Airline Competition

Industry Competitive and Financial Problems Gao ID: T-RCED-91-89 September 11, 1991

GAO discussed the airline industry's competitive problems and how the financial health of U.S. airlines affects competition in both the domestic and international markets. GAO noted that: (1) in the domestic industry, profitability has been low, although airlines appear to charge prices in excess of competitive levels on some routes; (2) by 2000, global passenger air travel is expected to nearly double, while the U.S. market, the largest single air travel market in the world, is expected to increase by 50 percent; (3) many restrictive practices in the airline industry have limited competitive opportunities for airlines wishing to begin or expand domestic service at U.S. airports; (4) several large airlines have weakened their financial position through leveraged buyouts and expansion plans, and the high costs of overcoming operating and marketing practices have also limited competition; (5) an increase in debt financing, both through debt instruments and the sale and leaseback of aircraft, can make highly leveraged airlines more vulnerable to either a short-run decrease in demand due to a recession or to a short-term increase in costs; (6) frequent flyer plans can help the dominant airline in a market maintain its position, but restricting frequent flyer plans can also strengthen competition for smaller, weaker airlines; and (7) foreign investment in U.S. airlines could cause potential problems in the areas of bilateral negotiations, investment by government-subsidized foreign airlines, and national security. GAO believes that long-term strategies are the most appropriate approach to enhancing competition.

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