	Airline Barriers to Entry Persist and Predominantly Affect Competition in the East and Upper Midwest

Operating barriers continue to limit competition and contribute to higher airfares in several key markets in the upper Midwest and East. As a result, our October 1996 report recommended that DOT take actions that we originally suggested in 1990 and highlighted areas for potential congressional action. The report specifically addressed the effects of slots, perimeter rules, exclusive-use gate leases, and marketing strategies developed by the established airlines since airline deregulation. In October 1996, we reported that this level of control over slots by a few established airlines had increased even further (see app. Recognizing the need for new entry at the slot-controlled airports, the Congress in 1994 created an exemption provision to allow for entry at O’Hare, LaGuardia, and Kennedy in cases where DOT “finds it to be in the public interest and the circumstances to be exceptional.” However, the exemption authority, which in effect allows DOT to issue new slots, has resulted in little new entry because DOT has interpreted the “exceptional circumstances” criterion very narrowly. Thus, we suggested that the Congress consider granting DOT the authority to allow exemptions to the perimeter rule at National when proposed service will substantially increase competition. In particular, they deter new as well as established airlines from entering those markets where an established airline is dominant. In our 1996 report, we found that the effect of these marketing strategies tends to be the greatest—and fares the highest—in markets where the dominant carrier’s position is protected by operating barriers. While DOT’s Recent Actions Represent Positive First Steps, Additional Actions Will Likely Be Needed

In its January 1997 response to our report, DOT stated that it shared our concerns that barriers to entry limit competition in the airline industry. The agency indicated that it would include competitive benefits as a factor when determining whether to grant slots to new entrants under the exceptional circumstances criterion. While this is a positive step, additional action will likely be needed because the number of new slots that DOT can grant is very limited. Recognizing this, DOT committed to giving careful consideration to our recommendation that it hold periodic slot lotteries. However, DOT did not concur with our recommendation that FAA make an airport’s efforts to have gates available to nonincumbents a factor in its decisions on awarding federal grants to airports. According to DOT, the number of airports that we identified as presenting gate access problems is sufficiently small that the agency would prefer to address those problems on a case by case basis. Finally, DOT expressed concern about potentially overly aggressive attempts by some established carriers to thwart new entry. Additional copies are $2 each.
Why GAO Did This Study

GAO discussed competition in the domestic airline industry, focusing on: (1) barriers to entry in the airline industry; and (2) the Department of Transportation's (DOT) response to the recommendations in GAO's October 1996 report.

What GAO Found

GAO noted that: (1) in its October 1996 report, GAO stated that little progress has been achieved in lowering the barriers to entry since GAO first reported on these barriers in 1990; (2) as a result, the full benefits of airline deregulation have yet to be realized; (3) in particular, operating limits in the form of slot controls, restrictive gate leasing arrangements, and perimeter rules continue to block entry at key airports in the East and upper Midwest; (4) several marketing strategies give advantages to the established carriers; (5) these strategies, taken together, continue to deter new as well as established airlines from entering those markets where an established airline is dominant; (6) these strategies' effect tends to be greatest, and airfares the highest, in markets where the dominate carrier's position is protected by operating barriers; (7) GAO recommended that DOT take actions that GAO had previously suggested in 1990 to lower the operating barriers; (8) moreover, GAO suggested that, absent action by DOT, Congress may wish to consider revising the legislative criteria that governs DOT's granting slots to new entrants and consider granting DOT the authority to allow exemptions to National Airport's perimeter rule to increase competition; (9) DOT concurred with GAO's recent findings and expressed concern about "overly aggressive" attempts by established airlines to thwart new entry; (10) to make it easier for new entrants to obtain slots, DOT indicated that it would revise its restrictive interpretation of the legislative criteria governing the granting of new slots; (11) while this is a positive step, additional action will likely be needed because the number of new slots that DOT can grant is very limited; (12) in its report, GAO also recommended that DOT create a pool of available slots by periodically withdrawing a small percentage from the major incumbents at each airport and distribute those slots in a fashion that increases competition; (13) DOT indicated that it is still considering this action; (14) DOT did not agree with GAO's recommendation that the Federal Aviation Administration consider an airport's efforts to make gates available to nonincumbents when making federal airport grant decisions; (15) DOT said that it would rather address this issue on a case by case basis as problems are brought to its attention; and (16) in light of the lack of progress over the past 7 years, however, GAO believes that its recommendations, combined with GAO's suggestions for potential congressional action, offer prudent steps to promote competition in regions that have not experienced the benefits of airline deregulation.