The Feds Get Busy

The DOJ and the DOT are relentlessly pursuing predatory-practices legislation to encourage new carriers at hubs.
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The airlines only thought their worst problems in 1999 were going to be lower unit revenues and increasing capacity. Silly geese. If they have not already done so, we think they need to add the Department of Justice and the Department of Transportation to the list. Oh, and they might as well throw in Congress' obsession with "passenger rights" legislation as well.

This morning, the

Wall Street Journal

reported that the DOJ may be ready to file an antitrust suit against

American Airlines'

parent company

AMR

(AMR)

. Or, then again, it may already be in settlement talks with the airline about the predatory-pricing actions it supposedly undertook against

Vanguard Airlines

(VNGD)

. Either way, this news is not new, as American, as well as most every other major carrier, has been under investigation by the DOJ for over two years in regard to predatory practices at selected hub cities in the U.S.

Basically the DOJ is investigating allegations of "capacity dumping" and predatory pricing. The scenario is pretty much the same whenever you see it.

Big airline controls hub. Little airline starts flying into hub. Big airline throws a lot of extra seats on routes little airline is now flying. Big airline also matches fares of little airline, or in some cases, lower levels than previous fares. Little airline can't make money, as most passengers would prefer the frequent flyer miles and perks of big airline. Little airline gives up and leaves market. Big airline shifts capacity to other parts of their system and more often than not actually increases fares on the old routes on which the little airline used to compete. Fare increase helps big airline recoup losses. Life goes on as we know it.

What is interesting to note about this investigation is that the government has not backed down. Even after airlines poured a record amount of PAC money into Congress last year, and crisscrossed Capitol Hill with lobbyists left and right, the DOJ has continued its investigation. This would suggest that the DOJ just might file suit against American if for no other reason than to make a statement. But the major airlines have seen this coming for a long time. This is no surprise.

This push from the Feds protecting smaller airlines has been in the works for several years. Three years ago

Frontier Airlines

(FRNT)

complained to both the DOJ and the DOT that

UAL's

(UAL) - Get Report

United Airlines

was engaged in predatory behavior at Denver's International Airport. The DOT and the DOJ listened. United backed off. And since that time both airlines have had a fairly successful, albeit not overtly friendly, coexistence.

The ruling we are waiting for however, and the one that should be out in July or so, is the predatory-practices ruling that the DOT is currently finishing. This ruling will attempt to set a more level playing field for new entrant carriers. The DOT is seeking to define when it can initiate an enforcement action against an established airline on the basis that it was engaging in "an unfair method of competition" against a new entrant to its market.

Again, the major carriers have lobbied very hard against these guidelines. In fact, they managed to get the process delayed for a period of time through legislative action last year through a bill that required "further study" of the issue. Well, that time period has now passed, and it appears the DOT has been pretty much unswayed by the major airlines' claims that deregulation works and that smaller airlines are not routinely being driven out of business by the bigger players.

According to a speech given today at an industry conference in Florida by Steven Okun, Deputy Counsel to DOT Secretary Rodney Slater, as part of their investigation into the issue of predatory practices, the DOT has found:

  • Hub dominance is growing. The average fares the public pays at "fortress" hubs can be 50% or 60% higher when compared with more competitive markets. And "hub premiums" (the amount of money hub carriers can charge because of their dominance at a particular hub) have grown dramatically in recent years.

  • The level of competition is declining. Among the city-pairs with daily traffic, the DOT saw a 28% decrease in competitive service over the last five years.

  • Most troubling for the DOT, it found that for over three years, new entry of airlines stopped. Through the early 1990s, five new airlines entered the market every year. From 1995 until this past February, not one new airline began service. AccessAir, a new airline based in Des Moines, Iowa, began service this past February.

  • The DOT has also seen a lack of price competition between major airlines in short-haul markets. In other words, there is a big difference in fares when there are two major airlines in competition, as opposed to a major airline and a lower-fare airline, such as Southwest Airlines (LUV) - Get Report.

While the prosecution of an antitrust case against a major airline such as American, in our opinion, would be very difficult, the DOT, by establishing predatory-practices rules, is seeking to set guidelines that will be enforceable. In talking to DOT officials last week, we have to say, they seem very committed to accomplishing this task. Possessed might be a better verb.

So, forget the issue of antitrust. Depending upon how these rules are finally written, the DOT might just succeed in creating a much more formidable weapon.

Holly Hegeman, based in Dallas, pilots the Wing Tips and Traveling With Wings columns for TheStreet.com. At time of publication, Hegeman was long Southwest Airlines, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.