Paul Hudson, president of the largest consumer advocate airline organization in the United States, submitted comments to the U.S. Department of Transportation (DOT) and the U.S. Department of Justice (DOJ) in response to their Request for Information (RFI) on the state of competition within the aviation industry. This comprehensive review is essential in evaluating how competition in the airline industry has continued to diminish and how pro-competition steps can be taken in the future.
The Flyers Rights website also provides more information about this brief, including a summary of arguments.
Introduction
FlyersRights welcomes the joint efforts of the U.S. Department of Transportation and the Department of Justice to review competition in the airline industry. A comprehensive review of the airline industry has not occurred since the Airline Deregulation Act of 1978.
Just one agency has the authority to police the airlines’ illegal, unfair, and deceptive behavior.
Its congressional appropriations and statutory limits on enforcement penalties are insufficient to protect consumers and competition.
In the decades since deregulation, the airlines have emphasized that market competition, not regulation, will best serve the interests of the flying public while simultaneously consolidating, reducing competition, enacting barriers to entry, and reducing the transparency of the information required for consumers to make informed decisions.
Anti-Competitive Behavior: Price-Fixing and Capacity Discipline
Antitrust textbooks are littered with airline price-fixing schemes. Starting soon after deregulation, these price-fixing schemes were overt and unsophisticated. But parallel to technological innovation, they became harder to detect.
First, airline CEOs would call other CEOs to set prices and routes jointly. Once that was punished, the airlines moved to sharing price information and negotiating prices through a company owned by a group of airlines. More recently, coordination has taken the form of price signaling and “capacity discipline.”
American Airlines and Southwest Airlines were involved in a class action lawsuit alleging they conspired to increase airfares. Both airlines settled the lawsuit, but they denied any wrongdoing.
Delta Air Lines and United Airlines appear to be on trial as well. In public shareholder calls, the airlines would signal they wanted to maintain “capacity discipline.” In other words, they tried to reduce output to increase prices. Breaking down fares into a menu of fees also enables higher price coordination.
In the past ten years, multiple airlines have increased bag fees in lockstep.
Alliances and joint ventures
In addition to concerted action, which is more easily accomplished in a highly concentrated industry, airlines have engaged in alliances and joint ventures that further concentrate the industry because alliance members do not compete.
American Airlines and JetBlue Airways participated in the Northeast Alliance for nearly three years, enabling them to coordinate flights and pool revenue. Delta, American, and United are members of three joint ventures for international travel alongside major foreign airlines and U.S. airlines such as Alaska Airlines and Hawaiian Airlines. JetBlue has entered into an alliance agreement with individual airlines from the three joint ventures without becoming a formal alliance member.
The Department of Justice states that these three airline alliances control 82% of the United States-European Union international air travel market.
The Department of Transportation grants antitrust immunity for these airlines despite objections that the airline industry continues to be highly concentrated. For each independent competitor taken away from a trans-Atlantic route with four competitors, prices increase by 7%.
The Department of Justice also determined that the benefits to competition from these airline alliances are not dependent on the airlines having antitrust immunity.
Common Ownership
Many of the top ten shareholders of any given U.S. airline are also the top ten shareholders of other U.S. airlines. Common airline ownership reduces the incentives for one airline to compete more aggressively, lower its prices, or enter a new market. It raises prices and reduces output in the airline industry.
Antitrust Immunity and International Airline Alliances, Economic Analysis Group, Department of Justice.
A research study by Azar estimates that airline common ownership “increases concentration by about as much as going from four equal-sized carriers to two equal-sized carriers.”
Azar estimates that common ownership of the average airline route is “more than 10 times larger than the threshold level ‘likely to enhance market power’ in the case of a traditional merger, according to the U.S. Antitrust Agencies’ Horizontal Merger Guidelines.”
Azar concludes that “voice, incentives, and vote– as well as doing nothing” are the mechanisms by which common ownership harms competition.
Opposition to Transparency Regulation
A competitive market requires an informed consumer empowered to make a rational decision. For competition to succeed, passengers must be aware of an ever-growing menu of ancillary fees that vary based on routes, dates, individual passengers, and the date or location the ancillary fee was paid.
On April 17, 2024, the Department of Transportation published a final rule requiring airlines to disclose critical ancillary fees when fare and schedule information is provided to a consumer. These ancillary fees include a first-checked bag fee, second-checked bag fee, carry-on bag fee, change fee, and cancellation fee.
However, Airlines for America, American Airlines, Delta Air Lines, United Airlines, JetBlue Airways, Alaska Airlines, Hawaiian Airlines, the International Air Transport Association, and the National Air Carrier Association sued to invalidate this rule.
This rule would have enhanced competition.
If the airlines had their way, they would strike down the full-fare Advertising Rule. Once a proposed rulemaking, they lobbied intensely to block and
Then, it was challenged in court, and it is now a fundamental protection for passengers.
Gate Exclusivity, Slot Squatting, and Airport Dominance.
Incumbent carriers stifle competition by imposing barriers to entry on potential competitors. Through fortress hubs and exclusive gates, incumbent carriers make it financially and physically impossible to compete at a hub airport.
Many of the largest airports, including Charlotte, Dallas, Philadelphia, Houston International, Washington Dulles, Atlanta, Detroit, Salt Lake City, and Minneapolis, are dominated by a single U.S. airline. Flights to or from a fortress hub come with artificially inflated prices.
By monopolizing gate access at an airport through long-term contracts, incumbent airlines can prevent the entry of new airlines into a market. Many of these gates sit unused, harming passengers and competition.
Anticompetitive Effects Of Common Ownership
Three U.S. airports are capacity-constrained and have a slot system overseen by the FAA.
The slot system was intended to reduce overcrowding while ensuring that the airports could serve as many passengers as feasible.
Contrary to the system’s purpose and its harmfulness to competition, airlines engage in “slot squatting,” where they operate low-load factor flights solely to prevent a competitor airline from acquiring that slot.
Airline Loyalty Programs
Loyalty reward programs constitute barriers to entry. Not only do these come with data privacy concerns, fees to redeem accrued benefits, and expiration dates often without notice, but these programs cause consumers to see higher prices.
Solutions
Return to Common Gates
In the United States, dominant airlines can control a large percentage of an airport’s gates through lucrative long-term leases with the airport. This control pushes out competitors and discourages potential competitors from entering the market. Exclusive gate leases are predominantly a recent American invention. Exclusive gate leases should be adequately defined as anti-competitive practices when they remove competitors and block potential competitors.
Flight Delay Compensation and Reciprocity/Interline Rules
The Department of Transportation should promulgate a flight delay compensation rule and a reciprocity rule to incentivize on-time performance for issues within a carrier’s control.
American passengers suffer damage when an airline causes a flight delay, cancellation, or disruption. U.S. carriers are familiar with delay compensation, as E.U. regulations and the Montreal Convention require delay compensation for international flights.
Flight delay compensation is inherently a competition question. When passengers are stranded due to a flight delay, they are beholden to the airline to get them to their destination as soon as possible. If alternate airlines operate a flight, a walk-up ticket will cost at least three times as much as their original ticket.
With the airline industry lacking competition in general, airlines are not incentivized to reroute their stranded passengers and minimize controllable delays.
Reinstating the reciprocity rule is an alternative method to incentivize competition by rewarding airlines that operate on time and as scheduled. Before deregulation, the reciprocity rule was a term in every airline tariff approved by the CAB. The reciprocity rule requires an airline to reroute a delayed passenger on the next available flight, regardless of the airline.
Reinstating this rule will incentivize carriers to avoid delays and minimize the harm to passengers caused by the airlines. Automatic penalties will not require time-consuming investigations by the DOT.
Redistribute Slots
The Department of Transportation must more aggressively re-allocate slots to meet the needs of passengers and competition. These should not be viewed as airline property, a valuable asset that justifies flying empty flights to maintain.
Expand Enforcement Capabilities
Currently, only one agency can enforce consumer protection laws. There are not many consumer protection regulations that airlines have to follow, yet the airlines are found to violate those regulations frequently. As a result, the airlines have treated DOT fines, statutorily capped, as the cost of doing business. They opt to violate these consumer protections under a calculation that the chance of enforcement is low and the cost of enforcement action is lower than it should be.
The Department of Transportation’s capacity must be expanded. This can be accomplished with a larger workforce enforcing consumer protection regulations. Additionally, the Department of Transportation can continue its arrangement with state attorneys general to combine the states’ resources with the federal authority of the Department of Transportation.
Congress should pass a law to enable state attorneys general to enforce federal consumer protection laws. In 2024, a bipartisan group of 38 state attorneys general wrote to Congress requesting this authority.
Protect the Value of Airline Loyalty Program Assets
Airline loyalty programs have anti-competitive effects by locking passengers into a single airline.
Aside from the transparency and consumer protections needed on the issue of devaluation and notice, short notice periods and constant devaluation further amplify this anti-competitive effect.
Passengers are compelled to rush or force purchases that they otherwise would not have wanted to avoid losing the benefits they bargained for in previous
transactions with the airlines (when these transactions were coaxed with the expectation of these future benefits).
Ease Capital Restrictions
In combination with the other pro-competition policies above, easing these restrictions will enable new entrants to compete with the incumbent carriers and aid existing carriers in maintaining and growing their competitiveness against other airlines.
Currently, federal law caps foreign ownership of an airline at 25% and requires an airline to have domestic control. In 2019, the Government Accountability Office studied the potential effects of raising this cap to 49% and did not find any harm in such a change, including to national security.
Although the GAO found positive effects on competition, not to be specific, the GAO found that increased foreign capital investments could positively affect competition in the future. This is even more likely during recessions and potential bankruptcies, whereas this study occurred during a strong U.S. economic climate.
Conclusion
Since deregulation, the airlines have been able to convince regulators not to scrutinize their oligopoly. Aside from the economic arguments discussed above, the airlines tout a purported decrease in fares as evidence that deregulation has succeeded. This type of argument
- ignores how much lower fares would be with increased competition today
- ignores four further decades of technological innovation that would have otherwise continued the downward trend of pricing that occurred in the final years of deregulation,
- ignores ancillary fees and harms to passengers arising out of delays, cancellations, strandings, bumping, and lower levels of customer service.