Airline Deregulation

Barriers to entry persist in the airline industry. Access to airports continues to be hampered by (1) federal limits on takeoff and landing slots at the major airports in Chicago, New York, and Washington; (2) long-term, exclusive-use gate leases; and (3) "perimeter rules" prohibiting flights beyond certain distances at airports in New York and Washington, D.C. New airlines--primarily those started after deregulation--have been affected the most because established carriers hold nearly all of the slots, are usually the beneficiaries of exclusive-use gate leases, and have their hubs located close enough to New York and Washington airports that their operations are not restricted by perimeter rules. These barriers particularly impede the entry of newer airlines into key markets in the East and the upper Midwest because several airports in those areas have leased most of their gates to a single airline. Even where airport access is not a problem, airlines sometimes decline to enter new markets because the strategies of established airlines make it extremely difficult for other carriers to attract traffic. These marketing strategies include bonus commissions paid to travel agents, frequent flier plans, airline ownership of the computer reservation systems used by travel agents, and code-sharing partnerships with commuter carriers. As a result, competition suffers, leading to higher airfares. The effect of these strategies tends to be the greatest--and the fares the highest--in markets where the dominant carrier's position is protected by operating barriers.

GAO found that: (1) barriers to entry persist in the airline industry; (2) federal limits on takeoff and landing slots at certain major airports, long-term exclusive-use gate leases, and perimeter rules prohibiting flights of certain distances at LaGuardia and Washington National Airport continue to impede new airlines' access to airports; (3) while such barriers can potentially affect any airline, they primarily affect airlines started after deregulation because the established airlines hold nearly all of the slots, are usually the beneficiaries of exclusive-use gate leases, and have their hubs located close enough to airports to avoid perimeter rule limitations; (4) these barriers particularly impede the entry of newer airlines in key markets in the East and upper Midwest because several airports in those regions have leased most of their gates to one airline; (5) even where airport access is not a problem, airlines sometimes choose not to enter new markets because certain strategies of established airlines make it extremely difficult for other carriers to attract traffic; (6) taken together, these marketing strategies deter new as well as established airlines from entering those markets where an established airline is dominant; (7) as a result, competition suffers, leading to higher airfares; and (8) the effect of these strategies tends to be the greatest, and fares the highest, in markets where the dominant carrier's position is protected by operating barriers. GAO also found that: (1) measuring the effects of barriers to entry on the quality of service is more difficult; and (2) while barriers may reduce the number of competing service options, consumers receive benefits in other ways, such as free frequent flier trips. Internal Use Only.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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