On Competition

ON COMPETITION

Aviation law forum examines the airport competition debate; DOT prepares to release its study

BY Monica L. Rausch, Associate Editor

August 1999

CHICAGO — The U.S. Department of Transportation's report on airport practices and their effects on air carrier competition is due out sometime this month, according to David Bennett, director of airport safety and standards for FAA. The DOT's investigation is spurring much debate in the industry: Do the actions of airport operators affect air carrier competition? Is it the duty of airports to keep their markets open to air carrier competition? Are regulations necessary?

Bennett, along with Thomas Anderson of Minneapolis-St. Paul International Airport, David Berg of the Air Transport Association, and Nancy Clawson with the Department of Aviation for the City of Chicago, offered their insights into the debate during the American Bar Association's Annual Meeting of the Forum on Air and Space Law held here recently. Here's the highlights from that session.

Boosting Competition
DOT investigators visited 13 large and medium hub airports and made use of a survey sent out by Airports Council International (ACI), according to Bennett. Regarding the study's conclusion, Bennett says, "The study was not intended to make a recommendation for regulations ... but the findings could be the basis for upcoming recommendations."

He also points out several airport practices that increase competition. These include:
1. Work with new entrants to make sure they feel welcome.
2. Monitor gate utilization to ensure the maximum use of gates by existing carriers.
3. Establish "use or lose it" policies: A carrier must use a gate or it will be given to another carrier. "Many airports have it," says Bennett, "but yet a lot of them don't invoke it."
4. Create guidelines for entrance as to what the airport can expect from air carriers and vice versa. Establish when a carrier's operations should begin.
5. Monitor sublease agreements on facilities to make sure terms are reasonable.
6. Convert exclusive use gates to common use.
7. Track passenger facility charges (PFCs) to make sure they're not used in a way that wouldn't promote competition.
8. Make competitive services available for ground handling so new entrants who are subleasing from another carrier are not obligated to buy that carrier's ground handling services.
9. Renegotiate majority-in-interest clauses so they won't prevent projects that would add capacity for new entrants.

Premium Fares and Capacity Issues
Thomas Anderson, general counsel for Minneapolis-St.Paul International Airport (MSP), says DOT's investigation means that airports are now faced with a "new paradigm."

MSP, a hub for Northwest Airlines and one of the airports visited by DOT during the investigation, was identified as one of the "pockets of pain" by DOT, says Anderson.

The DOT and others in industry argue that at their hubs, carriers are able to provide frequent and non-stop service to a large number of destinations, thereby dominating the hub market and charging passengers in excess of what a non-hub carrier would charge if the hub were more open to competition.

This extra charge has been termed a "hub premium" and, according to some sources, ranges from 37 to 49 percent higher than a typical fare, says Anderson.

"One of the most frustrating parts of this debate is that the concept of this ’hub premium' is really driving this entire discussion, and the carriers are vehemently denying whether there is such a hub premium," he notes. "Airports who traditionally do not monitor fare levels É are found caught in the middle and being forced to address the issue based upon the assumption that there is a problem."

DOT's investigation implies that it is no longer enough to create a level playing field and provide non-discriminatory access, says Anderson; it's now an airport's duty to actively spur competition. "The question that I think this presents to airports and airlines is É how far can airports go to tilt the playing field in order to promote competition?"

One main role of airports implicated in the study is that of providing capacity for air carriers, says Anderson. The problem of being able to provide enough facilities for both new and existing carriers is one of "time and money," he says. MSP is currently in the midst of a $2 million airport development project which includes adding a runway and 12 jetways from the main terminal, as well as building a new terminal for Sun Country Airlines.

The real problem in providing capacity for air carriers is predicting — with a fair amount of certainty — their needs into the future.

MSP finished a 10-year study on its future needs in 1996, and none of the improvements now in the works were forecasted then as being needed in the immediate future. "Just over two years later, we perceived an incredible shortage of gates." Their plan was based on a prediction of less than one percent growth in air traffic per year; MSP is now experiencing between 6 to 8 percent growth.

"Fundamentally, the question is: Who's going to pay for it and who will bear the risk if we build too much?" notes Anderson. "What is the ability of the airports to charge carriers in rates and charges for capacity that those carriers have not identified as being needed, so they (airports) just have a couple of spare gates in their hip pocket in case someone comes along? I think this is something the administration clearly needs to address."

DOT isn't the only agency interested in the status of air carrier competition at MSP, adds Anderson. Others who are conducting their own studies include the U.S. General Accounting Office, the attorney general's office, local federal reserve boards, and state auditors.

And the local community's interest is also piqued, says Anderson. Northwest's strike late last year taught the community much about its dependence on a stable air carrier in the region. The airport has been the subject of a few in-depth news reports.

Marketplace Forces
According to David Berg, assistant general counsel for the Air Transport Association, constraints on competition stem from the lack of airspace capacity — an air traffic control issue. Delays, he says, "cost the U.S. economy — not just the airlines, but the entire economy — some $6 billion annually."

He says that the federal government does not need to make new regulations regarding airline competition. Long-term, exclusive use gate leases are on the decline while the number of preferential, common use gate leases, gate utilization tests, and airport-controlled gates are increasing, he says. Majority-in-interest clauses, which allow dominant carriers a say in airport projects, are also becoming rarer.

"The conclusion that can be drawn from these factors is that marketplace forces are working," he notes. "Airport practices are evolving in response to the airline's deregulation in a way that enhance competition."

Berg agrees with Anderson that there is no precise way to determine the future facility needs of an airport. "I think airports and airlines really can't afford to stockpile facilities in case a new entrant or a new service comes along... Airports really don't have the ability to carry debt on assets that aren't producing revenue."

Facility availability closely matches demand, he says, although "on occasion there are situations where demand exceeds excess availability. That's a problem on occasions and will continue to be a problem." However, he notes, that is the problem DOT is focusing on.

In time, through airport and air carrier negotiations, the carrier's needs are eventually met, he notes, pointing to the building of a new terminal at MSP for Sun Country Airlines.

Adds Berg, "In my view, what's going on is DOT is using the issue for political reasons, political purposes.

"...This issue dovetails very nicely and very closely with this direct effort to regulate airline competition.

"DOT is creating an issue for which the solution already exists."

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