How Consumers Pay for Air Deregulation

Allegheny, Lake Central, PSA, Mohawk, Piedmont.

They were some of the regional airlines that linked the small towns of America with the big cities and the big airlines. Remember North Central, Trans Texas, Southern, Ozark and Frontier?

Those names are now history. A few weeks ago, when Piedmont was absorbed by USAir, the era of local-service airlines came to a sad close.

Not just sad in a sentimental way, but sad when one thinks of what this means to air travelers, their flight options . . . and their pocketbooks.

In the 10 years since the advent of deregulation, the small towns of America have been victimized as a result of the dozens of mergers, acquisitions, consolidations and outright airline failures.

Service Decline

Service to many of these communities has decreased, air fares have zoomed and, in some markets, single carriers so dominate certain airports that they operate a virtual stranglehold of routes, frequencies and prices.

Welcome to the growing--and dangerous--world of the “fortress hubs.”

Consider these facts: Since 1978, 200 new airlines have started flying. How many of the new carriers are left? Very few.

In order to break into established markets, the new entrants found themselves confronted with serious start-up problems. They were undercapitalized, had no strong marketing program, and couldn’t offer a competitive frequent-flier program or frequency of flights.

They only had one weapon at their disposal: lowering air fares. In the short run it was a great bonanza for passengers, as fare wars broke out and bargains were everywhere.

But it wasn’t long before the big carriers helped the new kids on the block to turn that weapon on themselves and commit corporate suicide.

It seems that every time a new airline lowered fares, the big airlines simply matched them. The mega-carriers knew that no airline could make any money in the severely discounted air-fare market. But they also knew a simple but painful truth: They could lose money much longer than the new airlines.

And they were right.

The little airlines that could . . . couldn’t. And today, eight giant airlines control 92% of the market. As a result, it is much harder to get a discount fare.

Fortress Hubs

Nowhere is that felt more by passengers than at a fortress hub.

What’s a fortress hub? It is a city so dominated by one airline that it has a virtual lock on the traffic at its airport--and prices move up less slowly than surely.

Here’s an example: Recently, I needed to fly between Los Angeles and Salt Lake City. I had many nonstop flight choices. I could fly on any of nine flights between LAX and Salt Lake between 5:55 a.m. and 9:40 p.m. Another two nonstops went from Burbank, and five more flew from either Long Beach or Ontario airports.

But in reality I had no choice, because each and every one of the flights listed was flown by Delta, which dominates the Salt Lake City market.

And the lowest fare quoted me, on a round-trip flight I had booked at least one week in advance, was $578. The argument can be made--and I am now making it--that this fare, compared to other flights of equal or greater length in other markets, is nothing less than skyway robbery.

The latest figures released by the Salt Lake Airport confirms the fears of hub domination: For a six-month period ending June 30, 2,857,377 passengers boarded airplanes in Salt Lake. Of those, 2,197,654 traveled on Delta, an increase of nearly 11% from 1988.

A distant second was United, which boarded 137,706 passengers in Salt Lake, a decrease of more than 12% from the year before.

Salt Lake Hub

Salt Lake City is one of Delta’s fortress hubs, but Delta is not alone. After it bought Ozark Airlines, TWA’s share of the market in St. Louis increased 82%. And the airline’s fares also increased. When Northwest bought Republic, a similar situation developed in Minneapolis.

A recent General Accounting Office study showed that air fares paid by travelers using airports dominated by one or two carriers average a staggering 27% higher than ticket prices charged at more competitive airports.

And a separate study commissioned by the U.S. Department of Transportation indicated that ticket prices at seven airports dominated by one or two carriers were significantly higher.

There was even a private study that used data supplied by none other than Boeing, that compared fares at 18 hubs where one airline controls more than 50% of the market. In 15 of those hubs--an overwhelming majority--the study discovered that passengers pay much higher fares than in other markets.

The GAO study targeted 15 fortress hubs for fare scrutiny: Atlanta, Charlotte, Cincinnati, Dayton, Denver, Detroit, Greensboro, Memphis, Minneapolis/St. Paul, Nashville, Pittsburgh, Raleigh/Durham, Salt Lake City, St. Louis and Syracuse.

Study Flaws Possible

The Air Transport Assn., the primary lobbying group of the airlines, argued that the GAO’s and other reports were wrong.

The ATA claims that the studies are flawed because they aren’t adjusted for inflation, and that they concentrated on routes flown most by business travelers, who traditionally pay higher fares because they usually can’t plan their trips far enough ahead.

Still, some nagging inconsistencies persist.

“It’s cheaper to fly across the nation than across South Dakota,” Sen. Larry Pressler (R-S.D.) said. “That’s bizarre.”

It’s also costly. Another example: Passengers leaving Nashville pay an average of 22.6 cents per mile for seats on American, the dominant carrier. But the average fare in 38 other competitive markets is just 15 cents per mile.

And it may get worse. Within days of the March, 1989, Eastern Airlines strike, some airlines moved quickly to establish even more fortress hubs.

American invaded Miami, and USAir moved into Philadelphia, announcing that the airline would add 18 flights and buy eight Eastern gates at the airport (and would thus control 23 of the airport’s 49 gates).

There is hope, however, that some fortress hubs may be partially dismantled and dominant-carrier grips may be loosened.

In the USAir move in Philadelphia, the U.S. Department of Justice announced that it would oppose the $75-million gate sale on grounds that the airline would dominate Philadelphia.

The Senate Aviation subcommittee has widened its investigation into the fortress hubs, and the Senate Commerce, Science and Transportation subcommittee has scheduled a Sept. 13 hearing on airline concentration and competition.

“The issue before Congress now,” says the GAO report, “is whether or not there are steps that need to be taken to revitalize competition in markets where competition has been reduced.”