BTC: US airlines pursuing strategy of predation against foreign carrier new entry

WASHINGTON, DC – US major network carriers have a rich legacy of predatory competitive practices, e.g., dumping tens of thousands of cheap seats into low cost carrier (LCC) markets, designed to run th

WASHINGTON, DC – US major network carriers have a rich legacy of predatory competitive practices, e.g., dumping tens of thousands of cheap seats into low cost carrier (LCC) markets, designed to run those existing airlines out of business and intimidate other competitors from entering the market. When these strategies of predation reached alarming heights in the mid-1990s, corporate, university and government travel managers intervened in the supply side of the market and supported, with their purchasing budgets, existing LCCs as well as new entrants. Today, these major carriers are once again perusing a strategy of predation, except this time, they are endeavoring to foreclose on competition with an assist from the United States Government. It is time again for travel managers to take a leadership position and intervene in the supply side of the market to avert a crisis that would harm their stakeholdersโ€™ strategic interests.

INTRODUCTION

In the mid-1990s major U.S. network carriers launched predatory pricing and distribution strategies designed to prevent low cost carriers (LCCs) from achieving their break-even load factors. Tens of thousands of cheap seats were dumped in LCC city-pair markets to force them to exit. Those โ€œinvestmentsโ€ by the major carriers were then recouped by raising prices above pre-LCC entry levels. According to U.S. Department of Transportation (DOT) documentation, the single most egregious perpetrator of these strategies was Delta Air Linesโ€™ merger partner Northwest Airlines – the airline currently leading the war on foreign carrier new entry.

Simultaneously, a communication plan targeting corporate travel managers was executed by those network carriers that pressed the false argument that corporate contractual support of LCCs, including Southwest Airlines, would weaken major carriersโ€™ networks and result in reduced service to mid-size communities and higher fares – the same unscrupulous message used today against Emirates Airline, Etihad Airways and Qatar Airways (the โ€œGulf Carriersโ€).

By 1997, LCC start-up applications to DOT had completely dried up; investors were no longer interested in funding start-up airlines in an environment of predatory competitive behavior. BTC countered this strategy by (a) launching a nationwide advocacy campaign, (b) working with DOT on a rulemaking, (c) consulting with the U.S. Congress, (d) advising State Attorneys General and (e) successfully counseling travel managers to intervene in the supply side of the market and dedicate a percentage of their travel spend to LCCs for the purpose of strategically influencing the commercial aviation competitive landscape. It worked. Major airlines throttled back on their most aggressive strategies, LCCs survived and investors returned.

AT ISSUE TODAY

Today, Delta Air Lines, American Airlines and United Airlines (the โ€œBig Threeโ€) have consolidated the domestic U.S. industry to such an extent that they, plus Southwest Airlines, control some eighty-five percent of seat capacity. Likewise, through antitrust-immunized alliances and joint ventures the Big Three control the North Atlantic market and thousands of other international city-pair markets. Unfortunately, U.S. mid-size communities have lost substantial air service as the newly engineered marketplace reality dictates that only the highest-yield traffic is flown over the Big Threeโ€™s major hubs.

Now that the Big Three have the structural market conditions and record profits that they have sought, they want to โ€œpull up the drawbridgeโ€ and foreclose on foreign carrier new entry competition โ€“ especially the Gulf Carriers. A study by Oxford Economics found that of the 1,700 routes the Big Three and Gulf Carriers flew in April 2015, they only competed head-to-head on two.

The problem, of course, is that the Big Three cannot pursue the predatory practice of dumping tens of thousands of cheap seats into markets where they do not compete with the Gulf Carriers. Consequently, the solution to deal with unwanted competition is to petition the U.S. government for protection from โ€œunfairโ€ competition. The Big Three have successfully stalled Norwegian Air Internationalโ€™s application at DOT to serve the U.S. and have waged scorched earth warfare on the Gulf Carriers demanding that the Obama Administration retroactively freeze their capacity. As was the case in the 1990s war on LCCs, consumers, mid-size communities and the national interest are being harmed.

ITโ€™S TIME AGAIN FOR SUPPLY-SIDE INTERVENTION

As in the 1990s it is time again for travel buyers to recognize that their strategic interests are being held hostage by the Big Threeโ€™s commercial protectionism gambit. Travel buyers need to intervene in the supply side of the market and support foreign carrier new entry to first safeguard the important, growing access to convenient and cost effective access to rapidly expanding business markets in Africa, the Indian subcontinent and Asia, and second, to remedy the growing problem of diminished U.S. domestic airline competition, which foreign carrier new entry can help address.

For example, JetBlue drove down average airfares by forty percent for consumers in the monopolized Boston – Detroit city-pair market when its partner Emirates Airline initiated service to Boston in 2014 and provided the necessary passenger feed to enable JetBlue to contest the market. JetBlueโ€™s CEO Robin Hayes is bullish on this new domestic service model made possible by partnerships with foreign carriers and recently commented: “It allows airlines like JetBlue to start adding service to markets that we never in a million years could have got started without themโ€ฆA lot of the benefit sits in the domestic network.”

PROGRAM

As encouragement of LCC new entry was critically important in the 1990s, it is in travel buyersโ€™ strategic interests today to proactively support foreign carrier new entry. Where Gulf Carriers and other foreign airlines currently provide service to U.S. markets or enter new markets, and where travel buyers field travelers in those specific markets, travel buyers should consider a program wherein their organization commits to providing a percentage of their traffic in those markets to those carriers. Travel buyers could also promote foreign carriers to their employees for leisure travel purposes and generally raise awareness of these carriers within their organizations.

We need more domestic and international competition, not less, and we need to send a message to the airline industry and the Obama Administration that the Big Three should and will not dictate travel options and alternatives to all Americans and us.

About the author

Avatar of Linda Hohnholz

Linda Hohnholz

Editor in chief for eTurboNews based in the eTN HQ.

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