All~lISI l!t!)o AIRLINE COMPETITION Industry Operating and Marketing Practices Limit Market Entry -- ~~Ao//I~(::I’:I~-~o-lri7 ---- “._ - . -...- ......_ __ _ ..”._._._.__ _ .““..ll.l~,,l__,*” _~”_.-. Resources, Community, and Economic Development Division B-236341 August 29,lQQO The Honorable John C. Danforth Ranking Minority Member, Committee on Commerce, Science, and Transportation United States Senate The Honorable Jack Brooks Chairman, Committee on the Judiciary House of Representatives In response your requests, this report provides information on how various airline industry operating and marketing practices limit entry into the deregulated airline industry and how they affect competition in that industry. Specifically, we identified two major types of . barriers. The first type is created by the unavailability of the airport facilities and operating rights an airline must have in order to begin or expand service at an airport. The second type is created by airline marketing practices that have come into widespread use since deregulation. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of the Department of Transportation; the Administrator, Federal Aviation Administration; and interested congressional committees. We will also make copies available to others upon request. If you have any questions about this report, please contact me at (202) 276-1000. Major contributors to this report are listed in appendix XIII. Kenneth M. Mead Director, Transportation Issues . , Executive Summary When the Congress passed the Airline Deregulation Act in 1978, it Purpose sought to foster competition so as to promote lower fares and good ser- vice. However, rising fares and a wave of mergers and bankruptcies have raised concerns that conditions in the industry are less conducive to competition than expected in 1978. The Ranking Minority Member of the Senate Committee on Commerce, Science, and Transportation and the Chairman of the House Committee on the Judiciary asked GAO to identify what changes had occurred in the airline industry and whether they can result in barriers to entry that reduce competition by making it more difficult for new airlines to begin service or existing airlines to serve new markets. This report provides information on how these barriers to entry work to limit competition. It is one of a series of GAO reviews on competition in the nation’s airline industry and complements our recent report Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/ RCED-90-102,July 11, 1990). The Civil Aeronautics Board (CAB) had regulated the airline industry Background since 1938, controlling what routes airlines could fly and what fares they could charge. When the Congress passed the Airline Deregulation Act in 1978, proponents of the act believed that regulation kept new carriers out of the market and discouraged competition. They thought that eliminating controls on fares and entry would allow new airlines to start service and existing airlines to enter new markets, that vigorous competition would result, and that consumers would benefit through lower air fares and better service. In the first few years after deregula- tion, new airlines did begin service, existing airlines entered new mar- kets, and consumers benefitted. However, most new entrants eventually went bankrupt or merged with the established airlines and many of the nation’s major airports became dominated by one or two airlines. To inaugurate service in a new market, an airline must have access to essential airport facilities, including gates, ticket counters, and baggage facilities. In addition to gaining access to the airport, a potential compet- itor must be able to attract passengers, generally by marketing its ser- vices through travel agents. To assess how easily airlines could get access to airports and attract passengers, GAO .conducted two surveys. Specifically, GAO surveyed 183 of the nation’s airports and 520 travel agents to build an understanding of the difficulties that new or existing airlines have in gaining access to airports and capturing traffic in new markets. Page 2 GAO/RCED-20-147 Airline Operating 8 Marketing Practices Executive Summary Both airport access and airline marketing barriers to entry have grown Results in Brief in recent years in ways not anticipated when the industry was deregu- lated. Airlines face several physical constraints in getting access to air- ports, including slots, gates, and noise restrictions. . Department of Transportation (bar) rules prevent potential entrants from starting service at four major congested airports-Washington National, New York Kennedy and LaGuardia, and Chicago O’Hare- unless they can secure operating authority (known as “slots”) for each take-off and landing. DOTissued a buy/sell rule for slots in 1985 which has virtually ended new entry at the four slot-controlled airports. Since access to these airports is important in developing a competitive route network, slot controls discourage entry into a wide range of markets in addition to those starting or ending at one of the four airports. . GAO'S airport survey revealed that gates and other essential airport facilities for entrants at most of the nation’s largest airports are limited by long-term exclusive-use leases. . Some airports, in order to protect people living nearby from airport noise, restrict the number of operations and/or the types of aircraft air- lines can use to serve the airports. As yet, these restrictions affect com- petition at relatively few airports. Even if airport access is not a problem, airlines might choose not to offer new service because marketing strategies of incumbent airlines inhibit non-incumbents from capturing traffic. For example, frequent flyer plans increase the loyalty of business passengers to the dominant airline at an airport, thus foreclosing much of the business passenger market from new airlines. Computerized reservation systems (CR%) channel traffic from entrants to the airlines that own CRSS.Bonus commissions paid to travel agents also raise the costs of attracting traffic, while agreements between jet airlines and commuter airlines to integrate ser- vice for connecting passengers (called code-sharing agreements) fore- close connecting traffic from non-code-sharing airlines. Barriers to entry pose a problem for the future of competition in the airline industry, but the appropriate policy response is not clear-cut. Some industry practices such as code-sharing that discourage entry also have benefits for consumers. While expansion of airport capacity would be useful in easing access to some airports, its effects might come too late to preserve the benefits of competition. Ongoing GAO work focuses on how to reach solutions that preserve the benefits of competition while simultaneously preserving the benefits from some of the airline Page 3 GAO/WED-90-147 Airline Operating & Marketing Practices Executive Summary operating and marketing strategies that threaten to undermine competition. GAO found that two major categories of barriers to entry have grown in GAO’s Analysis recent years in ways not anticipated when the industry was deregu- lated: (1) physical barriers which restrict access to airports and (2) mar- keting strategies that restrict airlines’ ability to attract traffic. Physical Entry Barriers GAO found that several physical entry barriers have tightened access to airports since deregulation. For example, DOT’S1985 buy/sell rule has not allowed new entry at the four slot-controlled airports. GAO'S analysis of FAA data shows that, between December 1985 and December 1988, the eight major airlines increased their control of slots from 70 percent to 96 percent. When slots are not used, the major airlines usually lease them for short time periods rather than sell them to other carriers. Leasing allows the airline to retain control and prevents the lessee from having reliable long-term access. GAO found that slot sales fell from about half of all slot transactions in 1986 to about 10 percent in 1988. (See ch. 2.) Most of the gates at the nation’s largest airports are under long-term exclusive-use leases to the major airlines, according to GAO'S airport survey. Furthermore, the eight major airlines control virtually all of the subleased gates, and thus can often set the terms of access to the air- port. (See ch. 3.) GAO'S survey showed that not only is existing airport capacity controlled by the major airlines, but these airlines also have a major voice in any capacity expansion. For example, more than 78 per- cent of the airports that are dominated by one or two airlines report having agreements with these airlines that could limit or delay expanding the facilities to accommodate new entrants. (See ch. 4.) GAO'S survey showed that 22 airports of the 183 in our survey have noise restrictions that could affect competition. These airports restrict the use of older, noisier aircraft in order to mitigate the burden of noise on the airport’s neighbors. Restricting the use of older aircraft raises the cost of entry for airlines, since it is these older aircraft that are most readily available for purchase or lease. (See ch. 5.) Page 4 GAO/RCED-90-147 Airline Operating & Marketing Practices Executive Summary Airline Marketing GAO also found that some of the new marketing strategies airlines have Strategies developed since deregulation enhance the position of the dominant air- line in a market and limit the available market for new competitors, (See ch. 6.) GAO'S analysis showed that: . Frequent flyer plans foreclose much of the business travel market to entrants, because they encourage passengers to fly on the dominant air- line. About 75 percent of the travel agents GAO spoke with said that their business travel customers choose to fly a particular airline more than half the time because of membership in its frequent flyer program. l Airline-owned CRSSincrease the efficiency of marketing airline tickets, but also raise costs for potential entrants. The nation’s two largest air- lines also own the two CRSSused by 75 percent of the nation’s travel agents. Travel agents tend to prefer the airline whose CRSthey use, which limits the available market for the new entrant. . Travel agents told GAO that travelers often let the agent select the airline for them. The agent’s choice, however, may be influenced by bonus com- missions and other volume incentives paid by airlines. While entrant air- lines can pay bonus commissions as well, these bonuses increase marketing costs and may discourage new entry. l Code-sharing agreements between jet airlines and commuter airlines allow for more convenient connecting flights, but they may also work to eliminate potential competitors by foreclosing connecting traffic from new airlines that do not have such agreements. In testimony before the Congress, GAO outlined the pros and cons of Recommendations options to promote airline competition. (See app. XII.) GAO'S ongoing work will estimate the effects of these entry barriers on fares and give the Congress a clearer sense of which barriers merit immediate atten- tion. A report synthesizing GAO'S work on airline competition, including appropriate recommendations, is planned for issuance early next year. GAO is not making any recommendations in this report. As agreed with your offices, GAO did not obtain agency comments on a Agency Comments draft of this report. However, GAO shared the results with agency offi- cials, and a recent nor report on the airline industry examined many of the same airport conditions and marketing practices as did this report. Page 5 GAO/RCED-90-147 Airline Operating & Marketing Practices , Contents Executive Summary 2 Chapter 1 10 Introduction Deregulation Has Changed the Way Airlines Operate 11 Objectives, Scope, and Methodology 16 Chapter 2 20 The Major Airlines’ Slot Controls Limit Entry 21 Major Airlines Have Used the Buy/Sell Rule to Strengthen 25 Control of Slots Deters Their Control of Slots Entry at Four Key DOT Task Force Findings 31 Airports Conclusions 31 Chapter 3 32 SomeLeasing Background 32 Most Airport Gates Are on Long-Term, Exclusive-Use 33 Practices Limit Access Leases to Airport Physical Most Gates Are Leased and Used by the Major Airlines 36 Facilities - Airport Facilities Other Than Gates Are Often Leased for 39 Exclusive Use Exclusively Leased Facilities May Represent a Barrier to 40 Entry Airlines Cite Lack of Competitive Access to Facilities as 42 an Entry Barrier DOl’ Task Force Findings 42 Conclusions 42 Chapter 4 Many Airports Face Many Airports Plan to Add No More Than Five Gates 44 Most Airports Have Access to Land for Expansion 44 Barriers to Expansion Various Other Factors Limit Airport Expansion 45 DOT Task Force Findings 53 Conclusions 54 Page 0 GAO/RCED-SO-147 Airline Operating 8r Marketing Practices Content9 Chapter 5 55 Few Airport Noise Airports Use Three Primary Types of Noise Control 55 Programs Control Programs Airports’ Limitations on Noisier Aircraft May Limit Entry 56 Represent a Barrier to DOT Task Force Findings 59 Conclusions 60 Chapter 6 61 SomeAirline Heavy Use of Frequent Flyer Plans Creates a Serious Barrier to Entry 61 Marketing Strategies Control of CRSs by Dominant Airlines Creates Additional 63 Limit Entry Barriers for Entrants Volume Incentives May Increase Marketing Costs for 64 Entrants and Influence Booking Patterns Anticompetitive Effects of Code-Sharing May Be Offset 66 by Benefits to Consumers DOI’ Task Force Findings 68 Conclusions 69 Appendixes Appendix I: Net Air Carrier Slots Leased and Sold by 70 Airline Type at Each of the Slot-Controlled Airports, April 1986 Through September 1988 Appendix II: Distribution of Air Carrier Slots Leased by 72 Length of Leases, April 1986 Through September 1988 Appendix III: Distribution of Domestic Slot Holdings 73 Between Related and Unrelated Airlines, by Airline Type, December 1985 Through December 1988 Appendix IV: Domestic Gates Leased at the 66 Large and 74 Medium-Sized Airports, by Airline and Airline Type Appendix V: Gate Use at Large and Medium-Sized 75 Airports, by Airline Type Appendix VI: Exclusive-Use Leasing of Facilities Other 76 Than Gates Appendix VII: Various Factors That Could Affect Airport 79 Expansion in the Next 5 Years Appendix VIII: Airports Reporting Stage II and Stage III 80 Aircraft Restrictions to Control Noise in Effect as of March 1988 Appendix IX: Airports Responding to the GAO Airport 82 Survey Page 7 GAO/RCED-W-147 Airline Operating % Marketing Practicea Appendix X: GAO Airport Survey Responses 86 Appendix XI: GAO Travel Agent Survey Responses 105 Appendix XII: Excerpts on Policy Options From GAO 122 Testimony on Barriers to Competition in the Airline Industry Appendix XIII: Major Contributors to This Report 128 Tables Table 2.1: Distribution of Domestic Air Carrier Slots 23 Before and After New Entrant Lottery Drawings Table 2.2: Net Air Carrier Slots Bought (Sold) by Airline 27 Type and Airport, April 1986 Through September 1988 Table 2.3: Air Carrier Slots Sold to Related and Unrelated 29 Carriers, April 1986 Through September 1988 Table 2.4: Air Carrier Slots Leased Between Related and 29 Unrelated Carriers, April 1986 Through September 1988 Table 3.1: Total Domestic Gates and Leased Gates by 33 Airport Type and Lease Type Table 3.2: Airports’ Leasing of Gates, by Lease Type and 34 Airport Type Table 3.3: Leased Gates, by Time Remaining Until Lease 35 Expiration Table 3.4: Gate Subleases From Major Airlines to Other 38 Airlines Table 4.1: Large and Medium-Sized Airports Where 49 Majority-in-Interest Limits or Delays Expansion Table 6.1: How Often Travel Agents Reported That 62 Business Clients Choose Flights to Build Up Frequent Flyer Miles Table 6.2: Customer Preference for Code-Shared and 68 Interline Flights, as Reported by Travel Agents Surveyed Table I. 1: Net Equivalent Air Carrier Slots Leased by 70 Airline Type, April 1986 Through September 1988 Table 1.2: Net Air Carrier Slots Sold by Airline Type, 71 April 1986 Through September 1988 Table VI. 1: Large and Medium-Sized Airports’ Exclusive- 76 Use Leasing of Facilities Other Than Gates Table VI.2: Small Airports’ Exclusive-Use Leasing of 77 Facilities Other Than Gates Page 8 GAO/RCED-90-147 Airline Operating Br Marketing Practices Contents Table VI.3: Exclusive-Use Leasing of Facilities Other 77 Than Gates, by Type of Airline Table XI, 1: Point Estimates and Sampling Errors for 123 Selected Data From the Travel Agent Survey Figures Figure 2.1: Results of the New Entrant Slot Lottery 24 Figure 2.2: Sales and Leases of Air Carrier Slots, April 26 1986 Through September 1988 Figure 4.1: Availability of Land for Airport Expansion 45 Figure 4.2: Percentage of Airports With a Majority-in- 51 Interest Agreement Where One Airline Can Block Expansion Figure 4.3: Percentage of Airports Where One or More 53 Factors Could Greatly Limit or Delay Expansion Abbreviations CAB Civil Aeronautics Board CRS computerized reservation system LKJr Department of Transportation FAA Federal Aviation Administration GAO General Accounting Office MI1 majority-in-interest agreements RCED Resources, Community, and Economic Development Division TACO travel agent commission override Page 9 GAO/RCED-90-147 Airline Operating % Marketing Practices Chapter 1 I Introduction When the Congress passed the Airline Deregulation Act of 1978, one of its policy objectives was to foster competition in the airline industry. The law led to the elimination of federal government regulation of air fares and routes. Proponents of the act believed that allowing the air- lines freedom to enter and exit markets and adjust fares without lengthy regulatory approval would benefit consumers through the increased efficiency that greater competition would bring to the industry. As a result, in listing the various criteria which the Civil Aeronautics Board (CAB)should consider in the public interest, the act included “maximum reliance on competitive market forces and on actual and potential com- petition” and “[tlhe encouragement of entry . . . by new air carriers, the encouragement of entry into new markets by existing air carriers, and the continued strengthening of small air carriers so as to assure a more effective, competitive airline industry.“’ Deregulation’s supporters believed that if airlines had the freedom to enter and leave markets at will, the discipline of competitive market forces and the threat of potential entry into individual markets would provide consumers with reasonable fares and good service. Indeed, in the years immediately following deregulation, the elimination of CAB entry regulations allowed many new airlines to compete intensely for air traffic, bringing expanded air service to many communities and lower fares for most travelers. By 1983 the number of markets with nonstop service increased by 77 (4 percent), and by 1984 the number of markets served by more than one airline increased by 651(55 percent). However, that period of expansion in the industry was followed by a wave of bankruptcies, mergers, and acquisitions that has reduced the number of independent airlines competing in the scheduled passenger service market. In the first few years after deregulation took effect, 26 airlines began offering scheduled passenger service for the first time. As a result of the influx of new airlines, the market share of the five largest airlines declined from 69 percent of total air traffic in 1978 to 57 percent in 1985. This period of intense competition brought low fares, new air ser- vice to some communities, and more frequent air service to other com- munities. However, by 1984 all but 7 of the 26 new airlines offering scheduled passenger service had ceased operations, and by 1988 the market share of the 5 largest airlines had rebounded to 74 percent. ‘49 USC. app. sec. 1302 (a)(4 and 10) (emphasis added). Page 10 GAO/RCED-90-147 Airline Operating 8t Marketing Practices Chapter 1 Introduction Reduced competition in the airline industry affects consumers in several ways. Several of the entrants had lower costs than the established air- lines, which meant they could offer low fares to consumers. When low- cost airlines compete in a market, studies have shown that fares are generally lower than fares in markets without a low-cost competitor. For instance, a new competitor in a market may try to build market share by offering passengers lower fares, better service, more frequent flights, or more nonstop flights to some destinations. In response, the incumbent airlines may then try to make their services more attractive to the consumer. Thus, competition can benefit the consumer by broad- ening the available choices and improving the product or service offered. Although airlines are now free to change routes and fares without regu- latory approval, the Department of Transportation (nor) has the authority under the Airline Deregulation Act of 1978 to regulate unfair and deceptive trade practices in the airline industry. This authority is the basis for D&S regulation of airline computerized reservation sys- tems (CRSS), reporting of consumer complaints, and reporting of airlines’ on-time flight performance and is intended to promote competition, In addition, our regulates the allocation of take-off and landing reserva- tions (called “slots”) at four key airports-Washington National, New York’s Kennedy and LaGuardia, and Chicago O’Hare. FAA’S Slot Adminis- tration monitors airline compliance with the provisions of the High Den- sity Rule governing use and trading of slots held by the airlines. The reduction in the number of competing airlines coincided with Deregulation Has changes in industry operating and marketing practices that may have Changed the Way discouraged competitive entry. These changes were in many cases a con- Airlines Operate sequence of deregulation, just as the elimination of CAB entry restrictions were. Deregulation allowed carriers to concentrate their flights at a handful of hub airports, several of which became dominated by one or two airlines. Many of these airports have long-term lease agreements with incumbent airlines that reduce access to those airports. DOI‘ responded to deregulation in 1986 by adopting a new, more market- oriented system for allocating slots at four key airports. Deregulation also encouraged the development of new airline marketing practices, particularly computerized reservation systems, travel agent incentive programs, and code-sharing agreements between airlines. Page 11 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 1 Introduction Airlines Developed Hub- After deregulation, most major and national airlines changed from using and-Spoke Route Systems the conventional point-to-point route systems to using hub-and-spoke systems.2 Under the hub-and-spoke system, an airline gathers passen- gers from many origination points and collects them at a central location (hub). At the hub, passengers are redirected to their ultimate destina- tions, often after transferring to other planes. Thus, for instance, 10 passengers arriving from 10 different “spoke” cities can be collected at the hub, put on a single airplane, and delivered to a common destination. This practice is more efficient than flying each passenger directly to that same destination. The development of the hub-and-spoke system has led to one or two air- lines dominating the traffic at some hub airports. To take full advantage of the benefits of a hub-and-spoke route system, the hubbing airline must have access to a large number of gates and other facilities at its hub in order to handle large groups (called “banks”) of incoming and outgoing flights several times a day. Thus, one or two airlines frequently control most of the facilities at hub airports. Competition, particularly on short-haul and nonstop routes, from such hubs could be affected by the hubbing airlines’ control of airport facilities. However, hubbing could enhance competition on long-haul routes if consumers have more choices between competing airlines. For instance, a passenger flying from New York to Los Angeles could conceivably travel through Chicago (a hub for United and American), St. Louis (TWA), Memphis (North- west), Dallas (Delta), Pittsburgh (USAir), or Denver (Continental). If most of an airport’s facilities are controlled by one or two incumbent airlines, other airlines seeking to begin or expand service may have to sublease facilities from one of the incumbents. Since subleasing is likely to be more costly than leasing facilities directly from the airport, control of an airport’s facilities by dominant incumbent airlines could limit the opportunities for competition in markets served from those airports, particularly for low-cost airlines. In markets where competitive entry is limited by lack of access to airport facilities, the dominant incumbent airlines may be able to sustain fare increases since passengers in those markets will have fewer choices between competing airlines. ‘DOT classifies airlines based on operating revenue. Major airlines have operating revenues in excess of $1 billion; national airlines, between $100 million and $1 billion; and regional airlines less than $100 million. In 1989 the eight major airlines were American, Delta, Northwest, Pan Am, Texas Air (Continental and Eastern), TWA, United, and USAir (including Piedmont). In January 1990, America West and Southwest were reclassified from national airlines to major airlines. In this report, they are included with the national airlines, their 1989 classification. Page 12 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 1 Introduction The major and national airlines also developed “code-sharing” relation- ships with smaller commuter airlines to strengthen their hub-and-spoke networks. In a code-sharing partnership, the commuter airline uses the same two-letter airline code as the larger airline so that a connecting flight between the two airlines appears to the passenger to be a change of planes on the same airline. The commuter airline also usually paints its planes with the same colors as its larger code-sharing partner, giving the passenger the impression that the aircraft are both part of the same airline. The purpose of the agreements is to deliver passengers to the larger airline’s flights, allowing it to support flights to a wider range of destinations, and enhancing the efficiency of its hub-and-spoke system. Airlines Changed the Way To attract and retain more customers, airlines also made important They Marketed Their changes in their marketing practices, offering passengers and travel agents reasons for choosing between competing airlines other than Services lowest fare or most convenient flight times. These new marketing prac- tices include frequent flyer plans, CRSS,and travel agent incentives. Code-sharing (as described above) is both an operational and a mar- keting strategy that reinforces passenger loyalty to a particular airline. Frequent flyer plans seek to ensure that people who frequently travel by air will make most of those trips with one airline. These plans offer incentives, such as free travel, that increase in value with the number of miles flown on the sponsoring airline. American Airlines introduced the first such plan in 1981; since then, all of the major airlines and several of the national airlines have introduced their own plans. The first external computerized reservation systems were developed by American Airlines and United Airlines from their internal reservation systems and expanded to include travel agents in 1976-77. The most current data available indicate that 81 percent of tickets are sold through travel agencies, and since 95 percent of travel agencies use CRSS, the systems have become an integral part of marketing airline services. The airlines owning the CRS systems (commonly called vendor airlines) get three types of revenue from their systems-booking fees from other airlines for each ticket sold on the other airlines’ flights, subscription fees from the travel agents using the system, and increased airline ticket revenues resulting from agents booking flights on the vendor’s airline. (This revenue from additional ticket sales on the vendor airline is called incremental revenue.) In September 1988 we testified that the comput- erized reservation systems owned by some airlines earn profits in excess Page 13 GAO/RCED90-147 Airline Operating BEMarketing Practices Chapter 1 Introduction of what would be expected in a competitive market.” These high profits are earned through booking fees in excess of costs and through incre- mental revenues, both of which transfer profits from airlines that do not own CRSS to those that do. Finally, to build brand loyalty among travel agents, the airlines also developed volume incentives. These incentives include free tickets; VIP club memberships (giving agents the use of special airport waiting rooms); monetary bonuses paid to travel agents who book a large volume of business with one airline (called commission overrides); and overbooking privileges which allow agents to book travelers on flights that appear on the CRS to be fully booked. These programs have the same loyalty-inducing goal as frequent flyer plans and reward agents who surpass a given threshold of ticket sales on the airline providing the incentive. The incentives either provide an extra source of income to agents or allow agents to provide enhanced service to favored clients. Airline marketing strategies may affect entry and competition. For example, frequent flyer plans could discourage entry if the plans are widely used, especially if passengers base their choice of airline on mem- bership in such plans. Code-sharing agreements could discourage new entry by making it more difficult for entrants to attract enough passen- gers to compete effectively with the dominant airline at the airport. CRSS could make it more difficult for non-vendor airlines to compete with vendor airlines if booking fees exceed the vendor’s costs or if incre- mental revenues are substantial. Finally, travel agent incentives could limit competitive opportunities if they induce agents to divert traffic to incumbent airlines, especially if the incumbent airlines are better able to offer more attractive incentives than entrants. FAA Changed the High In addition to the changes that airlines were making in the way they Density Rule to Allow operated, the new airlines beginning service under deregulation increased the demand for access to four key airports-Washington Selling and Leasing of National, Chicago O’Hare, and New York LaGuardia and Kennedy. Slots Because of severe congestion at these airports and the effect of that con- gestion on other airports across the nation, advance reservations or %ee Competition in the Airline Computerized Reservation System Industry (GAO/T-RCED-88-62, Sept. 14, 1988). Page 14 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 1 Introduction “slots” have been required under the High Density Rule for all sched- uled flights from these airports since 1969.4 There are separate alloca- tions of slots for air carrier and commuter aircraft at each of the slot- controlled airports (airports where slots are required).” In response to the demand for entry, nor began exploring ways to make access to those airports more responsive to the market forces unleashed by deregulation. From 1969 until 1986, slots were allocated by committees made up of representatives of the airlines serving or seeking to serve each of the slot-controlled airports. Slot allocations were negotiated by unanimous agreement in regular meetings of the scheduling committees. Each city subject to the High Density Rule had committees for allocating the slots for each airport. At Washington National, separate committees allocated the air carrier and commuter slots. This system worked reasonably well until deregulation brought an influx of new airlines seeking to offer new scheduled service at these airports. Since all slots were allocated, entrants could gain slots only if incumbents provided them. After deregulation, the incumbent airlines initially tried to accommodate the entrants’ requests, in part because of uncertainty about the way DOT would resolve a deadlock over slot allocations. In 1980 the committee responsible for allocating air carrier slots at Washington National wils unable to reach agreement for the next 6- month period, and DOTissued a Special Federal Aviation Regulation to resolve the deadlock. nor allocated the slots primarily based on the last 6-month allocation accepted by the committee. Once this initial deadlock was resolved in the incumbents’ favor by continuing the previous alloca- tion with minimal changes, the incumbents had little incentive to con- tinue giving up slots to entrants. By March 1981, the commuter committee at Washington National was deadlocked, and the air carrier committee was deadlocked again, In December 1985 D~T amended the High Density Rule, allowing airlines to buy and sell slots. DCJThad explored several alternatives for allocating slots, looking for a method that would be efficient, would adjust to changing market conditions, and would allow opportunity for entry or 414 C.F.R. Sec. 93, Subpart S. “Air carrier slots are used by airlines operating aircraft having 76 or more seats and turbojet aircraft having 66 or more seats. Commuter slots are used by airlines operating turbojet aircraft having fewer than 66 seats and propeller aircraft having fewer than 76 seats. The air carrier and commuter desig- nations do not correspond to DOT’s classification of airlines as majors, nationals, and regionals, which is baaed on the airlines’ operating revenues. Page 16 GAO/RCED-W-147 Airline Operating & Marketing Practices cllapter 1 lImoduction expansion while minimizing the government’s role in allocation. The 1985 amendment changed the High Density Rule in four major ways. First, the role of the scheduling committees was eliminated, and slots were allocated to the holders of record as of December 16, 1985-that is, incumbents’ allocations were “grandfathered.“” Second, beginning on April 1, 1986, airlines holding slots were allowed to sell or lease them, subject to Federal Aviation Administration (FAA) approval, setting up a market for transferring slots. Third, DOTinstituted a use-or-lose provi- sion requiring that a slot be used 65 percent of the time or be subject to forfeiture and reallocation by FAA. Fourth, DOT set up a lottery process for allocating any new, returned, forfeited, or unallocated slots that become available. Airports Adopted New At the same time that deregulation was changing the way airlines com- Noise Restrictions peted, concerns about aircraft noise were growing, leading to noise restrictions at many airports. In 1969 FAA promulgated noise standards for aircraft, which came to be known as “Stage II” standards (“Stage I” referred to the earlier aircraft that did not meet the standards). By the end of 1985, FAA generally required all aircraft operated in the United States to meet the Stage II standards. In 1977 FAA promulgated a new set of standards defining quieter “Stage III” aircraft. However, there is no requirement that the airlines use Stage III aircraft. Several airports, however, either on their own initiative or in response to litigation from their neighbors, began requiring airlines to use Stage III aircraft. These noise restrictions may affect competition. For instance, limits on the use of older, noisier aircraft (which are more readily available in the secondhand and lease markets than newer, quieter aircraft) could disad- vantage newer or smaller airlines if these airlines make greater use of the older aircraft. The Ranking Minority Member of the Senate Committee on Commerce, Objectives, Scope,and Science, and Transportation, and the Chairman of the House Committee Methodology on the Judiciary requested that we provide information on how various barriers to entry affect competition in the airline industry. We agreed to provide data on two types of airline operating and marketing practices that can become barriers to entry: (1) those related to access to airport “As part of the transition from scheduling committees to a slot market, 5 percent of the air carrier slots at Washington National, O’Hare, and LaGuardia were redistributed, in a random lottery having two drawings, to airlines having few or no slots at those airports. Page 10 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 1 Introduction facilities and (2) those related to airline marketing strategies. This report focuses on how these practices affect entry; a subsequent report will assess the relative impact of each of these barriers on airline fares. The primary source of data on barriers related to airport access was a mail survey of 187 airports. Using FAA’S size categories for the communi- ties that airports serve, we classified each of the airports on FAA’S list of 414 primary airports as large, medium-sized, or small7 Our sample included all 27 of the large airports and all 39 of the medium-sized air- ports in the continental United States. We also included 121 of the 163 small airports reporting at least 20 passengers per day to DOT.Of the 187 airports to which we sent the survey, 185 (including all of the large and medium-sized airports) responded, for a 99-percent response rate. (See app. IX.) However, two small airports that responded were dropped from the analysis because they reported that they do not have regularly scheduled service and two other small airports did not respond. We called airport officials as needed to complete or clarify survey responses. Five of the airports that did respond gave us limited key data rather than completing the entire survey. Our survey asked questions about the airports’ gate leases, facility leases, contractual arrangements with airlines, and airport financing and plans for expansion. The survey provided us with two kinds of data-a census of conditions at large and medium-sized airports and a sample of conditions at small airports. Since we got responses from all of the 66 large and medium-sized airports in the continental United States, the data accurately represent conditions at these airports. However, the small airports we surveyed are the same group we use for our forth- coming econometric analysis. The sample for the econometric model includes small airports that are end points on a stratified random sample of routes having 20 or more passengers per day. Thus, the small airports we surveyed are not themselves a random sample of airports, since airports with more routes had a greater chance of being selected than airports with few qualifying routes. Therefore, the data we got from these small airports are not generalizable to all small airports since we do not know how the small airports that were not selected may differ from those that were. However, the data show how the 117 small airports that did respond may be different from the larger airports. 7E’AAdefines airport size categories baaed on the percentage of total passengers enplaned in a city and its surrounding standard metropolitan statistical area. A large hub enplanes at least 1 percent of the passengers, a medium hub enplanes 0.26 percent to 0.99 percent of the passengers, and a small/ non-hub enplanes less than 0.26 percent of the passengers. Page 17 GAO/RCED-W-147 Airline Operating & Marketing Practices Chapter 1 lutroduction Because we focused on competition in the domestic airline passenger market, data on international and air cargo facilities are not reported. Our survey included responses from all of the 16 “concentrated” air- ports referred to in our June 7, 1989, testimony and subsequent reports Concentrated airports are defined as those that are the only airport in a metropolitan area and that have at least 60 percent of the passengers enplaned by one airline or at least 86 percent of the passengers enplaned by two airlines. In the testimony and in our subsequent report, we showed that travelers generally pay higher fares and have less choice between competing airlines when flying out of concentrated airports. Although we received responses from all 15 of the concentrated air- ports, the comparative information in this report focuses on the 14 con- centrated airports that meet our definition of large and medium-sized airports. Data on airlines’ slot holdings and transfers were obtained from FAA’s Slot Administration Office. The data on slot holdings covered all domestic slots held by an airline for 5 or more days per week. The data on slot transfers were a listing of all “uneven” transfers” approved by FAA between April 1, 1986, and September 30, 1988, the latest transfer data that were available at the time of our review. The listing of uneven transfers included data on both air carrier and commuter slots traded. In this report, we characterized permanent transfers of slots as sales and temporary transfers as leases. Sale and lease transactions were analyzed separately. We also conducted a telephone survey of 520 travel agents on barriers related to airline marketing strategies. We selected a stratified random sample of agents from a list of agents in nor’s computer reservation system data base, which includes over 23,000 unique agents. We did not verify the accuracy of this data base. We stratified the 23,000 agents initially into four groups or strata, based on the agencies’ total revenue, divided so that each of the four strata’s total revenue was equal. Each stratum had 200 agents. Within the last stratum, we noticed that there were six agents with extremely large total revenues, We created a fifth and final stratum which included all six of those agents. Thus, our total sSeeAir Fares and Service at Concentrated Airports (GAO/T-RCED-39-37, June 7,1989) and Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/RCEDQO-T(TZ; July 11,199O). “FAA defines uneven transfers as those involving trading a slot at one airport for more than one slot at another airport, for slots at a different time, for money, or for some other form of compensation. FAA does not include data on even or one-for-one trades of slots in their data base. Page 18 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 1 Introduction sample size was 806 agents. We received responses from 620 agents, for a response rate of 66 percent. All weighted estimates are therefore rep- resentative of about two-thirds of the original target population and total revenues. We do not know the degree to which the remaining one- third of non-responding agents differ from the responding agents. Finally, we reviewed the reports of the Secretary of Transportation’s Task Force on Competition in the U.S. Domestic Airline Industry, issued in February 1990. While our audit work was completed before these reports became available, we briefly discuss the Task Force’s findings as they relate to our work. At the direction of our requesters, we did not obtain official agency com- ments on this report. Our audit work was conducted between February 1988 and December 1989 in accordance with generally accepted govern- ment auditing standards. Page 19 GAO/RCED-90-147 Airline Operating & Marketiug Practices The Major Airlines’ Control of SlotsDeters ECntryat Four Key Airports The eight major airlines have steadily increased their control over domestic slots since airlines were first allowed to buy, sell, and lease slots at Washington National, Chicago O’Hare, and New York LaGuardia and Kennedy airports. This increased control of slots not only hampers competition at these airports; it also limits entrants’ ability to establish service in other markets in the East and Midwest because access to these four airports is crucial for establishing a competitive route structure. Since April 1986 the eight major airlines have dominated the slot market by using short-term slot leases, which effectively bar access to new entrants. Leasing indicates that airlines do not need slots for current operations but are withholding them from the sales market, thus restricting access by potential entrants. While an incumbent carrier may be able to add extra flights using slots leased on a short-term basis from other carriers, an entrant cannot afford to invest in starting up new ser- vice when its access to the airport may be withdrawn on short notice by the competing carrier from which it is leasing the slot. About 13 percent of the air carrier slots1 leased between April 1986 and September 1988 were leased by major airlines to regional airlines, most of which are related to the majors by common ownership or code- sharing agreements, When an air carrier slot is used by a regional air- line, fewer passengers are served, since commuter aircraft are smaller than the majors’ jets. Sales and leases of slots between related airlines reduce the number of slots available for sale or lease to entrants and other airlines not affiliated with carriers selling or leasing slots. As a result of their control over slots, the major airlines have the poten- tial to severely limit competition at these four airports. Because the majors and their related carriers controlled nearly all (96 percent) of the domestic slots as of December 1988, independent airlines have had little opportunity to obtain enough slots to challenge the majors effectively at these airports. The national airlines, which are the airlines in the best position to aggressively challenge the major airlines, in fact have fewer slots now than before the buy/sell rule took effect. Since the presence of a low-cost competitor has been shown to have a moderating effect on fares, the inability of such airlines to secure sufficient slots to compete ‘Airlines using air carrier slots operate turbojet aircraft having 56 or more seats and aircraft having 75 or more seats. Airlines using commuter slots operate turbojet aircraft having fewer than 66 seats and propeller aircraft having fewer than 76 seats. Airlines are classified by MJT as majors, nationals, or regionals based on their operating revenues, as discussed in ch. 1. Page 20 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Airports means that free market influence on fares is reduced at the slot- controlled airports2 Slot controls are needed at Washington National, Chicago O’Hare, and Slot Controls Limit New York’s LaGuardia and Kennedy airports because the demand for Entry flights exceeds the level of operations these airports can accommodate without excessive delays. Under the High Density Rule, scheduled air- line service is limited to a specified number of takeoffs and landings (i.e., slots) per hour or half hour time period.3 There are separate slot allocations for air carriers and commuter carriers at each airport, Spe- cial rules apply to slots used for international flights and for flights under the Essential Air Service program.4 Airlines wanting to fly into or out of the slot-controlled airports must reserve a slot in advance for the appropriate time period. Thus, an airline providing regularly scheduled passenger service normally secures a slot allowing it to land or take off at a particular time every day. There were approximately 3,800 domestic air carrier and commuter slots allocated in December 1985, before the buy/sell rule took effect.f, The major airlines and their related carriers” held about 70 percent of the domestic slots, with the major airlines alone holding about 65 per- cent. National airlines held about 8 percent of the slots; independent regionals, about 22 percent; and foreign and all-cargo airlines, less than 1 percent. Since virtually all of the domestic slots are allocated, it is difficult for an entrant to get slots, and even if an airline can get slots for new or ‘See, e.g., Diana I,. Strassman, “Potential Competition in the Deregulated Airline Industry,” Rice Uni- versity discussion paper, 1986. “The High Density Rule was issued in 1968, took effect in April 1969, and was made permanent in 1973. It has been suspended at Newark International Airport since 1970. “The Essential Air Service program ensures that small communities having air service when the Air- line Deregulation Act was passed will continue to have a minimum level of service, with the federal government subsidizing the airlines providing that service, if necessary. “Total domestic slots allocated have ranged from 3,801 in December 1986 to 4,006 in December 1987. As of December 1988, there were 3,986 domestic slots allocated. The total number of slots-air car- rier and commuter-for both domestic and foreign use is fixed at approximately 4,600 and does not change. “Airlines that have common ownership through a holding company, merger, or acquisition are defined as “related,” as are airlines that are partners in a code-sharing agreement. Examples include Pan Am and its subsidiary Pan Am Express, American and its American Eagle partners, and Texas Air Corporation’s Continental and Eastern. Page 21 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlined Control of Slots Deters Entry at Four Key Airports expanded service at a slot-controlled airport, it may still be at a disad- vantage compared with an incumbent airline. There are only two ways to secure slots-( 1) being awarded a slot by FAA or (2) buying/leasing a slot from another airline. Since very few slots are returned to the FAA and no new slots are being created, FAA has very few slots to award. The few slots that are available directly from FAA are usually at less desir- able hours, such as early in the morning, late in the evening, or on week- ends. Therefore, the entrant may not be able to get a slot directly from FAA at or near the desired time. In that case, the entrant must buy or, more likely, lease a slot from one of the airlines that already has slots. Thus, if the entrant can get a slot from an incumbent airline, the entrant’s costs for that slot are often higher than the incumbent’s since the incumbent airlines got most of their slots directly from FAA. The entrant will probably have only temporary use of the slot (i.e., will be leasing the slot) and will, in effect, be paying a potential competitor for the privilege of landing at an access-controlled airport. FAA’s Slot Lottery Made In order to mitigate some of the anticompetitive effects of SomeSlots Available to “grandfathering” incumbent airlines’ allocations, FAA withdrew about 5 percent of the air carrier slots at LaGuardia, O’Hare, and Washington New Entrants National, and distributed them to entrants in random lottery drawings in March and December 1986.7 The withdrawal created a pool of 152 slots to be reallocated, including slots from each controlled hour at each of / the three airports. (See table 2.1 for the distribution of lottery slots withdrawn and chosen.) Slots obtained in this lottery had to be used only for domestic service and within specified time limits, or they would be forfeited and returned to the original holder of record, from which they had been withdrawn. Airlines that got slots in the first drawing of the lottery and subsequently sold or failed to use them were ineligible to participate in the second drawing. 7Recipients of slots in the lottery, called the SFAR 48 Lottery, were limited to new entrants (those with no slots at an airport) and limited incumbents (those with fewer than eight slots at the airport whose slots were being distributed). International slots, Essential Air Service slots, slots at Kennedy International Airport, and slots held by airlines with eight or fewer slots at an airport were exempt from withdrawal. Kennedy airport was not included in the lottery because about half of its operations are international flights and because its scheduling committee had functioned well until it was disbanded. Page 22 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Airport-s Table 2.1: Distribution of Domestic Air Car&r Slot8 Before and After New Number of slots Entrant Lottery Drawings Withdrawn Before but not After Incumbent airlines IOttWV Withdrawn claimed Regained lotterv Major airlines 2,711 112 36 90 2,725 National airlines 303 19 3 6 293 Reaional airlines 135 2 2 0 135 Others” 13 0 0 0 13 FAAb b 19 2 8 b TotalC -- 3,162 152 43 104 3,166 Number of slots Before After Entrant and limited incumbent airlines lottery ChosenC lottery Maior airlines 93 15 108 National airlines 85 43 128 - Regional airlines 66 59 125 Total 244 117* 361 aThe “Others” category includes foreign and ail-cargo airlines bFAA holds slots only temporarily when they are returned or forfeited by airlines. At the time of the lottery, FAA held 19 such slots, which made a total of 152 slots available in the lottery. ‘The difference between slots held by incumbents before the lottery and after the lottery does not equal the number of slots chosen because some incumbent airlines that had slots withdrawn at one airport qualified to select slots as an entrant or limited incumbent at another airport. dThe number of slots chosen does not match the number of slots withdrawn because 43 slots were never selected and 8 slots that were chosen in the first drawing of the lottery were returned and reclaimed in the second drawing. Source: GAO analysis of FAA Slot Administration records. Only 13 of the 162 slots available to entrants and limited incumbent air- lines in the SFAR 48 LotteryR are still controlled by those airlines-2 at Washington National, 4 at LaGuardia, and 7 at O’Hare. (See fig. 2.1.) The major airlines actually increased their slot holdings by 14 slots after purchases of slots distributed in the lottery and after mergers with air- lines receiving such slots. Of the 152 available slots, 54 were sold-52 to major airlines and 2 to national airlines. Nineteen of those slots were sold by a smaller airline to a related major airline. Sixty-nine percent of the slots selected at Washington National were sold, 57 percent at LaGuardia, but only 23 percent at O’Hare. Thirty-six of the 152 slots that were available were returned to the original holders of record because the new entrant failed to use them in the time allowed. In one ‘Eight of the slots that were distributed in the March 1986 drawing were returned and redistributed in the December 1986 drawing. These slots, therefore, are counted twice, giving a total of 160 slots when all of the slots distributed and redistributed are totaled. Page 23 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slota Deters Entry at Four Key Airports case, the new entrant airline receiving slots could not get FAA certifica- tion in time to retain rights to the slots it got in the lottery. Two major airlines, Delta and TWA, acquired another 14 slots in their respective mergers with Western and Ozark. Forty-three of the slots, all at O’Hare, accounting for 29 percent of the available slots and almost half of the slots at O’Hare, were not claimed. Most of the unclaimed slots were for early morning or late evening hours. Figure 2.1: Rerults of the New Entrant Slot Lottery 45 Number of slot8 40 35 30 25 20 15 10 5 0 Urd by witrants Sdd Rotumod to Returned to FAA Acquired In Unclaimed airiinr merger ReallIt by alrpctl I Washington National LaGuardla m O’Hare Source: GAO analysis of FAA Slot Administration records Page 24 GAO/NED-W-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slot8 Detmfd Entry at Four Key Airporta Figure 2.2: Sales and Leabeb of Air Carrier Slots, April 1986 Through 360 Number of slots September 1988 300 250 266 169 199 50 0 2nd qtr. 3rd qtr. 4th qtr. 1st qtr. 2nd qtr. 3rd qtr. 4th qtr. 1st qtr. 2nd qtr. 2rd qtr. 1966 1966 1966 1967 1967 1967 1967 1966 1966 1996 Quarterly raloa and lamer - Sales -1-1 Leases Source: GAO analysis of FAA Slot Administration records. To the extent that sales of air carrier slots have taken place, they have generally been to the major airlines rather than to entrants. The major airlines bought 609 slots and sold 330 slots, from April 1986 through September 1988. Thus, the major airlines gained 17’9 slots overall through sales. (See table 2.2.) Other airlines had a corresponding net decrease of air carrier slots. National airlines sold more slots than they bought at all of the airports, including 61 percent of the net slots sold and 74 percent of those sold at LaGuardia. Regional airlines also sold more slots than they bought at all of the airports except Kennedy, selling 36 percent of the net slots sold. The distribution of commuter slots remained essentially unchanged-nationals gained four slots during the period while majors gave up one and regionals, three. Not a single new passenger carrier was able to establish service at a slot- controlled airport by buying slots. Page 26 GAO/RCED-W-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Airports Slots can be either sold or leased under the buy/sell rule. FAA classifies Major Airlines Have transfers as either even (i.e., trading a slot for a slot) or uneven (i.e., Used the Buy/Sell trading a slot at one airport for more than one slot at another airport, Rule to Strengthen for slots at a different time, for money, or for some other form of com- pensation). Our analysis focused on uneven transfers since even trans- Their Control of Slots fers have no effect on the relative net positions of the parties.R Although we analyzed uneven transfers of commuter slots as well as transfers of air carrier slots, trades involving commuter slots are generally a small portion of the overall trading. Therefore, this section concentrates on the activity in air carrier slots. DecreasingSlot Sales Limit Since the buy’/sell rule became effective in 1986, slot sales have fallen, Accessby New Carriers while slot leases have increased, thus reducing the ability of entrants to secure control of slots. Sales accounted for just over half of all transfers in the first 9 months of the buy/sell rule’s operation (April 1986 through December 1986). However, in the first 9 months of 1988, sales accounted for only about 12 percent of the transfers. The average number of air carrier slots sold fell from 128 per quarter in 1986 to about 20 per quarter in 1988. Leases have followed the opposite pattern, rising from a little less than half of the transfers in 1986 to almost 90 percent of all transfers in 1988. Leases exceeded sales in every quarter of 1987 and 1988. The average number of slots leased rose from 124 per quarter in 1986 to 151 per quarter in 1988. Decreased selling and increased leasing of slots indicates that the airlines holding slots have become less likely to relinquish control over slots to competing carriers, including new entrants. (See fig. 2.2.) “At the time of our analysis, the latest data on uneven slot transfers available from FAA were for the third quarter of 1988. Page 25 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Alrporte Table 2.2: Net Air Carrier Slots Bought (Sold) by Airline Type and Airport, April Slots bought (sold) 1988 Through September 1988 Airline type National Kennedy LaGuardia O’Hare Total Majors 30 3 57 89 -- 179 Nationals (16) (5) (42) (47) (110) Regionals - (14) 6 (15) (42) (85) Others 0 (4) 0 0 (4) aWhen airlines in a size category sold more slots than airlines in that same size category bought during the period April 1986 through September 1988, the net decrease in slots IS shown in parentheses. Source: GAO analysis of FAA Slot Administration records. Major Airlines Restrict Most leased slots are leased out by major airlines, indicating that these airlines hold more slots than they need and lease out their excess slots Accessby Entrants by rather than give up control of them to potential competitors. In the slot Holding Excess Slots leasing market, major airlines leased the equivalent of 893 full-time air carrier slotsI” from national and regional airlines between April 1986 and September 1988, while leasing 1,085 slots to national and regional airlines. The major airlines are holding more slots than they need for their current operations, as indicated by the fact that they leased out 192 more slots to national and regional airlines than they leased from these other airlines. About three-fourths of the slots the majors leased out were at O’Hare and Kennedy airports. Regional airlines gained 97 slots on leases, mostly from the major airlines, including all of the air carrier slots leased at Kennedy and 82 percent of them at LaGuardia. When air carrier slots are leased to commuter airlines by the major air- lines, some slots are being underutilized, since the commuter airlines generally operate smaller aircraft than those for which these slots were intended.” This means that fewer passengers can be served. (See app. I.) Leasing slots allows the airlines to protect the slots they hold because, under the use-or-lose rule, leased slots are considered “used” by the air- line holding them and are not subject to forfeiture for nonuse. Formerly, slots held by airlines having eight or fewer slots at an airport were also protected from withdrawal, regardless of whether the airline used the ~“Ikcause slots are leased for varying periods, the actual number of slots is converted to an equivalent number of full-time slots based on the number of days the leased slot is available for use. ’ ‘At each of the airports, commuter airlines have a separate allocation of slots that cannot be used for large jet aircraft. These commuter slots can only be used by airlines operating turbojet aircraft with fewer than 66 seats or propeller aircraft with fewer than 75 seats. Page 27 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Airports slots for its own operations or leased them.12 However, FAA found that some airlines with large slot holdings had sold or leased the slots mostly likely to be withdrawn to related airlines with few slots in order to pro- tect the slots from withdrawal. In such cases, the airline recorded as holding the slots did not use them for its own operations, but instead leased them back to the original holder. In 1989 FAA issued a new rule that protects the slots of an airline with eight or fewer slots only if the airline uses the slots for its own operations, but not if it leases the slots to another airline.‘:’ Short-Term Slot Leases Leases of air carrier slots are generally made for relatively short Limit Use by Entrants periods, allowing the airlines holding slots to exercise some measure of control over the ability of airlines needing to lease slots to continue operating at slot-controlled airports. Almost 70 percent of the air carrier slots leased are leased for periods of 90 days or less, with more than half being leased for 60 days or less. Longer leases lasting more than 180 days have declined from one-third of all leases in 1986 to only 3 percent of leases in 1987 and 9 percent of leases in 1988. Short-term leases of 90 days or less accounted for 52 percent of the slots leased in 1986,78 per- cent in 1987, and 66 percent in 1988. (See app. II.) While a carrier already operating at an airport may be able to add flights using short- term leased slots, an entrant could not justify investing the costs of starting up a new service if its only access to an airport could be termi- nated on short notice because it is based on a short-term slot lease from a potential competitor. Sales and Leasesof Slots Transfers between related carriers (i.e., airlines that are part of the Between Related Carriers same corporate entity, were merged or acquired, or are code-sharing partners) are a significant and growing segment of all sales and leases. ReduceAvailability of To the extent that transfers take place between related carriers, the Slots to Entrants number of slots actually sold or leased overstates the number of slots available to independent carriers offering competing service. Transfers between related carriers have accounted for about one-fifth of all sales and leases since 1986. Sales of slots between related carriers have grown from 14 percent of total sales in 1986 to 32 percent in 1987 and to about 40 percent in 1988. (See table 2.3.) Sales between related carriers have ‘“When the buy/sell rule was implemented in 1986, each slot was randomly assigned a withdrawal priority number. When FAA needs to withdraw a slot for any reason, slots are withdrawn based on this priority number, slots with a low withdrawal priority number being most likely to be withdrawn. %4 Fed. Reg. 34,904 (1989) (to be codified at 14 C.F.R. Sec. 93.223). Page 28 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Airports accounted for as much as 78 percent of the sales in a single quarter. The growth in sales between related carriers may be due, in part, to the declining number of independent airlines as a consequence of mergers, acquisitions, bankruptcies, and code-sharing agreements. Table 2.3: Air Carrier Slots Sold to Related and Unrelated Carriers, April - Number of slots 1986 Through September 1988 Quarterly Quarterly Quarterly Total slots avera e, average, ave:, ;6 traded, 1986 to Slots sold 1886 1987 ss 1988 To related carriers -~~ 18 13 8 131 (Percentage of total sales) --___ (14%) - (32%) (40%) (22%) To unrelated carriers 110 28 12 476 To all carriers 128 41 20 607 Source: GAO analysis of FAA Slot Administration records Leases between related carriers accounted for about one-fifth of the total slot leases in 1987 and 1988, up from 1986. Leases between related carriers were 14 percent of the total leases in 1986, 24 percent in 1987, and 20 percent in the first 3 quarters of 1988. (See table 2.4.) Leases between related carriers have accounted for as much as 56 percent of the leases in a single quarter. Table 2.4: Air Carrier Slots Leased Between Related and Unrelated Carrlers, Number of slots April 1986 Through September 1988 Quarterly Quarterly Quarterly Total slots average, average, average, traded, Slots leased 1986 1987____ -. 1988 1986 to 1988 To related -.- carriers ..-- -- 17 26 30 245 .-. (Percentage --_______- of __-.. total leases) (14%) .-_______- (24%) (20%) -_- --(20%) To unrelated carriers 107 83 121 1,013 To all carriers 124 109 151 1,258 Source: GAO analysis of FAA Slot Administration records Leases between related carriers often involve leases of air carrier slots from majors to their code-sharing partners, one of the ways that major airlines control access to these airports. Overall, regionals lease about 15 percent of the air carrier slots being leased, and 90 percent of those slots are leased to the regionals by major airlines. Seventy percent of the leases of air carrier slots between related carriers are between major airlines and their related regional airlines, along with more than 40 per- cent of the sales. Page 29 GAO/RCED-90-147 Airline Operating % Marketing Practices Chapter 2 The Major Airlines’ Control of Slots Deters Entry at Four Key Airports SomeAirlines Have As a result of the sales and leases of air carrier and commuter slots Increased Their Control of between April 1986 and September 1988, some airlines have increased their control of slots at hub airports. American and United have Slots at Hub Airports strengthened their positions at their slot-controlled hub, O’Hare. Both have had large net gains in air carrier slots at O’Hare resulting from buying slots (76 for American and 134 for United), and American also leases additional slots from other airlines there as well. Other major transfers resulted from sales of entire air carrier operations, including slots, gates, and aircraft. Pan Am had the largest net gain at LaGuardia (59 slots) and National (18 slots), primarily as a result of its purchase of New York Air’s shuttle operation.14 Texas Air-which, when it acquired Eastern, sold New York Air’s 76 slots used for shuttle service to Pan Am-had the largest net decrease in slots at LaGuardia. There were no significant net changes resulting from slot sales among the major air- lines at Kennedy. Major Airlines Have The major airlines as a group have consistently increased the percentage Increased Their Control of of domestic slots they hold. Consequently, they have the ability to limit Ccl..+” access to routes beginning or ending at any of the slot-controlled air- OLULY ports-airports that are crucial to establishing new service in the heavily traveled eastern and midwestern markets. In December 1985 the major airlines held about 65 percent of all domestic slots at all four air- ports. By December 1988 they held nearly three-quarters (74 percent). As mentioned previously, the major airlines were the only group to increase their control of slots by buying more slots than they sold. How- ever, only 804 of the approximately 3,900 domestic slots were sold between April 1986 and September 1988, showing that relatively few slots have changed hands. Mergers, acquisitions, and code-sharing agreements have also increased the share of domestic slots that the major airlines control. Combined, the majors and their related carriers increased their control of domestic slots from 93 percent of all domestic slots in 1986 to more than 96 percent in 1988. (See app. III.) In addition to increasing their control of total domestic slots, the major airlines have also increased their control of slots at each of the four slot- controlled airports. The independent national airlines have increased their holdings only at Kennedy, while losing ground at Washington 14PanAm acquired 76 slots from New York Air, Continental, and Eastern on September 18, 1986, in the New York Air shuttle transaction. Nineteen of these slots were at Washington National and 67 were at LaGuardia. Page 30 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 2 The Major Alrllnes’ Control of Slots Deters Entry at Four Key Airports National, O’Hare, and LaGuardia, As a group, independent national air- lines held only 1 percent of the domestic slots in December 1988. Inde- pendent regional airlines have seen their share of slots decrease at all four airports, suffering the largest decrease at Washington National, and holding only 2 percent of the domestic slots in December of 1988, as a group. The Secretary of Transportation’s Task Force on Competition in the U.S. DOI’ Task Force Domestic Airline Industry reported in February 1990 on the effects of Findings airport access problems on entry into airline markets. The report con- cluded that the High Density Rule “by itself is not a market-specific bar- rier to entry into the four markets presently covered by the rule.” However, it also noted, “There is a potential for exercise of market power in the market for slots, and thus a potential for a barrier to entry due to the HDR [High Density Rule].“15 In our 1986 report, we raised questions about the effect the buy/sell rule Conclusions would have on airline competition.l” It now appears that allowing air- lines to buy and sell slots has not produced the active market for distrib- uting slots envisioned in the buy/sell rule, Instead, it has led to the hoarding of excess slots, which airlines then lease for relatively short periods, frequently to airlines related to the holders by common owner- ship or code-sharing agreements. While such leasing does allow access to these airports, the short-term character of the leases does not allow entrants to make the investments in marketing and facilities necessary for vigorous competition. While FAA does attempt to place returned or forfeited slots in the hands of entrants, the number and desireability of the available slots is very low. While the SFAR lottery was successful in placing air carrier slots in the hands of entrants and limited incumbents, the resulting long-term entry was disappointing. This was partly because some of the lottery winners were code-sharing affiliates of incumbents or were primarily cargo or charter airlines, with the result that most of the slots allocated in the drawings were either sold to or returned to the incumbent airlines. ‘“Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Airports, Air Traffic Control, and Related Concerns (Impact on Entry), U.S. Department of Transportation, Office of the bcretary of Transportation, (Feb. 1990) pp. 2-17 and 2-27. l’iSee Airline Takeoff and Landing Slots: Department of Transportation’s Slot Allocation Rule (GAO/ RCED-86-92, Jan. 31,1986). Page 31 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 3 SomeLeasingPracticesLimit Accessto Airport Physical Facilities The airports responding to our survey indicated they want to accommo- date entrants, but many of the airports reported that they face major constraints. The ability to accommodate entrants depends on the availa- bility of gates, passenger waiting areas called hold rooms, ticket coun- ters, and baggage claim areas. Most existing gates, however, are on long- term leases for the exclusive use of the leasing airline. Most of these gates are leased to the eight major airlines, as are most of the other air- port physical facilities. This is particularly true at the larger airports. Eighty-eight percent of the gates at the nation’s 66 largest airports are leased to airlines. At more than four-fifths of these airports, either all leased gates are leased for exclusive use or all of some other critical facility is leased for exclusive use. Almost all of the airports help air- lines trying to enter the market that are having trouble getting access to facilities. However, when the airport cannot lease facilities directly to an entrant, the entrant has to negotiate with a potential competitor for the facilities needed to offer competing service, The set of facilities an airline needs to provide competing service in a Background market includes ticket counters, a baggage check-in area, passenger hold rooms, a baggage claim area, and enplaning/deplaning gates. Such facili- ties are usually either leased directly from the airport or subleased from an incumbent airline that leases them from the airport. Facilities are leased from the airports as part of the airline/airport use agreement, providing for either the exclusive or preferential use of each type of facility leased. An exclusive-use lease gives the lessee the sole right to use the facilities in question. A preferential-use lease gives the lessee first right to use the facilities. If the lessee does not have operations scheduled, the airport operator may allow another airline to use prefer- entially leased facilities during the unscheduled time. However, the lessee has first right to the facilities if it should later decide to schedule operations during those times. Leases, particularly exclusive-use leases, may be limited by recapture provisions that allow the airport operator to force the leasing airline to forfeit or share facilities it does not use. Airports have varying degrees of control over gates, depending on whether or not the gates are leased and, if leased, on what terms they are leased. In the most common arrangement, airports lease the entire use of gates to a single airline for that airline’s exclusive or preferential use. Some airports lease only part of the use of a gate to a single airline, either allowing common use at other times or partially leasing the gate to another airline as well. Larger airports may hold some unleased gates to accommodate airlines having only a few operations at an airport, Page 32 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 3 Some Leasing Practices Limit Access to Airport Physical Facilities such as charter operators. Finally, small airports often hold all of their gates unleased so any airline serving the airports can use them on a first-come-first-served basis. Nearly 88 percent of the 3,129 gates at the 66 large and medium-sized Most Airport Gates airports’ are leased to airlines, giving the airlines a measure of control Are on Long-Term, over those gates. Moreover, 26 percent of the airports have no unleased Exclusive-Use Leases gates at all. Only two airports (both medium-sized) have no gate leases, Eighty-five percent of the leased gates are leased for exclusive use. An even higher percentage of gates at large airports and at concentrated airports2 are leased for exclusive use (90 percent and 89 percent, respec- tively). (See table 3.1.) Table 3.1: Total Domestic Gates and Leased Qates by Airport Type and Lease Type Leased gates Percentage Number of Total gates Exclusive- Preferential- Size of atrport airports Number Percent Number use use Large ___-. .._.-_. - .,_._-._..I..___..- 27 2,036 65% 1,795 90% 10% Medium ..-- .._-.. ..__..._ ---.__.._____ 39 1,093 35% 943 77% 23% Total 60 3,129 100% 2,738 85% 15% Airport market Concentrated 14 894 29% 616 89% 11% Unconcentrated._._-__._---.- ..-______- 52 2,235 71% 1,922 04% 16% Gal ‘.- 66 3,129 100% 2,738 85% 15% Most large airports lease their gates only for exclusive-use. Seventy-four percent of the large airports and 64 percent of the concentrated airports have only exclusive-use gate leases, while only 49 percent of the medium-sized and 68 percent of the unconcentrated do. (See table 3.2.) Where gates are leased for one airline’s exclusive use, the potential exists for an airline to hold excess gates it does not need for currently scheduled operations. Since most airports have few unleased gates, potential competitors are less likely to be able to lease gates directly ‘We classified airports as large, medium-sized, or small based on the airport’s percentage of total revenue passengers enplaned, as noted in ch. 1. ‘As discussed in ch. 1, a concentrated airport is an airport where one airline enplanes at least 60 percent of the passengers or two airlines enplane at least 86 percent of passengers in metropolitan areas having only one airport. Fourteen of the large and medium-sized airports fit this definition. Page 33 GAO/RCED-90-147 Airline Operating 81Marketing practices chapter 3 Some Leasing Practices Limit Access to Airport Physical Facilities from the airport and are therefore less likely to be able to lease gates under the same terms and conditions as incumbent airlines lease them. Table 3.2: Airports’ Leasing of Gates, by Lease Type and Airport Type Percentage of airports With all With all Number of exclusive- With some preferential With nl~~~;~ Size of airport --. airports use leases of each use leases Total Larae 27 74% 15% 11% 0% 100% Medium -~ 39 49% 28% 18% 5% 100% Total 66 59% 23% 15% 3% 100% Airport market ..---- Concentrated 14 64% 22% 14% 0% 100% Unconcentrated ~...-. 52 58% 23% 15% 4% 100% Total 66 59% 23% 15% 3% 100% Eighty-seven percent of all leased gates at the large and medium-sized airports are leased on a long-term basis,” which gives the airlines more control over the gate than a short-term lease. Shorter leases give the airports more opportunities either to regain complete control of gates or to renegotiate lease terms. About 60 percent of the leased gates are on leases that still have more than 10 years until expiration, and 36 percent of the leased gates are on leases that have more than 20 years left until expiration. At concentrated airports, 53 percent of the leased gates have more than 20 years left on the lease, almost twice the percentage for unconcentrated airports. (See table 3.3.) Y 3We considered any lease expiring after 1990 (i.e., with more than 2 years remaining until expiration as of March 1988) to be long-term. This is because the Department of Justice in its Merger Guidelines (sec. 3.3, p. 28, dated June 14,1984) uses a a-year period to assessease of entry into a market. Page 34 GAO/RCED-fM-147 Airline Operating fir Marketing Practices Chapter 3 Some Leasing Practices Limit Access to Airport Physical FacUitiee Table 3.3: Leased Gates, by lime Remaining Until tease Expiration Percentage of leased gates Time left on leases Leases More Total leased already than 20 Size of airport’ --^ gates expired 2 yrs. or leas 3-10 yra. 1l-20 yra. yrs. Total Large 1,795 0% 12% 22% 25% 41% 100% Medium ---- 943 4% 10% 37% 25% 24% 100% Total 2,736 2% 11% 27% 25% 35% 100% Airport market’ ..-----.~ Concentrated ._ .~ 816 2% 6% 15% 24% 53% 100% Unconcentrated .._....~~.._~. ~~ - .._ _-..~.- .__. -1,922 2% 13% 32% 26% 27% 100% Total 2,736 2% 11% 27% 25% 35% 100% aThere are a total of 66 airports, 27 large airports and 39 medium-sized airports. Of the 66 airports, 14 are concentrated and 52 are unconcentrated. Only 16 percent of all leased gates at the large and medium-sized air- ports are covered by use-or-lose provisions, allowing the airport to recapture control of the gates if the leasing airline does not use them. The proportion at concentrated airports is much lower-only 7 percent. While we did not ask the airports how often they actually invoke their use-or-lose provisions, officials at four airports told us the leasing airline must cease all operations for at least 1 to 3 months before the use-or- lose provision could be invoked. More than three-fourths of the large and medium-sized airports that have such provisions reported they would use them to help an entrant having difficulty gaining access to their airports. Gate Leasing Practices Access to gates is particularly limited at the concentrated airports. Con- May Limit Entry at centrated airports have higher proportions of leased gates, gates on exclusive-use leases, gates on long-term leases, and gates not covered by Concentrated Airports use-or-lose provisions than unconcentrated airports. The combination of these factors is likely to make entry more difficult at concentrated air- ports than elsewhere. The small airports we surveyed reported a less restrictive pattern of gate leasing than did the large or medium-sized airports4 These 117 small airports lease only 64 percent of their gates (compared with 88 “We did not survey all of the small airports. The 117 small airports we did survey were not a random sample of small airports. See ch. 1 for an explanation of airport selection criteria and survey methodology. Page 35 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 3 Some Leasing Practices Limit Access to Airport Physical Facilities percent for the large and medium-sized airports). While 23 percent of the small airports reported they lease all of their gates, another 37 per- cent reported they do not lease any gates (compared with only 3 percent for the larger airports). About half of their leased gates are on preferen- tial-use leases (15 percent for the larger airports), and about half are on short-term leases (13 percent for the larger airports). These small air- ports have the lowest proportion of exclusive-use gates covered by use- or-lose provisions: 2 percent of their leased gates. However, since these airports have such a low proportion of exclusively leased gates, the scarcity of use-or-lose provisions is probably less significant than at larger airports, This difference in gate leasing patterns may be due, in part, to the type and number of facilities available at small airports. For instance, some small airports do not have gates with loading bridges but instead have doors in the terminal building leading to spaces where the airplanes park. Passengers simply walk out onto the tarmac and up a flight of steps to board the planes. Most Gates Are Leased The major airlines lease almost 80 percent of all gates at the large and medium-sized airports, including 90 percent of all of the leased gates. and Used by the Major The majors control 98 percent of the leased gates at concentrated air- Airlines ports and 94 percent of the leased gates at large airports. National air- lines control about 9 percent of the leased gates, most of them at medium-sized airports. Regional airlines lease about 1 percent of all leased gates and less than 1 percent of the leased gates at both large and concentrated airports. The major airlines have a higher proportion of exclusive-use gates than do either the national or regional airlines. Eighty-six percent of the major airlines’ gates are on exclusive-use leases, compared with 79 per- cent of gates leased by national airlines and 60 percent of gates leased by regional airlines. These proportions may reflect the relative financial ability of the airlines, their relative power and sophistication in lease negotiations, or the policies of the airports they serve. The major airlines also have the highest proportion of gates leased under terms giving the airline maximum control, that is, on long-term leases, on long-term exclusive-use leases, and on long-term exclusive-use leases without use-or-lose provisions. Majors lease about 88 percent of their gates on a long-term basis, and 62 percent of their gates are on leases with more than 10 years remaining. National airlines lease 81 per- cent of their gates on long-term leases, and only 42 percent are on leases with more than 10 years remaining. Regionals lease 63 percent of their Page 36 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 3 Some Leasing Practices Limit Access to Airport Physical Facilities gates on long-term leases, and about 37 percent are on leases with more than 10 years remaining. (See app. IV for details on each airline’s leasing of gates, including the terms of its leases.) Airlines Use Most of Their Airlines use most of their leased gates for their own operations but also LeasedGates for Their share and sublease some of their gates. Sharing use of a leased gate can take several forms, including subleasing. The leasing airline may sub- Own Operations lease part of the use of a gate, providing space only, and use the same gate for its own operations as well. Alternatively, the leasing airline may “handle” the flights of another airline, providing services, such as ticketing and use of its personnel, as well as space. A gate may also be shared by being leased to more than one airline, with each airline having the right to use the gate at different times of the day or week. This type of shared gate allows each airline to use the gate as needed for sched- uled flights without preventing other airlines from using it when it would otherwise be idle. Airlines hold few leased gates that go com- pletely unused. Seventy-six percent of the leased gates at large and medium-sized air- ports are used by the leasing airline solely for its own operations. Another 15 percent are shared, that is, used both by the leasing airline and by other airlines. About 6 percent of the gates are fully subleased to another airline, while 3 percent are unused.” (See app. V.) Gates at large and concentrated airports are less frequently sublet or shared than gates at other airports. Regional airlines are more likely than other air- lines to share the use of gates at all kinds of airports. At the 117 small airports we surveyed, airlines were more likely to share gates than at the larger airports. Major airlines lease virtually all of the fully subleased gates (152 of 154) at the large and medium-sized airports, as well as most of the unused gates (66 of 71), and all but 1 of the 15 unused gates at concentrated airports. National airlines, however, leave a higher proportion of their gates unused than the majors do (7 percent compared with 2 percent). The major airlines sublease most often to other major airlines. (See table 3.4.) When the major airlines do not sublease gates to other major air- lines, they are most likely to sublease to regional airlines, particularly to “Officials at several airports told us during our review that Eastern’s gates were unused but had been used before the strike against the airline. Because we asked airport officials to describe gate usage during 1988, before the strike, these gates are not counted as unused in our tabulations. Page 37 GAO/RCED-99-147 Airline Operating 81Marketing Practices “i” ,, Chapter 3 bbme Lensing Practices Limit Access to Airport Physical Facilities their code-sharing partners. Therefore, there are relatively few sub- leases from major airlines to national airlines whose lower operating costs make them particularly effective competitors with the major airlines. Table 3.4: Gate Subleases From Major Airlines to Other Airlines Total Percentage of subleases Size of airport’ --..-._-.__I__ subleases To majors To nationals To regional8 To othersb Total Larae 69 40% 19% 22% 11% 106% Medium 62 47% 16% 26% 11% 100% Total 131 47% 10% 24% 11% 100% Airport market* Concentrated l__l-_.__-.__.- -- 26 62% 15% 23% 0% 100% Unconcentrated 105 44% 18% 24% 14% 100% Total 131 47% 18% 24% 11% 100% aThere are a total of 66 airports, 27 large airports and 39 medium-sized airports. Of the 66 airports, 14 are concentrated and 52 are unconcentrated. bThe “others” category includes air cargo and international airlines. When leased gates are unused or subleased, it suggests that an airline is leasing more gates than it needs for current operations. Airlines may hold some unused or underused gates to ensure access to limited facili- ties for future expansion of service, since the actual cost of leasing gates is a small part of an airline’s operating cost at an airport. While such arrangements do permit access, airport and airline officials told us a subtenant airline usually pays a premium for access compared with the cost for the original lessee. This higher cost may disadvantage some air- lines, particularly those wanting to offer low-cost service, or discourage them from offering any service at the airport. While 83 percent of the large and medium-sized airports reported that they require approval of airlines’ subleasing arrangements, 37 percent do not examine the payment terms of such agreements. However, only about 12 percent of the large airports reported that they do not examine the payment terms of subleases, About 21 percent of the concentrated airports, 56 percent of the medium-sized airports, and 33 percent of the 117 small airports responding to our survey do not examine sublease payment terms. When airports have the right to examine sublease pay- ment terms, they have the opportunity to ensure that subleased facili- ties are made available on reasonable terms. Page 38 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 3 Some Leasing Practices Limit Access to Airport Physical Facilities The extent to which airport ticket counters, passenger hold rooms, and Airport Facilities baggage claim facilities are exclusively leased to airlines varies greatly. Other Than Gates Are Nearly all of the large and medium-sized airports lease some or all of Often Leased for their ticket counter space on an exclusive-use basis. More than three- fourths of these airports reported that they lease passenger hold rooms Exclusive Use on an exclusive-use basis. However, only about one-third of them lease baggage claim facilities on an exclusive-use basis. Many of the large and medium-sized airports that lease these facilities for exclusive use have no unused capacity in these facilities. In fact, 31 percent have no unused ticket counters, and 62 percent have no unused passenger hold rooms. Exclusive leasing of facilities other than gates adds to the problem of gaining access to the facilities needed to establish service, Fifty-three percent of the airports lease all of at least one of these facilities on an exclusive-use basis. Thirty-two percent of the airports have exclusive use leases on all of their leased gates and exclusive use leases on all of at least one other facility. In addition tothe 59 percent of airports that lease all of their leased gates exclusively, 21 percent lease all of at least one of these other facilities for exclusive use, so that 80 percent lease at least one type of facility (including gates) for exclusive use. Just as most gates are exclusively leased by major airlines, so are most of these other facilities, including 83 percent of the ticket counters, 90 percent of the hold rooms, and 91 percent of the baggage claim facilities. Most Large and Medium- The extent to which facilities other than gates are exclusively leased Sized Airports Lease varies widely. Ninety-two percent of the large and medium-sized air- ports lease at least some ticket counters on an exclusive-use basis. Facilities Other Than Forty-two percent of the airports lease all of their ticket counter space Gates for Exclusive Use for exclusive use. In addition, three-fourths of the airports either lease all of their ticket counters for exclusive use or have all of their leased gates on exclusive-use leases. Seventy-nine percent of the large and medium-sized airports lease at least some of their passenger hold rooms on an exclusive-use basis. Twenty-seven percent of the airports lease all of their hold rooms for exclusive use. Sixty-five percent of the large and medium-sized airports either have all of their leased gates or all of their hold rooms leased for exclusive use. However, only 39 percent of these airports lease any of their baggage claim facilities on an exclusive-use basis, and only 8 percent lease all of their baggage claim facilities for exclusive use. Page 39 GAO/RCED-90-147 Airline Operating % Marketing Practices Chapter 3 Some Lesdng Practices Limit Access to Airport Physical Facilities The Small Airports in Our The 117 small airports we surveyed are less likely than the larger air- Sample Are Less Likely to ports to have exclusive-use leases on their gates, hold rooms, and bag- gage claim facilities. There are several possible reasons for this. Because LeaseTheir Facilities for small airports have fewer facilities, airlines may have to share common Exclusive Use facilities rather than lease facilities for exclusive use. Also, it may be more economical for airlines that have only a few flights per day or week to pay fees for each use of common facilities than to lease facilities for exclusive use. Finally, since routes to and from these airports are often lightly traveled, service may change more frequently than on densely traveled routes, so it may be advantageous for both the airport and the airline to have the flexibility of less restrictive leases. Lack of access to ticket counter space appears to be the biggest con- straint a potential competitor would face at small airports, although more than 70 percent of the small airports have limited access to one or more facilities. The small airports we surveyed are more likely to have no unused ticket counter space than the larger airports (54 percent of small airports compared with 3 1 percent of the larger ones). They are also more likely not to have unused ticket counters when all of their current ticket counters are exclusively leased (51 percent compared with 25 percent of the larger airports). At those airports, a potential entrant may find it difficult to even sublease ticket counter space for its use. (See app. VI for details about the exclusive-use leasing of facilities other than gates.) Exclusively leased airport facilities, including gates, may represent a Exclusively Leased substantial barrier to entry at some airports. Of the 27 large airports, 20 Facilities May have all of their leased gates on exclusive-use leases, and another 4 have Represent a Barrier to all of at least one other facility leased for exclusive use. Of the 39 medium-sized airports, 19 have all of their leased gates on exclusive-use Entry leases, and another 10 have all of at least one other facility leased for exclusive use. At the 14 concentrated airports, 9 have all of their leased gates on exclusive-use leases, and 2 more have all of at least one other facility leased for exclusive use. In addition, a number of the large and medium-sized airports that lease 100 percent of their ticket counters, hold rooms, or baggage claim facili- ties for exclusive use also have no unused facilities of the same type. About two-thirds of the airports have no unused baggage claim facili- ties, two-thirds have no unused hold rooms, and about one-third have no unused ticket counter space. About one-fourth of the large and medium- sized airports not only lease all of their ticket counters for exclusive use, Page 40 GAO/RCRD-90-147 Airline Operating & Marketing Practices Chapter 3 Some Leasing Practice@ Limit Access to Ah-port Physical Facilities but also have no unused ticket counter space, while this same situation pertains to hold rooms at about one-fourth of the airports. Among the small airports we surveyed, over half have all of their ticket counters exclusively leased and have no unused counters. Airports are trying to retain control or regain more control of airport facilities, according to officials we interviewed at 17 airports. Officials at several airports, most notably in El Paso and Miami, told us that their policy is to regain more control over gates and other facilities as con- tracts with tenant airlines are renegotiated. Their strategies include moving toward more preferential-use leases, more short-term leases, and more widespread use of recapture provisions. However, officials at other airports told us that the airlines are resisting these efforts by refusing to sign new leases with less restrictive terms and even by going to court to try to force long-term agreements and majority-in-interest agreements (MIIS)6 which give the airlines some control over expansion decisions. Airlines seeking to begin or expand service at airports with such restric- tions would probably have to sublease facilities from a competitor unless the airport could build additional facilities or invoke use-or-lose provisions to make underused facilities available directly. Airport offi- cials told us that, in the absence of recapture provisions, airports whose facilities are fully leased usually attempt to match the entrant with an incumbent airline and to encourage the airlines to reach agreement through private negotiations. Another airport official, however, told us that matching entrant and incumbent airlines is complicated, for instance, when employees of the entrant airline belong to a different labor union or local than the incumbent’s employees or are non-union. The entrant would probably have to pay more than an incumbent airline would be paying for facilities and would have to make its plans known to a potential competitor. Thus, the ability of an airline to begin or expand service quickly in those markets could be severely limited. “A majority-in-interest agreement gives signatory airlines with a majority of operations at an airport a voice in decisions that affect the airlines’ financial commitment to the airport. Page 41 GAO/RCED-9@147 Airline Operating & Marketing Practices Chapter 3 Some Leasing Practices Limit Access to Airport Physical Facilities Officials of several airlines reported difficulty in gaining access to air- Airlines Cite Lack of port facilities on a competitive basis. An official for Southwest Airlines Competitive Access to reported that the use of another airline’s employees in a typical han- Facilities as an Entry dling agreement costs about 6 times as much as the airline’s own cost for similar services performed by its own employees. Subleasing is some- Barrier what less costly, according to Southwest officials, who say they pay another airline about 12 to 18 times as much for subleased facilities as that airline pays the airport authority. When America West was trying to begin service to Denver, it was asked to pay three times the actual cost for another airline to handle its flights, a cost that an airline official described as “not an acceptable option.” Another official reported that his airline was asked to pay 25 to 50 percent more than the market rate for similar services at Chicago O’Hare. In addition to increasing costs for the subtenant, subleasing agreements may give the subtenant airline little protection if the sublessor decides to terminate the agreement. With notice periods allowing from 48 hours to 30 days to vacate space, the subtenant airline has little time to find alternative space at the airport. The Secretary of Transportation’s Task Force on Competition in the U.S. DOI’ Task Force Domestic Airline Industry reviewed the findings of a survey of airport Findings facility availability carried out by the Airport Operators Council Inter- national. The Secretary’s Task Force concluded that limited access to gate facilities is a potential barrier to entry: While the practice of exclusive use predates deregulation, it greatly limits flexibility in allowing for new entry. Although there are sometimes lease clauses that allow the airport to reclaim gate space that is not in use, more frequently a new entrant gener- ally must go to incumbent lease holders in order to get access to the airport by sub- lease. Under these circumstances, the new entrant is likely to pay a sublease cost at least marginally higher (at the same utilization rate) than the incumbent will pay on the master lease.’ Opportunities for establishing new or expanded service are limited at Conclusions many airports by limited access to necessary airport facilities on equal terms with incumbent airlines. Our analysis shows that over 80 percent of the 66 large and medium-sized airports have limited access to at least 7Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Airports, Air Traffic Control, and Related Concerns(Impact on Entry), p. Y-5. Page 42 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 3 Some Leasing PracUcee Unit Access to Airport Physical Facilities one of four crucial facilities-gates, ticket counters, hold rooms, or bag- gage claim facilities -because of exclusive-use leases. At nearly 90 per- cent of the 27 large airports and more than 70 percent of the small airports we surveyed, the situation is the same. Exclusive-use leases are not necessarily a barrier to entry when they are coupled with effective use-or-lose provisions. In the absence of such pro- visions, however, there is often little the airport operator can do to pro- vide access to unused or underused exclusive-use facilities. Although officials at many of the airports told us they are trying to regain more control of their facilities, they also told us that incumbent airlines are vigorously resisting these efforts, In addition, since most of the leases currently in force have 5, 10, 20, or more years remaining, progress through renegotiating lease terms has necessarily been slow. When entrants cannot gain access to facilities on the same terms as incumbent airlines, they may find it difficult or impossible to offer com- peting service because their cost of operation at that airport will be higher than the incumbents’. When entrants sublease facilities, arrange- ments that include handling services or use of incumbent airline per- sonnel may artificially raise entrants’ costs, although such arrangements may be necessary because of the incumbents’ labor union contracts. Page 43 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 4 Many Airports FaceBarriers to Expansion One solution to the problem of having facilities controlled by airlines through exclusive-use leases is for the airport to build more facilities, but airports face several major constraints to further expansion of air- port capacity. Although most airports reported they have access to land for expansion, about half are planning little or no gate expansion in the next 5 years. Community opposition to airport capacity expansion (especially to increased noise); lack of funding; and majority-in-interest (MII) provisions in airport use agreements, which generally give airlines having a majority of operations at an airport a say in decisions that affect the airlines’ financial commitments, are the leading factors lim- iting or delaying expansion. We asked the airports how many additional gates they plan to add in the Many Airports Plan to next 5 years, including any gates currently under construction. Forty- Add No More Than four percent of the large and medium-sized airports reported they plan Five Gates to add no more than five gates during that time. Twenty-two percent of the large and medium-sized airports reported they have no plans to add any additional gates in the next 5 years and have no gates currently under construction, despite the fact that several of them have land available.1 Thirty-three percent of the large airports and 14 percent of the medium-sized airports do not plan to add any additional gates, nor do 21 percent of the concentrated airports. Another 22 percent of the large and medium-sized airports and 43 percent of the concentrated air- ports reported that they plan to build from one to five gates. Among the 117 small airports we surveyed, 37 percent have no plans to add gates. Only 18 percent plan to add more than five gates, while the median number of gates planned is two. Most of the large and medium-sized airports reported they have access Most Airports Have to land either owned by the airport or near it on which they could build Access to Land for additional facilities. (See fig. 4.1.) Eighty-six percent reported that they Expansion have access to land, while 14 percent reported they do not. Concen- trated airports are more likely than other airports to have access to land; 93 percent have such access. Eighty-nine percent of the small air- ports responding to this question indicated that they have access to land on or near the airport for expansion.2 ‘These percentages are based on the airports responding to this question. Three large and three medium-sized airports did not respond. All of the concentrated airports responded. 2We surveyed 117 of the 163 small airports with 20 or more passengers per day. The question about access to land was answered by 113 of the 117 small airports we surveyed. Page 44 GAO/RCED-90-147 Airline Operating fa Marketing Practices Chapter 4 Many Alrporta Face Barriers to Expendon Figure 4.1: Availability of Land for Airport Expansion 35 Number of airports Airports by size category L-l Definitely available Probably available Probably not available Definitely not available While access to land was generally not a problem, there are other impor- Various Other Factors tant constraints on airports’ ability to expand. These constraints include Limit Airport community opposition to increased noise and to other consequences of Expansion airport expansion, limitations on the ability of the air traffic control system to handle expansion, the need to comply with environmental reg- ulations, the unavailability of funding for financing expansion projects, and the presence of MII agreements in contracts between airports and airlines. Even among the 22 large airports that reported they have land available for expansion, 16 reported that at least 1 other factor will greatly limit or delay expansion in the next 5 years. Seven of the concentrated air- ports with land available are similarly limited by some other factor. Page 46 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 4 Many Airports Face Rarrlers to Expansion Community opposition to increased airport noise was the factor most frequently cited by these airports. Of the 113 small airports we surveyed that responded to this question, 101 said they have land available for expansion, but 29 reported that some other factor could greatly limit or delay expansion in the next 5 years. The small airports with access to land most frequently cited fac- tors other than community opposition and limitations on the air traffic control system as constraints, such as lack of available funding for air- port expansion. Community Opposition Community opposition to increased noise was the factor most frequently cited as impeding expansion for the large and medium-sized airports. Among the airports responding to this question, 18 of the 26 large air- ports and 7 of the 14 concentrated airports reported that opposition to increased airport noise could greatly impede expansion. Among the 114 small airports we surveyed that answered this question, only 13 reported that opposition to increased noise could greatly limit or delay expansion. Nine of the large and medium-sized airports responding to this question reported that community opposition to other consequences of airport expansion, such as increased highway congestion, could greatly limit or delay expansion. This type of community opposition is of greater con- cern to the large airports than to the medium-sized ones. Among the air- ports responding to this question, 6 of the 26 large airports reported that such community opposition could greatly delay expansion, while only 3 of the 38 medium-sized airports and 1 of the 14 concentrated air- ports reported that such community opposition could greatly delay expansion. Among the 114 small airports we surveyed that responded to this question, only 10 cited this factor as greatly impeding expansion. (App. VII provides data on the effects community opposition has on air- ports’ ability to expand, as well as on the effects of limitations on the capacity of the air traffic control system and other constraints.) Limitations on the Ten of the 62 large and medium-sized airports responding to this ques- Capacity of the Air Traffic tion reported that expansion could be greatly limited or delayed by the capacity of the air traffic control system. Six of the 25 large and 4 of the Control System 14 concentrated airports cited air traffic control capacity as a major problem. Only 7 of the 112 small airports we surveyed that responded to Page 46 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 4 Many Airporb Face Rarriere to Expansion this question cited air traffic control system capacity as a major problem. Other Factors Nine of the 27 large airports (including 2 of the concentrated airports) and 8 of the 39 medium-sized airports listed additional factors that could limit or delay expansion to some extent. One large airport and two medium-sized airports reported that a lack of available funding could greatly impede expansion. Two large airports cited government require- ments or regulations as greatly impeding expansion, and another one cited airline opposition to expansion. One large and one medium-sized airport cited environmental concerns (surface water drainage and the impact of expansion on wetlands areas) as major problems. Among the 14 concentrated airports, 1 cited both airline opposition and environ- mental concerns. Eleven of the 117 small airports we surveyed listed a lack of available funding, particularly FAA grants, as a problem that could greatly affect their ability to expand. Four small airports listed environmental con- cerns, four listed technical constraints (such as runways that are too short for some types of jet aircraft), and three reiterated their lack of access to land. One small airport reported that airline opposition to expansion could greatly limit or delay expansion. Majority-in-Interest MI1 agreements give airlines some control over airport expansion. These Agreements agreements between airports and airlines are called MI1 agreements because they give airlines having a majority of the operations at the air- port a voice in airport decisions that would alter the airlines’ financial commitment to the airport. Airlines, in return for making a long-term lease commitment to a particular airport, sometimes receive the right to approve some or all airport expansion projects. Under these agreements, an airport may be required to get the airlines’ approval of the proposed project itself, or the airlines may have some control over the airport’s ability to issue additional bonds or raise fees to pay for improvements. For example, an agreement might require approval by airlines enplaning 51 percent of the passengers in the previous year for any project costing over $50,000 whose costs would be recovered from fees charged to the airlines. Traditionally, it was considered necessary by the financial community for an airport planning a major improvement or expansion project to have the backing of the tenant airlines that are signatories of the MI1 Page 47 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 4 Many Alrporta Face Barrlens to Expansion (i.e., a commitment by them to pay sufficient fees to the airport to cover bond payments). Airports securing this long-term commitment from their tenant airlines were able to get a lower interest rate on their debt issues. In return, the airlines sought some guarantee that the airport could not unilaterally issue additional debt, which the airlines would then be required to help pay back through higher lease payments, landing fees, or other charges. Many times these MII agreements run for the life of the bond issue-20 to 30 years or longer. These long-term agreements could negatively affect competition if they are used to pre- vent expansion of facilities that would allow space for entrants. One alternative to signatory airlines’ funding expansion projects is for the airport to fund projects independently or by agreement with the partic- ular airline seeking the facilities. Several of the airports with MIIS told us they either have no other source of funding for major projects outside their MII provisions or would have difficulty recovering costs for projects backed by a single airline if that airline defaults on the agreement. Over half of the 66 large and medium-sized airports reported having an MII. In general, concentrated airports are more likely to have an MII than other large and medium-sized airports (79 percent of the concentrated airports compared with 48 percent of the unconcentrated airports). Nearly all of the large and medium-sized airports with an MI1 (33 of 36) give larger signatory airlines a greater voice in the approval of projects than smaller airlines by calculating shares or votes based on landed weight, fees paid, or enplanements. About three-fourths of the airports with an MI1 reported that the agreement limits or delays expansion to some extent. Six of the 36 large and medium-sized airports with an MII reported their MI1 greatly limits or delays expansion projects. (See table 4.1.) Page 48 GAO/RCED-99-147 Airline Operating & Marketing Practices Chapter 4 Many Airporta Face Ramiers to Expansion Table 4.1: Large and Medium-Sized Airport8 Where Majority-in-Interest Number of airports Llmlts or Delays Expanslon Effect of MII on expansion Greatly Moderately Somewhat Does not limits or limits or llmlts or limit or Total with Size of airport delays delays delays delay MIIS Largea 2 3 3 6 14 Medium 4 5 9 3 21 Total 6 6 12 9 35 Airport market Concentrateda 2 2 2 4 10 Unconcentrated 4 6 IO 5 25 Total 6 6 12 9 35 aOne large, concentrated airport with an MII did not answer this question. According to airport officials, the signatory airlines generally approve expansion projects that directly benefit the airlines. However, airport officials told us that the airlines are often reluctant to approve projects that would benefit other users, such as new facilities for cargo operators or general aviation, as well as projects that would benefit passengers but would not affect airline operations, such as parking garages. No airport official cited any instance in which signatory airlines rejected projects expanding the terminal or increasing the number of gates, although some projects were modified to make them less expensive. Airport offi- cials generally agree that the airlines make decisions on projects at one airport partly on the basis of projects proposed at other airports; for instance, one airline may agree to support a project another airline desires at one airport in order to get the second airline’s reciprocal sup- port for a project the first airline wants. Airport officials also generally agree that airlines and airports have different perceptions of the appro- priate timing of projects. Airports try to have facilities in place by the time growth projections indicate they will be needed; however, according to airport officials, airlines prefer to fund only those projects that address current needs. The airlines’ position may restrict capacity at these airports, possibly discouraging entry. According to airline offi- cials, no entrant has ever been prevented from starting service as a direct result of signatory airlines’ action under Mm. The delays resulting from MIIS may, however, discourage competitive entry. According to information provided by the airports, at least 9 of the 36 airports have one signatory airline with operations large enough to Page 49 GAO/RCED-99-147 Airline Operating & Marketing Practices Chapter 4 Many Airports Face Rarriere to Expansion block approval under their MII criteria, including 6 of the 11 concen- trated airports with an MIL3 (See fig. 4.2.) For example, the MI1 at St. Louis gives a single airline (TWA) power to block or delay most expan- sion decisions, since that airline’s operations alone are large enough to constitute a majority under the MII. Only one airport reported that projects can be approved by any one of the signatory airlines. One other medium-sized airport reported that all of its signatory airlines have an equal voice in decisions4 :3Minneapolis/St. Paul was in this group. However, a new airline use agreement, taking effect in 1990, will no longer allow any one carrier to block airfield capital improvement projects. Terminal projects are still not covered by the MII. 41n 11 cases, the information provided on the survey forms was not detailed enough to determine how many airlines would be required to either block or approve projects. Page 50 GAO/RCED-!#J-147 Airline Operating 81Marketing Practices Chapter 4 Many Airports Face Barriers to J3xpansion Figure 4.2: Percentage of Airports With a Majority-in-Interest Agreement Where 100 Percent of alrpotts with MI agreements One Airline Can Block Expansion Type of elrporl I One airline can block expansion One airline cannot block expansion Note: The data reported here represent only the 117 small airports surveyed by GAO and do not Include information on the other 46 small airports with 20 or more passengers per day. The 117 small airports we surveyed are less likely to have an MI1 than the larger airports. This may be due to low traffic density at the small airports and the lower proportion of small airports that are airline hubs. Therefore, airlines may place less value on having MIIs that allow them some control over costs at small airports than they do at their larger hubs. Only 18 of the 117 small airports have an MII agreement-15 per- cent compared with about 55 percent of the large and medium-sized air- ports. One airline can block projects at 4 of the 18 airports.6 Fifteen of “In 10 cases, the information given was not detailed enough to determine if any one airline would be able to block projects. Page 51 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 4 Many Airports Face Barriers to Expansion the 18 small airports with an MII reported that the agreement limits or delays expansion to some extent. Expansion at Many Most of the large and medium-sized airports cannot easily expand to Airports Is Limited by One accommodate new competition because of the combined effects of con- straints-including unavailability of land, community opposition to or More Factors increased noise and other consequences of expansion, limitations on the ability of the air traffic control system to handle expansion, the pres- ence of an MII, and other factors cited by the airports. Fifty-eight percent of the large and medium-sized airports (38 of the 66) reported that one or more constraints greatly impede expansion at their airport. This group includes almost three-fourths of the large airports (20 of the 27). (See fig. 4.3.) Eighty-nine percent of the airports (59 of 66) reported that one or more factors impede expansion to some extent. Sixty-nine percent of the small airports (80 of 117) we surveyed also reported that one or more factors impede their expansion to some extent. This situation is of special concern at highly concentrated airports and airports where all of at least one type of facility is exclusively leased to incumbent airlines, In those cases, an entrant may have to negotiate facility subleases with the dominant airline-the very airline it is trying to challenge for a share of the market. Page 52 GAO/RCED90-147 Airline Operating & Marketing Practices chapter4 Many Ahports PaceRaniera to Expansion Figure 4.3: Percentage of Airports Where One or More Factors Could Qreatly Limit 100 Percent of airports or Delay Expansion 90 Typa of airport 1 1One or more 1 Two or more Three or more I Four or more I Five or more Note: The data reported here represent only the 117 small airports surveyed by GAO and do not include information on the other 46 small airports with 20 or more passengers per day. The report by the Secretary of Transportation’s Task Force on Competi- Dar Task Force tion in the U.S. Domestic Airline Industry includes their findings on fac- Findings tors that limit expansion of capacity at airports. The analysis focused on MIIS and other clauses (such as clauses restricting the ability of the air- port to impose additional rates, fees, and charges on the airlines) that Y limit an airport’s ability to expand. The Task Force concluded that these clauses Page 63 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 4 Many Airport6 Face Barriers to Expansion may operate independently or in conjunction with MI1 clauses to stifle airport efforts to finance, build, and assign new capacity. . . . At best, the numerous contrac- tual barriers make it difficult for a new entrant to obtain cost-competitive access to airports. At worst, contractual clauses such as MI1 deter efficient development of new gate capacity, with a negative effect on new entry.” Overall, airports plan very little expansion of gates in the next 5 years, Conclusions although a few airports do plan significant expansions. Almost one-third of the 646 additional gates planned are at six large and medium-sized airports that will have to build additional runways in order to accommo- date all of the gates they have planned. Counting only the gates that can be added without building additional runways, the large and medium- sized airports plan to add an average of eight gates-an expansion of less than 4 percent per year. Community opposition to increased airport noise is an important constraint on expansion at many airports. We found no evidence that MIIS have been used to prevent entry by potential competitors. However, in our interviews with airport officials, we did find that these agreements usually delay proposed projects for months, even years, primarily because of the additional layer of review necessary to get the approval of signatory airlines. We also found that airlines are often reluctant to fund expansion before their operations are actually overcrowded, according to airport officials. As a result, we believe that MIIS contribute to chronic overcrowding that discourages entry by competing airlines. “Secretary’sTask Forceon Competitionin the U.S.DomesticAirline Industry: Airports, Air Traffic Control, and Helated Concerns (Impact on Entry), p. Y-14. Page 54 GAO/RCED-90-147 Airline Operating & Marketing Practices Chadx 6 Few Airport Noise Control Progmns Represent a Bamier to Ehtry We found that only 22 (about 12 percent) of the 183 airports we sur- veyed have a noise control program that could potentially limit competi- tion Our analysis of airport noise control programs was based on airport responses to our survey, analysis of noise rules and regulations, and interviews with airport officials. However, our survey included only 117 of the 163 small airports having 20 or more passengers per day. Small airports with more routes were more likely to be selected than those with fewer routes, because we used a random sample of routes rather than of airports to select the 117 small airports we surveyed. Because we used the airports’ responses to our survey to identify pro- grams to examine in detail, we do not know what programs, if any, the other 46 small airports have or how those programs differ from the noise programs at the 117 small airports we surveyed. Based on the air- ports’ noise abatement and mitigation programs as of 1988, we found that the larger airports are more likely to have noise restrictions. The most restricted airports are clustered in California (9) and along the East Coast (8). Several airports, including San Francisco, Minneapolis, San Diego, and New York Kennedy, reported that they plan to tighten their noise restrictions even further in the next few years. Airports use three primary types of noise control strategies, but two of Airports Use Three the three do not pose any substantial barrier to entry. Some type of Primary Types of noise control program is in effect at nearly all of the large and medium- Noise Control sized airports (63 of the 64 that answered this question) and 78 of the 117 small airports we surveyed. However, most of these programs Programs involve either controlling land use or directing flights away from noise- sensitive (primarily residential) areas. While such strategies do add to the cost of operating at an airport, they do not usually affect one air- line’s costs differently from another’s Land use strategies include zoning and building restrictions, soundproofing buildings near the air- port, guaranteeing the purchase of nearby homes, and buying land sur- rounding the airport. Strategies used to direct flights away from noise- sensitive areas include using a preferential runway for as many flights as possible, requiring landing approaches and takeoffs to be made over waterways, and directing aircraft to climb and descend at the steepest safe angle. All of these strategies minimize the time an aircraft spends over noise-sensitive areas. A third type of noise control strategy- restricting the types of aircraft used or the number of aircraft operations-is the one most likely to have a differential effect on airlines operating from the same airport. This strategy includes limiting the number of flights that can be made Page 65 GAO/RCED-W-147 Airline Operating & Marketing Practices Chapter 5 Few AIrport Noise Control Programs Represent a Barrier to Entry during certain times of day; limiting the number of airlines that can serve an airport; limiting or banning operations by specific kinds of air- craft, often during specific hours (for instance, at night); restricting training flights and engine testing; requiring the use of the quietest available aircraft; and limiting the amount of noise that can be gener- ated by operations at the airport1 We considered noise restrictions to constitute a potential barrier to com- petition when they (1) treat incumbents and entrants differently or (2) limit the use of the types of aircraft that might be more readily available to entrants. For instance, limits on the use of older, noisier aircraft might disadvantage the newer or smaller airlines since these aircraft are more readily available in the secondhand and lease markets than are the newer, quieter aircraft. Such noise control programs constitute a barrier if they cause the costs of operating at a particular airport to vary between airlines at that airport depending on when an airline started service or the type of equipment it uses. The Federal Aviation Administration designates aircraft as belonging to Airports’ Limitations either Stage II or Stage III based on the amount of noise they make.2 on Noisier Aircraft About 64 percent of the current fleet are Stage II aircraft, which are the May Limit Entry older, noisier, and less fuel efficient models. The other 36 percent of the fleet are the newer, quieter, and more fuel-efficient Stage III aircraft. When an airport requires that a higher than average percentage of flights be made using Stage III aircraft, it can create a barrier for those airlines that have primarily Stage II aircraft or that are acquiring used aircraft. The supply of Stage III aircraft is limited and aircraft manufac- turers’ commercial aircraft production is reserved for several years into the future, making the purchase of new, quieter aircraft difficult and reducing the availability of aircraft for lease. ‘Noise budgets or caps limit the amount of noise that can be generated and are used either to prevent total noise at an airport from increasing or to reduce the total noise over a period of time. ‘These stages are defined in Federal Aviation Regulation (FAR) part 36, sec. 36.1(f)(3) and (f)(6). The noisiest aircraft were designated Stage I, but these can no longer be flown anywhere in the United States. Page 56 GAO/RCED-90-147 A&fine Operating 81Marketing Practices Chapter 5 Few Airport Noise Control Programs Represent a Barrier to Entry SomeAirports Limit Stage Twenty airports in our survey restrict the operation of Stage II aircraft. II Operations All of these airports restrict Stage II operations during nighttime hours, and 10 restrict Stage II operations both day and night.” Only Long Beach, Burbank, Lake Tahoe, and Orange County, in California, entirely prohibit the use of Stage II aircraft during both daytime and nighttime hours. Palm Beach uses differential landing fees that make Stage II operations more expensive than Stage III operations, with Stage II night- time operations being assessed 13 times as much as the base fee.4 Only two other airports, Dallas Love Field and Boston, require a higher pro- portion of Stage III aircraft than that of the industry fleet as a whole. Dallas Love Field requires 60 percent of all operations to be performed with Stage III aircraft. Boston required 49 percent Stage III aircraft in 1988, but also offers airlines an alternative method of complying with its noise budget, discussed below. Denver, Minneapolis, and Islip also limit Stage II operations under their noise budgets. A Few Airports Have Six airports have noise budgets or caps. These airports include three Noise Budgets large airports (Boston, Denver, and Minneapolis/St. Paul), two of which are concentrated and one medium-sized airport (Orange County). Two of our 117 small airports (Islip and Long Beach) also have noise budgets. Boston’s noise budget is the most flexible of the group, allowing airlines to choose between two options: making a certain portion of their flights with Stage III aircraft (the portion was 49 percent in 1988 and 53 per- cent in 1989) or meeting a noise per seat standard. Under the second option, an airline could use a higher proportion of Stage II aircraft than it could under the first option if the planes are large enough and quiet enough. Boston does not limit the number of Stage III operations an air- line may add. Most of the noise budgets make some provision for entry at the airport. Under a noise budget, the airport determines what amount of noise will be allowed and allocates the rights to make that noise to airlines oper- ating at the airport. These noise rights can be transferred between air- lines (bought, sold, or leased) at some of the airports with noise budgets. The noise budget at Islip provides for a complete reallocation of all noise !%an Francisco’s nighttime Stage II ban is not included because it did not take effect until January 1, 1989. At six airports (Minneapolis, Midway, Palm Springs, Santa Barbara, Sarasota, and White Plains), the nighttime curfews are voluntary agreements. These airports report good compliance with their voluntary programs. However, if compliance levels were to drop, voluntary restrictions would probably be converted to mandatory ones. 4Palm Beach airport officials told us they are planning to further increase fees for Stage II aircraft operations in 1990. Page 57 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 6 Few Airport Noise Control Program@ Represent a Barrier to Entry allowances on a fixed schedule, allowing potential entrants a good opportunity to gain their own noise allocation rather than having to buy or lease noise rights from an incumbent airline that has an allocation. In practice, however, reallocation lotteries are held whenever the airport has requests for additional noise rights. The initial noise allocations at Boston, Denver, and Minneapolis were all based on the historical use of the airport by incumbent airlines. However, both Boston and Denver exempt from the noise budget airlines with only a few flights per day. In contrast, when Minneapolis designed its noise budget, a portion of the allowable noise was specifically reserved for future entrants. Minneap- olis and Denver both allow the sale of noise allocations from incumbents to entrants. Noise budgets are not necessarily more burdensome to entrants than to incumbents. In Minneapolis, incumbent airlines signed voluntary agree- ments with the airport authority that implemented the noise budget. Airport officials told us that an entrant would not automatically be cov- ered by the noise budget because it is a voluntary measure. However, Minneapolis officials also told us they have a formal noise budget mea- sure drafted that could be implemented if voluntary compliance were to deteriorate.” Although noise budgets are not necessarily more burdensome to entrants, they do sometimes give incumbent airlines advantages. Incum- bent airlines at Minneapolis were granted some exemptions from the noise budget for operations in place when the voluntary agreements were signed. In Denver, incumbents were granted noise allocations based on their historical use of the airport when the noise budget was imple- mented. Since no noise allocation was set aside for entrants at Denver, they must either maintain operations at the low level of flights that is exempt from the budget or purchase part of an incumbent airline’s noise allocation, Boston’s noise budget exempts cargo airlines that were serving the airport in 1985 (before the noise budget went into effect), which could give them an advantage over newer cargo airlines. SomeAirports Limit Stage Sixteen airports, including 7 in California, place some restrictions on III Operations even the quietest (Stage III) aircraft. Three airports-Orange County, Long Beach, and Islip-restrict Stage III aircraft during both day and * ‘When Minneapolis/St. Paul’s new airline use agreement takes effect ln 1990, all Stage II operations will be assesseda noise fee, and Stage III operations will earn a credit against the noise fee. Proceeds from the noise fees will be used for noise mitigation projects on property outside the airport’s grounds. Page 68 GAO/RCED-DO-147 Ah-line Operating & Marketing Practice6 Chapter 5 Few Airport Noiae Control Programa Represent a Barrier to Entry night hours. Orange County’s restrictions designate Stage III aircraft as belonging to one of three noise categories, strictly limiting operations for all but the quietest of the Stage III aircraft, Long Beach allows only Stage III operations, but even those are limited by the airport’s cap of 40 flights per day. Islip’s noise budget limits the use of Stage III aircraft to some extent, even though it allows airlines some latitude in allocating operations between Stage II and Stage III aircraft. Myrtle Beach has a nighttime curfew that prohibits all operations, including those by Stage III aircraft. Entry at four Southern California airports is severely limited by restric- tions on airport activity, primarily resulting from lawsuits over airport noise. Long Beach and Orange County stand out as having the most restrictive noise programs in the nation, while Burbank and Lake Tahoe have the next most severe restrictions. Long Beach is limited to a max- imum of 40 flights per day by court order, with the court also allocating these flights among competing incumbent airlines and entrants. Any change in the number or allocation of flights would have to be decided by the court, according to airport officials, According to DOT, the finan- cial burdens of litigation and aircraft testing required to gain access to the Long Beach airport resulted in one entrant’s bankruptcy. Orange County prohibits use of Stage II aircraft and also has caps on both the number of airlines that can serve the airport (9 air carriers) and the number of passengers. The airport maintains a list of airlines seeking entry and notifies them on a first-come-first-served basis when the opportunity for entry arises. However, entrants are offered only two flights per day, which may deter low-cost airlines from offering service. Burbank bans the use of Stage II aircraft entirely and, further, has a voluntary ban on Stage III operations at night. Similarly, Lake Tahoe requires that all aircraft comply with a decibel-level noise standard that no Stage II aircraft can meet. The airport also has court-ordered restric- tions on the number of flights. (See app. VIII.) The Secretary of Transportation’s Task Force on Competition in the US. DOI Task Force Domestic Airline Industry noted the presence of some highly restrictive Findings noise regulations at a handful of airports and suggested that “there could be a serious barrier problem if local rules restricting the operation of specific aircraft were to proliferate,” but concluded, “based on rules Page 59 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 6 Few Airport Nobe Control Program Represent a Barrier to Entry currently in place, that local environmental regulations do not represent a serious barrier to entry.“” Noise control programs that have the potential to limit competition are Conclusions not in widespread use. However, several of the airports that already have restrictive noise control programs are planning to increase their restrictions further. Airports across the country are attempting to bal- ance the needs of their local passengers for air travel with the needs of surrounding communities affected by airport noise. When one airport in a metropolitan area has noise restrictions, however, there are usually alternative airports within the metropolitan area that travelers can use, although these alternative airports may be less convenient. The terms of the airport noise control programs we examined are not very consistent. For instance, aircraft complying with the noise control restrictions at an airport at one end of a route might not comply with the noise restrictions of the airport at the other end of the route. Should these types of noise control restrictions become widespread, this lack of consistency could make it difficult for the airlines to schedule the use of their aircraft efficiently or could substantially raise the cost of pro- viding service. To the extent that new restrictions include exemptions for incumbent airlines, they would have a greater effect on entrants’ ability to start competing service. “Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Airports, Air Traffic Control, and Related Concerns (Impact on Entry), p. 4-6. Page 60 GAO/RCED90-147 Airline Operating & Marketing Practices Chapter 6 SomeAirline Marketing StrategiesLimit Entry The new airline marketing strategies developed since deregulation build customer loyalty among passengers and travel agents and increase the cost of entry by competing carriers. Frequent flyer plans are targeted at business flyers and encourage them to use the dominant carrier in each market, discouraging new entrants. Airline-owned computerized reser- vation systems (CRS) increase costs for entrants because they charge high booking fees and they encourage travel agents to book flights on the airlines owning the CRSS. Volume incentives paid by airlines to travel agents are effective in influencing the flights booked for the large per- centage of passengers who leave their choice of airline to the travel agent, and thus increase the costs of marketing tickets for both incum- bent and entrant carriers. Code-sharing agreements also raise the cost of entering new markets, but appear to have significant benefits for con- sumers as well. Since travel agents are the primary point of contact between airlines and consumers purchasing tickets, we conducted a telephone survey of 520 travel agents.’ Sixty percent of the agents said that more than 35 percent of their bookings are for business travel. Twenty-four percent of the agents, doing 38 percent of the bookings, did more than 65 percent of their bookings for business customers. Frequent flyer plans are a marketing strategy airlines use to encourage Heavy Use of customer loyalty. Under these plans, passengers qualify for various Frequent Flyer Plans awards by flying a specified number of miles with the sponsoring air- Creates a Serious line. The awards earned increase in attractiveness as the number of miles flown grows. After accumulating relatively few frequent flyer Barrier to Entry miles, a passenger may, for instance, earn the right to upgrade a ticket from coach to first class, while free flights to overseas destinations require earning higher accumulations of miles. Frequent flyer programs encourage passenger loyalty through the award structure. Some of the programs are designed so that as the mileage accumulated increases, the value or desirability of the awards earned per mile flown is greater. For example, a plan might require 30,000 miles of travel for a passenger to earn the first free ticket, but only an additional 20,000 miles for the second free ticket. A passenger with 30,000 frequent flyer miles earned under one plan would thus be better off to earn another 30,000 miles under that plan (earning, say, ‘See app. XI for responses to each question in the telephone survey of 520 travel agents and for sampling errors for selected data. Page 61 GAO/RCED-90-147 Airline Operating & Marketing Practices chapter 6 Some Airline Marketing Strategies Limit Entry both a second free ticket and an upgrade to a first-class ticket) rather than earn an initial 30,000 miles under another plan. In addition, some plans limit how long a participant can hold accumu- lated miles. This encourages passengers to travel on a single airline as much as possible in order to build up enough miles to earn an award before the miles expire. Because the award structures encourage passen- gers to fly regularly on a single airline, a frequent flyer plan helps a well-established airline to discourage its passengers from flying on other airlines that offer new service to the same destinations. The dominant airline at an airport generally offers service to the most destinations and will, therefore, offer participants in frequent flyer plans the most oppor- tunities to earn and redeem awards. We attempted to determine the extent to which passengers choose flights to build up miles in their frequent flyer plans and the reasons they choose the plans they do by making national projections baaed on our survey of 520 travel agents. Eighty-one percent of the travel agents we spoke with told us that their business customers choose flights to accumulate additional frequent flyer miles more than half the time. Almost as many agents believe that the ease of building up miles on a single airline is a major factor in passengers’ decisions about which fre- quent flyer plan to use. These results indicate that frequent flyer plans are heavily used and that the airline providing the most flights from a particular city is likely to attract the most frequent flyer participants. (See table 6.1.) Table 6.1: How Often Travel Agents Reported That Business Clients Choose How often business clients choose flights to build Percentage of travel agents Flights to Build Up Frequent Flyer Miles up frequent flyer miles --__ reporting Always or almost always 57 More than half the time 24 About half the time 9 Less than half the time 4 Rarely, if ever __----- 2 Othera 3 Total 100b Total agents responding to question 520 aThe “Other” response category includes those who answered “Don’t know” or “Other” to this question. bTotal does not add to 100 percent because of rounding. Page 62 GAO/RCED-90-147 Airline Operating & Marketing Practices Chapter 6 Some Airline Msrketlng Strategies Limit Entry CRSS increase costs and reduce revenues for airlines that are not CRSven- Control of CRSsby dors. A non-vendor will therefore be discouraged from entering markets Dominant Airlines where the dominant carrier is a CRS vendor. We concluded in our Sep- Creates Additional tember 1988 testimony that CRSS earn profits exceeding those that could reasonably be expected to be earned in a competitive market2 They Barriers for Entrants therefore unfairly transfer millions of dollars of revenues annually from airlines that do not own CRSS to those that do, making the former less competitive in the marketplace. In our September 1988 testimony, we also recommended that DCYI’ consider action to remedy the anticompeti- tive problems in the CRSindustry found by both GAO and the Department of Transportation. The current nor rules governing CRSS expire at the end of 1990. uor is currently considering revisions to its CRS rules under an official rulemaking proceeding. In May 1988 nor, in an extensive study on CRSS,” concluded that travel agents book a disproportionate number of flights on the airline that owns their CR%DOTfound that phenomenon, which it called the “halo effect,” boosted the revenues of CRS vendors by 9 to 15 percent. These additional revenues, called incremental revenues, come at the expense of non-vendors, making it more difficult for them to compete. Moreover, the costs of establishing a new CRS and signing up agents to use it are so high that establishing a new CRSis impractical for an entrant. The costs of signing up agents are increased by the restrictive provisions in the contracts between CRS vendors and travel agents. oar also found that for the two major CRSS controlling 75 percent of the market, the booking fees charged to competing airlines whose flights were booked on the CRSS were about double the costs of providing the bookings. These excessive booking fees, in combination with the incre- mental revenues earned by CRS vendors, resulted in the transfers of mil- lions of dollars per year from non-vendors to vendors. Some of the travel agents we surveyed told us that they are more likely to recommend the airline that owns their CRS to their customers than another airline. This response was consistent with D&S analysis. CRS vendor airlines also apparently used data from the CRS about agents’ bookings to target their travel agent incentives, programs that also 2Competition in the Computerized Reservation System Industry (GAO/T-RCED-88-62, Sept. 14, . . Competition: Impact of Computerized Reservation Systems (GAO/ 98s seeal L~-86-749”Mk$L36). ‘Study of Airline Computer Reservation Systems, U.S. Department of Transportation (DW-P-37-88-2, day 1QW. Page 63 GAO/RCED90-147 Airline Operating & Marketing Practices ClIapt43r 6 Some Airline Marketing Strategies Limit Entry influence agents to book additional flights on the vendor’s airline. Some of the agents we surveyed reported receiving visits from their CRS vendor’s representatives in response to changes in booking patterns. Airlines also offer several types of incentives to travel agents based on Volume Incentives an agent’s volume of bookings, including VIP club memberships, May Increase overbooking privileges, override commissions, and free tickets. The first Marketing Costs for of the incentives, membership in airline VIP clubs, provides members with a special waiting area and often includes additional services while Entrants and they wait, such as free coffee or the use of a computer. The second Influence Booking incentive, overbooking privileges, allows agents to book travelers on Patterns flights that appear on the computerized reservation system to be fully booked. This privilege is particularly useful to agents booking last- minute trips for business travelers. The third incentive, override com- missions, is monetary bonuses paid to travel agents who book a large volume of business with the airline offering the incentive. The last incentive, provision of free tickets, gives the agents awards similar to those that passengers receive under frequent flyer plans. Marketing Costs To the extent that these incentives are effective in inducing agents to book a disproportionate number of passengers on a particular airline, they may increase the costs of marketing tickets, because other airlines may feel compelled to offer equally costly incentives. An increase in the cost of selling tickets in a market may, in turn, discourage airlines from entering the market. We asked agents about the extent to which they (1) received these incentives, (2) could influence the travel choices of their customers, and (3) could have been influenced by these incentives in the recommendations they made to their customers. Booking Patterns Most of the agents we spoke with get volume incentives of various kinds. About three-fourths of the agents receive at least one kind of incentive. In our survey, the extent to which agents receive volume incentives was related both to the percentage of business customers served and to the size of the agency- agencies with a higher proportion of business customers and larger agencies got more incentives. Based on our survey results, we project that 41 percent of agents nationally get free tickets, 11 percent get free VIP club memberships, 36 percent get overbooking privileges, and 62 percent get override commissions. For Page 64 GAO/RCED-99-147 Airline Operating & Marketing Practices Chapter 13 Some Airline Marketing Strategies Llmtt Entry almost two-thirds of the agencies who reported receiving override com- missions, the commissions are moderately or very important to the office’s revenues. Passengers frequently leave the choice of airline for their flight up to their travel agent. Based on the results of our survey, 51 percent of the agents select the airline for their customers at least half of the time. In fact, more than two-thirds of the agents select the airline on at least one- auarter of the flights thev book. In the Travel Agent Market Studs. con- ducted by Louis Harris and Associates for Travel Weekly magazine, travel agents reported that they choose the airline 41 percent of the time for-business travelers and-55 percent of the time for leisure trav- elers4 Many agents mentioned low fares as an important consideration in their choice of flights when passengers leave the choice to the agents, while the majority of the agents mentioned factors affecting customer convenience, such as choosing flights to match the customer’s preferred time of travel and nonstop flights. Some of the agents mentioned they would choose their preferred airline or the airline that gives the agent incentives, when two flights are equally convenient for the customer. Forty-one percent of travel agents have a preferred airline, which they recommend to passengers who are undecided about which airline to choose, based on our survey results. The agents we surveyed mentioned both factors that affect the agency (for example, override commissions and ownership of the CRS)and those that affect customers (for example, customer preference and low fares) as the bases for choosing their pre- ferred airline. In addition, according to the Travel Weekly survey, 51 percent of travel agents choose a particular airline because of override commissions at least some of the time. Therefore, although the agents’ primary considerations in selecting between flights appear to be cus- tomer convenience and lowest available fare, agents are likely to be influenced to some extent by the incentives they receive from airlines. Our data show that travel agents often receive volume incentives and that these incentives have some influence on their booking patterns. Since 81 percent of airline tickets are booked through travel agents, and since 51 percent of the agents in our survey reported choosing the air- line at least half of the time, there is a potential for these incentives to influence a large proportion of airline bookings. The widespread use of these incentives indicates that travel agent incentives significantly raise 4SeeThe 1987 Travel Agency Market, pp. 28 and 46. The study, dated July 1988, was based on a survey of 702 agents in the 48 contiguous states. Page 65 GAO/RCED-90-147 AIrline Operating & Marketing Practices chapter 6 Some Ahllne Marketing Strategies Lhlt Entry the costs of marketing airline tickets. This may adversely affect entrants, which may be less able to bear these costs than a well- established incumbent airline can. The anticompetitive impact of incen- tives paid to travel agents appears to be less powerful, however, than the effects of frequent flyer plans and CRSS, because the incentives raise costs for both the entrant and the incumbent. However, if the entrant is smaller than the incumbent, the entrant may be more adversely affected by these higher marketing costs. Two types of arrangements are generally used when a passenger’s trip Anticompetitive involves flying on more than one airline: interlining and code-sharing. Effects of Code- With an interline agreement, one airline sells tickets that include travel Sharing May Be Offset on another airline’s flights. The other airline agrees to accept such tickets and provide transportation of passengers and their baggage. The by Benefits to airlines do not coordinate schedules or necessarily have facilities located Consumers near one another in the connecting airport. In a code-sharing arrange- ment, as discussed in chapter 1, a commuter airline enters into a part- nership with a larger airline to transport connecting passengers to and from the larger airline’s flights. For the convenience of the two airlines’ passengers, the airlines closely coordinate their schedules, with the larger airline often providing services such as baggage checking and air- port facilities such as gates for the commuter in an area close to its own. In code-sharing, the passenger’s ticket shows the two-letter airline code of the larger airline for all segments of the trip even though part of the trip is actually flown on the smaller airline. The smaller airline thus shares the airline code of the larger airline. The larger airline also han- dles much of the fare collection and accounting work and usually sets standards for the commuter airline’s service that are similar to its own. Code-Sharing There are three ways that code-sharing can disadvantage competing air- Disadvantages Non-Code- lines that do not have code-sharing agreements. First, code-shared flights are given preference over interline flights in the CFBSthat agents Sharing Competitors use to book flights, so that code-shared flights appear sooner in the dis- play. Since flights listed earlier in the CRSdisplay are more likely to be booked than those displayed later, code-shared flights are more likely to be booked than interline flights. Second, some passengers may choose code-shared flights over interline flights in the belief that the entire trip will be made with the larger air- line’s jet aircraft. DOT rules require that the passenger be informed that part of the trip will take place on a second airline. However, since a Page 00 GAO/WED-fW-147 Airline Operating & Marketing Practices Chapter 6 Some Alrllne Marketing Strategies Llmlt Entry passenger’s ticket shows the code of the larger airline for the entire trip, some passengers may believe that the entire trip will be flown on the larger airline’s aircraft. Third, code-sharing commuter airlines are more likely to deliver passen- gers to their code-sharing partner than to other airlines at the airport because of the partners’ unified ticketing procedures and their closely linked schedules and facilities. Most commuter airlines enter into code- sharing agreements with only one larger airline at any particular air- port. Thus, code-sharing could foreclose the market for other jet airlines that would not be able to capture enough of the passengers changing flights at the airport to compete with the larger code-sharing airline. Code-Sharing May Benefit Our survey could not assess the significance of the anticompetitive Consumers effects of code-sharing agreements. However, it did reveal advantages of code-sharing for consumers that may offset any anticompetitive effects it has. According to our survey, travel agents generally think that con- sumers are well aware of the fact that a code-shared flight involves flying on a commuter aircraft. Ninety-five percent of the agents either have a policy of informing passengers that a flight will be on a code- sharing commuter or believe that most passengers know which flights are code-shared. While more than half of the agents said that their customers have no preference between code-shared and interline flights, 66 percent of those who said their customers do have a preference reported that the customers prefer code-shared flights. (See table 6.2.) More convenient connecting times are the leading reason that customers prefer code- shared flights, according to the agents’ answers to questions about par- ticular aspects of service that might influence passengers’ choices. Fur- ther, agents reported fewer complaints about lost, delayed, or damaged baggage, inconvenient gate locations for connecting flights, and inconve- nient connecting times from customers on code-shared flights than on interline flights. For three other dimensions of service, the agents reported no difference in complaints between code-shared and interline flights on one dimension and fewer complaints about interline flights on the other two dimensions. Overall, these data suggest that code-sharing provides some consumer benefits which should be considered in relation to any anticompetitive effects this practice may have. Page 67 GAO/RCED-96-147 Airline Operating Br Marketing Practices Chapter 6 Some Airline Marketing Strategies Limit Entry Table 6.2: Customer Preference for Code-Shared and interline Flights, as Percentage of agencies Reported by Travel Agents Surveyed Customers preference responding Strong preference for code-sharina 19 Moderate preference for code-sharing 10 -No preference/depends on situation 53 Moderate preference for interlining 6 Strona preference for interlinina 9 OtheP 3 Total 100 Total number of agents responding 517 aThe “Other” response category includes those who answered “Don’t know” or “Other” to this ques- tion. The Secretary of Transportation’s Task Force on Competition in the U.S. WI’ Task Force Domestic Airline Industry reviewed the competitive impacts of frequent Findings flyer plans, CRSS, and travel agent commission overrides. About frequent flyer plans, the Task Force concluded that these plans “help stabilize and protect existing market shares among incumbent airlines, which may make it more difficult for smaller air carriers to compete success- fully in some markets.“” On CRSS, the Task Force’s conclusions were generally parallel to DOT’S earlier conclusions in its 1988 study of the systems. However, the Task Force did note that the CRS vendors’ recent estimates of incremental rev- enues, that is, the additional profits the vendors receive by virtue of owning CRSS,were “generally higher than the numbers used in the Department’s 1988 report.“” On travel agent commission overrides, the Task Force concluded that, “Override programs in general give larger carriers an advantage in win- ning an agency’s favor. . . . [and] given the importance of incremental airline revenues, the large carriers’ advantages in obtaining preferred status from travel agencies does weaken the competitive position of smaller carriers.“7 “Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Airline Marketing Prac- t&, p. 41. “Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Airline Marketing Prac- @, pp. 5-6. 7Secretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Airline Marketing Prac- *, p. 30. Page 68 GAO/RCED-90-147 Airline Operating & Marketing Practices chapter 6 Some Airline Marketing Strategtee Limit Entry The Task Force did not directly address the impact of code-sharing agreements on competition. However, it did comment on the relatively small average number of regional airlines serving hub-and-spoke routes, which “probably reflects the difficulty experienced by potential new entrants into hub-feeding markets in competing with the code sharing regional affiliates of major airlines” that operate connecting hubs at the larger airports8 Together, these airline marketing strategies are likely to significantly Conclusions limit the potential market for an entrant. Frequent flyer plans, under which the dominant airline has an advantage, exercise a significant hold on business passengers, who represent more than half of the market. cuss, usually owned by the dominant airline, and travel agent incentives significantly influence the booking patterns on flights selected for pas- sengers who leave their choice of airline to the agent. Even if the entrant can book a passenger on one of its flights, it may have to pay its competitor a premium for booking the flight on the competitor’s CM. While an entrant may be able to offer its own incentives to travel agents and establish its own code-sharing agreements, these strategies signifi- cantly increase the costs and risks of entry. Code-sharing seems likely to discourage entry, but may have enough advantages for consumers to compensate for its anticompetitive effects. %ecretary’s Task Force on Competition in the U.S. Domestic Airline Industry: Regional Airline Com- petition, p. 20. Page 69 GAO/WED-99-147 Airline Operating & Marketing Practices Appendix I Net Air Carrier Slots hased and Sold by Airline Type at Each of the Slot-ControlledAirports, April 1986 Through September1988 Table 1.1: Net Equivalent Air Carrier Slots Lessed by Airline Type, April 1986 Slots leased Through September 1988 Slots leased to from airline Net equivalent Airport and airline Woe alrllne tvDe tvpe slots leaseda Washington National Major airlines 199 232 (341b National airlines 43 7 36 Regional airlines 20 22 (2) Othersc Total New York Kennedy Maior airlines National airlines Regional airlines OthersC 0 0 0 Total 234b 234b 0 New York LaGuardia Maior airlines 203 219 (161 National airlines 15~- 13 3b Regional airlines 14 0 14 Othersc 0 0 0 Total 232 232 Ob Chicago O’Hare Maior airlines 332 401 (69) National airlines 124 52 72 Regional airlines 73 62 11 OthersC 1 16 (1% Total 531b 531 Ob All slot-controlled airports Maior airlines 093 1.085 (192) National airlines 183 73 110 Regional airlines 181 84 97 Othersc 1 16 (15) Total 1,258 1,258 0 aSlots are leased for various periods of time. In order to make leased slots comparable to purchased slots, leased slots were converted to equivalent slots by dividing the number of possible operations during the life of the lease (slot-days) by the number of days in a quarter (91). When more slots were leased out by the airlines in a size category than were leased to airlines in that size category, the decrease in equivalent slots is shown in parentheses. “Columns and rows do not add precisely because fractional equivalent slots leased were rounded. ‘The “Others” category includes foreign airlines holding domestic slots, all-cargo airlines, and non- airline holders of slots. Source: GAO analysis of FAA Slot Administration records. Page 70 GAO/RCED-90-147Airline Operating & Marketing Practices Appendix I Net Air Carrier Slota Leased and Sold by Airline Type at Each of the SlotControlled Ahporta, April 1986 Through September 1988 Table 1.2: Net Air Carrier Slots Sold by Airline Type, April 1996 Through slots sold to Slots sold by September 1988 Airport and airline type airline type airline type Net slots solda Washington National Major airlines 103 73 30 National airlines 17 33 (16) Regional airlines 17 31 (14) Othersb 8 8 0 Total 145 145 0 New York Kennedy Major airlines 17 14 3 National airlines 3 8 (51 Reaional airlines 14 8 6 Othersb 4 8 (4) Total 38 38 0 New York LaGuardia Major airlines 129 72 57 National airlines 6 48 (42) Regional airlines 0 15 (15) Othersb 0 0 0 Total 135 135 0 Chicago - O’Hare Major airlines 260 171 89 National airlines 21 68 (471 Reqional airlines 6 48 (42) Othersb 2 2 0 Total 289 299 0 All airports I”. Major airlinea al 330 179 ,, NBtlOnal airlmm 47 197 jiib) Regtonal airlirvx 37 102 (65) Othersb 14 18 (4) Total 607 607 0 aWhen airlines in a size category sold more slots than they bought during the period, the resulting net decrease in slots held by that category of alrline ISshown in parentheses. ‘The “Others” category includes foreign airlines holding domestic slots, all-cargo airlines, and non, airline holders of slots. Source: GAO analysis of FAA Slot Administration records. Page 71 GAO/WED-90-147 Alrline Operating & Marketing Practices Appendix II Distribution of Air Cder Slots Leasedby tingth of Leases,April 1986 Through September1988 Percentage of slots leased Length of leases 1986 1987 1988 1986-88 90 days or less 52% 78% 66% 69% 91-180 days 15% 20% 25% 21% Over 180 days 33% 3% 9% 10% Total 100% 100%’ 100% 100% Actual number of slots leased Total slots leasedb 241 651 462 1.354 aPercentages in this column do not add to 100 because of rounding. bThis is the actual number of slots leased in the period. Because slots are leased for varying periods, actual slots are converted to equivalent full-time slots. The 1,354 actual slots leased are equivalent to 1,258 full-time air carrier slots. Source: GAO analysis of FAA Slot Administration records. Page 72 GAO/WED-99-147 Airline Operating 81Marketing Practices Distribution of DomesticSlot Holdings Between Related and Unrelated Airlines, by Airline Type, December1985 Through December1988 Percentage of air carrier slots held Airline type0 Dece%i Dece%iz; Dece%ti Dece%i Major airlines and related carriers 86 96 97 98 National airlines 10 3 2 2 Regional airlines 4 1 Ob Ob Others Ob 1 1 Ob TotaP 100 100 100 100 Number of air carrier slots allocated Total slots 3,162 3,109 3,091 3,091 Percentage of total domestic slots held Major airlines and related carriers 70 94 95 97 National airlines a 2 2 1 Regional airlines 22 3 3 2 Others Ob 1 Ob Ob TotalC 100 100 100 100 Number of domestic slots allocated Total slots 3,801 3,956 4,006 3,985 aThe “Majors and related carriers” category includes all domestic slots held by the major airlines, their subsidiaries, and code-sharing partners. The “Nationals” and “Regionals” categories include all inde- pendent national and regional airlines. The “Others” category includes foreign airlines holding domestic slots, all-cargo airlines, and non-airline holders of slots. bThe actual percentage is less than 0.5 percent CColumns may not add to 100 percent because of rounding. Source: GAO analysis of FAA Slot Administration records. Page 73 GAO/RCED-90-147 Airline Operating 8eMarketing Practices Appendix IV c DomesticGaks Leasedat the 66 Large and Medium-SizedAirports, by Airline and Airline Type Percentage of leased gates Exclusive use Preferential use Total Without Without gates use-or- With use- use-or- With use- Airline _- .-_.. .-.. leased lose or- lose lose or- lose ~~ Total Major airlines ._“. .._. ..- ..-_.-. Texas Air” 484 62% 29% 7% 2% 100% USAir” 394 54% 20% 21% 5% 100% Delta 368 70% 12% 17% 1% 100% American 329 79% 6% 11% 4% 100% United 329 83% 6% 10% 1% 100% Northwest .I”_“” .._._.._. _.- _---.- 298 83% 9% 7% 1% 100% TWA __ . _. _. 214 86% 5% 7% 2% 100% Pan AmC 52 73% 19% 8% 0% 100% Total 2,468 72% 14% 12% 2% loo”! National airlines _--“... -.-__-.. ----.--.-...--.- Southwest 86 64% 16% 14% 6% 100% America West 55 70% 5% 20% 5% 100% Braniff 42 84% 2% 12% 2% 100% Midway 31 88% 0% 6% 6% 100% Alaska Air 25 36% 28% 36% 0% 100% American .“. Trans Air_ _.-_.__ -_--_--. 1 100% 0% 0% 0% 100% Total 240 69% 10% 16% 5% 100% Regional airlines Midwest Express ..-_.“..._. . .._-- -...._ 7 86% 0% 14% 0% 100% Horizon 3 33% 0% 67% 0% 100% Comair _........... .I.. ..- 2 50% 0% 50% 0% 100% MGM. Air_ .---.-.-- _... .-_- 2 100% 0% 0% 0% 100% Other regionals ..--. .- 16 31% 19% 44% 6% 100% Total 30 50% 10% 37% 3% 100% aTexas Air data include domestic gates leased to both Eastern and Continental. bUSAir data include domestic gates leased to both USAir and Piedmont. ‘Very few domestic gates were reported leased to Pan Am, which is primarily an international carrier Page 74 GAO/RCED-90-147 Airline Operating 8r Marketing Practices Appendix V GateUse at Large and MediumSizedAirports, by Airline Type Percentage of leased gates TotalOwn use Fully Shared Airport tvoea aatesb onlv subleased usec Unused Total Major airlines Size of airport Large 1,621 80% 6% 13% 1% 100% Medium 768 67% 8% 20% 5% 100% Airport market Concentrated 800 88% 4% 6% 2% 100% Unconcentrated 1.589 69% 8% 20% 3% 100% Subtotal 2,389 78% 7% 15% 2% 100% National airlines size of airDort Large 98 87% 0% 13% 0% 100% Medium 124 72% 1% 15% 12% 100% Airport market Concentrated 12 84% 0% 8% 8% 100% Unconcentrated 210 78% O%d 15% 7% 100% Subtotal 222 78% O%d 15% 7% 100% Regional airlines Size of airport Large 9 78% 0% 22% 0% 100% Medium - 21 48% - 4% 48% 0% 100% Airport market Concentrated 4 100% 0% 0% 0% 100% Unconcentrated 26 50% 4% 46% 0% 100% Subtotal 30 57% 3% 40% 0% Gil% All airlines Total. all airoorts 2,641 76% 6% 15% 3% 100% aThere are a total of 66 airports-27 large airports and 39 medium-sized airports. Of the 66 airports, 14 are concentrated and 52 are unconcentrated. bWe did not get gate use information on 97 of the leased gates CThe “shared use” category includes all gates where the leasing airline handles another airline’s flights or where the leasing airline subleases the gate to another airline part of the time. dActual value is less than 0.5 percent Y Page 76 GAO/RCED-90-147 Airline Operating & Marketing Practices Appendix JJI Exclusive-UseLeasingof Facilities Other Than Gates Table Vl.1: Large and MediumSIted AI~DoW Exclusive-Use Leaslng of Facilities Other Than Gates Percentage of airports None Some Unused and None leased leased on All leased all leased on Number of on exclusive exclusive on exclusive Total exclusive Airport size and market airports use use use leased use Ticket counters _ ._..__ - ..- ._~__--.-.-___ Size of airport -- Large 27 15% 56% 29% 100% 17% - Medium -. __.._I"._ .~~.- -._. --.. .-__-^._-__ 39 3% 46% 51% 100% 29% Total 88 8% 50% 42% 100% 25% Airport market Concentrated 14 0% 50% 50% 100% 14% Unconcentrated 52 10% 50% 40% 100% 28% Total 88 8% 50% 42% 100% 25% Passenger hold rooms -- _....... -.- .,._- -. __- Size -- . of airport.._- -~..--_-~ Large 27 15% 56% 29% 100% 30% Medium 39 26% 48% 26% 100% 21% Total 88 21% 52% 27% 100% 25% Airport -_-.l.. market .._.. ----~- . ___- 14 7% 57% 36% 100% 23% _ Concentrated .._. .. - ----. . --. Unconcentrated 52 25% 50% 25% 100% 26% Total 88 21% 52% 27% 100% 25% Baggage claim facilities .“_^-...__._... -.-..--...-.~_...___ - Size of _... _ _airport .._.. ..-- ._... --~- Large 27 44% 45% 11% 100% 20% -_- .-._ - .- Medium 39 72% 23% 5% 100% 9% Total 88 81% 32% 7% 100% 15% Airport market Concentrated 14 64% 36% 0% 100% 0% ..“l_.“. ,. __I.II_.““.^ ..-... Unconcentrated 52 59% 31% 10% 100% 19% Total 88 61% 32% 7% 100% 15% aThis percentage is based on the number of airports leasing the facility in question for exclusive use. It does not include those airports that do not lease the type of facility for exclusive use because those airports did not answer the questions regarding unused facilities. Page 76 GAO/RCED-W-147 Airline Operating & Marketing Practices Appendix VI EwcludveJJee Leasing of Facilities Other Than Gates Table V1.2: Small Airports’ Exclusive-Use Leasing of Facilities Other Than Gates Percentage of 117 small airports None Some unused and None leased leased on All leased all leased on on exclusive exclusive on exclusive Total exclusive Type of facility use use use leased usea Ticket counters 7% 38%’ 55% 100% 51% Passenger hold rooms 64% 20% 16% 100% 43% Baggage claim facilities 97% 1% 2% 100% 67% Note, These data are not generalizable to all of the small airports in the continental United States but apply only to the 117 small airports we surveyed. aThis percentage is based on the number of airports leasing the facility in question for exclusive use. It does not include those airports that do not lease the type of facility for exclusive use because those airports did not answer the question regarding unused facilities. Table Vl.3: Exclusive-Use Leasing of Facilities Other Than Gates, by Type of Percentage leased Airlkw B”gray; Ticket Passenger Airline type counters hold rooms facilities Large airports Major airlines 87% 94% 97% National airlines 6% 5% 1% Regional airlines -_I___--- 5% 1% 1% Othersa ---~.---- 2% 0% 1% Total 100% 100% 100% Medium-sized airports -.__~---_- Major airlines 78% 83% 75% National airlines 13% 12% 23% Regional airlines .-______- 6% 5% 0% Others? 3% 0% 2% Total 100% 100% 100% Concentrated airports -__I__--..--__ Major airlines 91% 96% 100% National airlines 5% 2% 0% Regional airlines 3% 2% 0% Others? 1% 0% 0% Total 100% 100% 100% (continued) Page 77 GAO/RCED-99-147 Airline Operating & Marketing Practices Appendix Vl FhcludveUse Leasing of Fadlitiea Other Than Gates Percentage leased B”, fize Ticket Passenger B counters hold rooms facilities Airline type Unconcentrated airports Maior airlines 80% 88% 89% National airlines 11% 9% 9% Regional airlines 7% 3% 1% Othersa 2% 0% 1% Total 100% 100% 100% Size of airport Number of facilities leased Larae 2.455 1.154 148 Medium 2,108 590 65 Total 4,563 1,744 213 Airport market Concentrated 1,160 594 24 Unconcentrated 3,403 1,150 189 Total 4.563 1,744 213 aThis category includes foreign airlines, all-cargo airlines, charter airlines, and fixed base operators, Page 70 GAO/RCED-90-147 Airline Operating 8sMarketing Practices Appendix VII Various Factms That Could Affect Airport l3xpansionin the Next 5 Years Number of airports citing each factor Community opposition TO To other Air traffic increased aspects of control Other Effect on expansion noise exoansion caoacitv factors” Large airports Greatly limit 18 6 6 7 Somewhat limit 4 9 9 4 Would not limit 4 11 IO b No response 1 1 2 18 Medium-sized airports Greatlv limit 6 3 4 6 Somewhat limit 23 3 Would not limit 9 26 25 b No response 1 1 2 31 Large and medium-sized concentrated airports Greatlv limit 7 4 2 Somewhat limit Would not limit 2 9 6 b No response 0 0 0 12 Small airpoW Greatly limit 13 10 7 25d Somewhat limit 32 15 14 6 Would not limit 69 89 91 b No response 3 3 5 88 Note: Airport representatives were asked to check boxes showing the extent that the two types of community opposition and the ability of the air traffic control system to handle expansion could limit or delay expansion in the next 5 years at their airports. They were also given an opportunity to write in additional factors of particular concern for their airport, which are tabulated in the column headed “Other factors.” aData in this column reflect the number of additional constraints on expansion written in by airport representatives. Some airports cited more than one such factor; other airports did not respond. Other factors cited include lack of funding, airline opposition to expansion, and concern over the impact of expansion on wetlands. bThe “Would not limit” category is not applicable for these factors that airport representatives wrote in. ‘Data on the small airports in our survey apply only to the 117 small airports that responded to our survey and are not generalizable to all small airports in the country. dFourteen small airports wrote in answers stating that lack of funding would limit expansion to some extent, with 11 saying it would greatly limit expansion and 3 saying it would somewhat limit expansion. Page 79 GAO/WED-90-147 Airline Operating 8~Marketing Practices “‘;,; ” , Appendix VIII . firports Reporting StageII and StageIII ’ Aircraft Restrictionsto Control Noise in Effect as of March 1988 Restrictions Stage II aircraft Stage III aircraft Maximum Noise Airport .- _.__ ll__._l-. .._I-----_.---.- Day Night use’ Day Night budget Large airports _.-. . ..-- .- ...-____ Boston _._-...._ .“.. ._-.-- .-...---.-----~__ 50.9%b Limit Ban Yes Denver Limit Limit Limit Yes -Minneapolis ._..... - ..- ~-. .-- -. BanC LimitC Bar-f Yes San Diego --... . ..__-. -.. Ban Ban Washington National Limit Ban Medium-sized airports _._ - ..-. -___--. Burbank BanC 0% Ban Ban Dallas Love Field 40% Limit Limit Midway . ..“....._._... ..-.-..--- ~...-- ..--- i3anc Bane Palm Beach Feed Feed San ._... Jose - - -.-- - .~. _____- Ban Ban Orange County Limit Ban 0% Ban Ban Yes Small airports” IsliD Limit Limit Limit Ban Yes Lake Tahoe Limit’ 0% Limit’ Limit’ Lona Beach Limits Limits 0% Ban Ban Yes Myrtle Beach Ban Ban Palm Stxinas Bane BanC Santa Barbara BanC Sarasota_.--. .__.___~_..._ BanC BanC Whtte Plains ----- Bar? BanC Worcester Ban Note: The absence of an entry indicates that no relevant restriction applies. aThese airports require a minimum level of use of Stage Ill aircraft. Therefore, they restrict flights by Stage II aircraft. bThis percentage applies only if an airline selects the fleet mix option, which requires a proportion of an airline’s flights be made with Stage Ill aircraft, for meeting the airport’s noise budget limits. CVoluntary restriction. dAirport uses a differential fee structure, making night operations and use of noisier aircraft more expensive. eThe data reported here represent only 117 small airports surveyed by GAO and do not include informa- tion on the other 46 small airports with 20 or more passengers per day. Y ‘Lake Tahoe has voluntary decibel level limits for each takeoff and landing. No Stage II aircraft meet these limits. oLong Beach has a court ordered limit of 40 flights per day. Page 80 GAO/RCED-90-147 Airline Operating & Marketing Practices Arports Respondingto the GAO Airport Survey Airport code Siren Concentrated Abort name and location ABE S Allentown/Bethlehem/Easton International Airport, Allentown, Pa. ABQ M Albuquerque International Airport, Albuquerque, N. Mex. ALB S Albany County Airport, Albany, N.Y. - ALW S Walla Walla City County Airport, Walla Walla, Wash. krviA S Amarillo International Airport, Amarillo, Tex. ASE~. .~ .__..^__.._-~ ..-.-..--. S Aspen-Pitkin County Airport, Aspen, Cola. ATL L Yes Hartsfield-Atlanta International Airport, Atlanta, Ga. ATW S Outagamie County Airport, Appleton, Wis. __- AUS A”L .‘. ._ ..^_ __._.. M - ..__ _...--- .s-- Robert Mueller Municipal Airport, Austin, Tex. - Asheville Regional Airport, Fletcher, N.C. AVP .._ ..__^_.._.. . . -.~~.-..----S - Wilkes-Barre/Scranton International Airport, Avoca, Pa. BtiL -. ~. _-..~.._- ..____.. ..__.. - ._. M Bradley International Airport, Windsor Locks, Conn. BGti S Edwin A. Link Field, Johnson City, N.Y. BGA . .-.--.- _ S Bangor International Airport, Bangor, Maine BHB -. S __--.- Hancock County-Bar Harbor Airport, Elseworth, Maine BWM S Birmingham Municipal Airport, Birmingham, Ala. BIL S.-. Billings Logan International Airport, Billings, Mont. BIS .- S Bismarck Municipal Airport, Bismarck, ND. BLI _ -...-..__--~. .-.._......- S Bellingham International Airport, Bellingham, Wash. BNA M Yes Nashville Metropolitan Airport, Nashville, Tenn. - BOI S Boise Air Terminal, Boise, Idaho BOS ,._ I..__- .--- L Logan International Airport, Boston, Mass. BPT S Jefferson County Airport, Beaumont, Tex. __--- BTR S Baton Rouge Metropolitan Airport, Baton Rouge, La< Biv .- S Burlington International Airport, South Burlington, Vt. BUF M Greater Buffalo International Airport, Buffalo, N.Y. BUR _ .__.-. M Burbank/Glendale/Pasadena Airport, Burbank, Calif. - BWI I_ .-..----- ---.-.-. --_-L Baltimore/Washington International Airport, Baltimore, Md. CAE -.. ~..~_______- S Columbia Metropolitan Airport, West Columbia, SC. CAk S Akron-Canton Regional Airport, North Canton, Ohio CHA S Chattanooga Metropolitan Airport, Chattanooga, Tenn. cl-6 .- .._.- _.....-~ ~_---__ S Charlottesville Airport, Charlottesville, Va. ..- Cl% S Charleston International Airport, Charleston, S.C.b .__ cib. - ~.-... . - .._....-.- __-.---_.--..--. S Cedar Rapids Municipal Airport, Cedar Rapids, Iowa -.- CLE . - _____---___. M Hopkins International Airport, Cleveland, Ohio CLT ..I . .__.-.. -- --- L Yes Charlotte/Douglas International Airport, Charlotte, NC. - CMH cM~ .-~..-....-.-~._-. ~-..-. _- ._.....-- M Port Columbus International Airport, Columbus, Ohio _-- S Willard Airport, University of Illinois, Savoy, Ill. cos S Colorado Springs Municipal Airport, Colorado Springs, Cola. (continued) Page 81 GAO/RCED-90-147 Airline Operating 81Marketing Practices Appendix IX Alrporta Responding to the GAO Airport Survey Airoort code ....-....._..~. ..- .-...... ..-..-..---- Size0 Concentrated AirPort name and location CRP S Corpus Christi International Airport, Corpus Christi, Tex. CRW S Yeager Field, Charleston, W.Va. CVG M Yes Greater Cincinnati international Airport, Cincinnati, Ohio DAB DAL . .~~~~~_~-~~---.--.M-.--. S Daytona Beach Regional Airport, Daytona Beach, Fla. _._. ..--. ~..-. .~--~-~__ Dallas Love Field, Dallas, Tex. DAY M Yes Dayton International Airport, Vandalia, Ohio DCA -. L Washington National Airport, Washington, D.C. i%N L Yes Stapleton International Airport, Denver, Cola. DET S Detroit City Airport, Detroit, Mich. DFW L Dallas/Fort Worth International Airport, Dallas/Fort Worth, Tex. iit7 bRo .~ ..- _.-...- S Duluth International Airport, Duluth, Minn. S Durango-La Plata County Airport, Durango, Cola. - DSM .. S Des Moines International Airport, Des Moines, Iowa DTW L Yes Detroit Metro/Wavne Countv Airport. Detroit. Mich. I I , , ELM S Elmira/Cornina Reaional Airport, Horseheads, N.Y. ELP M El Paso International Airport, El Paso, Tex.b ERI S _....I.~ .- -... . ._..-......- ___ Erie International Airport, Erie, Pa. EiJG S Mahlon Sweet Field, Eugene, Oreg. EVV S Evansville Regional Airport, Evansville, Ind. EWR .-. L Newark International Airport, Newark, N.J. EYW S Key West International Airport, Key West, Fla. FAR S Hector International Airport, Fargo, N. Dak. FAT S Fresno Air Terminal, Fresno, Calif. FAY .. ._ S Fayetteville Municipal Airport, Fayetteville, N.C. FLL M Fort Lauderdale/Hollywood International Airport, Fort Lauderdale, Fla. FL0_-. _“__ --- .~~--- --~~~ S _.------ Florence City-County Airport, Florence, SC. FNT S Bishop International Airport, Flint, Mich. FSD S ..~ . .._-..- Joe Foss Field, Sioux Falls, S. Dak. FYV S Fayetteville Municipal Airport, Fayetteville, Ark. GEG _-._“----__- S Spokane International Airport, Spokane, Wash. GJT S Walker Field, Grand Junction, Colo. GNV_. S Gainesville Regional Airport, Gainesville, Fla. GRB S Austin Straubel Field, Green Bay, Wis. 6kR S Kent County International Airport, Grand Rapids, Mich. GSO .._ ~. S . . .. ...-..”.-..---....-- Yes Greensboro/Highpoint Airport, Greensboro, N.C. GSP S GreenviIle/Spartanburg Airport, Greer, SC. GTF S Great Falls International Airport, . Great Falls, Mont. HOU M William P. Hobby Airport, Houston, Tex.b HPN HRL .._ .._ ~“- -.-.-..--..-..s..- S Westchester County Airport, White Plains, N.Y. -- -- ..~ ~-. Valley International Airport, Harlingen, Tex. HSV S Huntsville-Madison County Airport, Huntsville, Ala. ___- (continued) Page 82 GAO/NED-90-147 Airline Operating 6%Marketing Practices Appendix M Alrporta Responding ta the GAO Airport Survey Airport code Size0 Concentrated Airport name and location IAD --- M Dulles International Airport, Washington, DC. IAH L Houston Intercontinental Airport. Houston, Tex.b ICT S Wichita Mid-Continental Airport, Wichita, Kans. IND --- M Indianapolis International Airport, Indianapolis, Ind. ISP S Long Island/MacArthur Airport, Ronkonkoma, N.Y. JAN S Jackson Municipal Airport, Jackson, Miss. JAX Jacksonville International Airport, Jacksonville, Fla. JFK John F. Kennedy International Airport, New York, N.Y. LAN Capital City Airport, Lansing, Mich. LAS McCarran International Airport, Las Vegas, Nev. LAX Los Angeles International Airport, Los Angeles, Calif. LBB Lubbock International Airport, Lubbock, Tex. LEX Blue Grass Airport, Lexinaton, Kv. LFT Lafayette Regional Airport, Lafayette, La. LGA LaGuardia International Airport, New York, N.Y. LGB Long Beach Airport, Long Beach, Calif. LIT Little Rock Reaional Airport, Little Rock, Ark. LNK Lincoln Municipal Airport, Lincoln, Nebr. LSE La Crosse Municipal Airport, La Crosse, Wis. MAF Midland International Airport, Midland, Tex. MBS Tri-Citv Airport, Freeland, Mich. MCI ~~ M Kansas City International Airport, Kansas City, MO. MC0 L Orlando International Airport, Orlando, Fla. MDT S Harrisburg International Airport, Middletown, Pa. MDW --.-____ M Chicago Midway Airport, Chicago, Ill. MEM L Yes Memphis International Airport, Memphis, Tent-r. ~1__1___ MFE S McAllen-Miller International Airport, McAllen, Tex. MFR S Medford-Jackson County Airport, Medford, Oreg. MGM --..- S Dannelly Field, Montgomery, Ala. MIA L Miami International Airport, Miami, Fla. MKE M General Mitchell International Airport, Milwaukee, Wis. MLB S Melbourne Reaional Airport, Melbourne, Fla. MLI Quad-City Airport, Moline, Ill MOB -~- Mobile Municipal Airport-Bates Field, Mobile, Ala. MSN Dane County Regional Airport, Madison, Wis. MS0 Missoula International Airport, Missoula, Mont. MSP L Yes Minneapolis/St. Paul International Airport, Minneapolis, Minn. MSY M New Orleans International Airport, New Orleans, La. MYR S Myrtle Beach AFB, Myrtle Beach, SC. OAJ S Ellis Airport, Richlands, NC. OAK M Metropolitan Oakland International Airport, Oakland, Calif. (continued) Page 89 GAO/RCED-W-147 Airline Operating fb Marketing Practicea Appendix M Alrporta Responding to the GAO Airport Snrvey Airport code Size’ Concentrated Airport name and location OKC M Will Rogers World Airport, Oklahoma City, Okla. OMA S Eppley Airfield, Omaha, Nebr. ONT M Ontario International Airport, Los Angeles, Calif. ORD ~-- L -~ Chicago O’Hare International Airport, Chicago, III. ORF M Norfolk International Airport, Norfolk, Va. ORH -~ S Worcester Municipal Airport, Worcester, Mass. PBI PDT ..-. M ..s-.--.- Palm Beach International Airport, Palm Beach, Fla. __._-__ .--- _.._... - _-._ Pendleton Municipal Airport, Pendleton, Oreg. PDX M Portland International Airport, Portland, Oreg.b PFN S Panama City-Bay County Airport, Panama City, Fla. PHL L Philadelphia International Airport, Philadelphia, Pa. PHX L Sky Harbor International Airport, Phoenix, Ariz. PIA S Greater Peoria Airport, Peoria, III. PIT ~-~ .~-.. L _ .--_.---_ Yes Greater Pittsburgh International Airport, Pittsburgh, Pa.b PNS S Pensacola Regional Airport, Pensacola, Fla. POI S Northern Maine Regional Airport, Presque Isle, Maine PSC S Tri-Cities Airoort. , Pasco. Wash. PSP S -___ Palm Sorinqs .+ Reaional - Airport, Palm Sprinas, . - Calif. PUB S Pueblo Municipal Airport, Pueblo, Cola. Puw ~ ..._~ ~-__ S Pullman/Moscow Regional Airport, Pullman, Wash. PVD S __-- Green State Airbort. Warwick. RI. I PWM. - -- S Portland International Jetport, Portland, Maine RAP - S __p_-..L--- Rapid City Regional - Airport, Rapid City, S. Dak. RDD -.. S .._--- Redding Municipal Airport, Redding, Calif. RDM S Roberts Field. Redmond. Orea. ” RDU M Yes Raleigh/Durham Airport, Morrisville, N.C. RIC S Richmond International Airport, Richmond, Va. RN0 M Reno Cannon International Airport, Reno, Nev. ROA S Roanoke Regional Airport, Roanoke, Va. ROC M Greater Rochester International Airport, Rochester, N.Y. RST S Rochester Municipal Airport, Rochester, Minn. RSW M Southwest Florida Regional Airport, Fort Myers, Fla. SAN L San Dieao International-Lindberah Field, San Dieqo, Calif. SAT M ~- ~...-.- Antonio International Airport, San Antonio, Tex. San SAV S Savannah international Airport, Savannah, Ga. SBA S -- Santa Barbara Municipal Airport, Goleta, Calif. SBN S Michiana Regional Airport, South Bend, Ind. SCK S Stockton Metropolitan Airport, Stockton, Calif. SDF S Standiford Field, Louisville, Ky. SEA L -....- Sea-Tat International Airbort. , Seattle. Wash. SF0 L San Francisco International Airport, San Francisco, Calif. (continued) Page 84 GAO/RCED-99-147 Airline Operating fk Marketing Practices Appendix DC Ahports Responding to the GAO Alrport Survey Alrport code Sizea Concentrated Airport name and location SGF --~.I~ S Springfield Regional Airport, Springfield, MO. SHV S ShreveDort Reaional Airport, Shreveoort, La. SJC M San Jose International Airport, San Jose, Calif. SJT ._-___-______ _-- S Mathis Field, San Angelo, Tex. SLC L Yes Salt Lake Citv International Airoort, Salt Lake Citv. Utah SMF M Sacramento Metropolitan Airport, Sacramento, Calif. SNA .-- M John Wayne Airport, Orange County, Costa Mesa, Calif. SRQ __--_---- S Sarasota-Brandenton Airport, Sarasota, Fla. STL L Yes Lambert- Louis International Airbort. St. Louis, MO. sux S Sioux Gateway Airport, Sioux City, Iowa SYR -..-_..~ --._ M Yes Hancock International Airport, Syracuse, N.Y. TLH S Tallahassee Municipal Airport, Tallahassee, Fla. TOL S Toledo Express Airport, Toledo, Ohio TPA M Tampa International Airport, Tampa, Fla. TUS .--~- ---- M Tucson International Airport, Tucson, Ariz. TVL S Lake Tahoe Airport, South Lake Tahoe. Calif. TYS S McGhee Tvson Municipal Airport, Alcoa, Tent-r. VPS S Okaloosa County Air Terminal, Fort Walton Beach, Fla. YKM S Yakima Air Terminal. Yakima. Wash. Note: Two small airports that responded were dropped from the analysis. Wausau Municipal Airport (Wasau, Wisconsin) does not have regularly scheduled service. Knox County Regional Airport (Rock- land, Maine) has no terminal or gate space and all flights are handled by a fixed base operator. aAirports were divided into size categories based on their percentage of 1988 total national enplane- ments as follows: large airports (L) enplaned at least 1 percent of passengers; medium-sized airports (M) enplaned 0.25 percent to 0.99 percent of passengers; small airports (S) enplaned fewer than 0.25 percent of passengers. bAirport answered key questions, but did not provide detailed lease information for each airline leasing gates or other exclusive-use facilities. Page 85 GAO/WED-90-147 Airline Operating fk Marketing Practices Appendix X GAOAirpmtSurveyResponses U.S. GENERALACCOUNTINGOFFICE AIRPORT SURVEY: EXPANSION & LEASESa IWTRODUCTION The U.S. General Accounting Office This survey concerns only current (GAO), an independent agency of the conditions at the airport specified U.S. Congress, has been asked to below. assess the potential for competition in the nation's major Airport: 183 air traffic markete. Congress is concerned that control of this access by a few airlines may be -> PLEASE ANSWERALL OF THE raising faree and reducing service. FOLLOWINGQUESTIONS BASED ONLY We need an understanding of the ON CURRBNTCONDITIONS AT THE ways in which airports try to AIRPORT SPECIFIED ABOVE. provide access to air carriers wishing to compete for passengers at major airports. Only with your 1. Does this airport operator also help will we be able to give operate any other airports that Congress an accurate picture of the currently receive scheduled potential for competition at your passenger service? (CHECK ONE.) airport and in the markets served N = 180 by it. 1. [a] Yes -> Please write in the In this survey, we ask about your names of the other airport's ability to expand airports below: capacity to accommodate more domestic echeduled passenger service. We also ask about your leaeing arrangemente with airlines. arts run bv PleaBe return the survey in the tor enclosed post-paid envelope within two weeks from date of receipt, if 2. 19181 No possible. If you have any questions, you may call Delores Parrett collect at (202) 366-1780 or Jaok Wells at (202) 366-1758. If the envelope has become detached, please return the completed survey to: Delores Parrett U.S. General Accounting office 'Percentages may not add to 100% Nassif Building, Room 2336 due to rounding. 400 7th Street, S.W. Washington, D.C. 20590 1 Page86 GAO/RCED-90-147Airline Operating 8r Marketing Practices Appendix X GAO Ah-port Survey Reeponses In this section, we ask about projects that expand the airport's capacity for domestic air passenger operations. We are also interested in projects that allow more domestic airlines to provide service. 2. Has this airport undertaken any such capacity expansion and/or improvement projects since 1980 costing over $10 million? (CHECK ONE.) N - 179 1. [zB$] Yes -> Continue 2. UX%l No -> Skip to 5 3. Approximately how much has the airport spent on major capacity expansion and/or improvement projects since 1980 (those costing more than $10 million)? (CHECK ONE.) N - 104 1. [m] Less than $50 million 2. [M] $51-100 million 3. [m] $101-250 million 4. [m] $251-500 million 5. [a] More than $500 million 2 Page87 GAO/RCED-9O-147AirlineOperating%MarketiugPractices AppendixX GAOALrport SurveyResponses 4. To what extent, if any, are each of the following sources of funding typically used by your airport to finance major capacity expansion and/or improvement projects (i.e., those costing $10 million or more)? (CHECK ONE BOX FOR KACIi TYPE OF FINANCING.) (CHECK ONE BOX PER ROW) a. State or local general obligation bonds 23% I 8% I 70% 92 b. State or local revenue bonds 14% I 4%I 81k 91 c. Airport revenue bonds needins airline approval or guarantees 40% / 6% 1 54% 89 d. Airport revenue bonds Q& needina airline approval/guarantees 31% 16% 53% 93 e. Paid for by the airline seeking the improvements or expanded facilities 16% 41% 43% a7 f. Airport operator's own revenues 36% 51% 13% 99 g. Federal grants 68% 28% 4% 100 h. Other -- Please describe briefly below: 49% 24% 27% 33 5. Approximately what percent of 6. Approximately how many hours the time did the weather conditions were operations suspended in 1987 at this airport meet VFR (Visual due to weather conditions? (ENTER Flight Rule) standards in 1987? NUMBEROF HOURS. IF NONE, ENTER (ENTER PERCENT. IF NONE, ENTER "0" . ) "0" . ) N = 152 N = 149 Range: 9 - 250 Hours Range: 50% - 100% Mean: 31.5 hours Mean: 87% Median: 10.5 hours Median: 90% 3 Page88 GAO/RCED-90-147AirlineOperatig&MarketingPractices . Appendix X GAO Airport Survey Ftesponses 7. In your judgement, is there any 8. How many gates, including those land owned by the airport or currently under construction, for adjoining the airport on which it domestic use could be added at your would be practical for the airport airport without also adding to build additional terminals, additional runways? (ENTER NUMBER concourses, and gates? (CHECK OF GATES. IF NONE, ENTER “0”) ONE.) N = 162 N * 177 Range: p-148 gates 1. [m] Definitely yes Wean: 22 gates Median: 10 gates 2. [m] Probably yes 9. How many gates for domestic 3. [a] Uncertain use, including those currently under construction, do you plan to 4. [a] Probably no add at the airport within the next 5 years? (ENTER NUMBER. IF NONE, 5. [LQ%] Definitely no ENTER "O".) N = 171 Range: 0-60 gates Wean: 6 gates Median: 3 gates 10. The following are some other factors that may limit or delay expansior of an airport. Please indicate to what extent each factor would limit or delay expansion of capacity at your airport over the next 5 years. (CHECK ONE BOX FOR BACH FACTOR.) GREATLY SOMEWHAT WOULDNOT N = LIMIT LIMIT LIMIT OR DELAY OR DELAY OR DELAY (1) (2) (3) (CHECK ONE BOX FOR EACH ROW) a. Community opposition to increased airport noise 21% 33% 46% 178 b. Community opposition to other consequences of airport expan- 11% 19% 71% 178 sion (for example, increased highway congestion) c. Air traffic control system's ability to handle expansion 10% 18% 72% 174 d. Other --> Please explain below: 63% 20% 18% 56 4 Page 89 GAO/RCED-90-147Airline Operating & Marketing Practices AppendlxX GAOAlrportSurveyResponaes 11. Please consider airlines that 12. For those airlines who were have contacted this airport unable to begin service because operator about establishing service facilities were not available, at this airport since 1978. Have pleaso list the airline code and any such airlines been unable to data of reguest. (ENTER DATE AS start service because gates or THE TWO-DIGIT EQUIVALENT: e.g., other airport facilities were not MARCH1982 WOULDBE 03 82. USE available? (CHECK ONE.) ADDITIONAL SHEETS IF NECESSARY.) N - 175 Airline 1. [B] Yes -xZontinue oode Date [Month & year] 2. [MaI No ->Skip to 13 1*Lkprirllnaa-- 2.and -- 3. instancee - 4.aiven-- 5. -- 13. Please consider the following situation. An airline already serving the airport (incumbent) has unused or underused space. An airline wanting to establish service (entrant) has made a good faith effort to arrange a sublease or handling agreement with the incumbent. How likely is the airport operator to help the entrant in the following ways? (CHECK ONE BOX FOR EACH TYPE OF ASSISTANCE.) DOES NOT APPLY N= (4) (CHECK ONE BOX FOR E Eli ROW) a. Offer informal help with negotiations between entrant and incumbent 6% 176 b. Offer formal help with negotiations between entrant and incumbent (e.g., a 36% 26% 28% 10% 174 hearing process c. Invoke use-or-lose or recapture clauses in lease to provide access to entrant 26% 16% 16% 41% 172 d. Use other methods allowing airport operator to make space available to 59% 27% 9% 5% 176 entrant 0. Offer no aesistance to entrant 1% 0% 68% 31% 166 5 Page90 GAO/RGED-9O-147AirlineOperating%Market!ngPracticea Appendix X GAO Airport Survey Responsee - --> PLEASE ANSWERTIiE QUESTIONS IN Por each airline having at THIS SECJ!ION BASED ON AGREEMENTSIN &t a 58 share in the majority- FORCEAS OF MARCH31, 1988 in-interest agreement, please li8t its code and its percent share. 14. Does this airport have All airlines will not necessarily majority-in-interest agreements be listed and shares might not add with airlines that require airline to 1008. (PLEASE ROUNDTO NEAREST approval of runway and terminal WHOLEPERCENT.) expansions? (CHECK ONE.) N - 54 N = 183 Airline Percent 1. [m] Yes -> Continue wde ahare 2. ~Pppl No -> Skip to 19 1. - l-lOQ% range (NEXT PAGE) 2. differenf 8 15. Please describe the basis for 3. airlinea 8 determining majority-in-interest percentages (for example, number of 4. m 8 enplanements or landed weight of aircraft)? 5. 8 N = 56 6. 8 7. 8 8. 8 9. 8 16. To what extent does this requirement limit or delay capital 10. % projects to expand domestic passenger service at your airport? 11. 8 (CHECK ONE.) N - 54 12. 8 1. [n] Greatly limit or delay 13. 8 2. [m] Moderately limit or delay 14. 8 3. [&j&l Somewhat limit or delay 15. % 4. [=I Does not limit or delay 16. 8 17. In what month and year does 17. 8 the majority-in-interest agreement expire? (USE TWO-DIGIT CODESFOR 18. 8 MONTHAND YEAR; e.g., MARCH1990 WOULDBE ENTEREDAS 03 90.) 19. 8 N - 55 20. 8 F range 6 Y Page 91 GAO/RCED-99-147Airline Operating 8r Marketing Practices Appendix X GAO Airport Survey Respmsee 19. which ol! the following beet describes how the payment terms 02 subleases are controlled by this airport? (CHECK ONE.) N - 177 1. [a] Payments cannot exceed a pre-determined percentage of lease payments 2. [m] There is no pre-determined maximum payment, but payment terms are considered before subleases are approved 3. [ml Payment terms for subleases are D& examined by the airport operator 4. [m] Other -> Please explain: 20. Does this airport require approval of subleasing agreements between airlines? (CHECK ONE.) N = 177 1. [m] Yes 7 Page 92 GAO/RCED-90-147 Alrline Operating & Marketing Practices Appendix X GAO Airport Survey Responses The questions in this seotion 22. What is the total number of concern your airport'e facilities, ticket counter positions in other than gates, necessary to domestio terminals at your airlines offering scheduled airport? (ENTER NUMBER.) domestic Passenger service. (Gates N = 165 are covered in a separate part of Range : IrLlis. ticket counter the survey.) We are interested in positions facilities leased exclusively to Mean : 40 positions one airline. Pedian: 20 positions 21. Does your airport lease any 23. Row many of these ticket ticket counters in domestic counter position8 are leased to terminals to airlines on an airlines on an exclusive-use basis? exclusive-use basis? (CHECK ONE.) (ENTER NUMBER.) N = 183 N = 165 1. [ml Yes -> Continue Range: l-344 ticket counter po5itions 2. LZ31 No -> Skip to 25 Mean: 36 position8 (NEXT PAGE) Median: 18 positions 24. Approximately how many ticket counters are currently not being used at your airport? (ENTER NUMBER.) N = 164 Range: 0-73 ticket counters Mean: 4 counter8 Median: 1 counter 25. Please give the following information for each airline leasing the ticket counter positions in domestic terminals referred to in question 23. If the lease can be renewed at the owm of the au give the renewal option term in column D. (USE ADDITIONAL SHEETS IF NECE&U@Y.) N = 164 (A) (Cl (D) Airline Numb!:)of Original Renewal option code ease exu [YWl iru Range: Range: Range: 1. l-95 L983-2622 D-20 vrs. 2. 3. 4. -- 5. 6. 7. 8 Page 93 GAO/RCED-90-147 Airline Operating & Marketing Practices Appendix X GAO Airport Survey Responses 26. Does your airport have any 28. How many of these baggage baggage carousels in domestic carousels are leased to airlines on tonninals leaned to airlines on an an exclusive-use basis? (ENTER l xclumivo-use basin? (CHECKONE.) NUMBER.) N = 183 N * 25 1. [;Lbfc] Yes -> Continue Range : m baggage caroueels Mean: 9 carousel8 2. t&l33 No -> Skip to 29 Median: 6 carousel8 (NEXT PAGE) 29. Approximately how many baggage 27. What is the total number of carousels are currently not being baggage carousel8 in domestic used at your airport? (ENTER terminale at your airport7 (ENTER NUMBER.) BUMBER.) N = 26 N = 25 Range: p-2 baggage carousels Range : D baggage carousels Mean : 0 carounele Maan : 11 carousel6i Median: 0 carousel* Median: 10 carouselt3 30. Please give the following information for each airline learning the baggage carousels in domestic terminals referred to in gueotion 28. If the lease can be renewed nf the& of the B~.EJ&B give the renewal option term in column D. (USE ADDITIONAL SHEETS IF NECEkARY.) N = 26 (A) (B) (Cl (D) Air1 ine Number of baggage Original Renewal option w +%f&=- Range: Range: Range: 1. 1-a 1984-2027 P-21 vrs. 2. 3. 4. 5. 6. 7. 9 Page 94 GAO/WED-90-147Airline Operating % Marketing Practices 31. Does your airport lease any 33. HOWmany of these hold rooms passenger hold roomm in domeetic are leased to airlines on an terminals to airlinaa on exclusive- exclusive-use basis? (ENTER use basis? (CHECK ONE.) NUMBER.) N - 183 N = 90 1. [m] Yes -> Continue Range : u hold rooms Mean: 22 hold room8 2. Wi%I No -> Skip to 33 Median: 11 hold rooms (NEXT, PAGE) 34. Approximately how many 32. What is the total number of passenger hold rooms are currently paseenger hold rooms in domestic not being used at your airport? terminals at your airport? (ENTER (ENTER NUMBER.) NUMBER.) N - 90 N - 90 Range: Q=lJ hold rooms Range : u hold rooms Mean : 1 hold room Mean : 24 hold rooms Median: 0 hold rooms Median: 13 hold rooms 35. Please give the following information for each airline leasing the passenger hold rooms in domestic terminals referred to in question 33. If the lease can be renewed nl; the option of the &&J.DB give the renewal option term in column D. (USE ADDITIONAL SHEETS IF NBCESSARY.) N - 89 (A) (W (Cl (D) Airline Number of hold Original Renewal option Range: Range: Range: 1. l-62 l983-2027 Q-20 XL 2. 3. 4. 5. 6. 10 Y Page 95 GAO/RCED-90-147Airline Operating & Marketing Practices Appendix X GAO Ahpurt Survey Responses 36. Does your airport lease any 37. What is the total number of domestic pamsenger terminals to domestic passenger terminals at airlines on a exolueive-uee basis? your airport? (ENTER NUMBER.) (CHECK ONE.) bt I2 terminals 1. (k-1 Yea -Y Continue 2. r-3 No -> Skip to 37 How many of these domestic (NEXT PAGE) iiaaenger terminals are leased to airlines on an exclusive-use basis? (ENTER NUMBER.) k tenuiitale 39. please give the following information for each airline leasing the domeutic passenger terminals referred to in the previous question. If the lease can be renewed nf the of fhe , give the renewal option term in column D. (USE ADDI%& SHEETS IF NECESSARY.) (A) W (Cl w Airline Number of original Renewal option 1. -b 2. 3. 4. 5. bData for questions 36 through 39 are not presented due to inconsistencies in reporting: some airports baaed their responses on the number of concourses rather than the number of terminals. 11 Page96 GAO/RCED-90-147AirlineOperating &MarketingPractices Appendix X GAO Airport Survey R.espunses Detailed information on gates at 42. In some cities that have more your airport 16 owered on the than one airport in the same market white forms also included in this area, the area that can be served package. Please give the following from an airport is limited. This information about the total number ie often called a perimeter rule. of gates at your airport. Does this airport have such a rule? (CHECK ONE.) N - 183 40. What is the total number of 1. [J&l Ye8 -> Continue gates available for domeetic passenger service at your airport? 2. W3.3 No --> Skip to 42 (ENTER NUMBER.) N = 183 Range: t=IlQ gates 43. How is the area #at can be served defined? (CHECK ONE.) Mean : 21 gates N=4 1. [n] Length of flight-stage Median: 9 gates -B Enter miles: 41. What in the total number of gates available for domestic 2. [Tph] Geographic area passenger service that are held or -> Enter limits by controlled by the airport operator? States, counties, (ENTER NUMBER. IF NONE, ENTER etc.: "O".) N - 183 -- E gates 3.1-I Other -> Please describe =Data for question 41 are not briefly: preeented due to inconsistencies in reporting: some airports included preferentially leased gates as well as unleased gatee when responding to this question. Others reported only unleased gates. 44. Has there ever been a formal challenge to the perimeter rule in a court or administrative proceeding? (CHECK ONE.) N-4 1. [ml Yea 2. [iif&] No 3. L-1 Don't know 12 Page 97 GAO/RCED90-147 Airliue Operatiug & Marketing Practices Appendix X GAOAirpor&SurveyReepouaer 45. Aa mentioned in our cwer 46. Please fill in the name, letter, we need to obtain a copy of title, and telephone number of the a current map ahowinq the person we could call, if neceesary, location8 and numbers of your for additional information relating airport's qatea. Have you enclosed to this survey. r~ pp with this survey? (CHECK N - 179 . N - 171 Name: L79 c-ven 1. [m] Yes Title: 2. t-821 No Phone: 3. [A] Other -> Please explain: m 47. Thank you for your voluntary cooperation in making our study as complete and accurate as possible. Please add any comments about your airport's particular situation below. 30 airports added comments 13 Page Bg GAO/RCED-90-147 Airline Operating % Marketing Practices Appendix X GAO Airport Survey Responses Airports with gate leases 138 Gate forms with leases 838 Alruorts with no gate leases - 45 Gate forms with no leases -55 Total responding 183 Total forms returned gz (USE ONE FORM FOR EACH AIRLINE LEASING GATES FROH THIS AIRPORT/ U.S. GENERAL ACCOUNTING OFFICE GATE USE AND LEASE TERMS 1. Airline code 4. Please list the other airlines below that sublease gates from 2. Total gates leased by the thin airline. (ENTER AIRLINE airport operator to this airline as CODE(S). USE ADDITIONAL SHEETS IF of March 31, 1988, if poseible. (If NECESSARY.) another date is used, please enter 178 airlines date below.) 1. listed on Total: 3,229 96 forms with dates gates 2. 125 forms [DATE] Range: 1-62 Mean: 4 Median: 2 3. 3. Does this airline subleaso any gates to other airlines? Do not 4. include handling ;rTaT ;ments. (CHECKONE.) 9 5. 1. p.] Yea -> Continue / 6. 2. @Ll%]NO -> Skip to 5 3. [&I Don't know -> Skip to 5 5. Considering all the gates leased by this airline from the airport specified above, please give the number of gates being used in each of the following ways. (ENTER NUMBEROF GATES. IF NONE, ENTER "O".) TYPE OF USE NUMBER OF GATES a. Number of gates used exclusively by TotalRange O-6: leasing airline for passenger 2,312Mean 3 boarding8 only Median 1 b. Number of gates subleased to other Total Range o-13 airlines 164 Mean 0 Median 0 c. Number of gates where leasing airline Total Range O-38 handlea flights for or shares use 567 Mean 1 with other airlines Median 1 that are not currently used for Y (OVER PLEASE) Page 1 Page 99 GAO/RCED-90-147 Airline Operating & Marketing Practices Appendix X GAO Airport Survey Responses CJtr LIJSO InformJtlon -- AS OF wlCH 31, 1988 (contlnwd frw PJgo 1) Alrllw Coda (Iron PJg* I): ,h,, tJ,,te J$hS for t,,fO~JtfO,I Jbo‘,t thr 9JtrS YOUr JtrpOrt IOJSlS t0 thlr Jtrifn.. PiOJto ff11 OUt this trbt. bJ,od on condltlons JS Of HJrch 31, 1988, If possfblr. If Jnothrr drtr I8 urod, plrrsr ontor dJtr horr: PhJse US* thr fOllOUing drflol~~oos: Ew.lurlvr us,: only the hrrlng JlrllnO hrr the right LO USo the gltr Uw-or-low: rocrpturr clrurr roqulrlII# lrrrlng rlrllnr to l rtntrln J l lnlnr lwrl of USI to rrtrln porrosslon of the gJto OthJr recrpturr: rny othrr provlrlon thrt rlrport oprrrtor cm us0 to rrrrrlgn gJtr USI to Jn rlrllnr other than Irrslng rlrllnr ICI (6) LEASE TERM TYPE Of USC ILCAPYUIE lVPE OF GAIE * 3,229 gates (0) (HI (1) I 0th LULL Comblno gJt.5 Uso-or-Los0 Provl~tonc under idontlcrl Corutrr hrrr tom rnd Alrcrrft Both Yrs no Yes No Yrs lb f 31 121 111 121 111 12) lCHECW.~CtlEcb fM\ ._ Example: 2.406 197 626 . e [I [I [I [I [I [I Cl. Cl. 6 c5 75% 1 1 ("5 5': [I [I [I [I [I [I [ 1 [I [I umber of gates by type of lease Number Percen -- [ 1 [I [I 66 2% xclusive-Use (G): 1 I [I [I 10fl 3x WI tb Use-or-Lose (H) 389 12: t 1 [I [I 421 13% No Use-or-lose (H) 2.195 68: 405 12% [ 1 [I [I 536 17% ot Exclusive-Use (C) : [ 1 [I [I 740 23% With Use-or-Lose (H) 91 3: __ 961 2% NO Use-or-Lose (H) __ 554 _ 17: I 1 [I [I t 1 [I [I I Total 3.229 -- 100% === Total 3,229 100: - (J) Uso nukrs or dosl~nrtorJ, l . g, , l-10, Ml&Ml7, 12-151. (b) If thv Irrsv can bv rvnmd at the option ol tha rlrllrr. plrrso rntor th4 rwrC41 optlon tam In colon F of tlu l.aru lrrrr rctiaa. PACE2 *Information on other recapture provisions is not reported because of inconsistencies in the data gathered from respondents. Page 100 GAO/RCED-90-147 Airline Operating & Marketing Practices AppendixX GAOAirportSurveyBeapumes U.S. GENERAL ACCOUNTING OFFICE AIRPORT SURVBY: NOISE CONTROLSa The U.S. General Accounting Office This survey concerns only the (GAO), an independent agency of the airport specified below. U.S. congress, has been asked to examine airport noise abatement and Airport: 183 mitigation etrategies that may affect operations of aircraft in different ways. Some airlines --> PLEASE ANSWERTHE QUESTIONS IN believe that certain noiee- THIS SECTION BASED ON CONDITIONS AS control strategies make it harder OF MARCH 31, 1988, IF POSSIBLE. for new or smaller airlines to THIS WILL MATCH THE LATEST DATE FOR compete against the established WHICH WE HAVE FARE AND TRAFFIC DATA larger carriers. FOR YOUR AIRPORT. IF ANOTHERDATE IS USED, PLEASE ENTER THE DATE: In this survey, we ask about noise control restrictions that limit Note: 10 airports answered this acces8 for some types or classes of questionnaire based on 1989 aircraft. By restrictions we mean data. any regulation, voluntary agreement, or policy that helps to [Month] [Year] control airport noise. We are only interested in those that cap or 1. The Federal Aviation reduce airport noise m control Administration (FAA) designates access to the airport. aircraft as Stage II or Stage III based on the aircraft's noise The survey contains general level. (These stages are defined questions about your airport's in Federal Aviation Regulation noise control and abatement (FAR) Part 36, Sections 36.1(f)(3) strategies. Depending on your and (f)(5).) What percentage, if policies, your airport may receive any, of the aircraft used at this a follow-up telephone call airport by each airline during requesting more detailed daytime operations BBS& be Stage information. III aircraft? (CHECK ONE.) N - 181 Pleam return the survey in the 1. [$rZ&] Not required enclosed postpaid envelope within two weeks of date of receipt, if 2. [-I 1% - 15% Stage III possible. If you have any guaetions, you may call Delores 3. [-I 16% - 30% Stage III Parrett collect at (202) 366-1780 or Jack Wells at (202) 366-1758. 4. [-I 31% - 50% Stage III If the envelope has become detached, please return the 5. [a] 51% - 70% Stage III completed survey to: 6. [a] 71% - 100% Stage III Delores Parrett U.S. General ACCQUnting Office Nassif Building, Room 2336 400 7th Street, S.W. Washington, D.C. 20590 aPercentages may not add to 100% due to round ing. 1 Page101 GAO/RCED-90-147AirlineOperating%MarketingPractices Appendix X GAO Airport Survey Responses 5. Please use the following Please remember, by restriction definitions when answering this question: Incumbent carriers -- airlines that were already providing service at your airport when the 2. Do you have any of the restriction began. following restrictions on the use of aircraft meeting FU's SfaQe Entrant carriers -- airlines definition tor purposes of noise that began or applied to begin control? (CHECK ONE.) service at your airport after N - 183 the restriction began. 1. [a] Nighttime operations 2. I- ] Daytime operations Does your airport restrictions carriers have any noise that treat incumbent and entrant carriers 3. [,22] Both nighttime and daytime differently? (CHECK ONE.) operation8 N - 183 1. [A] Yes 4. [pIl] No Stage III restrictions 3. Do you have any of the following restrictions on the use 6. Has your airport ever been of aircraft meeting FAA's Sfaae ZI. involved in suits alleging definition for purposes of noise excessive noise or legal challenges control? (CHECK ONE.) to its noise policy? (CHECK ONE.) N - 183 N - 180 1. [a] Nighttime operations 1. [2p%] Yes 2. [- ] Daytime operations 2. L!Ul No 3. [-Qh] Both daytime and nighttime operations 7. Does your airport have a noise 4. [m] No Stage II restrictions budget or cap (i.e., a procedure to allocate allowable noise to scheduled air carriers operations from the airport? (CHECK ONE.) 4. Other than federal restrictions N - 183 on Stage I aircraft, does your 1. [a] Yes -> Continue airport restrict the use of certain types of aircraft (e.g., DC-S's, 2. WE%1No -> Skip to 9 707’s)? (CHECK ONE.) N - 181 1. [_2pl Yes 8. What month and year did the 2. [eail No noise budget or cap take effect? (ENTER TWODIGIT EQUIVALENT FOR MONTHAND YEAR: e.g., MAY 1986 WOULDBE 05 86.) Range: N=6 3981-1987 [Month] [Year] 2 Page102 GAO/~ED-90-147Air~eOperatingBtMarketingPractlcee Appendix X GAO Airport Survey Responnee 9. Does your airport currently 10. As mentioned in our cover have a noise mitigation or letter, we need to obtain a copy of abatement program? This may be the any noise rules or policies in FAA's Part 150 Noise Compatibility effect at this airport that limit Planning (14 CPK 150) or another acoese for particular types or program. (CHECK ONE.) classes of aircraft. Have you N - 181 enclosed copies of the pertinent rules with this survey? (CHECK 1. t-1 Yes, we are currently ONE.) working on a Part 150 plan N = 177 1. 12231 Yes 2. [ZQh] Yea, the PAA has approved our Part 150 plan 2. CA.%1No 3. [m] We do not participate in 3. [&&&I No?oetplicable (no noise the Part 150 process, but we do have our own program 4. [m] We do not currently have any noise mitigation or abatement program. 5. [;Lp$] Other -> Please explain: Y Page 108 GAO/RCJSD-90-147Airline Operating & Marketing Practices Appendix X GAO Airport Survey Responses 11. Please fill in the name, title, and telephone number of the person we should contact, if necessary, for additional information relating to this survey. N - 153 Name: Title: Phone: 1 1 12. Thank you for your voluntary cooperation in making our study as complete and accurate as possible. Please add any comments on your airport's particular situation below. 16 Airports had comments Page 104 GAO/RCEDM-147 Airline Operating % Marketing Practices Appeodix XI GAO Travel Agent Survey Responses PAGE 1 CODESHARINd In this first section of the survey, we want to ask you about customer attitudes toward code-sharing flights. On code- sharing flights, a passenger rides partly on a major airline and partly on a commuter airline that share the same airline designator code. We'd like to compare the code-sharing flights with interline flights when the passenger rides partly on a major carrier and partly on a carrier that does not share the same code. O.K.? 1. Does your office have a policy that agents make sure that your customers know that the flight they picked is a code-sharing commuter BEFOREthe flight is booked? N = 520 [&&&I 1. Yes (GO TO QUESTION3) SE = 3.8% [U&l 2. No SE = 3.7% [ -2-1 3. Don't know SE > estimate r-5-l 4. Other SE > estimate 2. How many of your customers do you think realize before they arrive at the airport that their flight is actually on a code- sharing commuter rather than on a major carrier? Would you say most of them, about half of them, less than half of them, or none of them? (CHECKONLY ONE ANSWER) N = 61 [m] 1. Most SE = 16.5% [A] 2. About half SE = 4.5% [m] 3. Less than half SE = 14.3% [m] 4. None SE = 12.5% 1-5-1 5. Don't know SE > estimate [- ] 6. Other lThe percentages shown in this appendix are national projections or estimates based on our survey of 520 travel agents. The actual number of agents responding to each question is represented by 81N.11 The sampling error for selected estimates is given as "SE." When the sampling error exceeds the estimate, the estimate is unreliable. Such estimates are denoted by a ll*ll. Percentages for some questions do not add to 100 percent because of rounding and because unreliable estimates are not reported. Page105 GAO/RCED-99-147AirlineOperating&MarketingPractices Appedh Xl GAOTravel Agent Survey Responses PAGE 2 3. Sometimes there may be an alternative for connecting flights between a code-sharing flight and an interline flight that includes a commuter airline. If you tell your customers that they may choose between the code-sharing and the interline flight, do they seem to show a preference for the code-sharing flight, for the interline flights, or do they not seem to have a preference? (CHECKONLY ONE ANSWER) N - 517 [m] 1. Strong preference for code-sharing flight [J,Q&] 2. Moderate preference for code-sharinyf;ilh:% SE = 3.4% [m] 3. No preference/depends on the Situation - 5.7% [a] 4. Moderate preference for interline f?Fght = 2.5% [a] 5. Strong preference for interline fl& SE = 3.1% [x] 6. Don't know or other SE = 2.3% I'd like to ask you about several aspects of service that might differ for your customers on code-sharing flights and interline flights. Think about each service I read and tell me whether you get more complaints from your customers on code-sharing flights, interline flights, or are the number of complaints about the same. If you don't get any complaints about a type of service, just tell me and we'll go on to the next one. 4. The first type of complaint is . . . Baggage was lost, delayed, or damaged. Do you get more complaints from your customers on code-sharing flights, interline flights, or are they about the same? (CHECKONLY ONE ANSWER) N = 516 [a] 1. Code sharing [JJ&] 2. Interline [&&&I 3. Both the same [m] 4. No complaints 1-2-1 5. Other Page 106 GAO/RCED-90-147 Airline Operating % Marketing Practices Appendix XI GAOTravel Agent Survey Re~ponsee PAGE 3 5. The next one is . . . Gates are too far for changing planes. Do you get more complaints from your customers on code-sharing flights, interline flights, or are they about the same? (CHECKONLY ONE ANSWER) N = 517 [f4%] 1. Code sharing [m] 2. Interline [m] 3. Both the same [zT%] 4. No complaints [a] 5. Other 6. The next one is . . . Flights are delayed or cancelled. Do you get more complaints from your customers on code-sharing flights, interline flights, or are they about the same? (CHECKONLY ONE ANSWER) N = 516 [2Q$] 1. Code sharing [a] 2. Interline [j&l&] 3. Both the same [l&&l 4. No complaints [a] 5. Other 7. The next one is . . . Connecting times are inconvenient. Do you get more complaints from your customers on code-sharing flights, interline flights, or are they about the same? (CHECKONLY ONE ANSWER) N = 516 [4%] 1. Code sharing [a] 2. Interline [m] 3. Both the same [4L%] 4. No complaints [a] 5. Other Page 107 GAO/RCED-90-147 Airline Operating fir Marketing Practices Appendix XI GAO Travel Agent Survey Responses PAGE 4 8. The next one is . . . In-flight service has problems. Do you get more complaints from your customers on code-sharing flights, interline flights, or are they about the same? (CHECKONLY ONE ANSWER) N = 517 [A] 1. Code sharing [*I 2. Interline [X&l 3. Both the same [m] 4. No complaints 1-2-1 5. Other 9. The next one is . . . It is difficult to locate airline gates, flight information, or ticket counters. Do you get more complaints from your customers on code-sharing flights, interline flights, or are they about the same? (CHECKONLY ONE ANSWER) N = 517 [m] 1. Code sharing [;L2%] 2. Interline [m] 3. Both the same [m] 4. No complaints [ -5-1 5. Other 10. Are there any other areas where you tend to receive complaints about code-sharing or interline flights? N = 520 Page 108 GAO/RCED-90-147 Airline Operating & Marketing Practices Appendix 2U GAOTravel Agent Survey Responses PAGE 5 FREQUENTFLIER PROGRAMS The next questions concern frequent flyer plans and how they may affect the traveling decisions your customers make. 11. First, how often do BUSINESS cUstOmerS tell you that they are selecting flights specifically to match a frequent flyer plan that they belong to? Would you say always or almost always, more than half the time, about half the time, less than half the time, or rarely, if ever? (CHECKONLY ONE ANSWER) N = 520 1. Always or almost always SE = 5.7% 2. More than half the time SE = 5.0% 3. About half the time SE = 3.1% 4. Less than half the time SE = 2.1 ] 5. Rarely, if ever SE = 1.5% 6. Don't know or other SE = 2.3% 12. Which frequent flier plans are used most frequently by your office's business customers? N = 506 13. (Are those the airlines/Is that the airline) that account(s) for mOSt of your office's bookings? (CHECKONLY ONE ANSWER) N = 514 [Z.F&l 1. Yes (Go TO QUESTION 14) [u] 2. No (GO TO QUESTION 14) [-I 3. Don't know (GO TO QUESTION 15) [-z-l 4. Other (GO TO QUESTION 15) 14. What airlines would those be? N = 77 Page 109 GAO/RCED-99-147 Airline Operatiug %MarketingPractices Appendix XI GAO Travel Agent Survey Responses PAGE 6 15. In this question, we'd like to ask your opinion on how your customers choose a frequent flier program. Some people think it's more important to build up miles easily traveling to places they normally travel. Others would rather choose a program that has the best destinations for awards. How do YOU think your customers choose programs? Is it more important to build up miles easily or to have good destinations for awards, or are those two reasons about equally important? (CHECKONLY ONE ANSWER) N = 519 [X&l 1. Easy to build up miles [m] 2. Good destinations [a] 3. Both about equally important [a] 4. Don't know [a] 5. Other 16. Now think for a minute about your customers actually choosing their awards for the frequent flier programs. some people choose trips to destinations that are far away to save the most money. Vacation spots are also popular for awards. Which do you think is more likely for your customers to choose-- a long trip, a vacation spot, or are those two things about equally important in choosing the award? (CHECKONLY ONE ANSWER) N = 519 [U] 1. Long trips [m] 2. Vacation spots [U&l 3. Both about equally important [a] 4. Don't know [a] 5. Other Page 110 GAO/RCED-90-147AirlineOperating& MarkethgPracticm Appendix Xl GAO Travel Agent Survey Responees PAGE 7 1 OVERRIDECOWMISSIONSAND OTHERVOLUMEINCENTIVES Now I'd like to ask you some questions about override commissions and other incentives from the airlines. I@'rngoing to read a list of volume incentives that your office might have received during the last 12 months. For each one, just tell me whether or not your office received that incentive from any airlines in the last 12 months. 17. The first one is . . . free tickets. Did your office receive any free tickets for increased volume in the last 12 months? (CHECKONLY ONE ANSWER) N = 499 1-1 1. Yes SE = 5.6% [m] 2. No (GO TO QUESTION 19) SE = 5.7% [_a%] 3. Don't know (GO TO QUESTION19) SE = 3.0% [J.&l 4. Other (GO TO QUESTION19) SE = 1.7% 18. Did you receive the incentive from more than one airline? (CHECKONLY ONE ANSWER) N = 234 [m] 1. Yes SE = 8.5% UL%l 2. No SE = 8.5% [ -2-1 3. Don't know SE > estimate I- ] 4. Other 19. The next one is . . . Free VIP Club memberships. Did your office receive that incentive in the last 12 months? (CHECK ONLY ONE ANSWER) N = 496 [JJ&] 1. Yes SE = 3.8% [m] 2. No (GO TO QUESTION21) SE = 4.7% [4%] 3. Don't know (GO TO QUESTION21) SE = 2.6% [a] 4. Other (GO TO QUESTION21) SE = 1.4% Page111 GAO/RCED9a147AirlineOperatinefBMarketingPractices Appendix Xl GAO Travel Agent Survey Responses PAGE 8 20. Did you receive that incentive from more than one airline? (CHECKONLY ONE ANSWER) N = 59 [a] 1. Yes SE = 17.0% KiQ?A 2. No SE = 17.8% [-z-1 3. Don't know SE > estimate [- ] 4. Other 21. The next one is . . . Overbooking privileges--that is, the ability to get a favored client booked on a flight that is already fully booked. Did your office receive that incentive in the last 12 months? (CHECKONLY ONE ANSWER) N = 499 [m] 1. Yes SE =I 5.5% [m] 2. No (GO TO QUESTION23) SE = 5.7% [a] 3. Don't know (GO To QUESTION 23) SE = 2.4% [_2%] 4. Other (GO TO QUESTION23) SE = 1.6% 22. Did you receive that incentive from more than one airline? (CHECK ONLY ONE ANSWER) N = 206 [m] 1. Yes SE = 5.7% LEtI 2. No SE = 5.7% [J&l 3. Don't know SE = 2.6% [_2%] 4. Other SE = 1.4% 23. The next one is . . . Override commissions--that is, the volume incentives that airlines pay above the normal commission when a travel agent's bookings on that airline are above a certain threshold. Did your office receive that incentive in the last 12 months? (CHECKONLY ONE ANSWER) N = 497 [m] 1. Yes SE = 5.7% [JJ&] 2. No (GO TO NEXT SECTION, PAGE 11) SE = 5.7% [A] 3. Don't know (GO TO NEXT SECTION, PAGE 11) SE = 2.6% [a] 4. Other (GO TO NEXT SECTION, PAGE 11) SE = 1.4% Page 112 GAO/RCED-90-147 Airliue Operating & Marketing Practices GAO Travel Agent Survey Reeponsee PAGE 9 24. Did you receive that incentive from more than one airline? (CHECK ONLY ONE ANSWER) N = 304 [m] 1. Yes SE * 7.7% US1 2. No SE - 7.5% [A] 3. Don't know SE = 3.3% [- ] 4. Other 25. When your office receives override commissions, are they ever tied to bookings made for particular routes? (CHECXONLY ONE ANSWER) N = 304 [ae%] 1. Yes U!Sl 2. No [-z-l 3. Don't know [ -5-J 4. Other 26. What proportion of the override commissions that your office receives are tied to bookings for particular routes? Would that be all or almost all, more than half, about half, less than half, very few, or don't you know? (CHECKONLY ONE ANSWER) N = 130 [a] 1. All or almost all [JJ&] 2. More than half [Z-Q&] 3. About half [&j.%,] 4. Less than half [m] 5. Few [--I 6. Don't know I- ] 7. Other Page 113 GAO/RCED-90-147 AWine Operating & Marketing Practices GAOTravel Agent Survey Responsee PAGE 10 27. Thinking about the last two years, have any new domestic carriers entered your market since January 1, 19871 (CHECK ONLY ONE ANSWER) N = 304 [p2%] 1. Yes [;L18] 2. No (GO TO QUESTION29) [a] 3. Don't know (GO TO QUESTION 29) [- ] 4. Other (Go To QUESTION29) 28. Did any of the OTHERcarriers change their override commissions in response to the new competition, or didn't you notice? (CHECKONLY ONE ANSWER) N - 183 Wi%l 1. yes, they did change [m] 2. No, they did not change [1Q%] 3. I didn't notice [a] 4. Don't know [- ] 5. Other 29. Considering the money made from override commissions, how important, if at all, do you think override commissions are in contributing to the revenue of your office? Would you say very important, moderately important, somewhat important, not very important, or don't you know? (CHECKONLY ONE ANSWER) N = 304 [X+%1 1. Very important [&$$I 2. Moderately important [m] 3. somewhat important [m] 4. Not very important [-~J 5. Don't know [-z-l 6. Other Page 114 GAO/RCED-90-147 Airline Operating fk Marketing Practices AQQendixXI GAO Travel Agent Survey ResponseS PAGE 11 PREFERRED AIRLINE 30. Some travel agents have a PREFERRED AIRLINE and they try to book domestic customers on that airline if the customers don't prefer another airline. Does your office have a preferred airline for domestic travel? (CHECK ONLY ONE ANSWER) N = 516 [4;L%] 1. Yes SE = 5.6% [m] 2. No (GO TO QUESTION 34) SE = 5.7% [-E-l 3. Don't know (GO TO QUESTION 34 1 SE > estimate [_2%] 4. Other (GO TO QUESTION 34) SE = 1.4% 31. What airline is that? N = 197 I 32. Why is [ Q31 1 your preferred airline? Could you tell me more about that? N = 213 33. (IF MORE THAN ONE REASON WAS GIVEN:) What was the single most important factor in picking [ Q31 ] as your PREFERRED carrier? N = 146 34. In this question, I'd like for you to think about the times that a customer books a domestic flight and has no preference for a particular airline. Could you tell me about what percent of your bookings the customer leaves it up to you to decide which airline to book the ticket on? I just need a rough estimate. (What percent?) N = 515 Percentage Percentage of bookincrs of aqents 25 percent or more 69% SE = 5.2% 50 percent or more 51% SE = 5.7% Page 115 GAO/RCED-90-147 Airline Operating & Marketing Practices Appendix XI GAO Travel Agent Survey Requmes PAGE 12 IF THE ANSWERTO THE LAST QUESTIONWAS: 0 -> GO TO NEXT SECTION, PAGE 13 GREATERTHAN 0 -> GO TO NEXT QUESTION 35. Could you tell me about how you decide which airline to use in those cases? (IF RESPONDENT MENTIONSONLY CUSTOMER'S CONVENIENCE,ASK:) What would you do if two flights were equally convenient for the customer? N = 474 Page 116 GAO/RCED90-147AirlineOperatinggEMarketingPractic~ Appendix XI GAO Travel Agent Survey Responses PAGE 13 CRS (COMPUTERRESERVATIONSYSTEMS) In the next few questions, we'd like to ask about the CRS aystem that you use for your bookings. 36. Which of the five computer reservation systems did this office use in the last 12 months to make the most airline bookings in terms of dollar amount? Would that be SABRB, APOLLO, SYSTEM ONE, PARS, or DATAS II? (CHECKONLY ONE ANSWER) N = 514 [m] 1. SABRB (owned by American Airlines) [m] 2. APOLLO (owned by United) [m] 3. SYSTEMONE (owned by Eastern/Continental) [m] 4. PARS (owned by TWA/Northwest) [JJ&] 5. DATAS II (owned by Delta) [- ] 6. Don't know (GO TO NEXT SECTION, PAGE 15) r-5-1 7. Other (GO TO NEXT SECTION, PAGE 15) 37. Record airline that owns respondent's CRS here: (See Question 36 above for airlines owning CRSs.) 38. Thinking about the airline representatives that visit you, do they seem to just come by on a regular basis, or do they sometimes contact you in response to declines in bookings? (CHECK ONLY ONE ANSWER) N = 514 [a] 1. Regular visits only [a] 2. In response to decline in bookings [J&&l 3. None come by (GO TO NEXT SECTION, PAGE 15) [ -5-1 4. Don't know (GO TO NEXT SECTION, PAGE 15) [m] 5. Other (Go TO NEXT SECTION, PAGE 15) J Page 117 GAO/RCED-90-147 Airline Operating fk Marketing Practices AppendixXI GAOTravelAgentSurveyReeponsee r PAGE 14 39. still thinking about visits from airline representatives, are there any instances that you can remember when you thought that a visit from the [ 436 ] representative was the result of information from the bookings you made on the CRS? (CHECK ONLY ONE ANSWER) N = 380 [a] 1. Yes [1p%J 2. No (GO TO NEXT SECTION, PAGE 15) [_;L%] 3. Don't know (Go TO NEXT SECTION, PAGE 15) [-&-I 4. Other (GO To NEXT SECTION, PAGE 15) Page118 GAO/RCED-90-147AirlineOperating%MarketingPractices Appendix XI GAO Travel Agent Survey Responses PAGE 15 BACKGROUND Finally, I have just a few questions about this travel agency. IId like to remind you that all the questions in our survey are voluntary. These questions are confidential and we ask them only so we can tell the types of travel agencies that were interviewed for our study. 40. I'm going to ask what category your office fits in terms of the proportion of business travelers. What percent of this agency's airline bookings are made by business travelers? Would you say zero to 15 percent, 16 to 35 percent, 36 to 65 percent, 66 to 85 percent, or 86 to 100 percent? (CHECKONLY ONE ANSWER) N = 519 [m] 1. 0% - 15% SE = 4.7% [m] 2. 16% - 35% SE * 4.9% [m] 3. 36% - 65% SE = 5.5% [2p%] 4. 66% - 85% SE = 4.3% [d] 5. 86% - 100% SE = 1.7% [-z-l 6. Don't know SE > estimate [-z-l 7. Other SE > estimate 41. Could you tell me what airports serve as the point of origin for most of your clients? N = 520 Page 119 GAO/RCED-90-147 Airline Operating & Marketing Practices Amendlx Xl GAOTravelAgentSu~eyR.eeponsee PAGE 16 42. Now, I'd like to read a list of categories for the total revenue for your Office for 1987. Just tell me the letter of the category that is closest to the revenue for your office in 1987. (A) $1 million or less; (B) $1 million to $3 million; (C) $3 million to $5 million: and (D) Over $5 million. (CHECKONLY ONE ANSWER) N - 511 [m-j 1. A: $1 million or less SE = 5.6% [J.$&] 2. B: $1 million to $3 million SE - 5.5% [a] 3. c: $3 million to $5 million SE * 2.3% [A] 4. D: Over $5 million SE = 1.3% [m] 5. Don't know SE = 3.5% [,2fr] 6. Other SE - 1.6% 43. That's all the questions I have today. If I need to ask for clarification later, would it be all right for me to phone you again? (CHECKONLY ONE ANSWER) N = 499 [ -1 1. Yes [- ] 2.No 44. Our study won't be completed for several more months, but when it is, would you like to receive a copy of our report? (CHECK ONLY ONE ANSWER) N * 519 [m] 1. Yes 45. Do you have any last comments or questions? (CHECKONLY ONE ANSWER) N = 519 Comments 17% No comments 83% Page120 GAO/WED-90-147 Airline Operating & Marketing Practices Appendix Xl GAO Travel Agent Survey Reeponetx Table X1.1: Point Estimates and Sampling Erron for Selected Data From the Travel Agent Survey Percentage Sampling error Percentage of Sampling error Dercrlption of data of agents (percent k) revenuesa (percent k ) Agents believing most customers know their fli ht is on a code-sharing commuter or having a policy of In 3 orming customers when the flight booked is a code-shared flight 98 2.4 95 2.1 Agents reportin their customers have a preference for 4 ts over interline flights code-shared flig 66 8.1 64 6.5 Agents reporting that business customers book flights to match their frequent flyer plans more than half the time 82 4.4 76 3.8 Agents reporting that ease of building up miles is a factor in customers’ choice of a frequent flyer plan 78 4.9 81 3.5 Agents receiving at least one incentive 74 5.1 75 3.9 Agents receiving override commissions and reporting that the commissions are moderately or very important to office revenues 63 7.6 69 5.4 Agents reporting more than 35 percent business customers 60 5.7 74 3.9 Agents reporting more than 65 percent business customers 24 4.5 38 4.3 Agents selecting airline for customers at least half the time 51 5.7 42 4.4 Agents selecting airline for customers at least one-quarter of the time _-I 69 5.2 64 4.3 Aaents reoortina office revenues of $3 million or less 73 4.5 54 4.2 aThis column represents an estimate of the proportion of total revenues earned by agents in the response category rather than an estimate of the number of agents in the response category. Page 121 GAO/RCED-90-147 Airline Operating % Marketing Practices Appendix XII Excerpts on Policy Options From GAO Testimony on Barriers to Competition in the Airline Industry On September 20, 1989, GAOtestified before the Subcommittee on Avia- tion, Senate Committee on Commerce, Science, and Transportation, on Barriers to Competition in the Airline Industry (GAO/T-RCED89-66).We presented the same testimony the next day, September 21st, before the Subcommittee on Aviation, House Committee on Public Works and Transportation (GAO/T-~~~~-89-66). In that testimony, we outlined various policy options for dealing with the features of airline markets that are likely to discourage entry. Those policy options are excerpted below. The data we have gathered on potential barriers to entry in the airline Policy Options industry indicate that some features of airline markets are likely to dis- courage entry. Slot controls, 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 DOTto consider possible reme- dies. Frequent flyer plans appear to present a clear potential for dis- advantaging 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 [travel agent commission overrides] appear to offer a less compelling basis for dis- advantaging 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 mini- mize the possible anticompetitive effects of the practices we have dis- cussed. During the course of our work, we have identified various policy options. Though not an exhaustive list, our preliminary evaluation sug- gests 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. Page 122 GAO/RCED-90-147 Airline Operating % Marketing Practices , Appendix XII Excerpts on Policy Options From GAO Testimony on Barriers to Competition in the Airline Industry ~~-~~ ~~ Gate Access Airport facilities are essentially local responsibilities, yet most operate under federal restrictions imposed by the Airport and Airway Improve- ment 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 access to an airport’s gates to justify their investment in providing ser- vice. However, it might be possible to provide this assurance 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 airports dependent on the airlines as a source of revenue. The Airport Development 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 air- lines 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 pas- senger facility charges for non-airline purposes. However, the 1982 Air- port and Airway Improvement Act requires airport operators to provide the Secretary of Transportation with assurances 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. Noise Restrictions A small number of airports have particularly stringent noise restrictions that, while not 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 poli- cies should go. Some airports (such as Boston and Denver) have adopted . Page 123 GAO/RCED-90-147 Airline Operating & Marketing Practices Appendix XJl Excerpta on Policy Options From GAO Testimony on Barriers to Competition in the Airline Industry noise rules that have waivers to ease entry 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 minimizing adverse impacts on competition. Slot Restrictions In our view, the buy/sell rule for airport slots has been ineffective at encouraging entry 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, in 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 significant1y.l 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 network in the north- eastern 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 commitment (e.g., by leasing gates and investing in advertising). We believe that something should be done to open up the slot market so that permanent entry becomes easier at slot-controlled airports. We are particularly concerned about proposals to extend slot restrictions as cur- rently structured to other congested airports. One solution to this problem would be for the FAA to lease slots to the airlines rather than ‘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 Daniel P. Kaplan, Deregulating the Airlines (Cambridge: MIT Press, 1986); Gregory D. Call and Theodore E. Keeler, “Airline Deregulation, Fares and Market Behavior: Some Empirical Evidence,” in Andrew F. Daughety (ed.), Analytical Studies in Transport Economics (Cambridge: Cambridge University Press, 1986), pp. 221-247; and Stephen A. Morrison and Clifford Winston, “Empirical Implications and Tests of the Contestability Hypothesis,” Journal of Law and Economics, vol. 30 (April 1987), pp. 61-62. Page 124 GAO/RCED-90-147 Airline Operating % Marketing Practices . . Appcndlx XII Excerpta on Pollcy Optiona From GAO Testimony on Barriers to Competition in the Airline Industry 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 recog- nize that airlines need to have assured access to slots for a long enough period to make reasonable investments in serving routes from that air- port. 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 airports that have long-term gate leases). Lease terms could be stag- gered 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 nor, under the provisions of the current buy/sell rule, periodically to withdraw a portion of the slots and reallo- cate them by lottery. Incumbent carriers would have the opportunity to buy the slots back from the winners 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. Computerized Reservation In our testimony last year on CRSS,we discussed a number of policy options, ranging from divestiture of airline-owned CRSSto non-airline Systems owners to modifications in vendor contracts with travel agents. We con- tinue to believe that further action is warranted to remedy the anticom- petitive 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 CRSsub- scription 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 min- imum use clauses. While uor is making further investigations into the competitive impact of CRSs,it has not acted to open any regulatory pro- ceedings, as we recommended it do last fall. It is especially important that nor begin to act since its CRSrules will sunset at the end of 1990. Other Airline Marketing The three other airline marketing practices that we have discussed- frequent flyer plans, TACOS,and code-sharing-have effects that are Practices Y more difficult to measure. Frequent flyer 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 Page 126 GAO/RCED-90-147 Airline Operating & Marketing Practices ,, ’ ~~ ----._ - Appendix XII Excerpta on Policy Options From GAO Testimony on Barriers to C&mpetition in the Airline Industry market share. Frequent flyer plans offer a literal free ride to their par- ticipants, but, these free trips are paid for in the form of higher fares for the average traveler and possibly also in the form of excessive business travel. INI’, in its Information Directive of June 14, 1989, has requested information on frequent flyer plans which may help to resolve the ques- tion 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 mar- keting tickets and thus may pose an entry barrier to entrants with less access to 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 sub.ject to regulation by DOTunder its authority to regulat,e 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 ‘I’A(X)Swere prohibited, airlines might well resort to other kinds of volume incentives. If code-sharing agreements were prohibited, airlines would probably just buy out their code-sharing partners or develop com- muter subsidiaries internally, as several 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 pro- hibit uss from listing code-shared and on-line connections ahead of interline connections, as the European CRSrules propose, but this would make it more difficult for travel agents to find code-shared flights for passengers who prefer code-shared connections. _--.-..- ..-. _.-. ..-__------- While our analysis is not yet complete, the work we have done so far Conclusions indicates that some features of airline markets are likely to discourage entry. The factors that appear most likely to discourage entry are gate Page 126 GAO/RCED-90-147 Airline Operating & Marketing Practices Excerpta on Policy Options From GAO Tehnony on Barriers to Competition in the Airline Industry access problems, slot controls, and CRSS.We have offered some alterna- tives for reducing the potential anticompetitive effects of these factors. While not an exhaustive list, these options involve important’policy con- siderations and require a careful weighing of costs and benefits and an assessment of trade-offs. While the effects of some of these factors seem fairly clear, the effects of others are still uncertain. As we obtain further results from our econometric model, we will be able to provide the Com- mittee with more information on the relative significance of these fac- tors. And as the significance of these factors becomes clearer, we would be happy to work with the Committee on further analysis of possible solutions. Page 127 GAO/RCED-90-147 Airllne Operating fk Marketing Fracticea Appendix XIII Major Contributors to This Report James Noel, Assistant Director Resources, Frank Mulvey, Assistant Director Community, and John V. Wells, Evaluator-in-Charge Delores Parrett, Evaluator Economic ” ’ Brian McLaughlin, Evaluator Development Division, Fran Featherston, Social Science Analyst Washington, D.C. James Jorritsma, Regional Assignment Manager Boston Re@ona1 Office Bill Hansbury 7Evaluator Linda Choy, Computer Programmer Analyst (341179) Page 128 GAO/RCED-90.147 Airline Operating & Marketing Practices : __ _l-..l”__- .I_.. .--- _.-.. _-_..--~- ---.-------._-.~ .,-. ~I~1--~ ----11------ - i J Ordt~rir~g Ill1’OI.IIIil1iOll I’.S. (itbnt*ral Acc*ounl,iltg Ol’l’ictb I’.(). Ih)X (i0 15 Gail tttbrslmrg, MI) 20X77 Orttt~rs ni;iy ;11so t)th plat+td by calling (202) 275-63241. _“. “- .__..__..” .._ .._.... ..__._ _._. ,”I _. .._” l,“.. ..._._-^..I._._-__-__ __._. _..-I-____._ -. -- f’ttilcd Stillw (h~nc*r-;~l Ac~otrrrt irlg Of’l’iw \%‘a?;ltillgltoll, I).( :. 205fH
Airline Competition: Industry Operating and Marketing Practices Limit Market Entry
Published by the Government Accountability Office on 1990-08-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)