oversight

Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports

Published by the Government Accountability Office on 1990-07-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

    Resources, Community, and
    Economic Development Division

    B-238198

    July 11,199O

    The Honorable John C. Danforth
    Ranking Minority Member
    Committee on Commerce, Science,
      and Transportation
    United States Senate

    The Honorable James L. Oberstar
    Chairman, Subcommittee on Aviation
    Committee on Public Works and
      Transportation
    House of Representatives

    This report responds to your request that we examine the effects of increased concentration
    on air fares and service at major airports around the country. We examined fares and service
    levels at 15 airports where one or two airlines handle most of the enplaning passengers. We
    compared fare levels at the concentrated airports with fares at 38 relatively unconcentrated
    airports.

    As arranged with your offices, unless you publicly announce its contents earlier, we plan no
    further distribution of this report until 30 days after the date of this letter. At that time, we
    will send copies to the Secretary of Transportation and to other interested parties.

    This work was performed under the general direction of Kenneth M. Mead, Director for
    Transportation Issues. Mr. Mead can be reached at (202) 275-1000. Major contributors are
    listed in appendix III.




V   J. Dexter Peach
    Assistant Comptroller General
                                                                                                          ,

libceeutiveSummary


              Airline deregulation was predicated on the belief that the industry was
Purpose       fundamentally competitive and that competition would ensure low
              prices and good service. However, allegations of high fares and service
              reductions, especially in cities where one or two airlines handle most of
              the traffic, have triggered congressional concern about the state of com-
              petition in many air travel markets. The Ranking Minority Member of
              the Senate Committee on Commerce, Science, and Transportation and
              the Chairman of the Subcommittee on Aviation, House Committee on
              Public Works and Transportation, asked GAOto examine trends in airline
              fares and service.

              GAOexamined airline yields-the     fare per passenger mile-at 53 of the
              75 busiest airports in the nation. Fifteen of the 53 airports have rela-
              tively high levels of market concentration in that one or two airlines
              handle most of the enplanements. Yields at these concentrated airports
              were compared with those at the 38 remaining airports, where there
              was more competition. GAOalso examined trends in departure frequen-
              cies and points served from the 15 concentrated airports1

              GAOtestified on June 7,1989, on its preliminary findings on changes in
              fares and service at concentrated airports between 1985 and 1988. This
              report extends the analysis and now includes fares paid by almost 45
              million travelers between 1985 and the second quarter 1989. This report
              also compares GAO'Sresults with those from studies by the Departments
              of Justice and Transportation and others.

              This report on major airports is one of a series of GAOreviews on compe-
              tition in the nation’s airline industry. Complementary work analyzes
              fares at airports serving small and medium-sized communities and
              examines how changes in the airline industry have affected the ability
              of new firms to enter the industry or of existing carriers to enter new
              markets.


              Over the past few years, a trend has developed toward the establish-
Background    ment of a dominant position by one or two airlines at a growing number
              of major airports. Airport dominance can result from an airline merger,
              or it might follow an airline’s decision to set up a hub at the airport. A
              hub airport is one where an airline consolidates and interchanges traffic
              from many other points in its system. A carrier that gains dominance

              lGA0 considered an airport market concentrated if one airline handled 60 percent of the enplane-
              ments or if two airlines handled 86 percent.



              Page 2                                   GAO/WED-99-102 Fares and Service at Major Airports
                     Executive Summary




                     over traffic at an airport can gain a significant advantage over its com-
                     petitors on individual routes.

                     At the same time that the major airlines were beginning to establish
                     dominant positions at a number of airports around the nation, they also
                     developed new operating and marketing strategies that can make it dif-
                     ficult for new firms to enter the airline industry or for existing carriers
                     to expand into markets controlled by other airlines. Increased market
                     power can lead to higher prices or reduced service as airlines try to
                     maximize their profits.


                     In June 1989 testimony, GAO reported that fares, on the average, rose
Results in Brief     more at the concentrated airports than at the airports where there was
                     more competition and were about 27 percent higher than at the airports
                     with more competition. Extending the analysis to include the first two
                     quarters of 1989 showed that fares remained close to 27 percent higher.
                     Fares charged by the dominant carriers tended to rise as their airport
                     market shares increased. Recent analyses of fares at concentrated air-
                     ports by Justice Department staff and others have also found that fares
                     are higher at concentrated airports.

                     Service levels at the concentrated airports generally improved: there
                     was more direct, or single plane, service to more places after the airport
                     became concentrated. However, the number of routes where there was
                     competition between carriers declined at most of the concentrated air-
                     ports, and more routes were served by only one airline.



Principal Findings

Fares Have Risen     In 1988, airline yields for all carriers at the concentrated airports aver-
                     aged about 27 percent higher than yields at the relatively unconcen-
                     trated airports. This difference persisted through the first two quarters
                     of 1989. Yields were higher at the concentrated airports in 1985 as well,
                     but the difference has widened as the dominant airlines have increased
                     their share of the traffic at these airports. In 1988, the average yield
                     earned by the dominant airlines at the concentrated airports was 20
                     cents per passenger mile, almost 38 percent higher than the average
                     yield for all carriers at the unconcentrated airports.



                     Page 3                          GAO/RCED-90-102 Fares and Service at Major Airports
                           Executive Summary




                           The yields received by the dominant airlines are generally above the
                           yields received by other carriers at the concentrated airports. GAOfound
                           that yields rose following the establishment of the dominant positions.
                           These dominant positions were established by mergers of competing car-
                           riers, the establishment of hubs, and the extension of already dominant
                           positions.

                           The airlines have offered a number of explanations for the higher yields
                           at concentrated airports, including shorter average trips out of hub air-
                           ports? and better quality service (i.e., more service to more points that
                           does not require a change of planes). GAOexamined these explanations
                           and, after taking into account differences in average flight lengths,
                           found that yields were still more than 20 percent higher at the concen-
                           trated airports.


Service Levels Have        GAOexamined several measures of the level of service at the 15 concen-
                           trated airports to see whether travelers at those cities received more or
Improved but Competition   less service as airport dominance grew. The number of destinations
Has Declined               served directly from concentrated airports, that is, with single plane ser-
                           vice, increased 10 percent, and the number of daily departures increased
                           3 percent between May 1985 and May 1988. These increases are prima-
                           rily comprised of large increases in service by the dominant carriers as
                           they established or strengthened their hubs. At airports that were
                           affected by mergers, the number of daily departures often declined. At
                           the same time, competition has lessened at the concentrated airports.
                           The number of destinations served directly by only one airline rose 25
                           percent, while the number of destinations served by four or more air-
                           lines fell 52 percent.


Other Analyses AlSo show   A study comparing fares at hub and nonhub airports undertaken for the
Higher Fares at            Air Transport Association (ATA) included 14 of the 15 concentrated air-
                           ports in this study. While the ATA study did not address the question of
Concentrated A irports     how market concentration affects air fares in the same way as GAO,ATA'S
                           data showed that in 13 of the 14 concentrated hub airports GAO
                           examined fares were above the industry average. The ATA study attrib-
                           uted the higher fares to factors other than concentration, including the
                           public’s willingness to pay for higher levels of service-i.e., more fre-
                           quent, nonstop flights to more destinations.

                           “Shorter trips spread fixed costs over fewer miles and so fares per mile are generally higher for
                           shorter flights than longer ones.



                           Page 4                                     GAO/RCED-90-102 Fares and Service at Major Airports
                  ExecutiveSummary




                  Analysts at the Justice Department recently examined airline fares at
                  two airports that became concentrated following mergers of competing
                  airlines and found that airline fares had risen significantly as a result of
                  the mergers. Finally, the Department of Transportation recently pub-
                  lished a multivolume study of competition in the airline industry. The
                  study concluded that, while most air travelers had benefited under
                  deregulation through more service and lower fares, there were “pockets
                  of problems” including higher fares for passengers traveling to and from
                  some highly concentrated airports. DOTconcluded that no action was
                  warranted at this time.


                  GAOis not making any recommendations in this report. However, in tes-
Recommendations   timony before the Congress, GAOoutlined the pros and cons of various
                  options that might be taken to promote competition in the airline
                  industry (see app. II). GAOalso is finalizing work on an econometric
                  model that will help the Congress and the Department of Transportation
                  decide what specific actions are most likely to promote competition and
                  preserve the benefits of deregulation for the consumer. A report synthe-
                  sizing all of GAO'Swork on competition in the airline industry, including
                  appropriate recommendations and matters for congressional considera-
                  tion, is planned for issuance early next year.


                  As agreed with the requesters, GAOdid not obtain formal agency com-
Agency Comments   ments on this report. However, GAOhas met with DOTofficials and they
                  concurred with the finding that fares are higher at concentrated
                  airports.




                  Page 5                          GAO/RCED-90-102 Fares and Service at Major Airports
                                                                                                     ,


Contents


Executive Summary                                                                                          2

Chapter 1                                                                                                12
Introduction                The Airline Industry Under Deregulation
                            Growing Concern About the Future of Airline
                                                                                                         12
                                                                                                         13
                                Competition
                            Objectives, Scope, and Methodology                                           14

Chapter 2                                                                                                21
The Airline Industry        CAB Regulation
                            Competition Under Deregulation: the Early Years 197%
                                                                                                         21
                                                                                                         22
Under Deregulation              1984
                            Competition Since 1984: Changes in Marketing and                             24
                                Operating Practices
                            Other Barriers to Competition                                                30
                            Industry Mergers and Consolidation                                           30

Chapter 3                                                                                                32
Trends in Airline           Yields Are Higher at Concentrated Airports
                            Trends in Yields at the Concentrated Airports
                                                                                                         32
                                                                                                         33
Fares at 15                 Trends at Different Concentrated Airports                                    35
Concentrated Airports       several Other Factors Could Affect Yield Differences                         46
                            Sensitivity Analysis                                                         49

Chapter 4                                                                                                52
Other   Recent   Analyses   The DDJ’St. Louis Study                                                      52
                            The Simat, Helliesen & Eichner Study for the Air                             55
of Fares at                     Transport Association
Concentrated Airports       Study by Justice Department Analysts                                         60
                            DOI’Task Force on Competition Study                                          61

Chapter 5                                                                                                64
Changesin Air               Number of Destinations Served Directly
                            Number of Daily Departures
                                                                                                         65
                                                                                                         66
PassengerService at         Degree of Competition                                                        67
15 Concentrated             Other Analyses of Service Changes at Concentrated                            70
Airports                        Airports




                            Page 0                        GAO/RCED90-102 Farea and Service at war   Airporta
              Contents




Chapter 6
Conclusions
Appendixes    Appendix I: Trends in Fares at Each of the 15                                 78
                  Concentrated Airports
              Appendix II: Policy Options Discussed in GAO Testimony                        94
                  on Barriers to Competition in the Airline Industry
              Appendix III: Major Contributors to This Report                               98

Tables        Table 1.1: Comparison of GAO and DOT/CAB Origin-                               18
                  Destination Data Fare Screens for 1988 Data
              Table 3.1: Airline Yields in 1988 at Concentrated Major                       33
                  Airports
              Table 3.2: Annual Average Yields and Enplanement                              36
                  Shares of Dominant Carriers at Minneapolis/St. Paul
                  and St. Louis Compared to Yields at 38
                  Unconcentrated Airports
              Table 3.3: USAir-Piedmont Fare Changes at Syracuse                             37
                  Compared to Changes in Fares at 38 Unconcentrated
                  Airports
              Table 3.4: Northwest-Republic Yields at Detroit                                38
                  Metropolitan Wayne County Airport and at 38
                  Unconcentrated Airports
              Table 3.5: Annual Average Yields and Enplanement                               39
                  Shares of American Airlines at Nashville and
                  Raleigh-Durham Compared to Yields at 38
                  Unconcentrated Airports
              Table 3.6: Delta Yields and Market Shares at Cincinnati                        40
                  Compared to Yields at 38 Comparison Airports
              Table 3.7: Yields and Enplanement Shares at Charlotte for                      41
                  USAir-Piedmont and Yields at 38 Unconcentrated
                  Airports
              Table 3.8: Yields and Enplanement Shares at Dayton for                         41
                  USAir-Piedmont and Yields at 38 Unconcentrated
                  Airports
              Table 3.9: Yields and Enplanement Shares at Piedmont                           42
                  Triad International Airport for U&%-Piedmont and
                  Yields at 38 Unconcentrated Airports
              Table 3.10: Yields and Enplanement Shares at Memphis                           43
                  for Northwest-Republic and Yields at 38
                  Unconcentrated Airports


              Page 7                        GAO/RCED-!M-102 Fares and Service at MaJor Airports
                                                                         .




Table 3.11: Yields and Enplanement Shares at Salt Lake                       43
    City for Delta-Western and Yields at 38
    Unconcentrated Airports
Table 3.12: Yields and Enplanement Shares at Pittsburgh                      44
    for USAir-Piedmont and Yields at 38 Unconcentrated
    Airports
Table 3.13: Yields at Atlanta for Delta and Eastern                          45
    Airlines and Yields at 38 Unconcentrated Airports
Table 3.14: Yields at Denver for United and Continental                      46
    and Yields at 38 Unconcentrated Airports
Table 3.15: Differences in Yields at 15 Concentrated                         48
    Airports and 22 Unconcentrated Airports
Table 3.16: Sensitivity Analysis of Assumptions                              51
    Employed to Calculate Yields at Concentrated and
    Unconcentrated Airports
Table 4.1: Comparison of Round-Trip Fare Changes by                          54
    Carriers Dominating Hubs
Table 4.2: Comparison of GAO and SH&E Origin-                                59
    Destination Data Fare Screens
Table 4.3: DOT-Calculated Fare Premiums on Monopoly                          62
    Routes and at Concentrated Airports in 1988
Table 4.4: DOT-Calculated Fare Premiums at                                   62
    Concentrated Hubs, 1984 and 1988
Table 5.1: Number of US. Destinations With Direct                            65
    Service From 15 Concentrated Airports During
    Month of May 1985-1988
Table 5.2: Number of Daily Flights to U.S. Destinations                      67
    From 15 Concentrated Airports During Month of May
     1985-1988
Table 5.3: Number of U.S. Destinations to Which Only One                     68
    Airline Flew Directly From 15 Concentrated Airports
    in Month of May 1985-88
Table 5.4: Number of U.S. Destinations to Which Two or                       69
    Three Airlines Flew Directly From 15 Concentrated
    Airports in Month of May 1985-88
Table 5.5: Number of U.S. Destinations to Which Four or                      70
    More Airlines Flew Directly From 15 Concentrated
    Airports in Month of May 1985-88
Table 5.6: Competition Among Carriers Providing Direct                       71
    Service From St. Louis
Table 5.7: Service Changes at St. Louis for Large Jet                        71
    Carriers (Domestic) June 1986 vs. June 1988



Page 8                       GAO/WED-90-102 Fares and Service at Major Airports
          Contents




          Table 5.8: Number of Nonstop Destinations From 15                              73
              Concentrated Airports During Month of May 1985-
              1988

Figures   Figure 3.1: Average Yield for 12 Airports Where                                35
              Concentration Increased
          Figure 3.2: Average Yield for 22 and 38 Comparison                             47
              Airports
          Figure I. 1: Atlanta (Hartsfield Atlanta International                         78
              Airport)
          Figure 1.2: Charlotte (Charlotte/Douglas International                         79
              Airport)
          Figure 1.3: Cincinnati (Greater Cincinnati International                       80
              Airport)
          Figure 1.4: Dayton (Dayton International Airport)                              81
          Figure 1.5: Denver (Stapleton International Airport)                           82
          Figure 1.6: Detroit (Detroit Metropolitan Wayne County                         83
              Airport)
          Figure 1.7: Greensboro/High Point/Winston-Salem                                84
              (Piedmont Triad International Airport)
          Figure 1.8: Memphis (Memphis International Airport)                            85
          Figure 1.9: Minneapolis/St. Paul (Minneapolis/St. Paul                         86
               International Airport)
          Figure I. 10: Nashville (Nashville Metropolitan Airport)                       87
          Figure I. 11: Pittsburgh (Greater Pittsburgh International                     88
              Airport)
          Figure 1.12: Raleigh-Durham (Raleigh-Durham Airport)                           89
          Figure 1.13: St. Louis (Lambert-St. Louis International                        90
               Airport)
          Figure I. 14: Salt Lake City (Salt Lake City International                      91
               Airport)
          Figure 1.15: Syracuse (Hancock International Airport)                           92
          Figure 1.16: Average Yield for the 15 Concentrated                              93
               Airports




          Page 9                          GAO/RCED-9@102 Fares and Service at Major Airports
Contents




Abbreviations

ATA        Air Transport Association
CAB        Civil Aeronautics Board
CPI        Consumer Price Index
CRS        Computerized Reservation System
DOJ        Department of Justice
DOT        Department of Transportation
GAO        General Accounting Office
HHI        Herfindahl-Hirschman Index
O&D        Origin and Destination
SH&E       Simat, Helliesen & Eichner, Inc.
TACOS      Travel agent commission overrides
TWA        Trans World Airlines


Page 10                       GAO/RCE!D90-102 Fares and Service at Major Airports
Page 11   GAO/RCElMO-102 Fares and Service at Major Airports
Chapter 1                                                                                                             ,

htroduetion


                       For over 40 years the nation’s airline industry was subject to eco-
                       nomic regulation by the Civil Aeronautics Board. Many economists
                       and airline industry experts believed that government control over
                       fares and service was inappropriate for this industry, and in 1978
                       the Congress passed the Airline Deregulation Act (P.L. No. 95-504).
                       Proponents of deregulation believed that the free market, not gov-
                       ernment regulation, should determine who should provide airline
                       service and at what price. They believed that the airline industry
                       was a naturally competitive one that should be treated like any other
                       industry in which competition could be expected to flourish.


                       In the early years following deregulation, many new firms entered the
The Airline Industry   industry and the existing carriers expanded their operations into new
Under Deregulation     markets. Between 1978 and 1984, as the proponents of airline deregula-
                       tion had forecast, service offerings expanded and competition intensi-
                       fied. While real (inflation-adjusted) fares rose due to sharp increases in
                       fuel prices, they began to fall after 1981.’However, over time, many of
                       the new entrants and some of the older carriers went out of business or
                       merged with other airlines. After a series of bankruptcies and mergers
                       between 1985 and 1988, the national air travel market became even
                       more concentrated2 than when the industry was regulated by the federal
                       government. For example, in 1978 the five largest airlines controlled 69
                       percent of the nation’s air travel market. Following the increase in com-
                       petition the share of the five largest airlines fell to about 57 percent in
                       1985, but by late 1988 it had risen to 74 percent.3

                       Since deregulation, the airlines have reconfigured their operations into
                       hub and spoke networks. Under a hub and spoke system, airlines bring
                       many flights from “spoke” cities into a central “hub” airport,
                       interchange the traffic, and send the flights back out to their final desti-
                       nations. Airlines using hub and spoke operations maintain a large pres-
                       ence at each hub airport and often dominate traffic at the hub. Thus,
                       while competition has increased on many airline routes, certain airports
                       have experienced increases in concentration.

                        ‘Some proponents of deregulation held that becauseentry into airline markets was relatively easy,
                       the threat of potential entry by would-be competitors would be sufficient to keep air fares low even
                       in markets dominated by one airline. Airline markets were believed to be highly “contestable.”

                       %oncentration is the degree to which sales in an industry or market are accounted for by a small
                       number of firms.

                       3This is not necessarily the most important measure. Three airlines all competing over every route in
                       the nation might well be better than five airlines each with a regional monopoly. Many routes remain
                       highly competitive and the industry as a whole remains more competitive than before deregulation.



                       Page 12                                   GAO/RCED-90-102 Fares and Service at Major Airports
                      Chapter 1
                      Introduction




Growing Concern       operations, many major airports around the nation are now dominated
About the Future of   by one or two airlines. Once established, airline dominance might be rel-
Airline Competition   atively secure because it can be difficult for other airlines to establish or
                      to significantly expand operations at airports where another carrier is
                      already dominant. Marketing strategies, such as frequent flyer pro-
                      grams, airline-owned computerized reservation systems, and travel
                      agent commission overrides4 can be used to reinforce the dominance of
                      the incumbent airline by keeping out potential competitors. In addition,
                      physical constraints, such as inadequate gate space to accommodate
                      new entrants and noise restrictions on the type of equipment that car-
                      riers can use to serve some airports, can also limit entry by potential
                      competitors.

                      Concern is growing that the major airlines might be taking advantage of
                      their positions at airports where they are dominant by charging higher
                      fares for air travel out of those airports or by cutting back on service
                      levels. Airport dominance, combined with other recent changes in the
                      ways the major airlines provide and market their services, might have
                      anti-competitive impacts and frustrate the goals of airline deregulation.

                      Such concern caused the Ranking Minority Member of the Senate Com-
                      mittee on Commerce, Science, and Transportation to ask us to examine
                      fares and service at Lambert-St. Louis International Airport before and
                      after the merger of Trans World Airlines (TWA) and Ozark Air Lines.”
                      Both TWA and Ozark Air Lines used St. Louis as their primary hub air-
                      port. Before the merger, TWA handled about 56 percent of the enplane-
                      ments at St. Louis, but after the merger TWA handled 82 percent.6 We
                      found that TWA’S fares for flights out of St. Louis rose substantially fol-
                      lowing the merger in comparison with fare changes elsewhere. We also
                      found that the number of carriers competing for traffic at St. Louis
                      declined. More routes were served by only a single carrier, usually TWA,
                      and far fewer routes were served by four or more carriers. Our fare




                      4Travel agent commission overrides are payments by airlines to agents above and beyond their
                      normal commissions for increasing their bookings on a carrier’s flights.

                      “Airline Competition, Fare and Service Changesat St. Louis Since the TWA-Ozark Merger (GAO/
                      RCED-8%217BR, Sept. 1988).
                      “Enplanements are passengerboardings at the airport, and include both originating and connecting
                      traffic.



                       Page 13                                 GAO/RCFB-90-102 Fares and Service at Major Airports
                           Chapter 1
                           Introduction




                           findings for St. Louis were later confirmed in an analysis by the Depart-
                           ment of Transportation (DCZ).7


                           At the request of the Ranking Minority Member of the Senate Committee
Objectives,Scope,and       on Commerce, Science, and Transportation and the current Chairman of
Methodology                the Subcommittee on Aviation, House Committee on Public Works and
                           Transportation, we extended our St. Louis analysis to include fares and
                           service at 14 other concentrated airports around the nation (see fol-
                           lowing list).


The 15 Concentrated        Atlanta
                           Charlotte
Airports                   Cincinnati
                           Dayton
                           Denver
                           Detroit
                           Greensboro/High Point/Winston-Salem
                           Memphis
                           Minneapolis/St. Paul
                           Nashville
                           Pittsburgh
                           Raleigh-Durham
                           St. Louis
                           Salt Lake City
                           Syracuse

                           Our objective was to determine whether

                       . fares at major airports where one or two carriers handled most of the
                         traffic were above fares for travel at other major airports where there
                         was more competition;
                       m dominant airlines charged higher fares than other carriers serving the
                         airport; and
                       l service levels had changed at concentrated airports.

                           We focused on the period since concentration began to increase, roughly
                           since 1985. We selected concentrated airports for analysis from among

                           7A Comparison of Air Fares and Services at St. Louis Before and After Trans World Airlines
                           Acquired Ozark Airlines (sic), U.S. Department of Transportation, Office of Economics (DOT-P-37-89-
                           3, Jan. 1989).



                           Page 14                                  GAO/RCFB-90-102 Fares and Service at Major Airports
Chapter 1
Introduction




the 75 busiest on the basis of enplanements. Our criteria for deciding
that an airport was concentrated were that one airline handled at least
60 percent of the passengers enplaning at that airport or two airlines
handled at least 85 percent of the enplaning passengers. A total of 22
airports met the concentration criteria. We chose enplanement share as
the criterion, but others are possible, including the proportion of
originating passengers handled by one carrier. Airlines have a smaller
proportion of originating traffic than enplanements at their hubs
because of the relatively large volume of non-originating, connecting
passengers. When we calculated enplanement shares, we grouped
together airlines under common ownership, such as Eastern and Conti-
nental or Piedmont and USAir.

From the total number of concentrated airports, we excluded six air-
ports that met the concentration criteria but were in metropolitan areas
served by more than one major commercial airport. Therefore, airports
in the New York City, Los Angeles, Chicago, Houston, Baltimore/Wash-
ington, San Francisco, and Dallas areas were not candidates even though
airports in some of these cities met the concentration criteria. We elimi-
nated airports in multi-airport cities because competition from carriers
serving the other airport might offset, to some extent, the effects of con-
centration. We also excluded one concentrated airport because it was
outside the 48 contiguous states.8 All but one of the 15 airports we
selected are hubs for one or more of the major airlines.g Some airports,
such as Phoenix, are hubs, but are not concentrated by our criteria.

We contrasted trends in yields (the fare per passenger mile) on routes
from the 15 concentrated airports with yields on routes from a compar-
ison group of 38 relatively unconcentrated airports listed below.LoThe
airports used for comparison are those in the top 75 airports in the 48
contiguous states that did not meet our definition of concentration and
were not in multi-airport cities. l1 We also compared the yields received
by the dominant airline at each concentrated airport with the yields


%ecause of their unusual geographic characteristics, we excluded airports outside the 48 states from
both the concentrated and comparison airports in our study.

‘USAir, which acquired Piedmont Airlines, has assumedthe dominant position at Greensboro,N.C.,
but does not operate a hub there.
“Passenger miles are the straight-line distances between the origin and destination, regardless of the
route taken by the individual airlines.
“Some of the airports in our control group are hubs (e.g., Phoenix), but they are not concentrated by
our definition.



Page 15                                    GAO/RCED-90-102 Fares and Service at Major Airports
                             Chapter 1
                             Introduction




                             earned by the other airlines serving the airport in order to further
                             understand the effects of dominance.

                             We examined trends in airline yields from the first quarter 1985 through
                             the second quarter 1989, the most recent quarter for which fare data
                             were available at the time this study was completed. Our analysis covers
                             fares paid by almost 45 million travelers between 1985 and the second
                             quarter 1989.


The  38 &woncmt,r
           __-________
                     lated   Albuquerque
                             Austin
Airports i n the             Birmingham
Comparison --- Group
               1             Boston
                             Buffalo
                             Cleveland
                             Columbus, OH
                             El Paso
                             Pt. Lauderdale
                             Ft. Myers
                             Hartford
                             Indianapolis
                             Jacksonville
                             Kansas City
                             Las Vegas
                             Little Rock
                             Louisville
                             Miami
                             Milwaukee
                             New Orleans
                             Norfolk/Virginia   Beach
                             Oklahoma City
                             Omaha
                             Orlando
                             Philadelphia
                             Phoenix
                             Portland, OR
                             Reno
                             Richmond
                             Rochester, NY
                             Sacramento
                             San Antonio
                             San Diego


                             Page 16                         GAO/‘RCED-90-102Fares and Service at Major Airports
Chapter 1
Introduction




Seattle
Tampa
Tucson
Tulsa
West Palm Beach

Because we are concerned with fares paid by travelers from the cities
served by a concentrated airport, all of the yields calculated in this anal-
ysis apply to traffic originating at such airports. To ensure that our
analysis of trends in yields reflected changes in fares, as opposed to
changes in the composition of the sample, we controlled for changes in
the distribution of destinations and changes in the proportion of one-
way and round-trip fares in the sample. For each combination of trip
types (one-way or round-trip) and destination, we calculated the
average yield for each quarter. We weighted the average yield for each
combination according to the average amount of traffic for that combi-
nation over the 18 quarters.

In order to improve comparability between the concentrated airports
and the comparison group, we examined a subset of 22 unconcentrated
airports that excluded airports where average trip lengths were greater
than 900 miles. Yields tend to be lower for longer flights because fares
increase less than proportionately with mileage flown and, on average,
the 38 airports in the comparison group had longer average trips than
the 15 concentrated airports. In addition, we compared yields between
the 15 concentrated and 38 unconcentrated airports for routes within
each of several distance categories.

We used the Origin and Destination (O&D) Survey data collected quar-
terly by DOT in its 10 percent sample of airline tickets to make our yield
comparisons. The airlines report detailed information on every tenth
ticket to DOT and, after processing the data, DOT makes the data available
for public use.‘”




“All large, certificated route air carriers and their code sharing partners are required to submit O&D
Survey data. Thus, only the smallest of domestic airlines offering scheduled service are exempt.



Page 17                                    GAO/RCED-90-102 Fares aud Service at Major Airports
                                                                                                                                                .
                                               Chapter 1
                                               Introduction




                                               Unfortunately, there are a variety of reporting errors in the O&D data. In
                                               particular, fares are occasionally misreported or miscoded.13As part of
                                               this study, we developed a new fare screen to eliminate fares that are
                                               too high or too low. I4Our fare screen was developed by examining avail-
                                               able fares in the Official Airline Guide and by discussing fares with
                                               industry experts. DOT is currently applying the high end of our fare
                                               screen to the latest submissions to identify any fares that are outside
                                               credible limits.15 Table 1.1 contrasts our new fare screen with D@S orig-
                                               inal screen. Based on an examination of listed fares, we developed a sep-
                                               arate fare screen for each year.


Table 1 .I: Comparison   of GAO and DOT/CAB Origin-Destination      Data Fare Screens for 1988 Data
                                             DOT/CAB screen                                                GAO screen
                                            Exclude if yield is                                         Exclude if yield is
                                      less than                 greater than                      less than                 greater than
Mileage category                     cents/mile                   cents/mile                    cents/mile                    cents/mile
l-100                                      10.00                       177.18                              8                           300
101-200                                     5.00                        77.63                              4                           255
201-300                                     3.33                        56.99                              3                           160
301-400                                     500                         48.12                              3                           125
401-500                                     6.00                        43.62                              3                           115
501-700                                     4.28                        38.28                              3                           105
701-1000                                    5.00                        32.93                              3                             80
1001-1300                                   4.61                        29.67                              3                             65
1301-1600                                   500                         27.75                              3                            55
1601-1900                                   430                         26.40                              3                            50
1901-2200                                   4.54                        25.34                              3                            40
2201-2500                                   4.40                        24.63                              3                            40
above2500                                   4.28                        2351                               3                            40


                                               To determine whether the differences in yields were statistically signifi-
                                               cant, we contrasted the average yield at each concentrated airport with

                                               13Forinternal uses, DOT had adopted a fare screen developed by the Civil Aeronautics Board to
                                               eliminate fares that were obviously too high or too low. However, the screen had not been adjusted
                                               for many years. As a result, over time many valid fares were being excluded. The Board's fare screen
                                               was used to develop SUMDOM, an internal data base. The data made available to the public and to
                                               data vendors are Data Bank lA, which does not screen out incorrect fares. Users can make their own
                                               adjustments. The criteria we developed more accurately screen the O&D Survey data.

                                               ‘“The unedited data sometimes have included recorded fares in the hundreds of thousands of dollars
                                               and as low as a few dollars when no such fares existed.
                                               ‘“DOT has elected to include very low reported fares, including the $0 fares paid by frequent flyers.
                                               Our focus is on fares actually paid by travelers, and so we exclude the $0 fares.



                                               Page 18                                    GAO/WED-90-102 Fares and Service at Major Airports
Chapter 1
Introduction




the average yield at the unconcentrated airports in 1988 and tested the
difference between yields at the concentrated airports in 1985 and 1988
to see if they were significant. All the differences were statistically sig-
nificant at the .OOl level except for the difference between the yield at
Detroit and the unconcentrated airports in 1988; that is, there is only 1
chance in 1000 that there is no difference in yields.

Other organizations, including D(JT, also have recently attempted to
measure whether fares are higher at airports where one or two carriers
dominate the traffic or where the airlines operate their hubs. Some of
these studies have been undertaken in response to our analysis. We have
reviewed the assumptions and methodologies underlying these alterna-
tive approaches and, where possible, have attempted to reconcile these
other findings with our own.

Increased market power can lead to reduced levels of service as well as
higher fares. Airlines can increase profits by cutting back on the number
of flights or replacing direct service with connecting service. To test
whether service levels had declined at the 15 concentrated airports, we
examined service level data for the month of May of each year between
1985 and 1988. We compared the number of cities that could be reached
by direct service, the total number of daily flights to all places, and the
amount of competition as measured by the number of markets served by
one carrier, by two or three carriers, or by four or more carriers. We did
not find that service levels were reduced as concentration increased, but
we did find that there were fewer routes with four or more carriers and
more routes served by only one airline.‘”

Finally, this report is part of a series of GAO reports on the state of com-
petition in the airline industry. Prior studies examined how DOT fulfilled
its role in overseeing airline mergers and what happened to airline fares
and service at Lambert-St. Louis International Airport following the
acquisition of Ozark Air Lines by TWA. I7The present report extends the
analysis of St. Louis to all of the large concentrated airports in the 48
contiguous states that are not in multi-airport cities.




‘“The source of these air service data was the automated version of the Official AirIine Guide, which
was purchased from an airline data vendor, I.P. Sharp, Inc.

17Airiine Competition: DOI% Implementation of Airline Regulatory Authority (GAO/RCED-89-93,
June 1989); Airline Competition: Fare and Service Changesat St. Louis Since the TWA-Ozark Merger
(GAO/RCED-%-217BR, Sept. 1988).



Page 19                                    GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 1
introduction




The present study does not attempt to measure precisely how market
concentration and the various factors that protect dominant positions
have affected airlines fares. We are currently developing an econometric
model of the airline industry that will establish the linkage between
fares and market conditions. In addition, the present study is concerned
only with relatively large airports. We are also preparing two studies of
fare trends at airports serving small and medium-sized cities following
deregulation and since the industry has become more concentrated.

Our review was conducted between September 1988 and November
1989. During that period we testified four times before the Congress on
airline fares and service.18




IsFactors Affecting Concentration in the Airline Indust&GAO/T-RCED-88-65, Sept. 1988j; &
Fares and Service at Concentrated Airports (GAO/T-RaD-89-37, June 1989); Barriers to Competi-
tion in the Airline Industry (GAO/T-RCED-89-65, Sept. 20,1989); and Barriers to Competition in the
Airline Industry (GAO/T-RCED-89-66, Sept. 21,1989).



Page 20                                  GAOjRCED90402 Fares and Service at Major Airports
Chapter 2

The Airline Industry Under Deregulation


                 After 40 years of regulation by the Civil Aeronautics Board (CAB), in
                 1978 the Congress enacted the Airline Deregulation Act, which
                 phased out economic regulation of the industry. In the early years of
                 deregulation, many new firms entered the airline industry and, as
                 expected by many airline industry analysts, service offerings
                 expanded and fares fell. However, many other changes in the airline
                 industry since 1978, unforeseen by the proponents of deregulation,
                 have had a significant impact on the competitive environment. Most
                 of the established carriers adapted to the new environment and
                 developed operating and marketing strategies that made it difficult
                 for the new airlines to successfully compete-and many failed. A
                 wave of mergers and consolidations in the mid-1980s reinforced the
                 trend toward a more concentrated airline industry.


                 In 1938, the Congress chose to regulate the airline industry because of
CAB Regulation   concerns over safety, the airlines’ financial health, and perceived inequi-
                 ties between airlines and other forms of transportation-since the other
                 forms of transportation were regulated, while the airlines were not.
                 Also, at the time economic regulation was imposed, many air carriers
                 were near bankruptcy and service was unreliable. The Civil Aeronautics
                 Act of 1938 (P.L. No. 75-706) created the Civil Aeronautics Authority
                 (predecessor to CAB) and gave it authority over fares and market entry
                 and exit similar in some ways to the Interstate Commerce Commission’s
                 authority over railroads and motor carriers.

                 CABcontrolled who could enter the industry and determined which air-
                 lines could serve which individual city-pair markets. Airlines could
                 neither add nor abandon routes without CABapproval. Furthermore, CAB
                 refused to grant operating authority to any new trunk (major) airlines.’
                 Over time, the number of trunk carriers declined from 16 in 1938 to 10
                 by 1974. However, no trunk airline was allowed to go out of business
                 entirely; instead, failing carriers were merged with healthier ones.

                 CABalso tightly controlled fares. If a carrier wanted to raise or lower its
                 fares, it had to file a tariff in advance with CAB.The Board could hold a
                 hearing on the proposed fare change on its own initiative or upon the

                 ‘CAB classified the airlines by the type of service provided. Tnmk airlines were those that had per-
                 manent operating rights between major population areas. Local service airlines were created in the
                 1940s when CAB certified 19 carriers to provide service between smaller population centers and
                 major airports. At the time the industry was deregulated, the number of local service airlines had
                 shrunk to 8. Two of the former local service airlines, USAii and Piedmont, later became major
                 carriers.



                 Page 21                                   GAO/WED-90-102 Fares and Service at Major Airports
                                Chapter 2
                                The Airline Industry Under Deregulation




                                complaint by any person. Competitors could oppose the change or use
                                the required waiting period to file a matching tariff. CABtried to set
                                fares so that the airlines earned sufficient revenues to cover expenses
                                and achieved a rate of return that CABbelieved necessary for financial
                                viability. By the mid-1970s it was widely accepted that CABregulation
                                had not been successful. The airlines rarely earned CAB’Starget rates of
                                return. Moreover, because the airlines were precluded by CABfrom com-
                                peting on the basis of fares, they often substituted service competition
                                for price competition. This substitution increased airline operating costs.
                                These higher costs could then be used to justify higher fares.2

                                Many economists argued that economic regulation of the airlines was
                                inappropriate. The airline industry appeared to be inherently competi-
                                tive and exhibited none of the characteristics of an industry that nor-
                                mally required regulation.3 Evidence from unregulated intrastate air
                                travel markets in California and Texas supported the argument that
                                fares would fall, carriers could prosper, and safety could be maintained
                                if the industry were deregulated.


                      The Airline Deregulation Act of 1978 phased out federal control over
Competition Under     airline fares and routes. The Act allowed new airlines to form and made
Deregulation: the     it easier for existing carriers to expand operations into new markets and
Early Years 1978-1984 deregulation
                      aban don old ones. Economic theory suggested that, in the long run,
                                     would lead to increased competition. Greater competition
                                would lead to lower fares, more service, and a wider variety of service
                                offerings. More competition would also force airlines to become more
                                efficient and reduce operating costs.

                                Deregulation’s proponents believed that, in the absence of government
                                regulation, airline competition would flourish. In those cases where only
                                one airline served a particular market, the carrier would not be able to
                                take advantage of its monopoly position because the principal form of
                                capital in the airline industry (i.e., the airplanes) is highly mobile. Any

                                 21nthe mid-1970s CAB adopted standards that made it more difficult for airlines to use such costs to
                                justify fare increases.
                                31ndustriesin which competition is not expected to be feasible are sometimes called natural monopo-
                                lies. An industry is a natural monopoly when the minimum average cost of production occurs at a
                                rate of output generally sufficient to supply the entire market. If two firms split the market, each
                                would be smaller than its optimally efficient size and each would have relatively high costs and an
                                incentive to expand output. If both lower prices to sell more, price will generally fall faster than
                                average cost becausea large portion of production costs in these industries is fixed, and competition
                                becomesruinous. Ultimately, only one firm can survive in such a market. Virtually all public utilities
                                are natural monopolies.



                                Page 22                                    GAO/RCEDIO-102 Fares and Service at Major Airpor&
Chapter 2
The Airline Industry Under Deregulation




attempt by an airline with a monopoly in a particular market to raise
fares and earn excessive profits would be short-lived because other car-
riers would quickly enter the market and, by their competition, drive
down the fares. Because every airline understood how its potential com-
petitors would behave, the threat of entry by potential competitors was
believed to be sufficient to discipline prices even in markets where only
one airline offered service.

The expectations of greater competition, more service, and lower fares
were largely fulfilled during the first several years following airline
deregulation. Between 1978 and 1984, the number of certificated air-
lines almost tripled, from 44 to 114. Although the former trunk airlines
still dominated the industry, their share of the traffic contracted while
the share of the smaller airlines, including the new entrants, increased.
Not only were there more carriers, but there were more carriers in more
markets. Routes served by two or more airlines increased by 55 percent
between 1978 and 1984, while those served by only one airline fell
almost 10 percent.

Fares also fell for most, although not for all, passengers. In constant dol-
lars, the average fare fell 6 percent between 1978 and 1984 despite
increases in airline operating costs that were higher than the general
rate of inflation. By offering lower fares, new airlines forced the estab-
lished carriers to offer substantial discounts. The proportion of travel
made on discount fares increased from 39 percent in 1977 to 81 percent
in 1984. Moreover, the discounts were deeper, increasing from 30 per-
cent below full fare in 1977 to 51 percent below full fare in 1984. Fares,
too, were more closely related to costs as carriers more fully incorpo-
rated the distance taper into their fares4 and thereby reduced many of
the cross-subsidies that had prevailed under CABregulation.”

On the other hand, the airline industry on the whole did not perform
very well financially in the early years of deregulation. From 1979
through 1984, the trunk and local service airlines lost $4 billion. These


4CAB largely set fares on the basis of distance. However, many airline operating costs do not vary
directly with distance but with the number of takeoffs and landings. Other costs are periodic and do
not vary at all with the distance flown. As a result, longer distance flights have lower costs per seat
mile than shorter distance flights. The CAB fare formula did not adequately account for the distance
taper.

‘The CAB fare formula subsidized travelers in short-distance, lightly traveled markets (who were
charged a price that did not cover costs) at the expenseof travelers in long-distance, heavily traveled
markets (who were charged a fare exceeding costs).



Page 23                                    GAO/RCED-90-102 Fares and Service at Major Airports
                          Chapter 2
                          The Airline Industry Under Deregulation




                          losses can be traced to other factors as well as to deregulationP Eco-
                          nomic recessions in 1980 and 1981-82 decreased the demand for air
                          travel. The air traffic controllers’ strike and subsequent dismissal of
                          much of the existing controller work force led to restrictions on the
                          number of operations. Also, a 90 percent, constant-dollar increase in fuel
                          costs between 1978 and 1981 led the airlines to raise fares. These fare
                          increases, too, dampened traffic. Higher fares and negative economic
                          growth combined to reduce traffic in 1980 and 1981. The industry had
                          not experienced two successive years of negative traffic growth since
                          World War II.

                          Nevertheless, deregulation also played a role in the poor financial per-
                          formance of the airline industry during the early years of deregulation,
                          as intense fare competition reduced airline profits. The trunk airlines
                          were most affected as their highly profitable routes attracted competi-
                          tors and fare wars broke out. After the recession, lower fares stimulated
                          traffic increases. Similarly, deregulation stimulated productivity
                          improvements, but operating costs rose faster than productivity growth.
                          Passenger miles per employee for scheduled airlines rose by more than
                          28 percent between 1978 and 1984 while seat miles per employee grew
                          33 percent. At the same time operating expenses increased nearly 94
                          percent.


                          Airline deregulation, in combination with the dynamic environment in
Competition Since         which it occurred, led to an industry shake-out and to a very different
1984: Changesin           airline industry from what had prevailed under CAB regulation. Three
                          major developments emerged:
Marketing and
Operating Practices   .   the surviving major airlines reconfigured their route systems from
                          linear systems to hub and spoke networks;
                          the major carriers adopted a number of marketing practices that made it
                          more difficult for potential competitors to challenge them in markets
                          where they were dominant; and
                          many new entrants and some of the original trunk carriers went out of
                          business or merged with stronger airlines.


                          “A number of studies have traced the early history of airline deregulation Among the notable are
                          Policies for the Deregulated Airline Industry, CongressionalBudget Office (Washington, D.C.: July
                          1988); Deregulation: Increased Competition is Making Airlines More Efficient and Responsiveto Con-
                          sumers (GAO/RCED-86-26, Nov. 1985); The Deregulated Airline Industry: A Review of the Evidence,
                          Federal Trade Commission (Washington, D.C.: Jan. 1988); Steven Morrison and Clifford Winston, The
                          Economic Effects of Airline Deregulation, The Brookings Institution (Washington, DC.: 1986). -



                          Page 24                                   GAO/RCED-90-102 Fares and Service at Major Airports
   .
                             Chapter 2
                             The Airline Industry Under Deregulation




Establ .ishment of Hub and   Deregulation not only gave the airlines freedom over fares, it also
                             allowed them to enter and exit routes without obtaining prior CAB
Spoke Systems                approval. This new flexibility allowed the airlines to reconfigure their
                             route systems into hub and spoke networks. Hub and spoke operations
                             concentrate most of an airline’s operations at one or a very few “hub”
                             airports and connect virtually every other airport (spoke) in the car-
                             rier’s system via nonstop service to the hub. The hubbing airline will
                             schedule flights so as to bring in travelers from many spokes to the hub,
                             transfer the passengers among planes, and send them off to their final
                             destinations, all in a relatively short period of time. This whole process
                             is repeated several times each day.

                             This system has produced substantial benefits for both the airlines and
                             the traveling public. While there are not sufficient passengers in most
                             airport-pair markets to justify multiple daily nonstop flights, by com-
                             bining passengers bound for many different places and flying them to a
                             hub where they can transfer to flights to their desired destinations, the
                             airline can effectively offer numerous daily one-stop flights in many air-
                             port-pair markets. Hub operations make it easier for many travelers to
                             secure flights departing and arriving at times that best match their pre-
                             ferred departure and arrival times.7 Hub and spoke systems also allow
                             the airlines to better use their airplanes.

                             However, hub and spoke systems require the hubbing airline to handle
                             many simultaneous departures and arrivals several times a day.
                             Because of its numerous departures and arrivals, the hubbing carrier
                             will control many of the gates or concourses. The hubbing carrier may
                             even have exclusive-use rights to its terminal. Given the overall limits
                             on an airport’s capacity to handle traffic and the size of the local
                             originating air travel market, hubbing will often result in one carrier
                             handling most of the enplanements at the airport where it has its hub-
                             bing operations.

                             Often an airport will expand its capacity in order to accommodate a car-
                             rier that decides to set up a hub there. The carrier and the airport will
                             typically enter into a long-term lease agreement for space at the facility.
                             The revenues from the lease payments will be used to underwrite the
                             airport bonds sold to pay for the capacity expansion and thereby lower
                             the cost of borrowing. As a quid pro quo, the airline may require the

                             ‘The difference between the traveler’s preferred time and the scheduled time of departure is called
                             “frequency delay.” Travelers value minimkiig delays of any type, so increased frequencies have a
                             positive impact on traveler welfare.



                             Page 25                                   GAO/RCEDSO-102 Fares and Service at Major Airports
                          Chapter 2
                          The Airline Industry Under Deregulation




                          airport to include a majority-in-interest clause in the lease agreement,
                          giving the airline a large say in any future airport construction activities
                          that would affect its lease payments.

                          By establishing a hub at a city, the airline can gain recognition as that
                          city’s airline. Since the hubbing airline offers so much service out of the
                          airport, travelers living in the city served by that airline might think of
                          it first when planning to fly. The airlines, however, have gone beyond
                          relying simply on market identification for securing the local traffic
                          base at the hub airport. They have also adopted a number of sophisti-
                          cated marketing techniques that can deter new entrants from chal-
                          lenging the dominant carriers at their hubs.


Frequent Flyer Programs   Frequent flyer programs were designed to create brand loyalty, and it
                          appears that they have been successful. Frequent flyer programs factor
                          prominently in determining a traveler’s choice of airline, In our recent
                          survey of 32 travel agents, three-fourths told us that their business
                          travel customers choose their flights on the basis of their membership in
                          frequent flyer programs more than half the time. Some frequent flyer
                          programs are designed so that the awards increase in value as higher
                          mileage thresholds are achieved. Because awards are paid only after
                          thresholds are met, the traveler who has collected some, but not all, of
                          the mileage needed to reach the desired award is unlikely to switch to
                          another carrier. In addition, most of the major airlines’ plans set dead-
                          lines for accumulating mileage to earn awards, so that a traveler can
                          only reach the higher awards levels if mileage is earned quickly. Thus,
                          members of frequent flyer programs will concentrate their air travel on
                          a single carrier, and they will tend to prefer the carrier that flies to the
                          most destinations and to the greatest variety of business and vacation
                          destinations from the traveler’s city of origin. The dominant carrier at
                          the airport, especially if it is the hub carrier, will likely be the one that
                          offers the greatest number and variety of destinations and, therefore,
                          offers the best opportunity to earn and to benefit from frequent flyer
                          awards.

                          Frequent flyer programs, therefore, can discourage potential competi-
                          tors from challenging an incumbent airline at an airport where it is dom-
                          inant. Airline passengers might not respond to the lower fares offered
                          by a new entrant unless they are low enough to compensate for the loss
                          of expected benefits from earning frequent flyer mileage. Indeed,
                          because frequent flyers are often business travelers whose fares are
                          paid by their employers, they lack incentive to switch to a new, low-fare


                          Page 26                                   GAO/RCED-90-102 Fares and Service at Major Airports
                           Chapter 2
                           The Airline Industry Under Deregulation




                           carrier and have considerable incentive to stay with the incumbent.
                           W ith respect to frequent flyer programs, a recent DOT report concluded
                           that frequent flyer programs stabilize and protect the existing market
                           shares of incumbent airlines and make it more difficult for smaller air
                           carriers to compete successfully in some markets.8


Computerized Reservation   More than 80 percent of all air travel today is booked through travel
                           agents, and 95 percent of all travel agencies use at least one of the five
Systems                    airline-owned computerized reservation systems (CFSS) to book flights?
                           Initially, the airlines that marketed their systems to travel agents used
                           the CRSS to gain an advantage over their competitors by biasing the com-
                           puter screen display so that their flights would be listed first. CABfound
                           this practice to be anti-competitive and prohibited it in 1984. Neverthe-
                           less, there is strong evidence that anti-competitive impacts continue.*O

                           CRSScan continue to have anti-competitive impacts in two ways. First,
                           although the systems no longer bias the screen displays to favor the
                           flights of the cRs-owning airline, the ens owners continue to get a dispro-
                           portionate share of bookings from agents using their systems. Second,
                           travel agents continue to favor the airline that owns the CRS the agent
                           uses because the cas-owning airline maintains supportive business rela-
                           tionships with its network of travel agent subscribers-the so-called
                           “halo effect.” These bookings for cas owners are revenues lost to the
                           airlines that do not own CR%.

                           While available data do not allow us to identify the traffic and revenue
                           impacts in different airport markets, the CRS-OWDiDg carriers attempt to
                           sign up most of the agents in the area served by their hub airport. Thus,


                           sAlrllne Marketing Practices: Travel Agencies, Frequent-Flyer Programs, and Computer Reservation
                           Systems, U.S. Department of Transportation, Secretary’s Task Force on Competition in the U.S.
                           Domestic Airline Industry (Washington, D.C.: Feb. 1990).

                           “The five CRSsare SABRE, owned by American Airlines, with a 43 percent share of revenues; Apollo,
                           owned by a consortium of airlines but principally by United Airlines and USAir, with a 32 percent
                           market share; PARS, owned by TWA and Northwest Airlines, with a 10 percent share; System One,
                           owned by Texas Air Corp., with a market share of 10 percent; and DATAS II, owned by Delta Airlines,
                           with a market share of 5 percent.

                           “‘In our 1986 report, Airline Competition: Impact of Computerized Reservation Systems (GAO/
                           RCED-86-74, May 1986), we found that it was likely that anti-competitive impacts continued to be a
                           problem, and we recommendedthat DOT study the issue. In May 1988, DCJIissued its report, Study of
                           Airline Computer Reservation Systems (DOT-P-37-88-2,May 1988), which, while presenting consider-
                           able evidence that CRS owners were earning excessive profits, drew no conclusions. In September
                           1988, we testified before the Subcommittee on Aviation, HouseCommittee on Public Works and
                           Transportation, on the DOT report and presented policy options for congressionalconsideration.



                           Page 27                                   GAO/RCED90-102 Fares and Service at Major Airports
                   Chapter 2
                   The Airline Industry Under Deregulation




                   in St. Louis, where TWA has its hub, TWA’S PARS system controls 77 per-
                   cent of the CRS market; in Dallas, where American Airlines has a hub, its
                   SABRE system has a 91 percent share; and in Denver, where United Air-
                   lines operates a hub, United’s Apollo system has a 76 percent market
                   share. An airline that sought to introduce competing service from these
                   points would find that the local travel agents usually subscribe to the
                   dominant airline’s CRS and exhibit a preference for the flights of the CRS-
                   owning dominant carrier.

                   Not only might potential new entrants find that the available market is
                   smaller than expected because of the “halo effect,” they might also find
                   themselves at an added cost disadvantage because they must pay a
                   booking fee to the CRS-Owning airline for each seat booked by a travel
                   agent. This amounts to an added sales cost of about $2.00 per seat for
                   the airline seeking to expand into a market where most of the local
                   travel agents subscribe to the CRS of the dominant carrier. Part of the
                   booking fee pays for the service provided, but most analyses of this
                   issue conclude that booking fees are substantially greater than the cost
                   of providing the service. Airlines have no choice but to pay these fees to
                   all the cRs-owning airlines or else forego access to much of the available
                   air travel market.

                   In a recent analysis of booking fees, DOTfound that the two largest sys-
                   tems, SABRE and Apollo, generate considerably more revenues from
                   booking fees to their owners, American and United Airlines respec-
                   tively, than those carriers paid out in booking fees to other CRS vendors.
                   The other cas-owning airlines either paid out in booking fees as much as
                   their systems earned or they were net payers of booking fees. DOT also
                   reviewed recent CRS vendor estimates of incremental revenues and con-
                   cluded that incremental revenues in 1988 might have been as high as $2
                   to $3 billion. This is much higher than DOT’S prior estimates.”


Yield Management   Yield management is an attempt by the airlines to optimize the pas-
                   senger mix on each flight departure in terms of those paying full fares,
                   those paying discount fares, and those paying deep discount fares. The
                   development of CRSS and the evolution of sophisticated computer sys-
                   tems allow the airlines to deal with large volumes of frequently
                   changing data. The airlines can change their prices on a seat-by-seat
                   basis as often as every 15 minutes. As a result, the airlines make

                   ’‘Airline Marketing Practices: Travel Agencies, Frequent-Flyer Programs, and Computer Reservation
                   Systems. Seealso Study of Airline Computer Reservation Systems.



                   Page 28                                   GAO/WED-90-102 Fares and Service at Major Airports
                          Chapter 2
                          The Airline Industry Under Deregulation




                          thousands of fare changes each day. This flexibility also permits incum-
                          bents to make rapid price adjustments in response to potential competi-
                          tion from an entrant. Thus, an incumbent carrier, enjoying an
                          established reputation and offering a wide variety of destinations, can
                          lower prices quickly on routes where it is challenged, thereby frus-
                          trating an entrant’s attempt to attract traffic by undercutting the
                          incumbent’s higher fares.


Travel Agent Commission   The growing importance of travel agents has led airlines to develop
Overrides                 incentive systems designed to increase their share of travel agent book-
                          ings. One such system, the travel agent commission override, is designed
                          to reward the travel agent for bookings on an airline above and beyond
                          those the agent would have made otherwise. The commission override is
                          often based on all the traffic that the agent books on a particular airline.
                          For example, if the agent normally books $100,000 worth of business
                          each month on a particular carrier and earns a 10 percent commission,
                          the airline might agree to pay a 13 percent commission on all bookings if
                          the agent books at least $120,000 per month. Commission overrides gen-
                          erally apply to total agency sales, but they can be targeted at particular
                          markets and particular flights. DGr concluded in its report on CRSS that
                          commission overrides significantly increase the number of tickets an
                          agent will book on a particular airline. A 1988 Louis Harris survey
                          showed that 51 percent of agency locations reported that they “usually”
                          (24 percent) or “sometimes” (27 percent) chose an air carrier in order to
                          get override commissions.12

                          Overrides raise the marketing costs of all airlines that pay them, and all
                          carriers have the option of paying override commissions. Nevertheless,
                          for several reasons override commissions might be a more effective
                          strategy for keeping out would-be competitors than for breaking into a
                          market at an airport where another carrier is already dominant. The
                          dominant carrier need only pay an override commission to the travel
                          agents for increased bookings on flights that are threatened by a poten-
                          tial competitor. This might be a relatively small share of the dominant
                          carrier’s total traffic at the airport. The carrier attempting to establish
                          competing service might pay the same absolute amount of override com-
                          missions to induce travel agents to steer passengers to its flights, but
                          these commissions would comprise a proportion of the entrant’s reve-
                          nues from the service out of that airport much larger than that of the

                          ’*“1988 Louis Harris Survey,” Travel Weekly, as cited in Airline Marketing Practices: Travel Agen-
                          cies, kequent-Flyer Programs, and Computer Reservation Systems, pp. 26-27.



                          Page 29                                   GAO/RCED-90-102 Fares and Service at Major Airports
                       Chapter 2
                       The Airline Industry Under Deregulation




                       dominant carrier. Potential entrants might ultimately conclude that it is
                       not feasible to start serving this market.


                       Resources in the airline industry are proving to be less mobile than
Other Barriers to      thought when the industry was first deregulated. In addition to the bar-
Competition            riers to entry created by airline marketing practices and the control over
                       facilities at some hub airports, entry is also restricted at some airports
                       because of noise and congestion problems. At four of the busiest airports
                       in the nation (O’Hare in Chicago, LaGuardia and JFK in New York, and
                       National in Washington) the number of takeoff and landing slots have
                       been limited since 1969 and the slots are controlled by the airlines that
                       have operated at those airports historically. Some studies have found
                       that fares are higher at slot-controlled airports.

                       Other airports restrict traffic and the type of equipment that can be
                       flown in order to reduce the noise burden on the airport’s neighbors.
                       While noise restrictions are necessary, they also discourage new firms
                       from entering the market. For example, in the past new carriers began
                       operations with used aircraft. However, noise restrictions at many air-
                       ports limit the use of older aircraft.13 Thus, a new carrier may have to
                       purchase relatively new airplanes if it wants to compete.


                       The third major development that has affected competition in the airline
Industry Mergers and   industry in recent years has been the decline in the number of firms
Consolidation          providing most domestic passenger service. Shortly after deregulation,
                       intrastate carriers, such as Southwest Airlines and PSA (Pacific South-
                       west Airlines); charter carriers, like Capitol and World; and entirely new
                       carriers, like People Express and America West, began interstate ser-
                       vice. Because these carriers often had lower wage scales and offered
                       fewer service amenities, they had significant cost advantages over the
                       carriers formerly regulated by CAB, and were able to offer substantially
                       lower fares. The market share of the new carriers increased while that
                       of the trunks declined. The share of domestic traffic handled by the
                       trunks fell from almost 90 percent prior to deregulation to 72 percent by
                       1985. By 1985, more than 20 new carriers had begun interstate service
                       with jet airplanes.


                       ‘“The Federal Aviation Administration designates aircraft as either Stage II or Stage III depending on
                       how much noise they make. As of 1989, about 60 percent of the fleet was Stage II type planes. Even
                       older, Stage I airplanes are no longer allowed to fly anywhere in the U.S. These stages are defined in
                       Federal Aviation Regulation (FAR) Part 36, Sections 36.1 (f)(3) and (f)(5).



                       Page 30                                    GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 2
The Airline Industry Under Deregulation




But, over time, the major airlines responded to the new competition by
adopting the marketing strategies discussed above and by learning to
selectively match the fares of the new entrants. Many of the new
entrants and some of the former trunks went bankrupt or were merged
with the larger firms. D(Tr ultimately approved all of the mergers it
reviewed, including some mergers between carriers that shared a
common hub airport. In other cases, both merging carriers served the
same region of the nation. This merger activity reached a peak in 1986,
when DOT approved 14 applications for acquisition, consolidation, or
merger.‘” The reduced competition and the loss of potential competition
caused by the mergers and bankruptcies aroused concern even among
those who ardently supported deregulation.

Nevertheless, deregulation continues to provide significant benefits to
the traveling public. While our work focuses on fare and service changes
at airports where one or two airlines dominate the traffic, the vast
majority of passengers now fly on routes served by at least two airlines;
the majority of the nation’s largest 200 airports are not concentrated;
and airline fares, adjusted for inflation, on most routes remain below
pre-deregulation levels. Economists at the Brookings Institution estimate
that airline deregulation continues to generate $10 billion annually in
savings to the traveling public.

The concern that has been raised centers on airports where one or two
carriers dominate the traffic. Our analysis focuses on these so-called
concentrated airports and compares fares and service levels at these air-
ports with fares and service levels at airports that are not concentrated.




14Theapprovals led to seven mergers among airlines classified as “major” or “national” air carriers
and six acquisitions of assetsor of smaller carriers.



Page 31                                   GAO/‘RCED-90-102Fares and Service at Major Airports
Trends in Airline Fares at 15 Concentrated
AiIpOtiS


                        Airports where one or two carriers handle most of the enplaning
                        traffic have higher fares than airports where the traffic is less con-
                        centrated. Moreover, the data show that fares tend to rise as concen-
                        tration increases. While many factors can influence fare changes, the
                        evidence that we have collected strongly suggests that fares and con-
                        centration at an airport are related. Fares are higher at concentrated
                        airports than at relatively less concentrated ones, and the evidence
                        suggests the gap is increasing.


                        The average yield, or fare per passenger mile, at the 15 airports where
Yields Are Higher at    one or two carriers handle most of the enplanements is higher than the
Concentrated Airports   average yield of the airlines at the 38 relatively unconcentrated airports
                        that comprise our comparison group. Many of the 15 concentrated air-
                        ports have been dominated by one or two carriers for some time, and the
                        average yield at these concentrated airports exceeded the average yield
                        at the unconcentrated airports throughout the 1985-1989 period. In
                        1988, the average yield at the concentrated airports was 27.2 percent
                        higher than the average yield at the 38 comparison airports, but the
                        entire 27.2 percent yield differential did not arise over the 1985-89
                        period. In 1985, the average yield at the concentrated airports was
                        already 18.8 percent higher than the average at the 38 unconcentrated
                        airports. Nevertheless, the gap has increased.’

                        In 1988, average yields for all carriers at 14 of the 15 concentrated air-
                        ports were higher than the average yield earned by carriers serving the
                        38 unconcentrated airports. At 13 of the 15 concentrated airports, the
                        yield of the dominant airline(s) was higher than the yield received by
                        the other airlines serving these airports.* At three of the concentrated
                        airports the yield received by the dominant airline was about 50 percent
                        higher than the yield earned by the other carriers at the airport, and it
                        was at least 15 percent higher at 10 of the airports. Moreover, the yields
                        of the dominant airlines at the concentrated airports were consistently
                        higher than those at the unconcentrated airports. Fare data for the first
                        two quarters of 1989 indicate that these relationships are continuing.
                        Table 3.1 shows yield data and market shares for the dominant carriers
                        at each of the 15 concentrated airports in 1988.

                        ‘These results were obtained when the traffic and sample distributions were held constant. The
                        change is even greater when shifts in traffic and the sample distribution are not taken into account.
                        In that case, yields at the concentrated airports grow from being 17.8 percent higher in 1985 to 29.2
                        percent higher in 1988.

                        “Yields for American Airlines, the dominant carrier, at Raleigh-Durham are also higher if actual data,
                        rather than weighted data, are used.



                        Page 32                                    GAO/RCED-90-102 Fares and Service at Major Airports
                                               Chapter 3
                                               Trends in Airllne Fares at 15 Concentrated
                                               Airports




Table 3.1: Airline Yields in 1988 at Concentrated     Major Airports
Yield in cents, Market shares in percentages
                                                    Share of dominant       Yield of dominant       Yield of nondominant                  Yield of all
Airport                                                        carrier                 carrier                    carriers                   carriers
Atlanta (Delta)                                                      58                   25.9                         17.4                       23.7
Atlanta flexas Air?                                                  36                   21.6                         17.4                       23.7
Nashville (American)                                                 62                   21.3                         19.7                       20.3
Charlotte (USAir)”                                                     93                 26.8                            18.6                    23.7
Cincinnati (Delta)                                                     78                 22.0                            18.5                    20.5
Dayton (USAir)”                                                        79                 20.7                            20.1                    20.4
Denver (Texas Air)                                                     42                 17.7                            15.8                    16.9
Denver (United)                                                        45                 16.6                            15.8                    16.9
Detroit (Northwestlb                                                   59                 16.4                            12.9                    14.3
Greensboro (USAir)                                                     64                 26.2                            20.4                    23.5
Memphis (Northwest)                                                    83                 23.3                            23.5                    23.4
Minneapolis (Northwest)                                                78                 17.1                            14.9                    16.4
Pittsburah 0JSAirl”                                                    87                 19.8                            14.3                    17.6
Raleigh-Durham (American)                                              69                 20.5                            21.5                    21.3
Salt Lake City (Delta)                                                 80                 21.6                            14.5                    18.3
St. Louis (TWA)                                                        82                 19.4                            15.9                    18.1
Syracuse (USAir)a                                                      61                 21.0                            13.9                    16.2

All 15 airportsC                                                                          20.0                            16.0                    18.5
                                               =Because USAir’s takeover of Piedmont was approved In October 1987, yrelds and enplanement shares
                                               for USAir Include Piedmont data

                                               bNorthwest has had 60 percent or more of the enplanements at Detroit at other times between 1985 and
                                               1989.

                                               ‘In contrast, yields at the 38 unconcentrated airports in 1988 averaged 14 5 cents per passenger mile.



                                               On average, yields at the unconcentrated airports declined from 14.7
Trends in Yields at the                        cents per passenger mile in the first quarter of 1985 to about 12.4 cents
ConcentratedAirports                           in the second quarter of 1986 and remained at about that level through
                                               the second quarter of 1987. After that, the average yield at the uncon-
                                               centrated airports began to increase and reached 17.2 cents in the first
                                               quarter of 1989. The average yield at the unconcentrated airports
                                               declined to 16.4 cents in the second quarter 1989.

                                               Between 1985 and mid-1986 the average yield at the concentrated air-
                                               ports also fell and then recovered. As was true for the unconcentrated
                                               airports, the average yield at the concentrated airports began to
                                               increase in the third quarter of 1987 and rose to 21.7 cents in the first


                                               Page 33                                    GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 3
Trends in Airline Fares at 15 Concentrated
AilpOrts




quarter of 1989. The average yield at the concentrated airports also fell
in the second quarter 1989 when it averaged 20.5 cents per passenger
mile. Despite the similarity in the yield trends at the two groups of air-
ports, the difference in the average yield at concentrated and unconcen-
trated airports increased from 2.5 cents per passenger mile in the first
quarter 1985 to 4.2 cents in the second quarter 1989.

Yields have risen nationwide since 1985, but they have risen more at the
concentrated airports. Yields at the concentrated airports were 27.8 per-
cent higher in the second quarter 1989 than they were in the second
quarter of 1985. Yield increases at these airports ranged from 10 per-
cent to 68 percent. Over the same period, yields at the unconcentrated
airports rose 20.4 percent.”

Some of the concentrated airports have long been dominated by one or
two airlines, and airlines serving those airports have achieved average
yields above those earned by carriers at the unconcentrated airports
throughout the period we examined. However, as concentration has
increased the difference in yields has grown. Figure 3.1 contrasts yields
at the 12 of the 15 airports where concentration has increased substan-
tially since 1985 with yields at the 38 relatively unconcentrated
airports.




3When comparing quarterly data, we use only the corresponding quarters of each year to avoid the
problem of seasonal influences.



Page 34                                  GAO/RCED-90-102 Fares and Service at Major Airports
                                                                Chapter 3
                                                                Trends in Airline Fares at 15 Concentrated
                                                                Ailp0l-t-S




Figure 3.1: Average Yield for 12 Airports Where Concentration                                   Increased
34   Average   Yields (Cents per Mile)
32

30

28

26

24

22



18
16

14

12

 lQ65       M85       3085      4Q65      lQ86      2Q86          3Q86         4086          1067   2087    3087    4Q87    1088    x288     3Q86    4Q68     lQ89        2Q99
 First Quarter 1985 through    Second    Quarter 1969

        -         12 Airports Where Conoenlraiion   increased
      mmmm        38ComparisonAirports




                                                                The 15 concentrated airports that we examined differed in how and
Trends at Different                                             when they became dominated, and the trends in fares reflect those dif-
ConcentratedAirports                                            ferences. The 15 airports include several that became concentrated as
                                                                the result of mergers, others that became concentrated since 1985 after
                                                                an airline set up or expanded a hub, and others that were concentrated
                                                                even before 1985. Two of the 15 are dominated by two carriers.4 Yield
                                                                trends at the 15 concentrated airports tend to track changes in concen-
                                                                tration levels. Appendix I shows the trend in yields at each concentrated
                                                                airport from the first quarter 1985 through the second quarter 1989.


Airports Where Yields                                            Five of the 15 airports we examined experienced large increases in con-
                                                                 centration as a result of mergers. At two of these airports, single airline
Rose Following Mergers                                           dominance was created by the mergers of two carriers hubbing at the



                                                                 4Thesecategories        overlap for some of the airports. For example, we have classified Denver as an
                                                                 airport     characterized  by two hubbing carriers, but it also was affected by mergers.




                                                                 Page 35                                           GAO/RCED-SO-102Fares and Service at Major Airports
                                           Chapter 3
                                           Trends in Airline Fares at 15 Concentrated
                                           Ail-pOrts




                                           airport. TWA’S acquisition of Ozark Air Lines eliminated a hubbing com-
                                           petitor at St. Louis, and Northwest Airline’s takeover of Republic Air-
                                           lines eliminated a hubbing competitor at Minneapolis/St. Paul. Both
                                           these mergers were first proposed in early 1986 but were not wholly
                                           consummated until late 1986. It is not possible to set a precise date as to
                                           when the mergers were far enough along to affect competition and
                                           prices. Therefore, we contrast yields during 1985-the year preceding
                                           the merger-with yields in the years following the mergers. Table 3.2
                                           shows market shares and yields for the dominant carriers at Minneap-
                                           olis/St. Paul and St. Louis and includes yields for the 38 unconcentrated
                                           airports.

                                           At Minneapolis/St. Paul, Northwest’s average yields were 5.7 percent
                                           higher in 1987 than in 1985, but they were 13.9 percent above 1985
                                           levels in 1988. The situation in St. Louis was similar. In 1987 TWA’S
                                           yields were 5.1 percent higher than in 1985, and in 1988 they were
                                           about 11 percent higher. At the same time, yields at the 38 unconcen-
                                           trated airports were actually 5.8 percent lower in 1987 than in 1985,
                                           and by 1988 they were 5.5 percent over 1985 levels. According to a
                                           recent study of fares and service at these two airports by analysts at the
                                           Department of Justice, the mergers led to higher fares at these airports.”

Table 3.2: Annual Average Yields and
Enplanement Shares of Dominant             Shares in percentages, Yields In cents
Carriers at Minneapolis/St. Paul and St.                          Northwestb at
Louis Compared to Yields at 38                                Minneapolis/St.    Paul                    TWAb at St. Louis        Yield at the
Unconcentrated Airports                    Year             Share                  Yield                Share          Yield       38 airports
                                           1985                42                   15.0                   59           17.5             . 13.8
                                           1986                52                   14.2                   61           15.7               12.6
                                           1987                79                   15.9                   82           18.4               13.0
                                           1988                78                   17.1                   82           19.4               14.5
                                           198ga               79                   18.9                   82           21.4               16.7
                                           aThe 1989 data are for first two quarters only.

                                           bEnplanement shares are for Northwest and Republrc (Minneapoks/St. Paul) and for T W A and Ozark (St
                                           Louis) In 1986 Northwest and T W A enplanement shares were 43 percent and 57 percent, respectively,
                                           during the first three quarters of 1986 Yield data are for Northwest and Republic and for T W A and
                                           Ozark In 1985 and 1986


                                           Syracuse’s Hancock International Airport also became concentrated as a
                                           result of mergers. Between 1977 and 1980, USAir had the largest share

                                           “Gregory J. Werden, Andrew S. Joskow, and Richard L. Johnson, The Effects of Mergers on Economic
                                           Performance: Two Case Studies from the Airline Industry, Antitrust Division, U.S. Department of
                                           Justice (Washington, DC.: n.d.).



                                           Page 36                                      GAO/RCRD-SO-102Fares and Service at Major Airports
                                         Chapter 3
                                         Trends in Airline Fares at 15 Concentrated
                                         AirpOrts




                                         of enplanements with about 38 percent of the market. In 1979, Empire
                                         Airlines was formed and established Syracuse as its hub. Although
                                         USAir continued to have the largest share of enplanements, by 1985,
                                         Empire and USAir each handled about 28 percent of the enplaning pas-
                                         sengers at Syracuse. In 1986 Piedmont took over Empire, and in 1987
                                         D(JTapproved the merger of USAir and Piedmont. In 1988, USAir had 61
                                         percent of the enplanements at Syracuse.

                                         Quarterly data on fares at Syracuse show that fares have risen more
                                         rapidly since USAir has taken over Piedmont. Although the USAir-Pied-
                                         mont merger was first approved by DOT in late October 1987, the actual
                                         integration of the two airlines proceeded slowly. USAir’s fares rose less
                                         rapidly at Syracuse during the first two quarters of 1988 than at the 38
                                         unconcentrated airports. However, by the third quarter 1988 USAir’s
                                         fares at Syracuse had begun to rise faster than fares at the 38 unconcen-
                                         trated airports. Table 3.3 shows changes in yields for USAir-Piedmont at
                                         Syracuse and for the 38 unconcentrated airports.

Table 3.3: USAir-Piedmont Fare Changes
at Syracuse Compared to Changes in                                            Percentage change from same period in prior year
Fares at 38 Unconcentrated Airports      Year and quarter                         USAir at Syracusea                38 airports
                                         1988 I                                                  - 1.5                      12.9
                                         198811                                                   13.8                      17.5
                                         1988 III                                                 11.7                       9.3
                                         19881V                                                   12.2                       7.6
                                         1989 I                                                  33.5                       21.8
                                         198911                                                   14.7                      12.4
                                         aPercentage changes based on USAIr and Piedmont data


                                         The recent study by Department of Justice analysts compared the effect
                                         of a merger on Detroit to the merger impacts at St. Louis and Minneap-
                                         olis/St. Paul. The analysts expected little or no effect from the merger
                                         on Detroit fares because only one of the merging carriers operated a hub
                                         at Detroit Metropolitan Airport. They found that the merger caused
                                         almost no change in fares at Detroit. Our data show a similar result. We
                                         found that the fares of the dominant carrier at Detroit rose by about the
                                         same amount as fares at the unconcentrated airports during the 1985-89
                                         period. Table 3.4 shows enplanement shares for Northwest-Republic and
                                         yield data for Northwest-Republic at Detroit and for the 38 unconcen-
                                         trated airports.




                                         Page 37                                 GAO@CED-90-102 Fares and Service at Major Airports
                                            Chapter 3
                                            Trends in Airline Fares at 15 Concentrated
                                            AilpOrts




Table 3.4: Northwest-Republic   Yields at
Detroit Metropolitan Wayne County           Shares in percentages, Yields in cents, Yield differences in percentages
Airport and at 38 Unconcentrated                                      Northwest-Republicb               Yield at the 38             Difference in
Airports                                    Year                  Enplanement Share             Yield          airports                    yieldsC
                                            1985                                            44        15.9                13.8                    15.9
                                            1986                                            61        15.2                12.6                    20.5
                                            1987                                            60        15.6                130                     20.1
                                            1988                                            59        16.4                14.5                    12.8
                                            1 98ga                                          64        19.2                16.7                    16.0
                                            ‘The 1989 data for first two quarters only.
                                            bEnplanement share for Repubk in 1985, Republic and Northwest in 1986 Yield data for Northwest and
                                            Republic in 1985 and 1986.
                                            ‘Percentage difference between dominant airline’s yield and yield at the 38 unconcentrated airports
                                            was calculated pnor to roundmg of yield data


                                            Denver’s Stapleton International Airport became concentrated when
                                            People Express, which had recently purchased Frontier, was acquired
                                            by Continental in late 1986. Denver and Atlanta, the only airports
                                            among the 15 to be dominated by two carriers, are discussed later in this
                                            chapter.


Yields Increased Following                  At airports where a carrier established a dominant position by setting
                                            up a hub during the period we examined, yields rose following the
the Establishment of Hub                    increase in concentration. American Airlines established a hub at Nash-
Operations                                  ville in the first half of 1986 and at Raleigh-Durham in the middle of
                                            1987. In both cases, American’s yields increased following the establish-
                                            ment of hub operations. American’s yields had been about 20 percent
                                            below those of other airlines serving Nashville and about 25 percent
                                            lower than others serving Raleigh-Durham in the year before the hubs
                                            were set up. After American became the dominant carrier, its yields rose
                                            much faster than those of the other carriers serving these airports. In
                                            the second quarter 1989 American’s yields at Nashville were about 9
                                            percent higher than those of other carriers and were only 3 percent
                                            below those of other carriers at Raleigh-Durham. Table 3.5 shows
                                            enplanement shares and yields for American at Raleigh-Durham and at
                                            Nashville and includes yield data for the 38 unconcentrated airports.




                                            Page 38                                       GAO/RCED90-102 Fares and Service at Major Airports
                                           Chapter 3
                                           Trends in Airline Fares at 15 Concentrated
                                           AirpOrts




Table 3.5: Annual Average Yields and
Enplanement Shares of American             Shares in percentages, Yields in cents
Airlines at Nashville and Raleigh-Durham                      Americ;;ra;aleigh-                             American at
Compared to Yields at 38                                                                                       Nashville            Yield at the
Unconcentrated Airports                    Year               Share                     Yield            Share           Yield       38 airports
                                           1985                    3                     11.6               19            17.3               13.8
                                           1986                   4                      13.7               45            17.6               12.6
                                           1987                  41                      16.8               59            19.5               13.0
                                           1988                  69                      20.5               62            21.3               14.5
                                           19a9a                 78                      246                72            24.0               16.7
                                           aThe 1989 data are for first two quarters only


                                           In establishing its hubs at Nashville and Raleigh-Durham, American
                                           greatly increased its number of short distance flights. Between the
                                           fourth quarter 1985 and the fourth quarter 1988, the share of Amer-
                                           ican’s traffic in the O-500 mile category increased from less than 1 per-
                                           cent to 18 percent in Nashville. Between the fourth quarter 1986 and the
                                           fourth quarter 1988, the share of American’s traffic in the O-500 mile
                                           category grew from 9 percent to 20 percent in Raleigh-Durham. Since
                                           short distance flights have higher yields, the change in traffic mix most
                                           likely accounts for at least some of the observed increase in average
                                           yields.”

                                           At Cincinnati, Delta Airlines had been the largest carrier in terms of
                                           enplanements for more than a decade, but did not dominate Cincinnati
                                           air travel until it doubled the number of flight operations in late 1986
                                           and early 1987. Yields at Cincinnati for Delta increased about 14 percent
                                           in 1987 while yields at the comparison airports increased about 3 per-
                                           cent. At Cincinnati the fares of the nondominant carriers, while still
                                           lower than Delta’s, have increased more than Delta’s since 1987. Table
                                           3.6 shows yield data and enplanement shares for Delta at Cincinnati and
                                           yields at the 38 unconcentrated airports.




                                            tiYields are higher on short distance flights becausecost per passengermile are higher. Some airline
                                            costs do not vary with miles flown but with the number of takeoffs and landings or other factors
                                            than distance.



                                            Page 39                                     GAO/RCED-90-102 Fares and Service at Major Airports
                                          Chapter 3
                                          Trends in Airline Fares at 16 Concentrated
                                          Ailp0l-t-S




Table 3.6: Delta Yields and Market
Shares at Cincinnati Compared to Yields   Shares in percentages, Yields in cents
at 38 Comparison Airports                                                  Delta                 Yield of other Cincinnati     Yield at the 38
                                          Year                    Share                    Yield                   carriers           airports
                                          1985                             48               18.8                        15.7              13.8
                                          1986                             47               17.7                        15.1              12.6
                                          1987                             72               20.2                       16.2               13.0
                                          1988                             78               22.0                       18.5               14.5
                                          198ga                            83               24.9                       21.7               16.7

                                          aThe 1989 data are for first two quarters only




Already Dominant Airlines                 In most situations where airports have always been dominated by one
                                          carrier, yields increased as concentration increased. Charlotte/Douglas
Maintained Higher Yields                  International Airport has long been a concentrated airport. Domination
                                          by Eastern Airlines in the 1970s and early 1980s was replaced by domi-
                                          nation by Piedmont (now part of USAir) in 1982. Despite the fact that
                                          Charlotte has long been concentrated, USAir has extended its dominance
                                          so that Charlotte is the most concentrated airport of the 15 we
                                          examined. In 1985 Piedmont handled about three-fourths of the
                                          enplanements at Charlotte; by the first half of 1989, USAir-Piedmont
                                          handled more than 94 percent of the enplanements.

                                          Yields have long been relatively high at Charlotte, but as USAir-Pied-
                                          mont’s share of enplanements increased, yields also increased. USAir-
                                          Piedmont’s yields at Charlotte rose 32 percent as its share of enplane-
                                          ments increased 16 percentage points between 1985 and 1988. During
                                          the same period, the average yield at unconcentrated airports rose less
                                          than 6 percent. Table 3.7 shows yields and enplanement shares for
                                          USAir-Piedmont at Charlotte and yields at the 38 unconcentrated
                                          airports.




                                          Page 40                                      GAO/RCED90-102 Fares and Service at Major Airports
                                           Chapter 3
                                           Trends in Airline Fares at 15 Concentrated
                                           AhpOrts




Table 3.7: Yields and Enplanement
Shares at Charlotte for USAir-Piedmont     Shares In percentages, Yields in cents, Yield differences in percentages
and Yields at 38 Unconcentrated Airports                                USAir-Piedmont                 Yield at the 38             Difference in
                                           Year                 Enplanement shareb             Yield          airports                    yieldsC
                                           1985                                     77          20 3               138                        47.5
                                           1986                                     81          21.2               126                        68.2
                                           1987                                     89          22.7               130                        75.4
                                           1988                                     93          26 8               14.5                       85.0
                                           198ga                                    94          30.5               16.7                       83.0
                                           aThe 1989 data for first two quarters only
                                           bEnplanement share for Piedmont only In 198587

                                           ‘Percentage drfference between dominant arrlrne’s yield and yreld at the 38 unconcentrated arrports
                                           was calculated prior to rounding of yield data


                                           Dayton, another Piedmont hub taken over by USAir, has been domi-
                                           nated by USAir-Piedmont throughout the 1985-89 period. The domi-
                                           nance has not been as dramatic as at Charlotte but, as at Charlotte,
                                           yields have risen and the gap between the dominant carrier’s yields and
                                           the yields at unconcentrated airports has widened, as USAir has
                                           increased its dominant position. Dayton was one of the airports whose
                                           dominant carrier’s yields were below those of the other carriers at the
                                           airport. Between 1985 and 1987 Piedmont’s yields were around 4 per-
                                           cent lower than those of the other carriers serving Dayton. Since 1988,
                                           however, USAir’s yields have been above those of the other carriers and
                                           in the first two quarters of 1989 have averaged more than 10 percent
                                           higher. Table 3.8 shows yields and enplanement shares for USAir-Pied-
                                           mont at Dayton and yields at the 38 unconcentrated airports.

Table 3.8: Yields and Enplanement
Shares at Dayton for USAir-Piedmont        Shares in percentages, Yields In cents, Yield differences in percentages
and Yields at 38 Unconcentrated Airports                                USAir-Piedmont                 Yield at the 38             Difference in
                                           Year                 Enplanement shareb             Yield          airports                    yieldsC
                                           1985                                     66          17.2               13.8                       25 0
                                           1986                                     65          163                12.6                       29.0
                                           1987                                     71          17.6               13.0                       35.8
                                           1988                                     79          20.7               14.5                       42.7
                                           198ga                                    80          23.2               16.7                       39.5
                                           aThe 1989 data are for first two quarters only

                                           bEnplanement share for Predmont only In 198587.

                                           ‘Percentage difference between dominant arrlrne’s yreld and yreld at the 38 unconcentrated arrports
                                           was calculated prior to rounding of yield data.




                                           Page 41                                      GAO/RCED-90-102 Fares and Service at Major Airports
                                           Chapter 3
                                           Trends in Airline Fares at 15 Concentrated
                                           AilpOrts




                                           Piedmont Triad International Airport, serving the Greensboro/High
                                           Point/Winston-Salem area, is unique among the concentrated airports
                                           we examined in that it is not a hub airport for the dominant carrier.
                                           Piedmont has had the largest presence at Greensboro over the entire
                                           period we reviewed. As was the case at Charlotte and Dayton, USAir-
                                           Piedmont’s market share has grown at Greensboro, and yields have fol-
                                           lowed suit. Piedmont’s market share was about 55 percent in 1985, and
                                           USAir has increased this to 64 percent by 1988. However, USAir-Pied-
                                           mont’s yields have risen much more rapidly. Table 3.9 shows yields and
                                           enplanement shares for USAir-Piedmont at Greensboro and yields at the
                                           38 unconcentrated airports.

Table 3.9: Yields and Enplanement
Shares at Piedmont Triad International     Shares in percentages,     Yields in cents, Yield differences   In percentages
Airport for USAir-Piedmont and Yields at                                   USAir-Piedmont                   Yield at the 38        Difference in
38 Unconcentrated    Airports              Year                     Enplanement shareb             Yield           airports               yieldsc
                                           1985                                       55            17.5                13.8                  27.0
                                           1986                                       57            18.9                12.6                  49.9
                                           1987                                             56      20.8                    13.0                60.3
                                           1988                                             64      26.2                    14.5                80.4
                                           1989"                                            66      31.2                    16.7                87.5
                                           aThe 1989 data are for first two quarters only
                                           bEnplanement share for Piedmont only in 1985-87

                                           CPercentage difference between dommant airline’s yield and yield at the 38 unconcentrated airports
                                           was calculated prior to rounding of yield data


                                           Memphis International Airport was a hub for Republic Airlines and is
                                           now a hub for Northwest Airlines. Since Northwest had no presence in
                                           Memphis before it acquired Republic, the merger, per se, did not affect
                                           competition at the Memphis airport. Until 1982 Delta had the largest
                                           share of enplanements at Memphis. In 1982 Republic became the domi-
                                           nant carrier, and since 1984 Delta’s share of the traffic has plummeted.
                                           By 1988 Northwest had 83 percent of the market.

                                           As is the case at most concentrated major airports, yields are higher at
                                           Memphis than they are at the 38 unconcentrated airports. However,
                                           changes in yields have lagged behind changes in the market share of the
                                           dominant carrier. In 1986 and 1987 concentration increased, but yields
                                           did not rise appreciably until 1988, when the growth in Northwest’s
                                           enplanement share had stopped. In early 1989, yields rose only slightly.
                                           The gap between yields at Memphis and unconcentrated airports has
                                           narrowed, but carrier yields at Memphis are still almost 44 percent



                                           Page 42                                      GAO/RCED-90-102 Fares and Service at Major Airports
                                      Chapter 3
                                      Trends in Airline Fares at 15 Concentrated
                                      AilpOrts




                                      above those at the 38 unconcentrated airports. Table 3.10 shows yields
                                      and enplanement shares for Northwest-Republic at Memphis and yields
                                      at the 38 unconcentrated airports.

Table 3.10: Yields and Enplanement
Shares at Memphis for Northwest-      Shares In percentages,     Yields In cents, Yield differences    in percentages
Republic and Yields at 38                                           Northwest-Republic                  Yield at the 38        Difference in
Unconcentrated Airports               Year                     Enplanement shareb              Yield           airoorts               vieldsC
                                      1985                                       64             21.2                13.8                  54.3
                                      1986                                       74             20.7                12.6                  64.5
                                      1987                                       85             21.7                13.0                  67.8
                                      1988                                              83      23.3                    14.5                60.8
                                      1989"                                             82      23.9                    16.7                43.7
                                      aThe 1989 data are for frrst two quarters only.

                                      bEnplanement share for Republrc only In 1985.

                                      =Percentage difference between dominant arrlme’s yreld and yield at the 38 unconcentrated airports
                                      was calculated prior to rounding of yield data


                                      Western Airlines had its hub at Salt Lake City before it was taken over
                                      by Delta in early 1987. Western’s yields had declined from the third
                                      quarter 1985 through the second quarter 1986. Delta proposed its
                                      purchase of Western in the third quarter 1986. Since Delta took over the
                                      hub at Salt Lake in early 1987, yields have risen as Delta has increased
                                      the share of enplanements held by the dominant carrier. Table 3.11
                                      shows yields and enplanement shares for Delta-Western at Salt Lake
                                      City and yields at the 38 unconcentrated airports.

Table 3.11: Yields and Enplanement
Shares at Salt Lake City for Delta-   Shares In percentages,      Yields in cents, Yreld differences   in percentages
Western and Yields at 38                                               Delta-Western                     Yield at the 38       Difference in
Unconcentrated Airports               Year                     Enplanement shareb              Yield            airports              vieldsC
                                      1985                                       74             169                  13.8                 23.2
                                      1986                                       74             16.1                 12.6                 27.4
                                      1987                                       77             17.5                 13.0                 34.8
                                      1988                                              80      21 6                 14.5                 49.2
                                      1989"                                             82      23.5                 16.7                 40.9
                                      aThe 1989 data are for first two quarters only.

                                      bEnplanement share for Western only In 1985 and 1986.

                                      CPercentage difference between dominant airline’s yield and yield at the 38 unconcentrated airports
                                      was calculated prior to rounding of yield data




                                      Page 43                                      GAO/RCED-90-102 Fares and Service at Major Airports
                                           Chapter 3
                                           Trends in Airline Fares at 15 Concentrated
                                           AirpOrts




                                           At Pittsburgh, where concentration levels were high and the dominant
                                           carrier’s market share increased one to three percentage points each
                                           year, yields did not increase until the first half of 1989. Nevertheless,
                                           they remained substantially above yields at unconcentrated airports. At
                                           Pittsburgh, USAir has accounted for 80 percent or more of the enplane-
                                           ments during the entire period under review. Its yields declined some-
                                           what in 1986 and 1987, but rose again in 1988 and by the first half of
                                           1989 were still more than 40 percent above the yields earned at the 38
                                           relatively unconcentrated airports. The decline may have reflected
                                           changes in the distribution of USAir’s traffic. The proportion of pas-
                                           senger miles flown in the lowest distance/highest yield category (O-500
                                           miles) fell from 43 percent to 31 percent between the fourth quarter
                                           1985 and the fourth quarter 1988. Table 3.12 shows yields and enplane-
                                           ment shares for US&r-Piedmont at Pittsburgh and yields at the 38
                                           unconcentrated airports.

Table 3.12: Yields and Enplanement
Shares at Pittsburgh for USAir-Piedmont    Shares in percentages, Yields In cents, Yield differences in percentages
and Yields at 38 Unconcentrated Airports                                USAir-Piedmont                 Yield at the 38             Difference in
                                           Year                 Enolanement shareb             Yield          airoorts                    vieldsC
                                           1985                                     80          20.8               13.8                       51.4
                                           1986                                     83          19.3               12.6                       53.4
                                           1987                                     84          18.7               13.0                       44.2
                                           1988                                     87          19.8               14.5                       36.4
                                           198ga                                    89          23.4               16.7                       40.4
                                           aThe 1989 data are for first two quarters only.

                                           bEnplanement share for USAir only In 1985-87
                                           ‘Percentage difference between dominant airline’s yield and yield at the 38 unconcentrated airports
                                           was calculated prior to rounding of yield data.




Cities W ith Two Domin .ant                At the Atlanta and Denver airports two airlines dominated the traffic.
                                           At Atlanta, before the Eastern Airlines strike, Delta Airlines handled
Airlines Provide an                        almost 60 percent of the enplaning passengers while more than one-
Additional Perspective                     third was handled by Eastern Airlines. Up until the time of the strike,
                                           the two-carrier concentration level was substantially unchanged,
                                           although Delta had increased its share somewhat relative to Eastern’s.
                                           Yields at Atlanta fell between 1985 and 1987. However, yields rose in
                                           1988 and yields for both Eastern and Delta rose sharply in the first
                                           quarter of 1989. In the second quarter of 1989, Delta’s yield remained
                                           high, while Eastern’s plummeted as a result of the machinists’ strike. As
                                           at most of the other concentrated airports, yields at Atlanta for the



                                           Page 44                                      GAO/RCED-90-102 Fares and Service at Major Airports
                                          Chapter 3
                                          Trends in Airline Fares at 16 Concentrated
                                          AirpOrts




                                          dominant carriers are substantially higher than yields at the unconcen-
                                          trated airports. In addition, the yields for Delta, the carrier with the
                                          larger share of the enplanements at Atlanta, have been consistently
                                          higher than Eastern’s yields. Table 3.13 shows yield data for Atlanta
                                          and for the 38 unconcentrated airports.

Table 3.13: Yields at Atlanta for Delta
and Eastern Airlines and Yields at 38     Yields In cents
Unconcentrated Airports                                                                Atlanta Yields                          Yield at the 38
                                          Year                          Delta         Easternb            All Carriers                airports
                                          1985                           24.0               20.6                   22.1                    13.8
                                          1986                           22.7               18.4                   20.6                    12.6
                                          1987                           21.8               17.9                   19.9                   13.0
                                          1988                           25.9               21.6                   23.7                   14.5
                                          198ga                          29.3               22.4                   26.4                   16.7
                                          aData for 1989 are for first two quarters only

                                          blncludes data for Continental and People Express


                                          Both United Airlines and Continental Airlines operate hubs at Denver.
                                          Before the third quarter 1986, Frontier Airlines also enjoyed a major
                                          presence at Denver, and average yields at Denver ranged from 9 to 26
                                          percent below the average for the comparison group. After Continental
                                          took over People Express and Frontier, yields at Denver increased. Prior
                                          to the third quarter of 1986, Denver was not a concentrated airport, and
                                          the average yield at Denver was lower than that for the 38 unconcen-
                                          trated airports. This changed in 1987. Yields for both United and Conti-
                                          nental rose rapidly, and Denver experienced an exceptionally large
                                          increase in yields during the first two quarters of 1989. For the first two
                                          quarters of 1989, Continental’s yields were 33 percent higher than those
                                          at the unconcentrated airports while United’s were almost 20 percent
                                          higher. For Denver’s airport as a whole, yields were 23 percent higher
                                          than the yields at the unconcentrated airports during the first two
                                          quarters of 1989. Table 3.14 shows yield data for Denver and for the 38
                                          unconcentrated airports.




                                           Page 46                                         GAO/RCED-SO-102Fares and Service at Major Airports
                                          Chapter 3
                                          Trends in Airline Fares at 15 Concentrated
                                          Airports




Table 3.14: Yields at Denver for United
and Continental and Yields at 38          Ytelds in cents
Unconcentrated Airports                                                            Denver Yields                               Yield at the 38
                                          Year                    United         Continentalb              All carriers              Airports
                                          1985                       12.0                 11.9                     12.2                    13.8
                                          1986                       10.4                 10.2                     10.6                    12.6
                                          1987                       14.2                 15.8                     14.8                    13.0
                                          1988                       16.6                 17.7                     16.9                    14.5
                                          1989"                      19.9                 22.2                     20.4                    167
                                          aData for 1989 are for first two quarters only
                                          blncludes data for Eastern, Frontier, and People Express



                                          In addition to concentration and market power, other factors could
Several Other Factors                     account for the differences in yields at the 15 concentrated and 38 rela-
Could Affect Yield                        tively unconcentrated airports and the differences between the domi-
Differences                               nant carriers and the other airlines serving the concentrated airports.
                                          One factor that might account for the differences between the airports is
                                          length of haul. We compared yield changes at the 15 concentrated air-
                                          ports with yield changes at a subset of our comparison group of airports
                                          that excluded airports where average trip lengths were much longer
                                          than those of the concentrated airports. We excluded airports with
                                          longer average trip distances (greater than 900 miles) because yields are
                                          generally lower for longer trips. When we compared the 15 airports to
                                          this smaller comparison group of 22 airports, the difference in yields
                                          narrowed, although the trends remained the same (see fig. 3.2).




                                          Page 46                                          GAO/RCEIN6-102 Fares and Service at Major Airports
                                                          Chapter 3
                                                          Trends in Airline Fares at 15 Concentrated
                                                          AllpOrts




Figure 3.2: Average Yield for 22 and 38 Comparison                   Airports
34     Average Yields (Cants per    Mile)
32

30

28

26

24

22

20

18

16

14

12


lQ85       2Q65       3Q85      4Q85        la86   2086    3486      4Q56       1QW   Ma7   3Q37    4087    lQ88   3Q63    3-8     4Q88    lQ89   2Q89
First Quarter 1985    through   Second   Quarter 1989

       -          22 Comparable-Distance ComparisonAirports
       mH=M       38 Comparison Airports


                                                          Contrasting yields at the 15 concentrated airports with yields at the
                                                          subset of 22 unconcentrated airports having comparable average trip
                                                          distances shows that yields at the concentrated airports were 21 percent
                                                          higher in 1988. This difference is 6.2 percentage points smaller than the
                                                          difference we observed between the 15 concentrated and the larger
                                                          group of 38 unconcentrated airports. Table 3.15 shows that, as was the
                                                          case with the 38 airports, the difference in yields between the 15 con-
                                                          centrated and the 22 unconcentrated airports has widened over time.




                                                          Page 47                                  GAO/RCED-90-102 Fares and Service at Major Airports
                                          Chapter 3
                                          Trends in AirEne Fares at 15 Concentrated
                                          AilpOrts




Table 3.15: Differences in Yields at 15
Concentrated Airports and 22              Yields in cents, Yield differences in percentages
Unconcentrated Airports                                                     Yield at 15                    Yield at 22         Difference in
                                          Year                 concentrated airports        unconcentrated    airports                yieldsb
                                          1985                                     16.3                            14.6                   11.7
                                          1986                                     15.2                            13.4                   13.7
                                          1987                                      16.4                           13.7                   19.8
                                          1988                                     18.5                            15.3                   21.0
                                          1989”                                    21.0                            17.4                   20.7
                                          aThe 1989 data are for first two quarters only
                                          bPercentagedifference between yield at the 15 concentrated airports and yield at the 22 unconcen-
                                          trated airports was calculated phor to rounding of yield data

                                          In preparing the testimony on fares at concentrated airports that we
                                          presented before the Senate Committee on Commerce, Science, and
                                          Transportation in June 1989, we interviewed officials with all of the
                                          major airlines except United, whose officials declined to meet with us.
                                          According to some of these industry spokespersons, yields could be
                                          higher at the concentrated than at the unconcentrated airports because
                                          traffic out of the concentrated hub airports was more often nonstop or
                                          direct, while traffic out of the unconcentrated airports often had to be
                                          routed through hubs. The industry spokespersons claimed that nonstop
                                          or direct service is more desirable and could command higher fares than
                                          connecting service. While we did not control for this directly, we did
                                          compare the average number of coupons per traveler out of the concen-
                                          trated airports with the average number at the unconcentrated airports.
                                          For the fourth quarter 1988, the average number of coupons was 2.26
                                          for the concentrated airports and 2.28 for the unconcentrated airports.
                                          This comparison suggests that the type of service was not materially
                                          different for the two groups of airports.

                                          Regarding the difference between the dominant airline and the other air-
                                          lines at the concentrated airports, the dominant carrier probably pro-
                                          vides nonstop or direct service more often than other airlines at the
                                          concentrated airport, which may be providing connecting service
                                          through other hubs. In addition, dominant airlines may command a
                                          higher proportion of higher yield, short haul traffic at the hubs.
                                          According to our data on direct service, the dominant carriers earn
                                          somewhat lower yields on average than the other carriers serving the
                                          concentrated airports. However, considerable variation among the 15
                                          airports makes it difficult to draw any firm conclusions about yield dif-
                                          ferences between the dominant and nondominant airlines for different
                                          types of service.


                                          Page 48                                      GAO/RCED-SO-102Fares and Service at Major Airports
      ,



                       Chapter 3
                       Trends in Airline Fares at 15 Concentrated
                       AilpOrts




                       While we did not adjust our data for the proportion of traffic carried by
                       the dominant and nondominant carriers when we calculated the average
                       yield, we did break down the yield data into mileage blocks using 500
                       mile increments. We found that for the shortest distance category (O-500
                       miles) the dominant airlines’ yields at the concentrated airports were
                       consistently higher than the yields for trips of a similar distance out of
                       the comparison airports. In addition, at 11 of the 15 airports the yields
                       on the short haul flights of the dominant airline were higher than those
                       of the other airlines serving the concentrated airport. In the longest
                       mileage category, these differences persisted, suggesting that even
                       though the dominant airlines may have a higher proportion of the short
                       haul traffic, their higher share does not account for all of the difference
                       in average yield.


                       In preparing this study, we had to choose which fares to include, which
Sensitivity Analysis   factors to control, and how to treat anomalies in data and reporting. We
                       believe that our assumptions and adjustments give the most accurate
                       picture possible of fare levels and trends, but it is important to know the
                       effect of these assumptions on the results. Therefore, we attempted to
                       determine how each assumption or adjustment affected the outcome by
                       relaxing each assumption and recalculating the difference between fares
                       at the concentrated and unconcentrated airports. We undertook the sen-
                       sitivity analysis for 1988 annual data to test how assumptions affected
                       our finding that fares were about 27 percent higher at concentrated
                       airports.


Weighted Data          Because we were interested in trends in fares at concentrated airports
                       over time as well as differences between concentrated and unconcen-
                       trated airports, we weighted the fare data to take into account changes
                       in the distribution of traveler destinations, changes in the proportions of
                       one-way and round-trip tickets in the sample, and changes in the pro-
                       portions of trips taken on the dominant and nondominant carriers. We
                       wanted changes in yields to reflect fare changes and not changes in the
                       trips taken. Therefore, for each combination of fare type (one-way or
                       round-trip), type of carrier (dominant or nondominant) and destination,
                       we calculated the average yield for each quarter. We weighted the
                       average yield for each combination according to the average amount of
                       traffic for that combination over the 18 quarters. For example, if one-
                       way trips from Denver to Chicago on United Airlines averaged 0.1 per-
                       cent of all trips on United over the 18 quarters, we weighted the results
                       for each quarter so that the proportion was always the same.


                       Page 49                                 GAO/RCED90-102 Fares and Service at Major Airports
                        Chapter 3
                        Trends in Airline Fares at 16 Concentrated
                        AirpOrEs




                        While this weighting is appropriate for analyzing changes over time, DOT
                        officials have criticized its use in comparing fare levels at different
                        groups of airports at the same time. Unweighted, actual data might give
                        different results. Therefore, we re-estimated 1988 fares at concentrated
                        and unconcentrated airports without applying the weights. We found a
                        slight increase in the difference. W ith unweighted data, fares were 29
                        percent higher at the concentrated airports. This result might be
                        expected, since we had observed that the difference was growing over
                        time. Adjusting for changes in traffic distribution had somewhat damp-
                        ened the gap in the latter years, The following adjustments use the
                        actual, unadjusted data for 1988.


Alaska Airlines         Because of reporting problems, Alaska Airlines was excluded from the
                        database. Alaska had reported fares many times greater than those
                        actually charged. To avoid biasing the results at those airports where
                        Alaska offered a significant amount of service, we excluded the carrier
                        from our analysis entirely. Alaska Airlines has since rectified the
                        problem, and fare data for recent periods are more accurate. We re-esti-
                        mated 1988 yields including Alaska Airlines, but the effect was small.
                        The difference in yields, using unweighted data, between concentrated
                        and unconcentrated airports including Alaska Airlines was 28.6 percent.


Interline Fares         Because we were interested not only in average fares at concentrated
                        airports but also in the fares of the carriers that dominated those air-
                        ports, we eliminated from our database trips that required the traveler
                        to change airlines. By doing so we avoided the difficulty of trying to
                        apportion the fare between the carriers. Interline trips are becoming less
                        common but still comprise a measurable segment of total air travel, and
                        including them gives a more complete picture. Since certain economies
                        are associated with on-line connections, the a priori assumption would
                        be that interline fares are higher. Recalculating yields including interline
                        trips did produce slightly higher yields, but the yields were higher at
                        both concentrated and unconcentrated airports. After including interline
                        tickets, yields at the concentrated airports were 30 percent higher than
                        at unconcentrated ones.


Multiple Coupon Trips   Our database was restricted to trips involving only two coupons in each
                        direction. This restriction admits into the database only direct flights
                        and those with one change of plane in each direction. W ith this restric-
                        tion the database captured most of the traffic, but excluded some


                        Page 60                                 GAO/RCED90-102 Fares and Service at Major Airports
                                      Chapter 3
                                      Trends in Airline Fares at 15 Concentrated
                                      AilpOrts




                                      trips-especially those where the final destination was a small city.
                                      Fares might be expected to be lower for trips requiring multiple plane
                                      changes. We expanded our database to included three coupons in each
                                      direction, that is, flights requiring two plane changes in each direction,
                                      but again found little change in the size of the yields and the difference
                                      between yields at concentrated and unconcentrated airports. As
                                      expected, yields were slightly lower, but concentrated and unconcen-
                                      trated airports were equally affected.


Low End Fare Screens                  We excluded from our data set fares that were either obviously too high
                                      or too low based on a review of listed fares, including $0 and nominal
                                      fares paid by frequent flyers. Our interest was in examining fares actu-
                                      ally paid for individual trips. Some analysts, however, may include $0
                                      fares because they believe that free travel earned in frequent flyer pro-
                                      grams should be included in calculating the average fare for travel out
                                      of an airport. We re-estimated yields without screening out fares that
                                      were too low and, as might be expected, yields fell. Yields were about 6
                                      percent lower at both the concentrated and the unconcentrated airports,
                                      and there was a small change in the difference. Yields at the concen-
                                      trated airports were still 27.6 percent above those at the unconcentrated
                                      airports.

                                      The results from relaxing each of the various assumptions discussed
                                      above appear in table 3.16.

Table 3.16: Sensitivity Analysis of
Assumptions Employed to Calculate     Yields in cents, Yield differences In percentages
Yields at Concentrated and                                                          Average yield                      Difference in
Unconcentrated Airports               Assumption                           Concentrated     Unconcentrated                    yieldsa
                                      All assumDtlons in Dlace                       185                 145                      27.2
                                      Unweiclhted data                               182                 14 1                     29.2
                                      Alaska Airlines included                       18.2                14 1                     28.6
                                      Interline fares included                       19.0                14.6                     30.0
                                      Three couDon trbs included                     181                 14.0                     29.4
                                      No low end yield screen                        170                 13.3                     27.6
                                      ‘Differences In yields were calculated prior to roundmg of yield data




                                      Page 51                                     GAO/RCED90-102 Fares and Service at Major Airports
Chapter 4

Other RecentAnalyses of Fares at
ConcentratedAirports

                   Over the past year several studies have examined fares at concentrated
                   airports and at airports where the major carriers have set up their
                   hubs.l Some of these analyses were undertaken in response to findings
                   we reported in testimony before the Congress.2According to the results
                   reported in Chapter 3, fares are significantly higher at major airports
                   where one or two carriers dominate the traffic than at airports where
                   enplaning passengers are distributed more widely among different
                   carriers.

                   The issues that we address in this report have also been examined by
                   industry and other government agencies. The Air Transport Association
                   recently commissioned a study of fares and service at hub airports. DOT
                   has examined fare and service changes at St. Louis following the TWA-
                   Ozark merger and has recently completed a study of fares at its own
                   sample of concentrated airports. Finally, analysts at the Justice Depart-
                   ment have recently assessedthe relationship between fares and concen-
                   tration at three airports that became concentrated following the merger
                   of hubbing carriers.3


                   We reported in September 1988 that average fares had risen for travel
The DCYI’
       St. Louis   out of St. Louis following the merger of TWA and Ozark Air Lines.4 We
Study              also testified on our findings at hearings before the Senate Committee on
                   Commerce, Science, and Transportation.5 DCIT also testified at those hear-
                   ings, and the Department was asked to prepare a response to our finding
                   that, following the merger of TWAand Ozark Airlines (a merger DOT
                   approved over the objections of the Justice Department), fares for St.
                   Louis travel had risen and competition at St. Louis had declined.

                   DOT issued its report in January 1989, and the Department took issue
                   with our findings on several grounds. First, DOT claimed our analysis

                   I ISome of these studies try to explain why air fares might be higher at concentrated ah-ports by
                   estimating an econometric model. We are also in the process of estimating a model of airline pricing
                   behavior that will focus on how the various barriers to airline market entry affect airline fares.

                   “DOT report on fare and service changes at St. Louis (DCJf-P-37-89-3);Hub Operations: An Analysis of
                   Airline Hub and Spoke Systems Since Deregulation, prepared for the Air Transport Association by
                   Siiat, Helliesen & Eichner, Inc. (May 1989). In addition, DOT recently issued a series of reports by
                   the Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry that includes a study
                   of fares at most of the concentrated airports in this study.
                   “Werden, Joskow, and Johnson.

                   lGA0 report on fare and service changes at St. Louis (GAO/RCED-8%217BR).

                   ‘Factors Affecting Concentration (GAO/T-RCED-88-65).



                   Page 52                                    GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 4
Other Recent Analyses of Fares at
Concentrated Airports




was based on faulty data. The data that DW had provided us contained a
fare filter that was out-of-date and led to the exclusion of many valid
fares. In fact, we first identified the fare-filter problem and brought it to
the attention of DOT.We created a new fare filter which DOTlater
adopted. D m was also critical of the periods we chose to compare, the
first three quarters of 1986 and 1987, and noted (as we had in our
report) that fares were especially low in 1986, making the fare increases
in 1987 seem larger than if some other base period were chosen. Finally,
based on the expected effect of the merger on market power and, there-
fore, on fare changes, we had separated the routes out of St. Louis into
four categories: (1) markets where TWAand Ozark were the only carriers
offering nonstop service prior to the merger, (2) markets in which TWA,
Ozark, and at least one other carrier offered nonstop service, (3) mar-
kets where only TWAor Ozark offered nonstop service, and (4) markets
that received nonstop service only from TWAor Ozark and at least one
other carrier. We expected the largest increase in fares to occur in mar-
kets where TWAand Ozark had been the only carriers providing nonstop
service prior to the merger, since the merger would lead to a monopoly
on these routes. Our results were inconclusive. The fare increase we
reported was relatively small in those markets where the merger pro-
duced a monopoly and was largest in markets where TWAand Ozark
competed along with other carriers. DOTcited this unexpected result as
further evidence that our analysis was flawed.

D m re-estimated the fare changes at St. Louis using a much less restric-
tive constraint on allowable yields. DOTexamined fares for the same 67
routes that we analyzed and employed the same division based on com-
petitive market categories. D m used the first half of 1985 as the base
period and examined the trend in fares through the first half of 1988.

DOTfound that TWA'Sfares in 1987 were 10 percent above those in 1985
and 20 percent over those in 1986. The increase reported by DOT,there-
fore, is even larger than the 13 to 18 percent increase we reported. DOT
also found that TWA'Sfare increases were greater than the rise in either
the airline component of the Consumer Price Index (CPI) or the overall
CPI. DOTreported that average fares rose an additional 11 percent in the
first half of 1988, while, at the same time, the airline component of the
CPI was unchanged and the overall CPI rose 4 percent. Between the first
half of 1985 and the first half of 1988, DCTfound that TWA'Sfares for
these 67 nonstop markets rose 22.7 percent, more than twice the
increase in either measure of inflation.




Page 53                             GAO/RCED-90-102 Fares and Service at Major Airports
                                      Chapter 4
                                      Other Recent Analyses of Fares at
                                      Concentrated Airports




                                      DW attributed the relatively large increase in TWA'Sfares out of St. Louis
                                      to demand factors. Between 1985 and 1988, St. Louis origin and destina-
                                      tion traffic increased by an average of 6.9 percent annually whereas,
                                      nationwide air travel grew 3.3 percent over the same period. In exam-
                                      ining why TWA'Sfares might have risen, DOTpresented data on TWA's
                                      system-wide operating costs. But, between March 1985 and June 1988,
                                      TWA'Soperating costs per available seat mile fell 16 percent from 8.82
                                      cents to 7.41 cents. DOTdid not comment on why the fare increase out of
                                      St. Louis coincided with this sizable reduction in operating costs.

                                      DOT also presented evidence on fare changes at other concentrated hub
                                      airports to demonstrate that TWA'Sincreases were not atypical (see table
                                      4.1). However, these data reinforce our point that fares have increased
                                      at airports where concentration has increased. Only Pittsburgh, which
                                      was concentrated throughout the 1985-88 period, and Atlanta, a two-
                                      carrier hub that was also concentrated throughout the period we
                                      examined, did not show a substantial increase. These results are fully
                                      consistent with the data we presented in Chapter 3.

                                      DOT  found that fares were relatively unchanged in the 38 city pair mar-
                                      kets where TWAand Ozark did not compete before the merger, but like
                                      GAO,~o'r noted that fares rose most in those markets where TWAand
                                      Ozark offered nonstop service along with other airlines, not in those
                                      markets where TWAgained a monopoly after absorbing Ozark. Based on
                                      this circumstance, DCXfound no basis for concluding that the merger had
                                      significantly affected fares.

Table 4.1: Comparison of Round-Trip
Fare Changes by Carriers Dominating                                                                      Percent fare change 1985-
Hub@                                  Hub                                     Carrier                                           88
                                      Atlanta                                 Delta                                             +5
                                      Charlotte                               Piedmont                                         +34
                                      Clnclnnati                              Delta                                            +25
                                      Detroit                                 Northwest                                        +27
                                      Minneapolis                             Northwest                                        +21
                                      Plttsburah                              USAir                                             -6
                                      Raleigh                                 American                                         +35
                                      St. Louis                               TWA                                              $22
                                      Salt Lake Cltv                          Delta                                            $26
                                      ?5ource: DOT report on fare and service changes at St LOUIS(DOT-P-37-89-3).

                                      However, our anomalous result occurred because we included the New
                                      York City-St. Louis route among those in which TWAand Ozark competed


                                      Page 54                                 GAO/RCED90-102 Fares and Service at Major Airports
                         Chapter 4
                         Other Recent Analyses of Fares at
                         Concentrated Airports




                         with other carriers. However, the only other carrier in this case was
                         People Express, an airline that went out of business during the period
                         covered by our study. Thus, this route could have been classified with
                         those where the merger resulted in a monopoly. Because fare increases
                         on this route were larger than on any of the other 67 we examined (39
                         percent) and because it is such a heavily traveled route, transferring it
                         to the post-merger monopoly category eliminates most of the anomaly in
                         our results. W ith the New York City-St. Louis route included with the
                         post-merger monopoly group, fare increases were largest in those mar-
                         kets where TWAand Ozark competed, and fares rose by roughly the same
                         amount on those routes regardless of whether or not other carriers also
                         served the route. DOT also included the New York City-St. Louis route
                         among those in which TWA and Ozark competed with other carriers.
                         Since DOT found the anomaly to be smaller than we estimated, including
                         St. Louis-New York with the other monopoly routes would have likely
                         yielded the expected result- fares rose most in markets where the
                         merger created a monopoly.

                         Anomalies notwithstanding, DOT’S results, as do ours, show unequivo-
                         cally that fares rose most in those markets where TWA and Ozark com-
                         peted before the merger. According to D&S data, comparing the first
                         half of 1985 with the same period in 1988 reveals that fares rose 17.7
                         percent on routes where the merger created a monopoly (excluding New
                         York) and 39 percent on routes where TWA and Ozark competed along
                         with other airlines. On routes where they did not compete before the
                         merger, fares rose by only 1.0 to 1.5 percent. Among the factors that
                         might be mitigating fare increases out of St. Louis is competition from a
                         low fare competitor, Southwest Airlines. DOT’S data showed that fares
                         rose least on routes where Southwest competed.


                         The results of the Simat, Helliesen & Eichner @H&E)study, undertaken
The Simat, Helliesen &   for the Air Transport Association, were presented to the Senate Com-
Eichner Study for the    mittee on Commerce, Science, and Transportation on the same day that
Air Transport            we testified before the Committee on our preliminary findings on air
                         fares at concentrated airports. The SH&Estudy examines changes in air
Association              fares and service at 30 hub and 30 nonhub airports since 1980 and
                         attempts to show that fares are not generally higher at hub airports and
                         that where they are higher it is the result of better service and other
                         factors.

                         Following the testimony presented at the hearing, the Ranking Minority
                         Member asked us to undertake an assessment of SH&E’S findings. We


                         Page 55                             GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 4
Other Recent Analyses of Fares at
Concentrated Airports




reviewed the SH&Ereport and submitted our findings for the hearing
record. We found that SH&E'Sdata were consistent with our finding that
fares are higher at airports where one or two carriers handle most of the
enplanements. W ith respect to the causes of the fare differences, how-
ever, we found that SH&E'Sanalysis contained some serious methodolog-
ical problems and, therefore, cannot be used to disprove the hypothesis
that fares and airport dominance are related.

While we compared fares at concentrated airports with fares at uncon-
centrated airports, SH&Econtrasted fares at 30 hub airports with fares
at 30 nonhub airports. Although many hubs are dominated by one or
two carriers, others are not. Some of the unconcentrated airports
making up our comparison group are hub airports for some of the
smaller airlines. We do not believe that hubs, per se, are the issue.
Indeed, we recognize that hub and spoke networks have given many
travelers greater choice in how to make their trips. More alternatives
mean more competition and can lead to lower fares for those traveling
through hubs.

By choosing to examine whether fares are higher at hub airports, SH&E
grouped airports where the hubbing airline has significant market
power with airports where the hubbing carrier wields much less market
power. Several of the hub airports that SH&Eincluded in its analysis are
not ones where one would expect fares to be above average. Some of
these hub airports are not highly concentrated-that is, they are not
dominated by the hubbing airline. Other hubs included by SH&Eare
located in cities with more than one airport. In multi-airport cities, com-
petition from carriers operating out of other airport(s) could offset some
of the advantages a dominant carrier might have at the concentrated
airport. For example, SH&Eincluded Dallas Love Field as a hub airport.
Love Field qualifies as concentrated since Southwest Airlines handles
100 percent of the enplaning passengers there. However, Southwest’s
ability to exploit its monopoly position at Love Field is limited by com-
petition from carriers serving Dallas/I% Worth International Airport.
We excluded from our analysis airports in multi-airport cities because
airport dominance will be less important if alternative air service is
available from a nearby airport.

SH&E'Sdata show that fares were above average at 21 hub airports and
below average at 9 other hub airports. However, the hub airports where
fares were lower are all either located in multi-airport cities or are not
concentrated. When airports in multi-airport cities (Dallas Love Field,



Page 56                             GAO/RCFD90-102 Fares and Service at Major Airports
.
    Chapter 4
    Other Recent Analyses of Fares at
    Concentrated Airports




    Houston Hobby, Detroit Metropolitan Wayne County,” and Chicago
    Midway) and unconcentrated hub airports (Las Vegas, Kansas City, Mil-
    waukee, Orlando, and Phoenix)-are excluded, SH&E’S data show that
    average fares were higher than the industry average at all of the con-
    centrated hub airports.

    Six of the hubs that, according to SH&E, have fares below the national
    average were those of smaller carriers (Southwest at Dallas/Love Field
    and Houston/Hobby, America West at Las Vegas and Phoenix, Braniff at
    Kansas City,i and Midway at Chicago/Midway). These carriers either
    dominated traffic at the smaller airport in a multi-airport city (South-
    west and Midway) or did not dominate traffic at their hubs.

    Even if these carriers did dominate an airport, they might not be able to
    exercise the same kind of market power as the larger dominant airlines
    because they lack the ability to erect effectively the same entry barriers
    as the larger airlines. For example, the frequent flyer programs of the
    smaller carriers are not as attractive as those offered by the majors
    because the smaller carriers do not fly to as many places. The less exten-
    sive route systems of the smaller carriers limit the traveler’s ability to
    earn free travel and offer limited opportunities for spending the
    bonuses. Once the distinction between hubs and concentrated market
    power is made, we find that SH&E’S data are consistent with our finding
    that air fares are higher at concentrated airports.

    SH&E  presented the results of an econometric model and claimed its
    results show that airport dominance is not a significant factor in
    explaining the variation in air fares. However, our review of SH&E’S
    model indicated that it contained serious methodological problems that
    invalidated its results.

    SH&E employed multiple regression analysis to estimate how air fares (as
    measured by a fare index) are affected by airport dominance (as mea-
    sured by the Herfindahl-Hirschman Index, or HHP ) and other factors.

    “Detroit was also included in our analysis, but it has become a multi-airport city since Southwest
    Airlines commencedoperations out of Detroit City Airport in July 1988.

    rBraniff has since declared bankruptcy.
    “The HHI is the sum of the squares of the market shares of the fii   in the market. Thus, the highest
    possible HHI is 10,000 when one firm controls 100 percent of the market (100 X 100 = 10,000). This
    measure assigns a higher value to the situation where one fii dominates a market than to cases
    where the firms have relatively equal shares. For example, the HHI for a market where three firms
    held 80, 10, and 10 percent shares would be 6,600, while a 40,30, and 30 percent distribution would
    produce an HHI of 3,400.



    Page 57                                    GAO/RCED90-102 Fares and Service at Major Airports
Chapter 4
Other Recent Analyses of Fares at
Concentrated Airports




Multiple regression analysis attempts to explain the variation in a
dependent variable (in this case air fares) by correlating it with the vari-
ation in the independent variables (in this case service levels, concentra-
tion factors, load factor, et al.) that are thought to explain the behavior
of the dependent variable. SH&Efound that the relationship between air
fares and airport dominance (the HHI) was not statistically significant
when the influence of other factors, especially service quality, was
taken into account. However, the model developed by SH&Esuffered
from a serious methodological problem: the independent, or explana-
tory, variables were not independent of each other.

If the independent variables in an econometric model are not truly inde-
pendent but are instead highly correlated with each other, then the
regression model is unable to separate the individual effects and, there-
fore, to elicit much confidence in the results. In general, whenever two
or more closely related explanatory factors are in the regression model,
the results will not show clearly which of them has the most significant
impact on the dependent variable. Statisticians call this condition mul-
ticollinearity, and when it exists, the measures of statistical significance
are biased toward concluding nonsignificance. SH&Ejustified excluding
the variable measuring airport concentration on the finding that it was
statistically insignificant.

SH&Eargued that high fares are caused not by high airport concentration
levels, but by other factors, such as high levels of service quality. High
levels of service are costly to produce, and people are willing to pay
more for this service. SH&Eincluded several variables that were sup-
posed to be proxies for service quality, but these variables were all
highly correlated with each other and with the variable representing
concentration.

In addition to multicollinearity, we identified several other problems
with SH&E'Sanalysis. These included problems with variable measure-
ment, database development, and the treatment of airlines that are
owned in common.

By not taking into account multi-airport cities in its analysis, SH&E'S
variable representing concentration and market power was poorly mea-
sured. For example, Dallas/Love Field has the highest HHI, a perfect
10,000, but Southwest Airlines’ market power is limited by competition
from carriers serving the larger Dallas airport. By assigning a high value
for the concentration variable to observations where concentration will



Page 58                             GAO/RCED-90-102 Fares and Service at Major Airports
-_I

                                            Chapter 4
                                            Other Recent Analyses of Fares at
                                            Concentrated Airports




                                            have little impact, the     SH&E    model undercut the variable’s explanatory
                                            power.

                                            As we did, SH&Eused DOT’SData Bank 1A in its analysis. When using
                                            Data Bank lA, it is necessary to edit the fare data to exclude errone-
                                            ously recorded fares that are obviously too high or too low. In preparing
                                            our analysis, we developed a new edit procedure, which DOThas
                                            endorsed and which at least one airline data vendor has adopted. SW&E,
                                            probably unaware that we had developed this new screen, applied
                                            instead a fare screen that excluded only fares over $2 per m ile and $0
                                            fares. Our fare screen, based on published fare data, recognizes the dis-
                                            tance taper in airline fares. A comparison between our fare screen and
                                            SH&E’Ssuggests that SH&E’Sscreen allows many fares into the database
                                            that are too high, especially for longer distances, while it excludes some
                                            valid short distance fares (see table 4.2).


Table 4.2: Comparison   of GAO and SH&E Origin-Destination   Data Fare Screens
                                                 SH&E screen                                               GAO screen
                                               Exclude if yield is                                      Exclude if yield is
                                               equal to         greater than                           less than         greater than
 Mileage category                           cents/mile             cents/mile                        cents/mile             cents/mile
 l-100                                                  0                  200                                  8                   300
 lOl- 200                                               0                  200                                  4                   255
201-300                                                 0                  200                                  3                    160
301-400                                                 0                  200                                  3                    125
401-500                                                 0                  200                                  3                    115
501-700                                                 0                  200                                  3                    105
701-1,000                                               0                  200                                  3                     80
1,001-l ,300                                            0                  200                                  3                     65
1.301-1.600                                             0                  200                                  3                     55
 1,601-l,900                                            0                  200                                  3                     50
1,901-2,200                                             0                  200                                  3                     40
2,201-2,500                                             0                  200                                  3                     40
above2.500                                              0                  200                                  3                     40


                                             Finally, we treated as a single carrier airlines that were jointly owned.
                                             We reasoned that if one airline was owned by another, it would not be
                                             expected to compete with the parent. SH&Etreated jointly owned airlines
                                             as different carriers. This was a problem in cities such as Syracuse
                                             where USAir and Piedmont, which were jointly owned and in the pro-
                                             cess of being merged, each had a large market share. Classifying an air-
                                             port such as Syracuse as more competitive than it actually is tends to


                                             Page 59                              GAO/RCED90-102 Fares and Service at Major Airports
                      Chapter 4
                      Other Recent Analyses of Fares at
                      Concentrated Airports




                      bias the results. If concentration is a factor explaining airline fares, then
                      misrepresenting competitive conditions will produce misleading results.


                      Analysts at the Antitrust Division of the Justice Department (DOJ) have
Study by Justice      recently completed an examination of the effects on fares and service of
Department Analysts   two airline mergers (approved by DOT but opposed by Justice)-TWA’s
                      acquisition of Ozark Air Lines and Northwest’s acquisition of Republic
                      Airlines. Justice’s analysts attempted to measure the impact of the
                      mergers on fares and service at St. Louis, Minneapolis/St. Paul, and
                      Detroit.

                      The Justice Department analysts attempted to isolate the effect of the
                      merger, taking into account other factors such as costs, the presence of
                      potential entrants, and other variables.” The DOJ analysts do not com-
                      pare yields at the concentrated airports to yields at other airports, but
                      rather attempt to predict how much higher (or lower) yields are due to
                      the mergers.

                      The DOJ analysts found that the Northwest-Republic merger affected
                      fares at Minneapolis/St. Paul by roughly the amounts DOJ had predicted
                      when it opposed the merger. According to the DOJ analysts, fares at Min-
                      neapolis/St. Paul, where Northwest and Republic both operated hubs
                      and had a number of overlapping routes, were 5.6 percent higher
                      because of the merger. The DOJ analysts found this to be a significant
                      increase. On long distance routes (more than 1000 miles) where North-
                      west and Republic competed before the merger, yields were 7.5 percent
                      higher. On long distance routes where they were potential competitors,
                      yields were estimated to be 7.6 percent higher because of the merger. On
                      shorter distance routes the impact of the merger on fares was smaller
                      but still pronounced. Yields on routes out of Minneapolis/St. Paul where
                      they did not compete directly rose only 2.9 percent. At Detroit, on the
                      other hand, only Republic operated a hub before the merger, and fares
                      did not rise following the merger but in fact fell slightly, by 0.8 percent.

                      The TWA-Ozark merger also produced an effect at St. Louis similar to
                      that predicted by DOJ when it opposed that merger. Although the overall

                      “The Justice Department analysts employed regression analysis to estimate predictive equations that
                      both forecast and backcast yields on routes out of the dominated airports The forecasting equation
                      predicts what yields would have been in the period after the mergers had they not occurred. The
                      backcasting equation predicts what yields would have been before the mergers had they already
                      occurred. The predictions are combined to form a single estimate of the effect of the mergers on
                      yields of a particular city-pair market.



                      Page 60                                   GAO/RCED90-102 Fares and Service at Major Airports
                    Chapter 4
                    Other Recent Analyses of Fares at
                    Concentrated Airports




                    estimated impact on airline yields was relatively small-an increase of
                    1.5 percent-yields did increase significantly-about      4.5 percent-on
                    routes where TWA and Ozark competed directly or where they were at
                    least potential competitors. Fares fell on other routes, causing the
                    overall effect to be small.

                    While, in many ways, DOJ’S approach differs from the approach we fol-
                    lowed, its findings are consistent with, and supportive of, the ones
                    presented here. Yields are higher at concentrated airports and increased
                    concentration leads to higher fares.


                         recently published the results of a g-month study of the state of
DOT Task Force on   DOT
                    competition in the nation’s airline industry. DOT’S results are consistent
Competition Study   with those from most other analyses in that the Department concludes
                    that, on balance, deregulation is working. Air fares are lower, service
                    levels have increased, and greater numbers of people can afford to fly.
                    However, DCK also found “pockets of problems,” including higher fares
                    at concentrated air traffic hubs.l”

                    DOT  focused on air traffic hubs and defined a hub to be concentrated if
                    one carrier had more than 75 percent of the enplanements. Under this
                    criterion, eight hubs were judged to be concentrated-Charlotte, Cincin-
                    nati, Dayton, Memphis, Minneapolis/St. Paul, Pittsburgh, St. Louis, and
                    Salt Lake City. DOr also identified 8 two-carrier concentrated hubs-
                    Atlanta, Chicago, Dallas, Denver, El Paso, Houston, Nashville, and
                    Raleigh-Durham. Thus, DOT’S analysis includes 12 of the 15 concentrated
                    airports we examined. *I

                    DOT’S approach differed from ours in a number of respects. The task
                    force compared yields at the concentrated hubs to the industry average,
                    rather than a control group of less concentrated hubs. DOT calculated a
                    fare premium, adjusted for distance and density factors, for concen-
                    trated single-carrier hubs, concentrated two-carrier hubs, and monopoly
                    routes. DOT also calculated the fare premium for the 15 concentrated air-
                    ports used in our analysis (see table 4.3).



                    “‘Air traffic hubs are communities, rather than airports, accounting for a certain percentageof the
                    nation’s travel. For example, the Chicago hub is served by O’Hare and Midway airports.

                    ’‘Because we excluded airports in multi-airport cities, each of these twelve airports accounted for all
                    traffic at the hub it served.



                    Page 61                                    GAO/RCEXb90-102 Fares and Service at Major Airports
                                          Chapter 4
                                          Other Recent Analyses of Fares at
                                          Concentrated Airports




Table 4.3: DOT-Calculated Fare
Premiums on Monopoly Routes and at        Market type                                   Average fare premium             Percent premium
Concentrated Airports in 1988             Monopoly Routes                                               $16.59                        14.0%
                                          8 Concentrated Hubs
                                            (Srnale carrier)                                             $22.30                      18.7%
                                          8 Concentrated Hubs
                                            (Two earners)                                                $10.42                       8.9%
                                          15 GAO Concentrated Hubs                                       $21.44                      18.4%


                                           DCTcalculated fare premiums for both single-carrier and two-carrier
                                           concentrated hubs and compared the 1988 premium with that of 1984.
                                           The single-carrier concentrated hubs show the largest premiums. On
                                           average, two-carrier concentrated hubs show premiums about half as
                                           great. However, Atlanta, which is a two-carrier hub, has the largest pre-
                                           mium of any concentrated hub (see table 4.4).


Table 4.4: DOT-Calculated Fare Premiums at Concentrated     Hubs, 1984 and 1988
Premiums in percentage, Shares In percentage
                                                               1988                                               1984
                                                                   Dominant carrier                                    Dominant carrier
Hub                                          Premium             enolanement share             Premium              enolanement share
Single Carrier.

Charlotte                                            27.1                          90               22.7                               75
Cincinnati                                           34.1                          78               29.5                               56
Dayton                                               17.3                          75               10.2                               63
Memphis                                              28.8                          86               28.1                               47
Minneabolis/St.Paul
       I       I
                                                     19.7                          78               12.0                               48
Pittsburah                                           10.4                          86               16.3                               77
St. Louis                                            17.8                          82               16.4                               58
Salt Lake City                                       16.7                          80                9.9                               71

Two Carrier:

Atlanta                                           40 2                             93               38.8                               93
Chicaao                                          -1.2                              72               27.5                               68
Dallas                                            18.5                             79                9.8                               68
Denver                                           -5.4                              85               -6.0                               65
El Paso                                         -18 0                              73              -30.5                               82
Houston                                            6.7                             76               -9.0                               51
Nashville                                         10.3                             71                17.4                              38
Raleiqh-Durham                                     9.6                             80                11.9                              52




                                           Page 62                                GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 4
Other Recent Analyses of Fares at
Concentrated Airports




DOT  found that average fares were greater in most distance and density
categories for single-carrier concentrated hubs, and that the most signif-
icant premiums were in markets of more than 100 passengers per day
and for distances ranging between 250 and 1000 miles. Passengerstrav-
eling in these distance- and density-market categories paid 71 percent of
the total 1988 premiums at the 8 single-carrier concentrated hubs. In
fact, fares in dense markets at the concentrated hubs were frequently
higher than fares in less dense markets even for the same distance cate-
gories. This is the reverse of what normally happens in the airline
industry. Scale economies and competition usually result in lower fares
in densely traveled markets.

The DOT task force report further buttresses the finding that fares are
higher at concentrated airports. Moreover, the study contains consider-
able information on airline operating and marketing practices that limit
market entry and protect dominant, incumbent positions. Yet, the study
does not explore any policy options that DOT or the Congress might con-
sider to address the limits to competition.‘” DOT’S recently released
National Transportation Plan calls for increased spending to expand the
capacity of the aviation system. I3Yet, the concentrated airports that are
experiencing higher fares are not all capacity constrained, and the bar-
riers to market entry identified in Chapter 2 will not be eliminated by
building more runways and new terminals.




“For a discussion of the pros and cons of various policy options, see app. II, which contains an
excerpt from Barriers to Competition (GAO/T-RCED-89-65). See also Competition in the Airline
Computerized Reservation System Industry (GAO/T-RCED-88-62, Sept. 1988) and Effects of Airline
Entry Barriers on Fares (GAO/T-RCED-90-62, April 1990). Copies of these publications can be
obtained by writing or calling GAO (see information on the inside of back cover of this report).

‘“Moving America: New Directions, New Opportunities, U.S. Department of Transportation (Wash-
ington, DC.: Feb. 1990).



Page 63                                  GAO/RCED-90-102 Fares and Service at Major Airports
Chapter 5

Changesin Air PassengerService at 15
ConcentratedAirports

               In addition to raising concerns over higher fares, airport dominance by
               one or two airlines has prompted concern that service levels could
               decline at concentrated airports. Increased market power, combined
               with effective barriers to new entry, could cause reduced service levels
               at the concentrated airports as the dominant carriers discover they have
               less need to respond to competitive pressures by offering high levels of
               service.

               The term “service levels” can be used to mean either the quantity of
               service available or the quality of service delivered. The quality of ser-
               vice delivered includes such things as the quality of in-flight meals, the
               friendliness of ticketing and on-board personnel, the percentage of late
               flights, and the amount of lost baggage. We did not examine trends in
               these qualitative attributes of air travel. Some, such as the quality of the
               food served, are simply too subjective, while for others, such as on-time
               performance, the data were either unavailable for appropriate time
               periods or did not allow meaningful comparisons.

               Instead, we examined trends in the quantity of service available. Specif-
               ically, we examined trends in the number of routes served directly, the
               number of flights, and the number of airlines competing for traffic on
               routes out of the concentrated airports. Direct service includes both non-
               stop service to destinations and service with stops but not requiring the
               passenger to change planes.

               To assess changes in service levels at concentrated airports, we com-
               pared service level data for the month of May from 1985 through 1988.
               We compared the number of cities that could be reached by direct ser-
               vice, the total number of daily flights to all places, and the amount of
               competition as measured by the number of markets served by one car-
               rier, by two or three carriers, or by four or more carriers.

               The service data for carriers operating out of the 15 concentrated air-
               ports between May 1985 and May 1988 show an overall increase in the
               amount of service offered and in the number of places that can be
               reached by direct air service. However, at most of the airports affected
               by mergers, the number of daily flights decreased. In addition, the
               amount of competition declined on many routes out of the 15 concen-
               trated airports. More routes were served by only one carrier and fewer
               could be considered highly competitive. We considered routes highly
               competitive if four or more carriers provided direct service.




               Page 64                         GAO/RCED-90-102 Fares and Service at Major Airporta
    .
                                         Chapter 5
                                         Changes in Air Passenger Service at 15
                                         Concentrated Airports




                                         The number of destinations that can be reached by direct air service
Number of                                from the 15 concentrated airports increased at 10 of the airports,
Destinations Served                      declined at 3 of the airports, and remained about the same at the other 2
Directly                                 (changed less than 5 percent). Overall, the number of places served
                                         directly increased 10 percent, but there was considerable variation
                                         among the 15 airports. The improvement was most pronounced at air-
                                         ports where the airlines established or built up hubs during this period.
                                         At airports in Charlotte, Cincinnati, Detroit, Memphis, Nashville,
                                         Raleigh-Durham, and Syracuse hubs were established or built up
                                         between 1985 and 1988, and all except those in Charlotte and Detroit
                                         registered large increases in the number of destinations that could be
                                         reached with direct air service. Table 5.1 shows data on the number of
                                         routes with direct service at the 15 concentrated airports.

Table 5.1: Number of U.S. Destinations
With Direct Service From 15                                                                                              Percentage
Concentrated Airports During Month of                                                                                        change
May 1985-88                              Concentrated     airport                 1985   1986       1987   1988              1985-88
                                         Atlanta                                   152    151        143    150                   -1
                                         Charlotte                                  85     88         94     91                     7
                                         Cincinnati                                 74         82     89    102                    38
                                         Dayton                                     50      69        63     60                    20
                                         Denver                                    158     158       151    147                   -7
                                         Detroit                                   121     117       121    125                     3
                                         Greensboro                                 53      46        45     48                   -9
                                         Memphis                                    92      97       101    106                    15
                                         MlnneapolQSt      Paul                    123     133       124    134                     9
                                         Nashville                                  62      81        85     80                    29
                                         Pittsburgh                                114     111       116    128                    12
                                         Ralelah-Durham                             55      54        59     85                    55
                                         Salt Lake City                             86      84        91    102                    19
                                         St. Louis                                 136     132       131    126                   -7
                                         Syracuse                                   51      57        62     69                    35
                                         Total                                    1412    1460      1475   1553                   10
                                         aPercentage changes rounded to nearest whole number

                                         Source I P Sharp, Inc


                                         Raleigh-Durham experienced the largest increase. Because American
                                         Airlines established its hub there, the number of cities served directly
                                         from Raleigh-Durham increased from 55 in May 1985 to 85 in May 1988,
                                         a 55 percent increase. Of the airports where hubs were set up or
                                         expanded during this period, Detroit and Charlotte registered the



                                         Page 65                                  GAO/RCED90-102 Fares and Service at Major Airports
                  Chapter 5
                  Changes in Air Passenger Service at 15
                  Concentrated Airports




                  smallest improvements, with increases of just 3 percent and 7 percent,
                  respectively, in the number of destinations served directly.

                  Greensboro, the only concentrated airport that we examined which was
                  not a hub airport, experienced the largest relative reduction in the
                  number of places served directly-a 9 percent decline-while Denver, a
                  two-carrier hub, experienced the largest absolute reduction in the
                  number of places served directly-l 1 fewer destinations could be
                  reached without changing planes in 1988 than in 1985. Also 10 fewer
                  places were served directly from St. Louis in 1988 than in 1985.


Number of Daily   percent between May 1985 and May 1988, but 7 of the 15 concentrated
Departures        airports experienced a decline in the average number of daily flights.
                  Departures out of Raleigh-Durham more than doubled while the number
                  of flights from Nashville and Dayton increased more than 50 percent. On
                  the other hand, the number of daily flights out of Denver fell 20 percent,
                  while flights out of Minneapolis/St.Paul, Detroit, and Memphis-air-
                  ports affected by the Northwest-Republic merger-fell between 10 and
                  16 percent.

                  W ith respect to the number of flights offered, the patterns for the domi-
                  nant and the nondominant firms differed. Daily departures offered by
                  the dominant carriers grew 50 percent, and the proportion of total
                  departures accounted for by the dominant firms grew by 46 percent.                             *
                  Conversely, the number of daily departures out of these 15 airports by
                  the nondominant carriers fell almost 50 percent. Table 5.2 provides
                  flight frequency data for the 15 concentrated airports.




                  Page 66                                  GAO/RCED-90-102 Fares and Service at Major Airports
                                             Chapter 5
                                             Changes in Air Passenger Service at 15
                                             Concentrated Airports




Table 5.2: Number of Daily Flights to U.S.
Destinations From 15 Concentrated                                                                                                    Percentage
Airports During the Month of May 1985-                                                    Number of daily flights                        change
88                                           Concentrated airport                      1985    1986      1987     1988                  1985-88b
                                             Atlanta                                   1162    1215      1193     1207                           4
                                             Nashwile                                   170     258       292      269                         58
                                             Charlotte                                  409     434       402      466                         14
                                             Cincinnati                                 284     264       340      405                         43
                                             Dayton                                     138     209       207      215                         56
                                             Denver                                     900     887       805      718                       -20
                                             Detroit                                    635     648       572      569                       -10
                                             Greensboro                                 128     110       111      108                       -16
                                             Memphis                                    413     404       375      346                       -16
                                             Minneapolis                                563     615       507      506                       -10
                                             Pittsburgh                                 512     520       523      559                           9
                                             Raleigh-Durham                             142     154       160      286                        101
                                             Salt Lake City                             299     292       323      341                         14
                                             St. Louis                                  646     699       608      605                        -6
                                             Syracuse                                   175     162       177      169                        -3
                                             TotaP                                     6578    6872      6595     6769                           3
                                             Note, Dally flight data calculated from monthly data and rounded to nearest whole numbers

                                             Tolumns   may not add to totals due to rounding

                                             bPercentage changes rounded to nearest whole number

                                             Source: I.P Sharp, Inc.



                                             As the data on service levels suggest, the dominant carriers at the con-
Degreeof Competition                         centrated airports have increased their dominance over the past few
                                             years. As a result, on many routes out of the 15 concentrated airports
                                             the air traveler’s ability to choose among airlines has narrowed.
                                             Although there was an overall increase of 10 percent in the number of
                                             domestic destinations served directly from the 15 concentrated airports
                                             between 1985 and 1988, there was a 25 percent increase in the number
                                             of domestic destinations from the 15 concentrated airports that were
                                             served directly by only one carrier. Of the 15 concentrated airports we
                                             examined, 13 experienced an increase in the number of monopoly
                                             routes. One of the two exceptions was Atlanta, where concentration did
                                             not change greatly over the 1985-88 period. Atlanta is a hub for two
                                             carriers, Delta and Eastern Airlines. However, since the Eastern Airlines
                                             strike and subsequent bankruptcy, Eastern has substantially reduced its
                                             operations out of Atlanta. Therefore, the one airport that did not experi-
                                             ence an increase in one-carrier routes between 1985 and 1988 has seen a



                                             Page 67                                    GAO/RCED-90-102 Fares and Service at Major Airports
                                            Chapter 5
                                            Changes in Air Passenger Service at 15
                                            Concentrated Airports




                                            substantial decline in the activity of the principal competitor. Table 5.3
                                            provides data on the number of routes where there has been a monopoly
                                            on direct service.

Table 5.3: Number of U.S. Destinations to
Which Only One Airline Flew Directly                                                                                        Percentage
From 15 Concentrated Airports in Month                                                                                           change
of May 1985-88                              Concentrated      airport                1985    1986    1987     1988             1 985-88a
                                            Atlanta                                    70      58      55       60                   -14
                                            Nashville                                  40      51      49       50                     25
                                            Charlotte                                  46      52      72       74                     61
                                            Cincinnati                                 43      47      53       66                     53
                                            Dayton                                     36      43      41       42                     17
                                            Denver                                     62      65      65       74                     19
                                            Detroit                                    59      51      67       65                     10
                                            Greensboro                                 39      33      33       38                    -3
                                            Memphis                                    51      61       75      86                     69
                                            Mrnneapolis                                64      66       64      88                     38
                                            Pittsburah                                 81      78       89      90                     11
                                            Raleigh-Durham                             39      33       39      50                     28
                                            Salt Lake City                             52      56       64      72                     38
                                            St. Louis                                  80      69       87      84                       5
                                            Syracuse                                   2%      3%       39      46                     64
                                            Total                                     790     801      912     985                     25
                                            aPercentagechanges rounded to nearest whole numbers
                                            Source: I.P. Sharp, Inc.

                                            In some cases, the increase in the number of direct routes served by a
                                            single carrier may simply reflect added service by an airline at its hub
                                            and, as such, represents a net improvement in service offerings and
                                            traveler welfare. One carrier offering direct service is better than no
                                            direct service at all. However, at nine of the concentrated airports, the
                                            increase in the number of direct routes served by only one carrier is
                                            greater than the increase in the number of routes with direct service. If
                                            more routes are served by one carrier, and there is no corresponding
                                            increase in the total number of routes served directly, then it follows
                                            that fewer routes are served by two or more carriers. For example, at
                                            Charlotte there were 6 more routes with direct service in May 1988 than
                                            in May 1985. However, the number of direct routes served by only one
                                            airline grew by 28, from 46 to 74 routes.

                                            For the 15 concentrated airports as a group, no change occurred in the
                                            number of routes served by 2 or 3 airlines between 1985 and 1988, since


                                            Page 68                                  GAO/RCED90-102 Fares and Service at Major Airports
                                            Chapter 5
                                            Changes in Air Passenger Service at 15
                                            Concentrated Airports




Table 5.5: Number of U.S. Destinations to
Which Four or More Airlines Flew                                                                                            Percentage
Directly From 15 Concentrated Airports                                                                                          change
in Month of May 1985-88                     Concentrated airport                     1985    1988     1987     1988            1985-88=
                                            Atlanta                                      8      14       4         9                  13
                                            Nashville                                    1       7       4         2                 100
                                            Charlotte                                    5       4       0         1                -80
                                            Cincinnati                                   4       1        1        1                -75
                                            Dayton                                       1       3       3         0               -100
                                            Denver                                     23      27        9       12                 -48
                                            Detroit                                    23      27        9        14                -39
                                            Greensboro                                   3       2       2         0               -100
                                            Memohis                                      a       6        1        0               -100
                                            Minneapolis                                 12      12        6        4                -67
                                            Pittsburgh                                   1       3       3         3                 200
                                            Raleigh-Durham                               2       1        1        1                -50
                                            Salt Lake CitvI
                                                                                         3       3       2         2                -33
                                            St. Louis                                   10      12       2         2                -80
                                            Syracuse                                     2       0       0         0               -100
                                            Total                                     106     122       47       51                 -52
                                            aPercentagechanges rounded to nearest whole numbers.
                                            Source: I.P. Sharp, Inc



                                            Other studies examining air fares also have examined trends in service
Other Analyses of                           levels at concentrated airports. The approaches taken and the perform-
Service Changesat                           ante measures examined are usually different from ours, and so the
                                            results of these other analyses are not strictly comparable. None of the
ConcentratedAirports                        studies we reviewed contradicts our results.


DOT St. Louis Study                         The Ranking Minority Member of the Senate Committee on Commerce,
                                            Science, and Transportation asked D(X to respond to our findings on fare
                                            and service changes reported in our September 1988 testimony before
                                            the Committee.1 Our analysis of service changes at Lambert-St. Louis
                                            International Airport following the TwA-Ozarkmerger compared service
                                            levels in June 1986 with those prevailing in June 1987. We found that
                                            TWA had increased the number of places served directly or with nonstop
                                            service from St. Louis. In 1987, TWA provided direct service to six more
                                            cities and offered nonstop service to four more cities than TWA and

                                            ‘Factors Affecting Concentration (GAO/T-RCED-88-65);
                                                                                              GAO report on fare and service changes at
                                            St. Louis(GAO/RCED-88-217BR).



                                            Page 70                                  GAO/RCED-90-102 Fares and Service at Major Airports
                                            Chapter 5
                                            Changes in Air Passenger Service at 15
                                            Concentrated Airports




                                            increases at some were offset by reductions at others. However, no clear
                                            patterns emerged among gainers or losers. Table 5.4 provides data on
                                            the number of routes where two or three carriers provide direct service.

Table 5.4: Number of U.S. Destinations to
Which Two or Three Airlines Flew                                                                                             Percentage
Directly From 15 Concentrated Airports                                                                                           change
in Month of May 1985-88                     Concentrated      airport                1985    1988     1987     1988              1985-88
                                            Atlanta                                    74      79       84       81                     9
                                            Nashville                                  21      23       32       28                    33
                                            Charlotte                                  34      32       22       16                  -53
                                            Clnclnnati                                 27      34       35       35                    30
                                            Davton                                      13     23       19        18                   38
                                            Denver                                     73      66       77       61                  -16
                                            Detroit                                    39      39       45       46                    18
                                            Greensboro                                 11       11       IO       IO                  -9
                                            Memphis                                    33      30       25       20                  -39
                                            Minneapolis                                47      55       34       42                  -11
                                            Plttsburah
                                              ---.-- a                                 32       30       24       35                    9
                                            Raleigh-Durham                             14       20       19       34                  143
                                            Salt Lake Cltv                             31       25       25       28                 -10
                                            St. LOUIS                                  46       51       42       40                 -13
                                            Syracuse                                   21       19       23       23                   10
                                            Total                                     516      537      516      517                    0
                                            aPercentage changes rounded to nearest whole numbers

                                            Source: I.P. Sharp, Inc.


                                            On the other hand, the number of routes served by 4 or more carriers
                                            fell 52 percent. Although there are fewer routes in this category than in
                                            the single-carrier and two- or three-carrier categories, the results are the
                                            least ambiguous. In May 1988, four airports had no routes where 4 or
                                            more carriers competed, and most of the others registered dramatic
                                            reductions. The three airports where the number of routes served by 4
                                            or more carriers increased gained only 4 such routes while the other 12
                                            airports lost 59 routes served by 4 or more carriers. Table 5.5 provides
                                            data on the number of routes with direct service by at least 4 carriers.




                                            Page 69                                   GAO/RCED-90-102 Fares and Service at Major Airports
                    Chapter 5
                    Changes in Air Passenger Service at 15
                    Concentrated Airports




                    other carriers, 10 continued to receive competitive nonstop service in
                    1988. The exception was New York where People Express ceased pro-
                    viding service after it was taken over by Texas Air. TWA reduced weekly
                    flights in these markets by almost 15 percent while all carriers reduced
                    flights about 11 percent. Some of TWA'S service reductions were offset by
                    the expanded operations of other airlines.

                    In 36 markets where either TWA or Ozark provided the only nonstop ser-
                    vice before the merger, TWA continued to serve all but two following the
                    merger. TWA provided a total of 850 nonstop flights each week in 1988,
                    while TWA and Ozark together provided 760 flights per week in 1986. In
                    addition, DOT found two markets that were no longer monopolized,
                    Phoenix and Cincinnati. Finally, in the 5 markets where either TWA or
                    Ozark competed with others before the merger, DOT reported that TWA
                    had increased nonstop service by 29 percent while the other carriers
                    serving these markets had reduced service by 19 percent.

                    The primary difference between DOT'S analysis of the merger impacts at
                    St. Louis and our study is that we did not report changes in the number
                    of flights. DOT recorded a 7 percent decline in nonstop departures
                    between 1986 and 1988. Although we did not present them in either our
                    testimony or our subsequent report, we did collect data on the number
                    of departures. Our data showed a 6 percent decline between 1985 and
                    1988. W ith respect to the merging carriers, Dm found that departures
                    declined 8 percent between 1986 and 1988. Our data show a 6 percent
                    decline over that period. However, TWA'S departures in 1988 were 19
                    percent higher than TWA and Ozark’s combined in 1985.


Study by Justice    The recent study by Justice Department staff also noted reductions in
                    the volume of competitive service at some of the concentrated airports.2
Depar tment Staff   The Justice study examined changes in the number of departures, avail-
                    able seats, and the number of cities receiving nonstop service out of two
                    airports where a merger eliminated a major competitor, St. Louis and
                    Minneapolis/St.Paul. Justice had opposed the TWA-Ozarkand the North-
                    west-Republic mergers, both of which eliminated a major competitor at
                    these airports. This study also examined Detroit, a hub airport for only
                    one of the merging partners, Republic.

                    The approach in our analysis of the available service data differs in
                    many ways from that of the Justice study. These differences largely

                    'Werden,Joskow,andJohmon.



                    Page 72                                  GAO/RCEJI-90-102 Fares and Service at Major Airports
                                          Chapter 5
                                          Changes in Air Passenger Service at 15
                                          Concentrated Airports




                                          Ozark combined before the merger. On the other hand, other carriers
                                          serving St. Louis reduced the number of points served directly from 83
                                          in 1986 to 66 in 1987. They also reduced by seven the number of places
                                          served nonstop. Our analysis also showed that there was a decline in
                                          competition on routes out of St. Louis. Table 5.6 provides DOT data on
                                          the competitive status of direct service routes out of St. Louis.

Table 5.6: Competition Among Carriers
Providing Direct Service From St.Louis                                                              Number of routes served
                                                                                                     June                Percentage
                                          Number of carriers                                1986              1987           change
                                          Four or more carriers                               15                   7             -53
                                          Three or more carriers                              30                 16              -47
                                          Two or more carriers                                64                 36              -44
                                          One carrier                                         60                 85                42
                                          Total routes with direct service                   124                121               -2


                                          The report prepared by DOT, at the request of the Ranking Minority
                                          Member of the Senate Committee on Commerce, Science, and Transpor-
                                          tation, reexamined the question of service changes at St. Louis. Rather
                                          than focus on the periods immediately preceding and following the
                                          merger, Dm compared service levels in June 1986 with those prevailing
                                          in June 1988. DOT also examined nonstop rather than direct service. DOT
                                          reported almost no change in the number of cities receiving nonstop jet
                                          service from St. Louis. Some cities lost nonstop jet service from St.
                                          Louis, but others were added. Table 5.7 summarizes D&S findings on
                                          service changes.

Table 5.7: Service Changes at St. Louis
for Large Jet Carriers (Domestic) June                                       Weekly departures                      Weekly seats
1986 vs. June 1988                                                                 June                                 June
                                          Carrier                               1986        1988                     1986        1988
                                          TWA/Ozark                              2541        2331                 347,160    316,886
                                          Other Carriers                          579         574                   68,690     69,852
                                          Total                                 3120        2905                  415,850    386,738


                                          According to DOT, some carriers, especially Southwest Airlines, increased
                                          service out of St. Louis since the merger. DOT also analyzed service
                                          changes using the same categories of market competition we devised to
                                          analyze fares. In the 18 markets where TWA and Ozark were the only
                                          carriers providing nonstop jet service before the merger, TWA reduced
                                          service in 16 markets and offered 26 percent fewer weekly flights in
                                          1988. In the 11 markets where TWA and Ozark competed along with


                                          Page 71                                  GAO/RCED90-102 Fares and Service at Major Airports
Conelusions


              There is general agreement that the increased competition spawned by
              deregulation has led to an overall reduction in real airline fares, that is,
              fares adjusted for inflation. However, it is also true that fares have
              fallen more in some markets than in others and, in some markets, fares
              probably are higher today than they would have been had the industry
              continued to be regulated.

              Under regulation, airline fares did not accurately reflect the differences
              in the costs of serving different markets. As a rule, passengers flying on
              heavily traveled, long-distance routes paid fares higher than those nec-
              essary to cover costs, and their fares subsidized passengers in lightly
              traveled, short-distance markets. Deregulation permitted the airlines to
              set fares without obtaining prior government approval and has allowed
              the airlines to rationalize the fare structure and make the pricing of air
              travel more economically efficient. Rationalizing air fares by eliminating
              or reducing the previous subsidies has meant that, in general, fares are
              now relatively higher in short distance markets than in long distance
              ones than they were under CABregulation.

              It is also true that airline fares are higher today in both real and nominal
              terms than they were in 1986, the peak of the recent wave of mergers
              involving some of the nation’s largest airlines. Many airline industry
              analysts believe that fares in 1986 were too low and were not consistent,
              in the long run, with a financially healthy industry. These analysts
              claim that fares had to rise if firms in the industry were to earn ade-
              quate rates of return. While air fares have risen since 1986, real fares
              are still well below 1979 levels.

              Thus, in some markets, higher fares might be consistent with improved
              economic efficiency, and higher fares industry-wide than those pre-
              vailing in 1986 may be necessary if carriers are going to earn sufficient
              revenues to buy new planes and provide investors an adequate return
              on their investments. Congressional concern over higher fares has cen-
              tered on fare increases that reflect growing market power, not with
              those that reflect cost differences.

              Our review focused on trends in fares and service at 15 airports around
              the nation dominated by one or two carriers. We found that the yields
              earned by the dominant airlines at these concentrated airports were con-
              sistently higher than yields at a comparison group of unconcentrated
              airports, and that at most of the concentrated airports the yields
              received by the dominant carriers were considerably higher than the
              yields earned by the other airlines serving those airports. According to


              Page 74                         GAO/RCED-90-102 Fares and Service at Major Airports
         .



                                        Chapter 6
                                        Changes in Air Passenger Service at 15
                                        Concentrated Airports




                                        relate to the different purposes of the studies. Nevertheless, despite the
                                        dissimilarities of purpose and approach, common threads link the con-
                                        clusions. Justice found a large increase in the number of cities receiving
                                        nonstop service from Minneapolis and a somewhat smaller increase out
                                        of Detroit following the Northwest-Republic merger. Justice found no
                                        increase at St. Louis while we recorded an increase. Table 5.8 shows our
                                        service data using nonstop, instead of direct operations.

Table 5.8: Number of Nonstop
Destinations From 15 Concentrated                                                                                      Percentage
Airports During Month of May 19851988                                                                                      change
                                        Concentrated     Airport                 1985   1988     1987     1988          1985-l 988
                                        Atlanta                                   118    115      117      114                  -3
                                        Nashville                                  28     48       52       49                   75
                                        Charlotte                                  61      64       69       76                  25
                                        Cincinnati                                 44      42       56       66                  50
                                        Dayton                                     37      42       40       40                   8
                                        Denver                                    102     105      108      108                    6
                                        Detroit                                    63      69       75       75                  19
                                        Greensboro                                 22      21       20       19                -14
                                        Memphis                                    61      69      82       83                   36
                                        Minneapolis                                71      79      89       90                   27
                                        Pittsburgh                                 88      91      92       96                    9
                                        Raleiah-Durham                             30      28      26       52                   73
                                        Salt Lake City                             49      55      63       64                   31
                                        St. Louis                                  87      91      99      100                   15
                                        Syracuse                                   25      24      28       29                   16
                                        Total                                     888     943    1016     1061                   20
                                        Percentage changes rounded to nearest whole numbers.

                                        Source: I.P. Sharp, Inc




                                        Page 73                                  GAO/RCED-!W102 Fares and Service at Major Airports
Chapter 6
Conclusions




Our analysis focuses on concentrated airports and how concentration in
certain markets might lead to higher fares and to the erosion of the ben-
efits of deregulation. In a related study, we are examining which
changes in airline operating and marketing practices have resulted in
barriers to entry and how such barriers might be reduced or eliminated.
We are concerned that, if airline markets become highly concentrated,
then the benefits of deregulation to the traveling public might be
reduced.

We do not believe that our results or the results of other studies show
that airline deregulation has failed. Although the analyses we reviewed
concur that fares are higher when there is less competition, the conclu-
sion we draw from these analyses is that competition must be strength-
ened and that barriers to successful competition be reduced. Thus, the
issue before the Congress should not be whether the airline industry
needs to be reregulated but rather what steps can be taken to revitalize
competition in markets where competition has been reduced.




Page 76                       GAO/RCED96-102 Fares and Service at Major Airports
Chapter 6
Conclusions




the most recent period for which data were available, the gap between
yields at concentrated and unconcentrated airports is widening. In addi-
tion, yields increased as concentration increased even at airports that
were already highly concentrated. Controlling for differences in average
length of haul at unconcentrated airports did not appreciably alter our
finding that yields were higher at concentrated airports.

The issue of airline dominance and higher fares has been addressed in
several other studies over the past 2 years. In some cases, these studies
were undertaken in response to our analyses and were designed to
counter our finding that fares are higher at concentrated airports. These
alternative analyses generally do not contradict our finding that fares
are higher at airports where one or two carriers handle most of the
enplaning passengers, and whatever differences exist between the
results reported by these other studies and our finding can usually be
traced to differences in the evaluative methodologies. Some of these
other studies attempt to attribute the fare difference to higher service
levels, but the one econometric analysis attempting to make this case
suffered from serious methodological problems and cannot be relied on
to dispute the hypothesis that fares are higher at concentrated airports
because of the market power of the dominant airlines.

W ith respect to service offerings, we found some increases in the
number of places served and in the number of daily flights, but in most
cases the increases were on the part of the dominant carrier, offset by
reduced offerings from nondominant carriers. In addition, many trav-
elers have less choice among airlines as more routes out of the concen-
trated airports are being served by only a single airline, usually the
dominant carrier.

Overall, deregulation has led to lower airline fares for most travelers,
and the establishment of hubs has allowed the airlines to realize impor-
tant operating efficiencies. While more passengers travel on competitive
routes than was the case prior to deregulation, growing concentration,
especially at hub airports, has led to fewer competitors on many routes.
Over the past few years, numerous mergers and bankruptcies have
reduced the number of airlines providing the vast majority of U.S. air
passenger service. The mergers and bankruptcies that led to increased
concentration cannot be easily undone. At the same time, changes in air-
line marketing and operating practices make it more difficult for new
airlines to enter the industry or for existing carriers to expand into mar-
kets where another carrier already dominates the traffic.



Page 75                        GAO/RCED90-102 Fares and Service at Major Airports
                                                                                                                                                                .
Appendix I

Trends in Fares at Each of the 15
ConcentratedAirports

Figure    1.1: Atlanta    (Hartsfield Atlanta InternatIonal Airport)

34      Average Yields (Cents per Mile)

32

30
                                                                                                                                                       ,,“‘-.
28                                                                                                                                               ***




 lQ65       2Q85       3Q05     4085        1086   26186   3086      4086    1087     2087    3Q87     4Q87     100%     MB8     3088     4Q8a          lQ89        2089
 First Quarter 1985 through    Second   Quarter 1989

         -         Texas Air
         m--m      Delta
         m         Other Airlines
         Mama      38 Comparison Airports

                                                           Note: Texas Air includes yield data for Eastern, Continental, and People Express.




                                                           Page 78                                    GAO/RCED-90-102 Fares and Service at Major Airports
.




    Page 77   GAO/RCEIMO-102 Fares and Service at   Mejor   Airports
                                                        Appendix I
                                                        Trends in Fares at Each of the 16
                                                        Concentrated Airports




Figure 1.3: Cincinnati        (Greater Cincinnati International Airport)
34      Average Yields (Cents per Mile)

32

39

28

26

24

22




 lQ89       2085       3085    4085       lQ86   2486    3QS6      4QR     lQ87   MB7       3Q87   4Q67    lQ98   M99     3Q88    4Qa8   lQ89    2Q99
 First Quarter 1985 through   Second Quarter 1989

        -          Delta
        -      Other Airlines
        00 8 m 38 ComparisonAh~~fts




                                                         Page 80                                   GAO/RCED-90402 Fares and Service at Major Airports
                                                       Appendix I
                                                       Trends in Fares at Each of the 16
                                                       Concentrated Airports




Figure 1.2: Charlotte (Charlotte/Douglas         International Airport)

34     Average Yields (Cents per Mile)

32

30

28

26

9A




IQ85       2Q85      3Q05     4085       lQ86   2Q86    3086     4488     1087   2067   3Q37    4087     lQ88     2Q88   3Q88   4Q88   lQ89   2Q89
First Quarter 1985 through Second Quarter 1999

       -          USAir Group
       m          Other Airlines
       WHM        38ComparisonAirports


                                                       Note: USAir Group indudes Piedmont and USAir yield data.




                                                       Page 79                                 GAO/RCEIMO-102 Fares and Service at Major Airports
                                                            Appendix I
                                                            Trends in Fares at Each of the 15
                                                            Concentrated Airports




Figure      1.5: Denver       (Stapleton International Airport)

30      Average Yields (Cents per Mile)

28

25

24

22

20

18
16




12

10




 lQ85          2465       3055     4085      lQ86   ZQ86     3086     4Q86    1087     MS7      3Q57     4487    lQ88     2Q88     3Q55     4QBB     lass   2Q89
 First Quarter 1985 through       Second Quarter 1989

        -             Texas Air
        -1-1          United
        m             Other Airlines
        q WHH         38ComparisonAirports

                                                            Note: Texas Air includes yield data for Continental, Eastern, Frontier, and People Express.




                                                            Page 82                                    GAO/RCED-90402 Fares and Service at Major Airporta
                                                          Appendix I
                                                          Trends in Fares at Each of the 16
                                                          Concentrated Airports




Figure     1.4: Dayton    (Dayton International Airport)
34      Average   Yields (Cents per Mile)

32

30

28

26

24

22

20

18

16                                                                                                                                          y-          -
                                                                                                                                    l a**
                                                                                              ,~~amammmmmm8mmmmmmmmmmm0



 IQ65       2Q85       3Q85      4Q85       lQ86    MB6    3Q86      4Q86   IQ07    2Q87      3Q87    4Q87   lQ88     x288   3Q88    4Q88        1089   2QB9
 First Quarter    1985 through   Second   Quarter 1989

        -          USAir Group
        m          Other Airlines
        nnnn       36ComparisonAirpwts


                                                           Note: USAir Group indudes Piedmont and USAir yield data.




                                                           Page 81                                   GAO/RCEKHO-102 Fares and Service at Mdor Airports
                                                            Appendix I
                                                            Trends in Fares at Each of      the 15
                                                            Concentrated Airports




Figure       1.7: Greensboro/High        Point/Winston-Salem          (Pfedmont   Triad International   Alrport)


34      Average Welds (Cants per Mile)

32

30

28

28

24

22

20

18
                                                                                                                                                        ++‘=.m.
16                                                                                                                                                 #*
                                                                                                                               -           ~,,r+                    I
                                                                                                     _laaaa*~““‘m'
                                                                                                                            l mmmmmmmammL'~


 1085          2Q85       3Q85    4085        lQ86   2Q86      3086     4Q88      1 Q87    MB7       3087     4Q87   lQ88    2Q88   3088    4088        lQ89      2Q89
 First Quarter 1985 through       Second Quarter 1989

        -             USAir Group
        m             Other Airlines
         n   mw n     38 ComparisonAirports


                                                            Note: USAir Group includes Piedmont and USAir yield data.




                                                            Page 84                                         GAO/RCED-SO-102Fares and Service at Major Airports
                                                         Appendix I
                                                         Trends in Fares at Each of the 16
                                                         Concentrated Airports




Figure 1.6: Detroit (Detroit Metropolitan         Wayne County Airport)


32     Average Yields (Cents   per Mile)
30

28

28

24

22

20

18

16

14

12




lQ85       2Q85       3Q85     4085        lQ88   2Q88   3086      4Q86    lQ87     2Q87     3Q87    4487     lQ88     2Q86     3Q88    4Q88     lQ69     2Q89
 First Quarter 1985 through    Second   Quarter 1989

       -          Northwest (& Republic)
       I          Other Airlines
       n m8 n     38 Comparison Airports


                                                         Note: Northwest includes both Northwest and Republic yield data prior to their merger in late 1986.




                                                         Page 83                                    GAO/RCED-90-102 Fares and Service at Major Airports
                                                          Appendix I
                                                          Trends in Fares at Each of the 16
                                                          Concentrated Airports




Figure 1.9: Minneapolis/St.           Paul (Minneapolis/St.     Paul International    Airport)


30      Average   Yields (Centsper Mile)
28
26

24

22

20
18

16
14

12

10




lQ8!5       MB5       3485     4G85        1486   2Q89        3886    4486     lQ87       2Q87   3m7    4087    lQ88   2Qa8     3Q88     a68      lQ69    2Q89
First Quarter 1985 through    Second Quarter 1989

        -         Northwest (& Republic)
        m         Other Airlines
        n mam     38CompatisonAirporte


                                                          Note: Northwest indudes both Northwest and Republic yield data prior to their merger in late 1996.




                                                          Page 86                                      GAO/ICED-90-102 Fares and Service at Major Airporta
           .
                                                            Appendix I
                                                            Trends in Fares at Each of the 16
                                                            Concentrated Airports




Figure 1.8: Memphis              (Memphis International Airport)

34     Average       Yields (Cfmts per Mile)

32

30

20

29

24

22
20
18

16




ma!5           2cw        3Q85      4485       lQ86   M86    3Q86     4Q89    lQ87     2487     3Q87    4Q87     lQ88     2488     3088     4Q88     lQ89    2Q89
First Quarter        1985 through   Second Quarter 1969

       -       Northwest (a Republic)
       m       Other Airlines
       n m W m 38CcmparisonAirports


                                                            Note: Northwest includes both Northwest and Republic yield data prior to their merger in late 1986.




                                                            Page 86                                    GAO/RCELNO-102 Fares and Service at Major Airports
                                                          Appendix I
                                                          Trends in Fares at Each of the 16
                                                          Concentrated Airports




Figure 1.10: Nashville (Nashville Metropolitan Airport)

34     Avenge   Yields (Cents per Mile)

32

30

28

25

24

22

20

18
16                                                                                                                                      4   +,@mmm&r
14   l -.....                                                                                        ,mmmmmmmmmmmmmmmmmmmmmm*
                       •m--8~8mmmmm                                                           ,8a*
12                                                l mmmmmmmmmmmmmmmmmmmmmmmmmm8
1085       2085       3Q85         4Q8!5   IQ86    2Q85    3Q86     4486   IQ87    2Q87       3QB7    4Q87   lQ88    2488    3888   4Q58     IQ89      2Qs9
First Quarter   1985 through   Second Quarter 1969

       -          American
       m          Other Airlines
       ¤mm~ 38 ComparisonAirports




                                                          Page 87                                    GA0/BcED-9o-102 Fares and Service at Major Airports
                                                          Appendix I
                                                          Trends in Fares at Each of the 15
                                                          Concentrated Airports




Figure 1.11: Pittsburgh          (Greater Pittsburgh International Airport)

32      Average    Yields (Cants par Mile)

30

26

26

24

22

20

16

16

14

12

10


 IQ65       2085        3Q55      4485       1Q95   M86   3086      4086      IQ57   2087   3Q57    4457    IQ55     2Q88   3Q55   4Q55   1089   2Q59
First Quarter 1965through Second         Quarter 1989

        -          USAir Group
        -          Other Airlines
        mn n n     38 ComparisonAirports



                                                          Note: USAir Group indudes Piedmont and USAir yield data.




                                                          Page 88                                  GAO/RCED-W-102 Fares and Service at Major Airports
                                                            Appendix I
                                                            Trends in Fares at Each of the 15
                                                            Concentrated Airports




Figure 1.12: Raleigh-Durham               (Raleigh-Durham Airport)


30      Average   Yields (Cents   per Mile)

25

25

24

22

20

18




 5


 1055       2Q55       3Q55       4Q55        IQ55   2Q55   3Q56      #a5   1087    Ma7     3Q57   4Q57    lQ55    2Q55    3Q55    4Q55    IQ59    2Q59
First Quarter 1985 through        Second Quarter 1959

        -          American
        m          Other Airlines
        n n n n    38ComparisonAirports




                                                            Page 89                                GAO/RCED-90-102 Fares and !&xv-ice at Major Airports
                                                           Appendix I
                                                           Trends in Fares at Each of the 16
                                                           Concentrated Airports




Figure 1.13: St. Louis (Lambert-St.           Louis International   Airport)


32     Average Yields (Cants pftr Mile)

30

25

25

24

22
20
18

16

14

12

10


lQ85       2Q55       3Q55      4Q55       IQ55    M55      3Q55      4QS5     lQ57    2Q57     3Q57     4Q57     IQ55     2Q55     3088     4Q55      IQ59   2089
Fiat   Quarter   1985 through   Second Quarter 1959

       -          T W A (&Ozark)
       m          Other Airlines
       n n nn     38 Comparison Airports


                                                            Note: T W A includes both T W A and Ozark yield data prior to their merger in late 1986.




                                                            Page 90                                     GAO/RCED-!W-102 Fares and Service at Major Airports
                                                       Appendix I
                                                       Trends in Fares at Each of the 16
                                                       Concentrated Airports




Figure 1.14: Salt Lake City (Salt Lake City International Airport)

30   Average Yields (Cents per Mile)

25

25

24

22

20

18

16

14

12

10

 5


lQB5     Ma5       2Q65      4Q85       IQ55    2Q55   3Q56      4Q55     IQ57        2Q57       3Q97       4Q57       1488     2Q55     3ce5     4Q58      IQ59   2Q59
First Quarter 1955 through   Second   Quarter 1959

     -         Delta (& Western)
     -         Other Airlines
     mm88      38 Compsrison Airports


                                                       Note: Delta includes   both   Delta and   Western     yield   data prior to their merger in early 1987.




                                                       Page 91                                             GAO/RCFD9@1O2 Fares and Service at Major Airports
                                                       Appendix I
                                                       Trends in Fares at Each of the 16
                                                       Concentrated Airports




Figure 1.15: Syracuse        (Hancock International Airport)

b2      Average Yields (Cents per Mile)

30

28

26

24

22

20

18

16

14

12

10


lQ9!5       2Q85     3096     4(185       lQ99   M96   9Q96      4086   lQ97     zQ97    3Q87     4087    lQ99     2Q99    cm99   4088   1489   2Q99
First Quarter 1995 through    Second Quarter 1999

        -       USAir Group
        m       Other Airlines
        n w m m 38 Comparison Airports


                                                       Note: USAir Group includes yield data for Piedmont, USAir, and Empire.




                                                       Page 92                                  GAO/R(ZEIMO-102 Fares and Service at Major Airporta
                                                        Appendix I
                                                        Trends in Fares at Each of the 15
                                                        Concentrated Airports




Figure 1.16: Average Yield for the 15 Concentrated             Airports

34     Average Yields (Cents per Mile)

32

30

28

29

24




lQ85       2Q85     3Q85      4QB5       lQ86    2Q86   3QB6      4086    lQB7   2487       3087    4Q87   lQ89   2QM    3Q98    4Q88     1089    MB9
 First Quarter 1985 through   Second   Quarter 1989

       -       15 Concentrated Airports
       W m m m 38CompariwnAirprts




                                                        Page 93                                    GAO/WED-~102    Fares and Service at Major Airports
Appendix II

Policy Options Discussedin GAO Testimony on
Barriers to Competition in the Airline Industry

                We discussed policy options in our testimony before the Subcommittee
                on Aviation, Senate Committee on Commerce, Science, and Transporta-
                tion, on September 20, 1989. The discussion of policy options is
                reorinted below. The full written statement, Barriers to Comnetition in
                the Airline Industry (GAO/T-RCED-8%65), can be obtained at the address
                printed on the inside of the back cover of this report.

                The data we have gathered on potential barriers to entry in the airline industry indi-
                cate that some features of airline markets are likely to discourage entry. Slot con-
                trols, gate leases, and, at a few airports, noise restrictions are likely to restrict
                access to the essential facilities needed to establish competing service. While we do
                not have definite estimates yet from our econometric model of the impacts of these
                restrictions, we believe they are likely to restrict entry and inhibit competition.

                The effects of some of the airline marketing strategies are less clear. CRSs, as we
                indicated in our testimony last year, appear to have a clear anticompetitive effect,
                and we have urged DOT to consider possible remedies. Frequent flyer plans appear
                to present a clear potential for disadvantaging entrants. However, because of the
                lack of data on levels of use of these plans, it may not be possible even with the
                results of our econometric model to estimate these plans’ effects. TACOS appear to
                offer a less compelling basis for disadvantaging entrants. We do have some data on
                TACOS, however, that may be able to show their effect on fares. Code-sharing may
                have some anticompetitive effects, but also appears to offer some consumer advan-
                tages that may offset these effects.

                We recognize that the Committee is considering taking action to minimize the possible
                anticompetitive effects of the practices we have discussed. During the course of our
                work, we have identified various policy options. Though not an exhaustive list, our
                preliminary evaluation suggests that they can provide a framework for analysis and
                deliberation. All of these options involve important policy considerations and require
                a careful weighing of costs and benefits and an assessment of trade-offs.

                Airport facilities are essentially local responsibilities, yet most operate under federal
Gate Access     restrictions imposed by the Airport and Airway Improvement Act of 1982. This act
                requires that airports receiving federal grants be public use facilities, available for all to
                use on an equal basis. One policy option would be to extend additional federal restrictions
                on new leases so as to reduce the long-term control that leasing airlines acquire over the
                airport’s facilities. Airlines need some assurance of accessto an airport’s gates to justify
                their investment in providing service. However, it might be possible to provide this assur-
                ance without giving the airline the broad control over a gate that an exclusive-use lease
                provides. A preferential-use gate, for example, gives the leasing airline access to the gate
                whenever it needs it, while still making the gate available to others when it is unused.
                Several airports have acted to regain control over their facilities, either by requiring
                short-term or preferential leases or, as Omaha and Grand Rapids have done, by not
                renewing majority-in-interest clauses.

                Another policy option would be to reduce the federal restrictions that make the air-
                ports dependent on the airlines as a source of revenue. The Airport Development



                Page 94                                GAO/RCED-90-102 Fares and Service at Major Airports
                     Appendix II
                     Policy Options Discussed in GAO Testimony
                     on Barriers to Competition in the
                     Airline Industry




                     Acceleration Act of 1973, for example, prohibits the airports from imposing any
                     direct passenger facility charges on the passengers using the airport. The airports
                     argue that this act, by preventing the airports from charging the passengers
                     directly, forces them to rely on the airlines as a source of revenue, thus giving the
                     airlines more bargaining power in lease negotiations. Airlines believe that it is
                     appropriate for them to control airport expansion, and also have been concerned
                     that municipal authorities would use revenues from passenger facility charges for
                     non-airline purposes. However, the 1982 Airport and Airway Improvement Act
                     requires airport operators to provide the Secretary of Transportation with assur-
                     ances that all local revenues will be expended for airport purposes as a precondition
                     for obtaining federal airport grants. Passenger facility charges could help solve the
                     funding problems that have prevented airport expansion and reduce the airports’
                     need to seek majority-in-interest clauses.


                     A small number of airports have particularly stringent noise restrictions that, while not
Noise Restrictions   imposed by airlines, can be a substantial entry barrier. While all parties agree on the
                     desirability of reducing airport noise, they disagree on the questions of the pace and
                     strategy for doing so. These contentious issues have often set local and national interests
                     at odds, and it is not clear how far federal efforts to impose national noise policies should
                     go. Some airports (such as Boston and Denver) have adopted noise rules that have
                     waivers to easeentry while still achieving the desired level of noise reduction. Further
                     exploration of noise control strategies might identify other approaches that would allow
                     airports to control noise while mlnimlzing adverse impacts on competition.


                     In our view, the buy/sell rule for airport slots has been ineffective at encouraging entry
Slot Restrictions    into slot-controlled markets. Our analysis of FAA’s data indicates that no new entrants
                     have been able to establish service by buying slots; that the number of slots sold has
                     steadily declined; and that the slot market is increasingly becoming a short-term leasing
                     market, ln which major carriers that have accumulated excess slots lease out rather than
                     sell the ones they do not need. The leasing market, while permitted in FAA’s original
                     formulation of the market, appears to have been considered the exception. It is now the
                     exception that is becoming the rule. Several outside studies have found that the presence
                     of slot controls increases airline fares significantly.’

                     By allowing a public right-the right to use the nation’s airspace-to be treated in
                     some respects as a private asset that is not generally available on the open market,
                     the present operation of the buy/sell rule not only restricts competition at the four
                     slot-controlled airports, but can impede competition throughout the northeastern
                     and midwestern United States. These airports are a critical part of any air traffic


                     ‘See, for example, David R. Graham, Daniel P. Kaplan, and David S. Sibley, “Efficiency and Competi-
                     tion in the Airline Industry,” Bell Journal of Economics,vol. 14, No. 1 (Spring 1983), pp. 135-136;
                     Elizabeth E. Bailey, David R. Graham, and Camel P. Kaplan, Deregulating the Airlines (Cambridge:
                     MIT Press, 1985); Gregory D. Call and Theodore E. Keeler, “Airline Heregulation, k’ares and Market
                     Behavior: Some EmpiricalEvidence,”in Andrew F. Daughety(ed.),Analytical Studies in Transport
                     Economics (Cambridge: Cambridge University Press, 1985), pp. 221-247; and Stephen A. Mornson
                     YUZXfZd Winston, %npirical Implications and Tests of the Contestability Hypothesis,” Journal of
                     zw and Economics,vol. 30 (April 1987), pp. 61-62.



                     Page 95                                  GAO/‘RCED-90-102Fares and Service at Major Airports
                           Appendix Jl
                           Policy Options Discussed in GAO Testimony
                           on Barriers to Competition in the
                           Airline Industry




                           network in the northeastern or midwestern parts of the United States. It is difficult
                           for any carrier to become an effective competitor in these heavily populated parts
                           of the country without access to these four airports. The short-run access to slots
                           that leasing permits is a risky basis on which to invest in a long-term service com-
                           mitment (e.g., by leasing gates and investing in advertising).

                           We believe that something should be done to open up the slot market so that perma-
                           nent entry becomes easier at slot-controlled airports. We are particularly concerned
                           about proposals to extend slot restrictions as currently structured to other con-
                           gested airports. One solution to this problem would be for the FAA to lease slots to
                           the airlines rather than allow them to retain the control of slots that were given to
                           them for nothing. Leasing would have the advantage both of generating revenue for
                           the federal government and of opening up the slot market to new entrants. It would
                           be essential, in establishing such a market, to recognize that airlines need to have
                           assured access to slots for a long enough period to make reasonable investments in
                           serving routes from that airport. It would be equally important, however, to ensure
                           that the leases ran for a limited period of time so as to prevent the slots from
                           becoming the de facto property of the leasing airlines (as gates have become at air-
                           ports that have long-term gate leases). Lease terms could be staggered so that leases
                           would be long enough to assure continuity of service while ensuring that some
                           leases would come up for renewal each year, giving entrants an opportunity each
                           year to bid on airport capacity.

                           An alternative would be for DOT, under the provisions of the current buy/sell rule,
                           periodically to withdraw a portion of the slots and reallocate them by lottery.
                           Incumbent carriers would have the opportunity to buy the slots back from the win-
                           ners of the lottery, but at least new entrants would have an opportunity to secure
                           slots, either through the lottery itself, or by bidding on slots sold by lottery winners,


                           In our testimony last year on CRSs,we discussed a number of policy options, ranging
Computerized Reservation   from divestiture of airline-owned CRSsto non-airline owners to modifications in vendor
Systems                    contracts with travel agents. We continue to believe that further action is warranted to
                           remedy the anticompetitive features of the CRSindustry. As we emphasized in our earlier
                           testimony, action in one area, such as reducing or eliminating booking fees, could create
                           problems in another area, such as increases in CRSsubscription fees to travel agents.
                           Consequently, travel agents’bargaining power with CRSvendors would have to be
                           increased by modifying restrictive contract provisions, e.g., length of contract terms and
                           minimum use clauses. While DOTis making further investigations into the competitive
                           impact of CRSs,it has not acted to open any regulatory proceedings, as we recommended
                           it do last fall. It is especially important that DCJl’
                                                                                begin to act since its CRSrules will
                           sunset at the end of 1990.


                           The three other airline marketing practices that we have discussed-frequent flyer plans,
Other Airline Marketing    TACOS,and code-sharing-have effects that are more difficult to measure. Frequent flyer
Practices                  plans have proven to be extremely popular promotional tools, but they have the potential
                           to reduce competition in markets where a single carrier has a dominant market share.
                           Frequent flyer plans offer a literal free ride to their participants, but these free trips are



                           Page 96                                GAO/RCED-90-102 Fares and Service at Major Airports
Appendix II
Policy Options Discussed in GAO Testimony
on Barriers to Competition in the
Airline Industry




paid for in the form of higher fares for the average traveler and possibly also in the form
of excessive business travel. DOT,in its Information Directive of June 14, 1989, has
requested information on frequent flyer plans which may help to resolve the question of
their impact on competition. Travel agent commission overrides, overbooking privileges,
and other volume incentives clearly have some effect on the pattern of airline bookings.
They increase the cost of marketing tickets and thus may pose an entry barrier to
entrants with less accessto capital than established airlines have. Code-sharing agree-
ments offer some advantages to airline passengers,while also probably having some
anticompetitive effects.

All these practices are subject to regulation by DOT under its authority to regulate
anticompetitive practices in the airline industry. Should anticompetitive effects of
these practices be demonstrated, they could be either prohibited or modified in some
way so as to reduce any anticompetitive impact. The popularity of frequent flyer
plans may make action to reduce their anticompetitive effect unpalatable. For
example, one modification short of outright prohibition would be to require that
mileage be transferable from one plan to another or from one passenger to another.
While this would reduce the potential anticompetitive effects because passengers
could earn valuable miles on any airline, such a requirement could make the plans so
unattractive to the airlines that they would withdraw them.

If TACOSwere prohibited, airlines might well resort to other kinds of volume incen-
tives. If code-sharing agreements were prohibited, airlines would probably just buy
out their code-sharing partners or develop commuter subsidiaries internally, as sev-
eral airlines have already done. An important part of the success of code-sharing
has been the preference that code-shared flights are allowed in CRSs, where code-
shared flights are generally listed ahead of interline flights. It would be possible to
prohibit CRSs from listing code-shared and on-line connections ahead of interline
connections, as the European CRS rules propose, but this would make it more diffi-
cult for travel agents to find code-shared flights for passengers who prefer code-
shared connections.




Page 97                                GAO/RCED-99-102 Fares and Service at Major Airports
Appendix III

Major Contributors to This Report


                        James D. Noel, Assistant Director
Resources,              Francis P. Mulvey, Assistant Director
Community, and          Kim F. Coffman, Evaluator-in-Charge
                        Thomas F. Noone, Senior Systems Analyst
Economic                Sandra J. Weiss, Senior Social Science Analyst
Development Division,   John C. Johnson, Staff Evaluator
Washington, D.C.




 (340595)                Page 98                        GAO/RCEDBO-102   Fares and Service at Major Airporta