oversight

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)

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