Leveling the runway for low-fare airlines

Washington is beginning to react to American consumers' growing frustration with a booming airline industry that keeps raising its prices as it hauls record numbers of people.

When the Justice Department sent a warning shot over the bow of the major air carriers last week by bringing suit against American Airlines for anticompetitive practices, it was just one of several initiatives already under way to give air travelers a better deal.

Two so-called "Passengers Bill of Rights" are pending in Congress, as is a proposal that would make it easier for low-fare carriers to get into some of the nation's most congested airports. Another would dramatically expand and improve air infrastructure and air-traffic-control systems.

The Department of Transportation (DOT) has also proposed a set of guidelines that could be used to determine when a big airline is unfairly undermining a new competitor - just what the Justice Department accuses American of doing.

"It's a symptom of a larger problem, which is a lack of competition," says David Stempler, president of the Air Travelers Association, a passenger advocacy group in Washington.

The suit against American is the first Sherman Anti-Trust Act case brought against an airline since the industry was deregulated in 1978. It signals that the government will no longer tolerate the well-financed big guys unfairly throwing their weight around to squeeze out upstart competitors.

The end result of all of these efforts should be good news for consumers. Studies have already shown that in markets where low-fare carriers compete with the majors, prices are lower, significantly so in some cases. And the the government's actions to date, along with a series of other factors, are again helping to encourage the development of new, low-fare carriers after a lull of several years.

"Until the government stepped up to the plate [last] week, investors were uncertain about the climate that a new entrant may face, both because of what large carriers might do to them and other barriers," says Ed Faberman, executive director of the Air Carrier Association in Washington, which represents start-up airlines.

Many of the nation's major airports are congested and operate under a so-called "slot" system that determines how many landings and take-offs there can be an hour. That makes them difficult to get into. Both the DOT and the Federal Aviation Administration (FAA) have also toughened up their certification process, so the processing time is longer than in the past.

"Quite frankly, the record for new start-ups hasn't been very good, but now that's changing," says Faberman, noting that Vanguard Air, Frontier, and several others are now in the black and growing..

After the 1996 ValuJet crash, which raised alarms about the safety of some of the low-cost carriers, there was a dearth of new start-up carriers. And quite a few went under.

"There's lots of controversy about why," says Thomas Menzies, a senior researcher at the National Research Council of the National Academy of Science. "One was that Wall Street no longer saw low-fare start-ups as a good investment; another is the DOT's tougher stance on approving new applications; and the other is that the ValuJet accident occurred about the same time the airlines were doing a lot of this predatory pricing."

IN the early, heady days of airline deregulation in the late 1970s and early '80s, competition ran almost rampant. Dozens of new upstart carriers came on line to challenge the majors.

People Express went from New York to Burlington, Vt., for a mere $19 one way. Freddie Laker's airline offered regular round trips to London for $200 - you just had to remember to bring your own brown-bag lunch. For a few brief years, it was an airline passenger's delight.

But rough economic times in the early 1980s and tough competition drove many of the start-ups under.

Then a spate of mergers consolidated the industry into a handful major companies - each of which developed its own major hub: American in Dallas/Ft. Worth, Delta in Atlanta, Northwest in Minneapolis, and United in Denver.

Since 1993, the low-fare airlines have complained that the majors have taken advantage of their power in the hubs to unfairly undercut competition. When a new low-fare carrier would come into a market and offer a discounted price on a specific route, the major would often match the price, offer frequent-flier bonuses, and then schedule extra planes to increase their capacity.

The majors, like American, call that healthy, all-American competition - just protecting their turf. The small start-ups and the Justice Department call it "dumping capacity" and "predatory pricing," because after the new entrant was driven out, capacity dropped and prices went right back up.

"The lawsuit is essentially saying that because of airport dominance, a hub carrier can squeeze out low-fare operators, and because of that, airfares are higher than they would otherwise be," says Frank Berardino, president of GRA Consulting, a transportation consulting group located outside Philadelphia.

But Mr. Berardino and other analysts note that predatory pricing is difficult to prove. For instance, American Airlines contends that it increased capacity only to meet increased demand brought on by lower prices, not to drive out its competitor.

Analysts also say this suit will not affect the current hub-and-spoke system or the dominance of the major airlines. At most, it will help level the playing field so start-ups can enter the airline industry and serve as breaks to help keep the major airlines' prices within reason.

"What it really tells the big airlines is that you better play fair and watch what you're doing, because we're watching you," says passenger advocate Mr. Stempler.