REMARKS PREPARED FOR DELIVERY
U.S. TRANSPORTATION SECRETARY RODNEY E. SLATER
PROPOSED GUIDELINES ON UNFAIR COMPETITIVE PRACTICES
IN THE AIRLINE INDUSTRY
WASHINGTON, D.C.
APRIL 6, 1998
This year is the 20th anniversary of airline deregulation. Looking back, deregulation has been good for both airlines and consumers.
Consumer prices are way down, a third-lower than two decades ago. More frequent, convenient service is generally available to cities of all sizes. Airline profits are up for the third year in a row. With President Clinton’s determination to balance the budget and keep the economy strong, combined with the determination of airline management and hard work of airline employees, many believe we will see record profits again this year.
In the deregulated environment, the industry and government working together have made the aviation system more efficient, delivering better service at lower prices for the hundreds of millions of us who fly every year.
The purpose of deregulation was to make the airline industry competitive and make air travel affordable. But competition only works if it exists. So, today we are proposing a set of guidelines on unfair competitive practices to ensure that deregulation works for another 20 years.
There is growing concern that major carriers are willing to lose money -- lots of it -- in the short run to drive off competition; selling so many seats at low fares that the airline’s strategy is economically rational only if it forces out competition from low-fare, start-up airlines.
The start-ups say these anti-competitive practices are driving them out of markets, especially at the nation’s busiest airports. Some say they have been driven out of business altogether by these practices.
Many people are taking notice. Congress has held hearings on competition, and legislation is pending. I have heard from mayors, consumer and business leaders from across the country. The General Accounting Office has done studies. Community roundtables have been sponsored by lawmakers around the nation. And the Justice Department is investigating whether the biggest airlines are using anti-competitive practices at hub airports.
We’ve listened to the concerns that have been raised. We’ve analyzed the problems that we have identified, and the policy statement I am proposing today defines what kind of competitive behavior is unfair and exclusionary. And the Department will consider taking enforcement action against such conduct. This policy is not intended to ensure the success of any start-up carrier, but rather to ensure a level playing field. Consumers deserve a pro-competitive standard that helps ensure affordable airfares and accessible service. To provide a level playing field, we must preserve vigorous competition and prohibit unfair exclusionary practices meant solely to eliminate that competition.
Let me state the standard clearly:
We will consider that a major carrier is engaging in unfair exclusionary practices if, in response to entry by a new carrier into one or more of its local hub markets, it pursues a strategy of price cuts or capacity increases, or both, that either (1) causes it to forego more revenue than all of the new entrant’s capacity could have diverted from it, or (2) results in substantially lower operating profits -- or greater operating losses -- in the short run than would a reasonable alternative strategy for competing with the new entrant.
We will examine possible unfair practices on a case by case basis. Our policy states three identifiable patterns of behavior which will trigger an investigation. These triggers are:
(1) the major carrier adds capacity and sells such a large number of seats at very low fares that the ensuing self-diversion of revenue results in lower local revenue than would a reasonable alternative response,
(2) the number of local passengers that the major carrier carries at the new entrant’s low fares (or at similar fares that are substantially below the major carrier’s previous fares) exceeds the new entrant’s total seat capacity, resulting, through self-diversion, in lower local revenue than would a reasonable alternative response, or
(3) the number of local passengers that the major carrier carries at the new entrant’s low fares (or at similar fares that are substantially below the major carrier’s previous fares) exceeds the number of low-fare passengers carried by the new entrant, resulting, through self-diversion, in lower local revenue than would a reasonable alternative response.
Let me be clear: This is not an effort to re-regulate commercial aviation. We are encouraging vigorous competition. Major airlines do not want to go back to the days of regulation, and neither do we. Two decades ago, Dr. Alfred Kahn, the father of deregulation, said: "The eggs have been scrambled and cannot be put back together." I agree. We are not about to turn back the pages of history.
During the 60-day initial comment period, we will actively engage industry, workers, lawmakers, consumers, city leaders, state officials and others in a full and honest discussion. I have already met with many stakeholders, including leaders of big and small airlines.
The result of these discussions, we hope, will be a clear and informed policy that preserves the benefits of competition, and protects the interests of consumers. To keep the skies open to healthy competition, we must keep the debate open to all opinions.
Our common goal is to expand the pie, to provide opportunity for all, and prepare the aviation industry for the challenges of the 21st century. In 12 years, 1 billion people will be flying each year, compared to 600 million today.
At the end of the day, what we all want is for the economy to stay strong and the airline industry to stay safe, healthy and dynamic. We are the world leader in aviation. We have the best airplanes, the best airlines, and the best airports. Our air travelers are the best-served anywhere. For our efforts, we want a stronger, safer, more integrated transportation system -- a system that is international in reach, intermodal in form, intelligent in character and inclusive in service.
By working together, by encouraging vigorous but fair competition, by ensuring safe and secure travel I know that our best days are yet to come.
Thank you.
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