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Testimony of Edward P. Faberman
Air Carrier Association of America
National Civil Aviation Review Commission
May 28, 1997
Chairman Mineta, Members of the Commission, my name is Edward P. Faberman. I am the Executive Director of the Air Carrier Association of America. I am here on behalf of carriers offering affordable fares, the communities they serve and would like to serve, and the passengers who use affordable carriers to visit friends and family and to make important business trips.
There should be no question as to the possible impact of a change in the ticket tax. Shifting costs from the large carriers -- who are currently experiencing another year of record breaking profits -- to the smaller affordable fare carriers will have a long term destructive impact on competition in this country.
It is important to recognize the current state of airline competition in the United States. The nations large carriers are growing stronger and becoming more dominant in their hubs and throughout the country. They are expanding their international services and forming larger and more powerful alliances throughout the world. At the same time, smaller carriers are struggling to be profitable, increase market share and to enter new markets. In many parts of this country, particularly in small and medium communities, there is less service, fewer competitors, and significantly higher fares than at any time since deregulation. As Senator Bill Frist said at the BTTC Airline Summit on April 23, "one third of our Nations mid-size communities face higher fares than ever before, some as much as 20% higher. One-fifth have experienced significant reductions in the number of seats, departures, non-stop flights. Some communities have faced both of these problems, higher fares and a decline in air service quality." Senator Byron Dorgan recently said:
"These mega carriers have created theifdoms, securing dominate market shares at regional hubs. Since deregulation, all major airlines have created hub-and-spoke systems where they funnel arrivals and departures though hub airports where they dominate traffic. Today, all but 3 hubs are dominated by a single airline where the carrier has between 60 and 90 percent of all the arrivals, departures, and passengers at the hub."
"Deregulation has also resulted in disproportionate air fares. It has been demonstrated that hub concentration has translated into higher fares and rural communities that are dependent upon concentrated hubs have seen higher fares."
One only needs to review the multiple reports issued by GAO over the past several years to get a clearer picture of the current state of airline service in the U.S. -- higher fares and less competition. As all of this is occurring, there are few applicants at DOT seeking air carrier authority.
If you listen to the "poor, struggling" mega carriers you would believe that business people are outraged over the ticket tax. What they are outraged over is increases in fares and less competition. The higher fares experienced by most Americans is not a result of a 10% ticket tax but is a result of increased dominance by the larger carriers and the lack of true competition. The May 13th edition of USA Today showed dramatic year to year increases in business fares:
Mr. Chairman, there is no secret why we are debating a proposal to replace the ticket tax with a tax that will further limit competition. It is part of an effort by the large carriers to eliminate affordable fare carriers. This proposal combined with predatory behavior and barriers to entry are aimed at the heart of affordable fare carriers. One only needs to review Mike Levines 1987 Yale Journal piece on "Airline Competition in Deregulated Markets" to see this anticompetitive game plan. After laying out a game plan for predatory behavior and slot hoarding, Levine acknowledges a major step in eliminating competition -- "airline behavior is designed to raise rivals costs or handicap their ability to generate revenue." This is the ticket tax plan.
Because of the possible implication of changing the existing formula, it is essential that the ATC system continue to be funded by the existing ticket tax. If additional funds are needed, the ticket tax should be increased.
The large carriers want Congress to focus on only one element that impacts competition and costs. That would be a disservice to the American people and could be a fatal blow against airline competition. Instead, it is time to review all of the factors that impact competition -- their costs and how those factors should be modified to create a level playing field.
Before a change in the ticket tax is considered, there should be an evaluation of the economic benefits accruing to the large carriers by the advantages they have as a result of barriers to entry identified in GAOs October 1996 study -- "Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets" (GAO/RCED-97-4) along with other predatory actions identified in other GAO and DOT reports.
These barriers/predatory actions include domination of slots at high density airports.
Moreover, in its study on the issues raised by the Big Sevens tax proposal (airport and Airway Trust Fund - Issues Raised by Proposal to Replace the Airline Ticket Tax - GAO/RCED-97-23), GAO emphasized that it was important to understand the costs imposed by large numbers of hub operations at highly congested airports.
When discussing the true costs of the ATC system it is essential to understand which operators have created the historical demand for ATC services and which operators are the primary drivers of current operational costs. The answer to both questions are the larger carriers.
Lets use D/FW as an example. As background, it is important to summarize the changes made by the FAA to the Dallas/Fort Worth Metroplex ("D/FW Metroplex"). A brochure issued by the FAA discusses the multiple changes made by the FAA when the D/FW Metroplex Air Traffic System Plan was implemented in October, 1966. According to the FAA, the new airspace plan increased capacity in the D/FW area by about 75%. As the FAA notes, work on this plan began in 1987. After years of hard work and billions of dollars in investment, the agency created an air traffic system plan that is now a model for other locations around the country. There is no question that the beneficiaries of these changes are American Airlines and Delta. American operates over 70% of the D/FW departures. Delta operates approximately 21% of the departures. As to new entrants:
Since the airspace plan was implemented, one new runway has opened at D/FW and plans for others (along with 12 new AA gates) have been announced. The peaking throughout the day -- drawing additional manpower and equipment -- costs are created by the two carriers at 90% not the "new entrants" at less than 1%.
In the New York and Chicago area -- where ATC costs have always been high, the slotted airports are dominated by larger carriers. These slot holders have created delays and increased demand for ATC services. As former Secretary Jim Burnley acknowledged in the mid 1980s when FAA called the carriers together to reduce peaking -- peaking causes delays and adds to the costs of the system. As GAO has noted, there has been little opportunity for new entry at slot controlled airports. Those large carriers should be paying for operations in those parts of the country and for the slots given to them by the FAA.
D/FW is only one example. The FAA has spent billions of dollars to allow the larger carriers to open new hubs and expand existing ones. Is there any doubt which operator has benefited from the changes made in the Denver airspace. United Airlines has approximately 80% of the departures at Denver. In Detroit, Northwest has an identical number. In comparison, in Detroit, Reno has .20% and Spirit has .78% of the departures. What about the expenditures made for new hubs -- Cincinnati, Raleigh-Durham, Nashville -- those costs are directly attributable to one carrier (in some cases that carrier created the costs and then left the hub!).
The only way to bring lower costs to travelers is to improve the competitive environment. The large carriers dominate most hubs and charge monopoly fares at those airports. If a passenger wants to find lower fares, the passenger must often travel long distances to an airport served by an affordable fare carrier. By lowering the ticket tax and increasing user fees, history demonstrates that the large carriers will not lower fares, but the affordable fare carrer will be forced to increase its ticket prices. The winners -- the large carriers -- and the losers -- consumers. This is why the dominant carriers want a change in funding.
We we ask you to recognize how important the availability of affordable airline service is to communities and airport authorities throughout this country, particularly at small and medium cities. Expanded affordable service allows communities to attract:
We also ask you to recognize how important affordable travel is for those using affordable fare carriers to:
Let me read portions of some letters sent to affordable fare carriers:
"My mom in Louisville died of brain cancer in Junes of 1994. She was diagnosed in December of 1993. I was able to fly home every month for seven months, and even fly my children from other states there for her funeral -- had it not been for your airline and the reasonable fares -- I would have not been able to do as much as I did"
"My wife suffers from "MS" and traveling to her hometown in a car was impossible. The cost of air fare with a major airline kept our travels to once a year. When you began to fly, it was like a miracle. Now my wife can see her elderly mother as often as needed."
"Your economical fares have allowed me to spend meaningful and fulfilling time with my mother in the months since my dads death. In past times, the cost would have been prohibitive."
Those letters best explain why this is not the time to alter funding mechanisms. Before that is considered, a thorough analysis of competition and its future must be undertaken. If not, these people may have taken their last trips.