Small and medium-sized airlines are disappearing, and the flow of new entrants has slowed to a trickle. In the past year, nearly every major U.S. airline has acquired, or proposed to acquire, another carrier of significant size. Some analysts and most of the large airlines assure us that the domination of the industry by a few giant carriers will not lessen competition. Unfortunately, this claim conflicts with the facts.
An example: Delta Airlines carries 54 percent of the passengers out of Atlanta. From many large cities in the United States, Delta offers the only single-plane service to Atlanta. The average passenger traveling to or from Atlanta on Delta pays 22 cents per mile. Yet, the average fare on all other Delta flights is only 13 cents per mile.
Could the cost of using Atlanta's airport be that much higher than at most other cities? Apparently not -- Delta passengers who only change planes at Atlanta pay just 18 cents per mile. These are customers for whom Delta must compete with airlines that would route the travelers through other hubs. No such direct competition exists for most people traveling to or from Atlanta.
Nor is Delta unique. All the large airlines -- American, United, Delta, Eastern, Northwest, USAir, Piedmont and TWA -- charge substantially higher prices for flights to or from their major hubs than on the rest of their systems. Carriers with small shares at the same airports do not charge significantly higher prices than on their other routes.
Airline deregulation was based on the premise that prices on a route would be disciplined by the threat of competition, even if actual competition was absent. Yet, factors commonly associated with a dominant share of traffic at an airport -- controlling most of the airport gates, having the most attractive frequent-flyer program for local residents, giving bonuses to area travel agents who generate large revenues for the airline, being the primary buyer of many local support services, and having a dominant reputation -- substantially lessen that threat of competition.
Imagine that you run a small airline that is considering entry into the St. Louis market. Most St. Louis business travelers have already built up mileage on their TWA frequent-flyer plans. In addition, they realize that most of their future trips will still be on TWA, since it has more than half the flights out of St. Louis. Charging a few dollars less than TWA is not going to induce these most valued customers to switch, particularly when the fare is paid by their employers, while they get the frequent-flyer rewards. In fact, the price difference will have to be quite large, thereby discouraging entry in the first place. Frequent-flyer programs also increase the cost of switching among established airlines, thus lessening price competition among the large carriers.
The dominant airline in a city often wins the favor of local travel agents by offering them commission override bonuses. These are essentially "frequent booker" plans. If the agent produces a certain amount of revenue for the airline, he or she receives a reward, such as a higher commission rate or free travel. Your travel agent's recommendations may be based on lower prices and better service -- or it may be based on commission override bonuses.
The travel agent's bias can also come from the computer reservation system (CRS) used to book your flight. Each of the six largest airlines owns all or part of a CRS. In cities dominated by one of these carriers, local travel agents tend to prefer that airline's CRS. Predictably, the airline manipulates the display of flights on its CRS so that its own flights show up first and appear most attractive.
These advantages of being the major carrier in a city are likely to lead to the demise of small airlines and to diminished competition among the six or seven carriers that will remain.
Is deregulation to blame for this outcome? Absolutely not. Airline deregulation was never meant to restrict enforcement of the antitrust laws. If the Department of Transportation begins to enforce these laws in the airline industry, it will still be possible to enjoy the benefits of deregulation without suffering the costs of uncontrolled monopoly pricing. Some suggestions:
1. Force divestiture of computer reservation systems. The vice president of planning at Piedmont Airlines, which is itself trying to buy into a CRS, recently stated candidly that "the CRS system owners receive an unspoken preference from the thousands of agents who utilize their respective systems; and they obtain immediate access to critical marketing data of competitors."
2. Require that the frequent-flyer mileage awarded by an airline be transferable among consumers. The market in frequent-flyer mileage that would result would allow an individual to cash in his investment when he switches to another airline, thereby eliminating "customer lock-in." The effect of these programs as "kickbacks" would also be lessened. A company could immediately sell the frequent-flyer mileage from its employees' trips.
3. Stop approving airline mergers among the major carriers. The Northwest/Republic, TWA/Ozark and Texas Air mergers have created exactly the dominance at some airports that encourages monopoly behavior.
Airline deregulation has brought great benefits to consumers, benefits estimated by one study to be $6 billion per year. Those benefits are threatened, however, by the rising dominance of a few giant carriers. Re-regulation is not the answer. The government already has the tools to preserve competition. All it need do is enforce the antitrust laws that are on the books.
The writer is an associate professor of economics and public policy at the University of Michigan. He is currently a consultant to America West Airlines in the pending USAir/Piedmont merger case.