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Chief Operating Officer
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Consultant Proposes Stand Still on Major Airline Predation

WASHINGTON, DC (April 27, 1998): Morten Beyer, Chairman of Morten Beyer and Agnew, an aviation consultancy based in McLean, Virginia today proposed to the House Aviation Subcommittee a stand still plan under which major airlines would be required to maintain existing fares and frequencies in the face of a new low cost carrier entering their markets.

Characterizing the DoT’s recent proposal to restrain predatory pricing and capacity dumping by the major airlines against low cost new entrants, Beyer stated, “The DoT’s proposal is complex, convoluted, and unenforceable. It deserves to be junked and replaced by clear guidelines.”

Beyer’s proposal requires a major airline faced with low cost competition by a new entrant to maintain its existing fares and capacity for a period of two years following the new carrier’s entry into a market. “This is not re-regulation”, Beyer stated. “It merely requires that the major airline continues doing what they were doing for a reasonable period of time before being able to launch ruthless rate wars and capacity dumping against the low fare newcomer.”

A copy of Mr. Beyer’s testimony follows:

Aviation Subcommittee of the
U.S. House of Representatives
Washington DC

Gentlemen:

We appreciate the opportunity to submit our written testimony to this Committee. I am a consultant to the airline industry with over fifty years experience in the management of airlines of every type serving all continents.

Once upon a time, the airlines were seen to serve the public convenience and necessity. No more. Today, the major airlines of the U.S. have been freed by deregulation to pursue their maximum aggrandizement, their infliction on the public of an unfair and discriminatory fare structure, and the ruthless extermination of any would-be competitors. All of this countenanced by a “hear no evil, see no evil” DoT and a “don’t care” DoJ.

Twenty years ago, you and your previous colleagues pulled down the regulatory structure known as the CAB and loosed the airlines to engage in Darwinian struggle for survival and dominance. The results were predictable then, and are approaching full fruition today:

• The thirty certified air carriers that existed in 1978 have been reduced to 12 today through bankruptcy and merger.
• 99% of the new airlines who sought entry to the industry offering lower fares and better service perished, and only a handful survive in precarious condition.
• Only two thirds of all American communities who enjoyed scheduled air service in 1978 still have it today, and half of those remaining are served only by captive regional airlines with small propeller-driven aircraft feeding the mega-major’s hubs.
• In 1978, airline fares were determined by the cost of providing service. Today, they are dictated by the “yield management” bureaucracies of the major airlines, who squeeze the maximum out of business travelers, small communities, and the markets they monopolize in order to subsidize below cost fares in the markets where they compete, fiercely and inefficiently, with other mega-majors. Thus, DoT studies show mega-major’s fares at their oligopolistic hubs are 50-100% higher than at cities with competitive service.
• The record is replete with examples of the predatory behavior of the majors when a hopeful new startup airline deigns to enter their markets, or dares to try to improve service in a market they have handed over to a captive commuter. The new entrant is greeted with fare cuts of up to 80%, addition of new jet service by the major, and a blizzard of advertising, all designed (successfully, too) to drive him from the market.

All this is depicted by the mega-majors as the “working of the new marketplace”, “the exercise of free competition”, and “this is what Deregulation was meant to do”. Those who decry this abuse of competitive power are depicted as “re-regulators”, advocating the return to un-American controls on the exercise of free enterprise.

And now comes the Age of Alliances, quasi-mergers exempted from Anti-trust laws, linking the major airlines of the world. It is ironic indeed that the major thrust of these alliances is to eliminate competition. Once, both airlines flew the routes. Today one provides the aircraft and crews, and both “code share” the trip using their own different flight number. Thus, Northwest’s DC-10 Boston-Amsterdam Flight 38 becomes also KLM’s flight 8038, and Lufthansa’s Frankfort-Atlanta A-340 flight 444 becomes United’s 3507. More efficient? Sure. Deceptive? Probably. Anti competitive? Absolutely!

And now Continental and Northwest plan an eventual merger, with Northwest owning majority control of Continental. Not to be outdone, Delta and United, and American and US Airways plan “Alliances” of undetermined scope. First off, the carriers will share their Frequent Flyer program. Big Deal! Next will be reservations and marketing, soon to be followed by schedule integration. Delta flies 17 round trips daily Atlanta-Chicago, United flies ten and American seven. How long do you expect it will take before Delta and United “code share” their 27 daily flights down to a more economic level? And what then happens to American’s pitiful seven flights?

A look at the stations. United and Delta both operate to over 100 of the same airports, most with only a few flights per day. Take Kansas City, where both carriers only fly to their respective major hubs. How long will it take to combine duplicate ticket counters, gates, handling staff and under-the-wing services?

The DoT and DoJ have recently proposed to take a few timid steps toward curtailing the predatory practices of the major carriers toward new entrants. The DoT’s proposal is complex, convoluted, and unenforceable. It deserves to be junked and replaced by clear guidelines. When a new entrant enters a non-stop market served by a major carrier, the major carrier:

• May not reduce his pre-existing fares for two years,
• May not increase his capacity in the market for two years
• May not alter his discount seat allocations for a similar period.

When a new entrant starts service in a non-stop market not currently served by a major’s jets, the major may not enter that market for a period of two years with jet service.

The two-year period will give the new entrant an opportunity to establish itself. It will not be faced with immediate, ruthless rate wars and exploded competitive capacity, forcing it into withdrawal or bankruptcy.

This is not “re-regulation”. It merely requires the majors to continue doing what they were doing for a reasonable period of time. It is easy to monitor, and predatory behavior is obvious from Day One – it does not require complex formulas as proposed by the DoT, or long evidentiary hearings before some bureaucrat.

We appreciate the fact that the Congress is at least beginning to look at the mess the airline industry has created, its abuse of the law, and its failure to properly serve the public convenience and necessity.

April 27, 1998

Mr. Don Pevsner
Attorney at Law
1765 East Rivera Drive
Merritt Island, Florida 32952

Dear Don:

Attached is a copy of the testimony I am submitting to the House Aviation Subcommittee. They could not find an opening for me (sic) at the actual hearing, and invited me to submit my testimony in writing.

I also plan to distribute it to the Press, were it may get some attention. Well see.

I would particularly like your reaction to my suggestions that the majors be forced to “stand still” when a new entrant tries to serve one of their markets.

Best regards,

Morten S. Beyer
Chairman & CEO

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