Airline Deregulation:

Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets

RCED-97-4: Published: Oct 18, 1996. Publicly Released: Nov 13, 1996.

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Pursuant to a congressional request, GAO provided information on airline operating and marketing practices that restrict the entry of new airlines in the deregulated airline industry, focusing on: (1) whether barriers still exist that prevent airlines, particularly those started after deregulation, from servicing new markets; and (2) how these barriers have affected fares and service.

GAO found that: (1) barriers to entry persist in the airline industry; (2) federal limits on takeoff and landing slots at certain major airports, long-term exclusive-use gate leases, and perimeter rules prohibiting flights of certain distances at LaGuardia and Washington National Airport continue to impede new airlines' access to airports; (3) while such barriers can potentially affect any airline, they primarily affect airlines started after deregulation because the established airlines hold nearly all of the slots, are usually the beneficiaries of exclusive-use gate leases, and have their hubs located close enough to airports to avoid perimeter rule limitations; (4) these barriers particularly impede the entry of newer airlines in key markets in the East and upper Midwest because several airports in those regions have leased most of their gates to one airline; (5) even where airport access is not a problem, airlines sometimes choose not to enter new markets because certain strategies of established airlines make it extremely difficult for other carriers to attract traffic; (6) taken together, these marketing strategies deter new as well as established airlines from entering those markets where an established airline is dominant; (7) as a result, competition suffers, leading to higher airfares; and (8) the effect of these strategies tends to be the greatest, and fares the highest, in markets where the dominant carrier's position is protected by operating barriers. GAO also found that: (1) measuring the effects of barriers to entry on the quality of service is more difficult; and (2) while barriers may reduce the number of competing service options, consumers receive benefits in other ways, such as free frequent flier trips.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: With the April 2000 passage of Public Law 106-181, the Congress revised the legislative standard governing DOT's granting of additional slots to accommodate new entrants. In doing so, the Congress made consideration of competitive benefits a key criterion. Specifically, the law authorizes the Secretary of Transportation to encourage more vigorous competition at each of the nation's four slot-controlled airports. At Chicago O'Hare, for example, the Secretary has now granted new takeoff and landing rights to six airlines that provide service from O'Hare to a total of 10 communities. Also at O'Hare, the Secretary has now provided additional slots to airlines that replace their turboprop aircraft with regional jets and that increase their operations to small-hub airports. Under the law, slots at O'Hare will be phased out completely by 2002. At New York's LaGuardia and Kennedy airports, the law allows the Secretary to eliminate the slot rule by 2007. Until then, the Secretary must grant new-entrant and limited-incumbent airlines additional slots at each airport. In addition, during the interim period, the Secretary must award slots for all new operations to small-hub airports, whether by regional jet or by turboprop. Several regional airlines have applied for slots to link various underserved cities in the Northeast U.S. with LaGuardia using regional jets. In April 2000, the Secretary granted authority to the airlines to provide this service. Finally, the law authorizes the Secretary of Transportation to grant 24 additional exemptions to the slot and perimeter rules at Ronald Reagan Washington National Airport. Twelve of these exemptions must be for nonstop flights to and from cities located beyond the airport's 1,250-miles perimeter. On July 5, 2000, the Secretary awarded the exemptions to several new-entrant and limited-incumbent airlines. This includes the granting of beyond-perimeter slots to four new-entrant or limited-incumbent airlines to offer nonstop service to Las Vegas, Phoenix, Los Angeles, and Denver.

    Matter: If the Department of Transportation (DOT) does not choose to create a slot pool, Congress may wish to revise the legislative standard governing DOT granting of additional slots to accommodate new entrants. Specifically, Congress may want to make the consideration of competitive benefits a key criterion, taking into account the need to balance the benefits of increased competition with the possible costs from increased congestion and communities' concerns about aircraft noise.

  2. Status: Closed - Implemented

    Comments: A new law grants this authority to the Secretary of Transportation. In April 2000, the president signed Public Law 106-181, which authorizes the Secretary of Transportation to grant 24 additional exemptions to the slot and perimeter rules at Ronald Reagan Washington National Airport. Twelve of these exemptions must be for nonstop flights to and from cities located beyond the airport's 1,250-miles perimeter. On July 5, 2000, the Secretary awarded the exemptions to several new-entrant and limited-incumbent airlines. This includes the granting of beyond-perimeter slots to four new-entrant or limited-incumbent airlines to offer nonstop service to Las Vegas, Phoenix, Los Angeles, and Denver.

    Matter: Congress may also wish to grant the Secretary of Transportation the authority to allow exemptions to the perimeter rule at Washington National Airport when the proposed service will substantially increase competition.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOT has relaxed its definition of "exceptional circumstances," thereby facilitating access for new entrants at slot-controlled airports. Since October 1997, DOT has granted 93 slot exemptions for air carriers providing jet service from certain generally small- and medium-sized markets into Chicago's O'Hare and New York's LaGuardia airports.

    Recommendation: To promote competition in regions that have not experienced lower fares as a result of airline deregulation, the Secretary of Transportation should create a pool of available slots by periodically withdrawing some slots that were grandfathered to the major incumbents, taking into account the investments made by those airlines at each of the slot-controlled airports, and hold a lottery to distribute them in a fashion that increases competition.

    Agency Affected: Department of Transportation

  2. Status: Closed - Not Implemented

    Comments: Although DOT agrees that some actions by the Department may be needed to better ensure the potential for competition in airline markets, it does not agree with the specific remedy suggested in the recommendation and plans no action to implement it.

    Recommendation: To promote competition in regions that have not experienced lower fares as a result of airline deregulation, the Secretary of Transportation should direct the Administrator, Federal Aviation Administration (FAA), to make an airport's efforts to have gates available to nonincumbents a factor in FAA decisions on federal grants to airports.

    Agency Affected: Department of Transportation

 

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