We found, in fact, that since deregulation, substantial regional differences had existed in fare and service trends, particularly among small- and medium-sized-community airports. In particular, we noted that most low-fare airlines that began interstate air service after deregulation, such as Southwest Airlines and Reno Air, had decided to enter airports serving communities of all sizes in the West and Southwest because of these communities’ robust economic growth. Airline Barriers to Entry Continue to Affect Competition

We reported in October 1996 that operating barriers at key hub airports in the upper Midwest and the East, combined with certain marketing strategies of the established carriers, had two effects on competition. The operating barriers and marketing strategies deterred new entrant airlines and fortified established carriers’ dominance of those hub airports and routes linking those hubs with nearby small- and medium-sized-community airports. In the upper Midwest, there is limited competition in part because two airlines control over 80 percent of the takeoff and landing slots at O’Hare, and one airline controls the vast majority of gates at the airports in Minneapolis and Detroit under long-term, exclusive-use leases. Slots

To reduce congestion, the Federal Aviation Administration (FAA) has limited since 1969 the number of takeoffs and landings that can occur at O’Hare, National, LaGuardia, and Kennedy. These exemptions can help to enhance service in the East and upper Midwest. Long-Term, Exclusive-Use Gate Leases

Our reports have also identified restrictive gate leases as a barrier to establishing new or expanded service at some airports. Range of Initiatives Will Likely Be Needed to Address Air Service Problems

Because a variety of factors has contributed to the higher fares and poorer service that some small and medium-sized communities in the East and upper Midwest have experienced since deregulation, a coordinated effort involving federal, regional, local, and private-sector initiatives may be needed. On April 6, 1998, DOT issued draft guidelines that define anticompetitive behavior by major airlines in response to new entry and could lead to an investigation and possible fines by DOT. Attendees at the October conference endorsed concepts that included (1) holding periodic slot lotteries to provide new entrant airlines with access to airports with slot controls and (2) allowing new entrants and other small airlines to serve points beyond the distance established by National’s perimeter rule. There are no simple solutions to these problems. However, the recent initiatives by DOT, legislative proposals to remove some operating barriers and enhance competition in underserved markets, as well as local efforts to improve service provide steps toward increasing competition and improving air service for some communities.
Why GAO Did This Study

GAO discussed its work on the effects of airline deregulation, focusing on: (1) fare and service trends; (2) factors contributing to service problems; and (3) the initiatives by the Department of Transportation (DOT) and others to address these problems.

What GAO Found

GAO noted that: (1) not all communities have benefited from airline deregulation; (2) certain airports--particularly those serving small and medium-sized communities in the East and upper Midwest--have experienced higher fares or poorer service since deregulation; (3) there are several reasons for the substantial regional differences in fare and service trends, including the dominance of routes to and from these airports by one or two traditional hub and spoke airlines and operating barriers, such as long-term, exclusive-use gate leases at hub airports; (4) in contrast, the more widespread entry of new airlines at airports in the West and Southwest since deregulation--and the resulting geographic differences in fare and service trends--has stemmed from the greater economic growth in these regions as well as from the absence of dominant market positions of incumbent airlines and barriers to entry; (5) operating barriers--slot controls, restrictive gate leases, and perimeter rules--continue to block entry at key airports and contribute to fare and service problems in the East and upper Midwest; (6) to minimize congestion and reduce flight delays, the Federal Aviation Administration has set limits since 1969 on the number of takeoffs or landings--referred to as slots--that can occur during certain periods of the day at four congested airports--Chicago O'Hare, Ronald Reagan Washington National, and New York's Kennedy and LaGuardia; (7) a few airlines control most of the slots at these airports, which limits new entrants; (8) these operating barriers, combined with certain marketing strategies by established carriers, have deterred new entrant airlines while fortifying established carriers' dominance at key hubs in the East and upper Midwest; (9) similarly, marketing and business alliances between major carriers may affect competition in markets where they dominate; (10) increasing competition and improving air service at airports serving communities that have not benefited from deregulation will likely entail a range of federal, regional, local, and private-sector initiatives; (11) DOT has recently undertaken several efforts designed to enhance competition, such as granting slots to new entrants at two airports with slot controls and issuing draft guidelines that define anticompetitive behavior by airlines that could lead to an investigation and possible fines by DOT; and (12) in addition, recently proposed legislation would seek to increase air service in underserved markets and address barriers to competition and predatory behavior by air carriers.