Since deregulation, established airlines have expanded into many new markets and numerous new airlines have started up. While such arrangements exist at many airports across the country, their predominance at several important airports in the East and upper Midwest exacerbates the negative impact of slots on competition in those regions. “As a means to improve access for new air carrier entrants, we have previously proposed a modest withdrawal of air carrier slots, not to exceed 3 percent on an annual basis, for reallocation to new entrants and small incumbents by lottery. . . . the FAA is urged to consider this option which would improve the competitive environment, but would not seriously compromise existing operations.”

		Congressional Efforts to Spur Entry at Slot-Controlled Airports Have Had Limited Success

Recognizing the need for new entry at the slot-controlled airports, in 1994 the Congress directed DOT to (1) study whether slot controls were still needed and (2) grant exemptions from those controls—in effect, issue new slots—for new entrants seeking to serve either O’Hare, LaGuardia, or Kennedy when DOT “finds it to be in the public interest and the circumstances to be exceptional.” In part, the Congress was responding to the National Commission to Ensure a Strong Competitive Airline Industry, which in 1993 recommended that the slot controls be reviewed “with the aim of either removing these artificial limits or raising them to the highest practical level consistent with safety requirements.”
In its congressionally directed study, DOT found that eliminating slots would not affect safety and would result in increased competition, thereby lowering fares and expanding air service options for consumers. Long-Term, Exclusive-Use Gate Leases Also Continue to Hinder Airline Entry

In 1990, our survey of the 66 largest U.S. airports revealed that 85 percent of their gates were leased to established airlines under long-term, exclusive-use leases. As table 2 shows, the vast majority of gates at each airport are exclusively leased, usually to one established airline. As a result, according to executives at many airlines that started after deregulation, it is extremely difficult to gain competitive access to these airports. Barriers to Entry Contribute to Higher Airfares, but Effect on Quality of Service Is More Difficult to Measure

While many factors, such as the relative amounts of business and leisure travel, affect the average airfares at an airport, the markets affected by operating barriers tend to have much higher fares. By discouraging entry, the airlines’ various marketing strategies perpetuate such dominance. Measuring the effects of barriers to entry on the quality of service in these markets, however, is more difficult. While barriers to entry reduce the number of airline options available, consumers in these markets receive benefits in other ways. For example, consumers receive free trips as a result of frequent flier plans. Scope and Methodology

To determine if barriers to entry exist and, if so, the extent to which they prevent airlines from entering new markets, we interviewed the senior management of all 10 established airlines and 26 of the 38 airlines that started after deregulation and that operated in 1995. Airline Competition: Industry Operating and Marketing Practices Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990). Airline Takeoff and Landing Slots: Department of Transportation’s Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986). A recorded menu will provide information on how to obtain these lists.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on airline operating and marketing practices that restrict the entry of new airlines in the deregulated airline industry, focusing on: (1) whether barriers still exist that prevent airlines, particularly those started after deregulation, from servicing new markets; and (2) how these barriers have affected fares and service.

What GAO Found

GAO found that: (1) barriers to entry persist in the airline industry; (2) federal limits on takeoff and landing slots at certain major airports, long-term exclusive-use gate leases, and perimeter rules prohibiting flights of certain distances at LaGuardia and Washington National Airport continue to impede new airlines' access to airports; (3) while such barriers can potentially affect any airline, they primarily affect airlines started after deregulation because the established airlines hold nearly all of the slots, are usually the beneficiaries of exclusive-use gate leases, and have their hubs located close enough to airports to avoid perimeter rule limitations; (4) these barriers particularly impede the entry of newer airlines in key markets in the East and upper Midwest because several airports in those regions have leased most of their gates to one airline; (5) even where airport access is not a problem, airlines sometimes choose not to enter new markets because certain strategies of established airlines make it extremely difficult for other carriers to attract traffic; (6) taken together, these marketing strategies deter new as well as established airlines from entering those markets where an established airline is dominant; (7) as a result, competition suffers, leading to higher airfares; and (8) the effect of these strategies tends to be the greatest, and fares the highest, in markets where the dominant carrier's position is protected by operating barriers. GAO also found that: (1) measuring the effects of barriers to entry on the quality of service is more difficult; and (2) while barriers may reduce the number of competing service options, consumers receive benefits in other ways, such as free frequent flier trips.