Testimony On The State Of Competition In The Airline Industry

Before The Committee On The Judiciary
House of Representatives, United States Congress
OVERSIGHT HEARING ON THE STATE OF COMPETITION IN THE AIRLINE INDUSTRY
Wednesday, June 14, 2000

Mr. Chairman, Ranking Member Conyers, members of the Judiciary Committee. Thank you for the opportunity to present my concerns about monopoly abuses in the airline industry — particularly the apparent agreement by the major airlines not to compete in each other's Fortress Hub markets.

I know much of the discussion at today's hearing will focus on the recently announced merger between United and US Air and the potential responsive mergers between other major airlines. That these mergers are anti-competitive and should be prohibited is self-evident.

But I believe that we have a much bigger problem to address today. That is the existing monopoly environment in the airline industry. The major airlines have currently created a monopolistic system of Fortress Hubs that represents a blatant violation of federal antitrust laws. Moreover, if government estimates are correct, these current monopoly abuses at Fortress Hubs are costing air travelers billions of dollars a year in excess fares.

Myriad studies, including some by the Federal Aviation Administration, the General Accounting Office, and other Federal, State and Local agencies, outline egregious anti-competitive practices by our leading airlines. These studies conclude that Fortress Hubs stifle competition and gouge consumers.

We all know that Northwest owns Minneapolis and Detroit; Delta owns Atlanta and Cincinnati; American and United own Chicago; US Air owns Pittsburgh. Because the major Fortress Hubs are located in thriving urban business centers, one would assume the market would invite competition. One would assume therefore that United would — under normal circumstances — wish to compete with Delta in Atlanta; Delta would — under normal circumstances — wish to compete with United and American in Chicago, et cetera.

But we do not have normal circumstances here. That’s why we don’t see the airlines coming before Congress complaining about their inability to compete with their rivals. Instead, we have a collective decision by the major airlines not to compete in each other's hub markets.

The Metropolitan Chicago market presents a textbook example of this geographic market allocation and anti-competitive collusion. And perhaps the most startling proof comes from the airlines Chief Executive Officers themselves. In letters to the last two Illinois Governors, the top sixteen airlines’ CEOs emphatically state that they will refuse to use a proposed new Chicago airport. The CEOs told Governors Edgar and Ryan, and I quote:

“We are writing to express our concerns about further planning and development of the so-called Third Chicago Airport. It is our understanding that the State of Illinois will not proceed with the construction of a third airport without the support of the airlines. This letter is intended to inform you that the airlines oppose further planning and construction of this facility.”

How clear can they be? In precise, almost threatening, terms, United and American Airlines, the dominant carriers at O’Hare – in concert with their fellow members of the Air Transport Association (ATA) – have jointly declared their collusive effort to stop new capacity in an already constrained market.

The Fortress Hub monopoly system has many negative consequences, of course. One is higher fares. The General Accounting Office (GAO) has warned us for years that concentration of market power has led to significantly higher prices than would otherwise be the case with aggressive competition. In two recent studies, the State of Illinois concluded that travelers at O'Hare alone pay on the order of seven-hundred-million dollars per year in overcharges -- compared to the national average -- because of the lack of significant competition. Extended nationally, monopolistic overcharges are likely to exceed several billion dollars per year.

The Secretary of Transportation in my home State of Illinois, Kirk Brown, often tells his real-life story about anti-competitive fares. Secretary Brown lives in Springfield, Illinois, which is between Chicago and St. Louis. There is no direct air service from Springfield to Washington D.C. He must fly either through Chicago or St. Louis. Now, if he buys a ticket in Springfield and catches a commuter flight to either city, the total round-
trip fare from his home to D.C. and back is about $490. However, if he drives to St. Louis or Chicago, and catches a direct flight from either hub, his fare on the same plane is $1,207. In short, the longer trip is much cheaper because St. Louis and Chicago are competing for his service, whereas in either hub competition is almost nil.

But the traveler is not the only victim of this Fortress Hub system. Once again, Chicago illustrates other widespread adverse consequences of this illegal conduct. One, communities near Fortress Hubs suffer severe environmental impacts. The O'Hare area communities are adamantly opposed to airport expansion because it will subject them to more noise, pollution, congestion and safety hazards. Two, communities located great distances from airports suffer serious economic decline. As you know, Chairman Hyde and I each represent a part of Chicago and its suburbs. There are roughly equal numbers of people living in the south suburbs, which I represent, and the northwest suburbs, which Chairman Hyde represents. However, during the past ten years, eighty percent of the new jobs created in the Chicago region were in Mr. Hyde's district, while my district lost jobs.

Tragically, the Federal Government has assisted in the growth and expansion of the Fortress Hub monopoly system – and its resulting impacts. Congress’ response has been inadequate. Rather than taking steps to promote competition, Congress last year approved a band-aid solution by adding slots at our busiest airports. Predictably, most of these new slots have gone to the hub’s dominant carriers, thus strengthening the existing monopolies.

The Administration’s lack of action, however, is even more disturbing. The Federal Government— through the Airport Improvement Program (AIP) or the Passenger Facility Charge Program (PFC) — awards or authorizes the expenditure of billions of dollars for airport development. Yet it is clear that little effort has been made by the Department of Transportation to ensure that these billions of federal taxpayer dollars are used to enhance competition and to deter monopoly. Indeed, since Congress approved the PFCs in 1990 as a means to fund new airport construction in places such as Chicago, there has been no new airport built in the U.S. Conversely, the evidence strongly suggests that the Department of Transportation, under Secretary Slater, has acted in collusion with the major airlines to fortify hub monopolies and to discourage competition.

This neglect of the antitrust implications of federal airport funding policy is vividly illustrated by the Administration's bizarre actions relative to, once again, Chicago. First, Secretary of Transportation Rodney Slater and FAA Administrator Jane Garvey have repeatedly denied planning and development funds for a new regional airport -- despite Garvey’s declaration that the country needs ten new airports the size of O’Hare just to meet today’s aviation demands. Second, Secretary Slater and Administrator Garvey continue working with Chicago on O’Hare’s so-called "World Gateway" program to expand and solidify the dominance of United and American in the region. In short, the Federal Government is blocking potential competition while funneling billions in taxpayer dollars to expand existing monopoly. This is disgraceful and unacceptable behavior by our Federal Government.

Sadly, I fear that the proposed mega-mergers in the airline industry will only make matters worse. Because it will only compound the problems we now see, resulting from a concentration of market power in the hands of too few.
The key to breaking up aviation’s geographic cartel -- and de facto monopolies -- and per se violations of antitrust laws -- is to build new airports that will increase capacity and competition, not provide cover for monopolistic corporations.

I am submitting to the Committee several recommendations for followup by the Committee. I will not go into those here, but I would ask for your serious consideration in future deliberations on this matter. Once again, Mr. Chairman and Members of the Committee, I thank you for your time.


Conclusion and Recommendations

Based on my own survey, and the findings of several federal, state and Chicago- area studies, I conclude that the evidence is overwhelming that the major airlines have developed a Fortress Hub system that enables individual airlines to dominate geographic markets and charge exorbitant monopoly supported air fares. I further conclude that as part of their program to maintain and expand this illegal system, the major airlines have acted in concert not to compete in each other's Fortress Hub markets for lucrative business travel markets — with the result that business travelers are overcharged billions of dollars per year. Finally, I conclude that this Fortress Hub system constitutes a per se violation of federal antitrust laws. Given these conclusions, I make the following recommendations to this Committee:

It is obvious that the proposed and potential "mega-mergers" should be stopped.

I respectfully ask that the Committee join with me in asking the Department of Justice to initiate an investigation into the collective refusal of the Big Seven airlines to compete against each other in each other's Fortress Hub markets.

I respectfully ask that the Committee join with me in asking the Department of Justice to initiate a civil action in federal court to break up the Fortress Hub geographic market allocation by the major airlines and to prohibit the collective refusal of the major airlines to compete in each other's Fortress Hub markets.

I respectfully ask that the Committee join with me in asking the state Attorneys General to bring civil damage actions to recover treble damages for the billions of dollars per year in overcharges imposed on travelers as a result of Fortress Hub system.

I respectfully ask this Committee to join with me in a request to the Department of Justice and the Department of Transportation that no further federal funds (either Airport Improvement Program funds or Passenger Facilities Charges) be authorized or approved at O'Hare until there have been full public hearings and public consideration of the antitrust implications of the proposed alterations to O'Hare.

I respectfully ask that the Committee join with me in seeking major reform of the federal aid process to airports to insure that the federal funds are used to promote competitions and to discourage maintenance and growth of Fortress Hub monopoly power.

I respectfully ask that the Committee join with me in the following recommendation to the Department of Transportation: Until completion of construction of a new Chicago regional airport, the existing capacity of O'Hare should be reallocated from its current dominance by United and American into a shared capacity allocation program that reserves a significant share of O'Hare's capacity (e.g. 40%) for new competitive entrants. And by new competitive entrants, I do not mean affiliates of United and American.
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