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Airline Monopoly

Delta Airlines: Predator or competitor?

Dr. Elinor Garely, eTN  Mar 27, 2011

According to Kevin Mitchell, the Chairman of the Business Travel Coalition (BTC), Delta Airlines is breathing new life into the practice of predatory pricing and attempting to “…maintain its monopoly position at Minneapolis St. Paul International Airport (MSP)” by targeting Frontier Airlines, a low-cost carrier, and mirroring the “…carrier’s routes from Reno to MSP, Seattle, Los Angeles and San Diego” starting on June 6, 2011.

Although Mitchell finds an anticompetitive environment at this Midwest airport, Trebor Banstetter, Corporate Communications executive for Delta claims, “…Delta does not have a monopoly position at MSP. The airport already had low-fare competition with flights on Southwest, AirTran, Frontier and Sun Country before Frontier began the MCI flight. And it also has competition from American, Continental, United and Alaska.”

Roaring Mouse: Frontier
Frontier, currently serving 70+ destinations, plans to enhance its profile in 2011, and differentiate itself from rivals United and Southwest. In 2008 Frontier filed for bankruptcy and was acquired by Republic Airways Holding in 2009. In 2010 Republic merged the brand with Midwest Airlines, enabling Frontier to expand its route map. Today Frontier’s major US hubs include Denver, Milwaukee, Kansas City, Omaha, West Coast markets and Texas as well as service to Mexico and Costa Rica.

Mammoth Gorilla: Delta
Delta Airlines serves more than 160 million passengers each year. Through its global network, Delta and Delta Connection, it services 356 destinations in 65 countries on six continents and employees 80,000 worldwide. Delta operates a mainline fleet of more than 700 aircraft and participates in a trans-Atlantic joint venture with Air France-KLM and Alitalia. The airline offers customers more than 13,000 daily flights with hubs in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita. In addition, it is investing more than US$2 billion through 2013 in airport facilities and global products, services and technology.

Predator, Prowler, or Savvy Competitor
According to Stephan Brady and William Cunningham of the Air Force Institute of Technology, the objective of predatory pricing is to “…drive out smaller competitors.” Since the passage of US airline deregulation in 1978, travelers have been concerned with: a) the negative effects of ruinous pricing on the industry, b) wide disparity in fares charged between business and leisure travelers, and c) the predatory behavior by major airlines in setting fares.

Predatory pricing discourages the entry and sustainability of low-cost competitors and the number of airlines has shrunk from 10 (before deregulation) to 5. The original ten carriers included: American, Braniff, Continental, Delta, Eastern, Northwest, Pan Am, Trans World, United and Western. Although the deregulation legislation was intended to encourage and support competition, between 1950 and 1975 ninety-four applications for trunk common carriers were presented to the Civil Aeronautics Board (CAB), and all were turned down.

Prove It
Observing predatory pricing and proving it are two different issues. “In fact, the courts regard predatory pricing as a so-called legal fiction: It's theoretically against the law but nearly impossible to prove,” according to Mike France and Steve Hamm of Business Week.

To determine proof of predatory pricing questions to be answered include: a) is the price an act of predation or competition; b) if price should cover cost, what is an acceptable level; and c) recoupment (will the firm be able to recoup losses sustained during predatory pricing). Robert Bork claimed that while predatory pricing is theoretically possible, in practice it is extremely rare and research over the past 35+ years has failed to show any examples of predatory pricing leading to the creation of a single monopoly.

Competition vs. Oligopoly
Charlie Leocha of the Consumer Travel Alliance finds the tourism supply chain is heavily dependent on airlines to transport travelers from their homes/offices to destinations and the local hotels, restaurants and attractions. This growing reliance has given the airlines an enormous amount of power, allowing them to “squeeze” the public and private sectors, convincing them to turn a blind eye to the ongoing expansion of mega-brands. It is possible that the US government believes that the consolidation of the industry provides increased market efficiencies, over and above the opportunities provided by increased competition.

A Slippery Slope
Kevin Mitchell of BTC sees the Delta action as “hub fortification” extending to almost exclusive contracts with corporations and travel management companies along with gate hoarding, schedule bracketing, triple frequent flyer points and travel agency override programs, making the barriers to entry for low-cost carriers of the 1990s seem small. However, Trebor Banstetter of Delta Airlines Corporate Communications finds that, “Delta competes vigorously with other airlines on the vast majority of our flight. We believe that healthy competition benefits our customers and the airline industry.”

Where is Congress?
Calling attention to the US$9.2 billion extracted from the traveling public in airline fees in 2010, Mitchell notes that a percentage of the fees have not been shared with travel agencies nor has there been transparency in these fees for the travel agent, the corporate travel manager or the consumer. The concept of comparative shopping for airline tickets has become a historical event, worthy of classroom discussion, but no longer relevant in what we used to describe as the American competitive landscape.

Leocha and Mitchell suggest that from the US Department of Justice to State Attorney Generals the return of predation and anti-competitive practices from the airline industry should not only be noted, but government agencies should aggressively investigate the nature of the actions.

Perhaps the US Department of Justice should follow the guidelines proposed by the India Civil Aviation Minister, Paul Patel, “…predatory pricing cannot be allowed to continue. We shall try our best to bring disciple [to the industry].”

Delta Airlines: Predator or competitor?
Kevin Mitchell, Chairman, Business Travel Coalition

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