Dickinson, North Dakota, who have a hankering to visit Queens, this bill is a godsend," Boyd told Congress. Boyd also predicts that defining "underserved" will create "a field day for paid consultants and politicians at cities that can barely support a 7-Eleven, let alone jet service."

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