PROPOSED STATEMENT OF ENFORCEMENT
POLICY ON UNFAIR EXCLUSIONARY
CONDUCT BY AIRLINES
April 6, 1998
Contact: Bill Mosley
Tel.: (202) 366-5571
Competition in the Domestic Airline Industry Since Deregulation
In deregulating the airline industry in 1978, Congress made it clear that the maintenance of competition was to play the central role in the government's economic oversight of the industry. With a minimum of government economic oversight, the domestic airline industry has generally evolved in ways that have increased competition, improved the convenience and usefulness of air service to most people and lowered inflation-adjusted fares for the nation as a whole. The Department of Transportation has monitored the industry to be sure competition continues to work.
A comprehensive 1990 DOT study of domestic airline competition found that the development of multiple competing hub-and-spoke networks had produced positive service and pricing benefits for most air travelers. However, a major carrier at a connecting hub could charge premium prices to local passengers at that city. The department later analyzed a fundamentally different model of airline service -- low-cost point-to-point service -- developed by Southwest Airlines that was providing an effective competitive counter to local hub-and-spoke market power. The rapid and financially successful growth of Southwest and the entry into the industry of other new-entrant carriers using the low-cost strategy appeared to be correcting the lack of price competition at hubs. By 1995, markets with low-fare competition accounted for nearly 40 percent of domestic passengers. Spurred by this competition, some major carriers began creating more cost-efficient divisions devoted to competing with low-fare airline services. Since early 1996, however, the growth of this new source of competition in the form of new-entrant airlines has slowed. DOT now believes that anticompetitive activity on the part of some network airlines is part of the reason.
The Need for an Enforcement Policy
DOT believes that the responses of some large, established major carriers at their hub cities to service by small, new-entrant airlines have inhibited competition, resulting in higher prices for many passengers and preventing a large sector of air travel demand from being efficiently served. These responses, which protect major carriers' ability to charge higher prices in local hub markets, involve temporarily selling such large numbers of seats at low fares, comparable to new-entrant fares, that by sacrificing profits in the short term, they force the new-entrant carriers to exit from the local market.
The enforcement policy, when made final, will provide guidance for the department, as well as the aviation industry and general public, on which actions by airlines will be considered unfair exclusionary practices and subject to enforcement action.
Legal Authority
The department has authority under 49 U.S.C. 41712 to stop unfair exclusionary conduct in the airline industry. This statute authorizes the department to prohibit conduct that does not amount to a violation of the antitrust laws, but could be considered anticompetitive under antitrust principles.
Enforcement Process
DOT 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. It will examine possible unfair practices on a case-by-case basis.
The department also will:
Responses That Will Result in Enforcement Proceedings
In the absence of convincing reasons to the contrary, the department will institute enforcement proceedings when one or more of the following occurs:
###