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Predation, Competition & Antitrust Law: Turbulence in the Airline Industry

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Document pages: 156 pages

Abstract: Though the early 1990s brought about a proliferation of new entrant airlines, the late 1990s was an era of bankruptcies, liquidations and retrenchments for upstart airlines. Five new airlines per year emerged from 1990 to 1995. But from 1995 until early 1999, not a single new airline began service. New entrants like Air South, Pan Am (which included Carnival Airlines), Western Pacific, Kiwi, and Sun Jet International fell into bankruptcy, while others were facing enormous financial difficulty. By 1999, new entrants accounted for only 1.3 of the total market. While hub concentration was growing, competitive service declined 28 in city-pairs between 1994 and 1999. Several new entrant airlines came together in 1996 to form the Air Carrier Association of America. The Air Carrier Association of America was initially formed to deal with the effort of the major airlines to shift the excise tax burden away from the largest airlines and onto the smaller, affordable airlines. But as they came together, the new entrants learned they had something else in common. The major airlines appeared to be on a homicidal mission to destroy the low-fare airlines. The window of opportunity opened after the ValuJet catastrophe in the Everglades, in May of 1996. The U.S. Department of Transportation [DOT] had been a champion of the competition brought to bear by the new entrant airlines, praising their annual $6 billion contribution to consumer savings as a clear success of deregulation. But the Everglades crash occurred in an election year, and for political reasons, DOT soon found itself neutralized. The Federal Aviation Administration grounded ValuJet s 53 aircraft. The question in the industry became, "Why did Delta allow ValuJet to grow so large? Why didn t Delta kill off ValuJet when it had the chance? " According to the new entrants, that mind-set put a number of relatively smaller airlines in the cross hairs of the majors. For example, the world s largest airline, United, allegedly targeted Frontier and Western Pacific. American allegedly set its sights on Vanguard, Western Pacific, and Sunjet International. Delta allegedly targeted Valujet. Northwest allegedly targeted Sun Country and Spirit Airlines. By 2002, Western Pacific, Vanguard, SunJet International, Sun Country and Spirit had either been driven from the market or driven into bankruptcy. Though the DOT had earlier been able to dissuade predation by jaw-boning the major airlines into engaging in responsible competitive behavior (by persuading Northwest and Delta to back off of their below-cost pricing and capacity dumping in markets entered by Reno and ValuJet, respectively), such moral persuasion no longer worked. Low-fare new entrant airlines complained that the major airlines engage in below-cost pricing and capacity-dumping when a small affordable air carrier enters the markets they dominate, particularly when one dares to provide competition at their "Fortress Hubs. " They alleged that pricing and capacity are not the only predatory weapons in the arsenal of the major airlines. Predatory behavior designed to suppress competition takes many forms. According to the new entrants, capacity dumping and below cost pricing were essential foundations of this campaign to eradicate competition. In each situation, the tactics differed somewhat, but the alleged purpose was the same-destroy the affordable airlines so as to raise consumer prices. This essay is divided into six broad sections: 1. The first is the introduction. 2. In the second, we examine the empirical evidence of predatory conduct. We examine how major airlines behave in three scenarios: ( 1) major airline vs. major airline; (2) major airline vs. Southwest Airlines; and (3) major airline vs. small low-cost low-fare airline. It is in the third category that we see the most flagrant instances of predatory conduct. 3. In the third section we develop a case study to examine the efforts of the world s largest airline to monopolize one of the world s largest airports. 4. The fourth section of this essay provides a legal analysis of capacity dumping, pricing discrimination, predatory pricing, monopoly leveraging, refusing to deal, refusing to share an essential facility, raising rivals costs, and exclusive dealing arrangements. That analysis is heavily grounded in Sherman and Clayton Act applications, for the case law is well developed there, and the competition laws in the Federal Aviation Act have largely lain dormant for the two decades of deregulation. While the "unfair or deceptive practice " or "unfair method of competition " provisions of the Federal Aviation Act are not constrained by Sherman and Clayton Act interpretations, nonetheless the DOT is free to apply analogous standards to its interpretation of the Federal Aviation Act. Moreover, as explained below, many of the predatory practices of the major airlines may offend all three statutes. 5. In the concluding section, we address the policy dimensions of enhanced governmental oversight and enforcement of predatory behavior by large incumbent airlines against new entrants.

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