Brancatelli – August, 29 2003

Brancatelli – August, 29 2003

A federal appeals court in Denver issued an important–if barely noticed–ruling on the state of airline competition in July. If we have any hope of saving the nation’s air-transport system from the inept, yet iron-fisted, grip of the Big Six, we’d better start thinking about how we come to terms with the court’s pronouncement.

In case you missed it–and you probably did, since the ruling came just before July 4th and it received almost no media coverage–the 10th U.S. Circuit Court of Appeals refused to allow the Department of Justice to revive a 1999 predatory-pricing case against American Airlines.

Originally filed in federal district court in Wichita, Kansas, the government case claimed American engaged in what then Attorney General Janet Reno called a “calculated strategy” of driving smaller competitors off newly established routes to and from American’s gigantic hub at Dallas/Fort Worth Airport. American’s activities against three smaller airlines–Vanguard, Western Pacific and Sun Jet, all now defunct–essentially consisted of slashing prices and flooding markets with new flights, more seats and bigger planes until the smaller carriers withdrew from DFW. To the government–and most of us–that seemed like a textbook example of Standard Oil-type antitrust.

The government never got its day in court, however. The Wichita action was summarily dismissed in April, 2001, a month before it was due to go to trial. The Denver appeals court ruling last week essentially upheld the judgment of the district judge in Wichita, J. Thomas Marten. He was imperious in his rejection of the government’s contentions and unequivocal in his belief that American’s behavior was not illegal.

“There is no doubt that American may be a difficult, vigorous, even brutal competitor,” Marten wrote in his summary dismissal more than two years ago, “but here it engaged only in bare, not brass knuckle competition.”

Let’s not waste time questioning the Denver court’s decision to refuse to allow the Justice Department to revisit its case. At this late date, let’s not revisit Marten’s decision to toss the case without letting it go to trial. Let’s not even excoriate American Airlines in specific because American is not the sole purveyor of this type of activity. Each of the Big Six has repeatedly used bare-knuckle tactics against start-up carriers since the dawn of deregulation.

The issue now, I believe, is whether we, as a nation, want the Big Six to engage in Judge Marten’s “bare knuckle competition.” We already allow them to maintain fortress hubs, schedule without regard to airport capacity, price in a manner so convoluted that even airline bosses admit the system is irrational and engage in practices such as code-sharing that are illegal in other industries. And since Marten dismissed the Wichita case, we’ve given them billions of dollars in bailouts, tax breaks, tax refunds and tax holidays.

Do we now also want them engaging in Marten’s “bare knuckle competition” against the newer, smaller carriers that are finally creating viable air-travel alternatives to the rotting carcasses of the established order?

Most of us would agree that the answer is no. And I suggest that we need to change the rules so that “bare knuckle competition” is not permitted.

As a nation, we own the air space. As taxpayers, we pay for the airports and most of the security. We have a right to decide what kind of air system we want and how airlines compete within that system. It is in the national interest to ensure that Marten’s “bare knuckle competition” doesn’t leave the Big Six with iron-fisted control of the skies.

First and foremost, we need to protect any carrier willing to pioneer new, nonstop routes. Here’s an idea: Any airline–Big Six, start-up carrier, regional operator–that launches nonstop jet flights between two cities where there is currently no such service should be given two years of protection from competition. If you have the guts to launch flights on a route that no other airline currently serves, you deserve two years of grace to build the market.

Second, we need to protect new competitors that are willing to enter markets with limited, entrenched competition. Here’s a suggestion: Any airline that launches a nonstop jet route where there is currently only one or two existing carriers should be given a two-year shield from “capacity dumping.” If an existing carrier wants to match–or even undercut–the fares offered by a new competitor, I say “Viva Price Wars!” But the entrenched carriers should not be allowed to add additional capacity for two years after the entry of a new competitor. After all, if the incumbent thought there was a market for more service, why didn’t it launch additional capacity before the new airline arrived?

(This is exactly the behavior that Delta is now exhibiting in the Atlanta-Los Angeles market, where it held a nonstop monopoly before AirTran and JetBlue launched flights in May. In a transparent, iron-fisted attempt to drive AirTran and JetBlue out of the market, Delta has launched an unprecedented torrent of new flights, created triple-mileage bonuses and slashed its fares.)

Lastly, to enhance the ability of carriers to compete on new routes, I suggest targeted tax breaks. Any airline that launches nonstop jet service on an unserved route or in a monopoly/duopoly market should be exempted from local airport passenger facility charges and all aviation-related taxes. The Big Six have been in our pockets repeatedly since 9/11. Why not target the perks we give out instead? I say only airlines that pioneer new flights in new markets should get tax breaks.

In his wisdom, Judge Marten said “bare knuckle competition” is okay. Marten, I suspect, probably doesn’t fly as much as you and I. We know the realities and the rapacious nature of the Big Six.

We know bare knuckles become iron fists faster than you can say “oligopoly.”

Leave a Reply

Your email address will not be published. Required fields are marked *