Airline Competition

The transport of cargo throughout Hawaii is greatly affected by the state's unique geography. Air service is the only way, in many cases, to transport goods in a timely fashion from island to island. Historically, two airlines--Aloha Airlines and Hawaiian Airlines--have provided service to meet this need. Exempt from the provisions of the Airport Noise and Capacity Act, these two airlines are allowed to operate flights within Hawaii using relatively noisy "stage two" aircraft, which are being phased out on the mainland. In May 1995, the Federal Aviation Administration (FAA) determined that American International Cargo also qualified for this exemption because it was providing what FAA deemed turnaround service in Hawaii as of November 1990, when the legislation was passed. In November 1995, this airline began to conduct scheduled interisland cargo service consistent with FAA's decision. Later, FAA, in a reinterpretation of its 1995 decision, concluded that American International Cargo did not qualify to continue providing such service. This revised interpretation required American International Cargo either to begin operating quieter, stage three, aircraft on interisland routes or to exit these markets entirely. Converting an aircraft for stage three operations typically costs $1.5 million per engine. This report discusses on what basis FAA revised its interpretation of turnaround service. GAO also determines how Air International Cargo's November 1995 entry has affected--and how its potential future exit could affect--competition in Hawaii's air cargo markets.

GAO noted that: (1) in May 1995, FAA determined that one segment of a flight AIC had been operating in November 1990 with a single Stage 2 aircraft included a takeoff and a landing in Hawaii and that it therefore qualified as inter-island turnaround service; (2) consequently, FAA concluded that, under the Airport Noise and Capacity Act, AIC could legally initiate scheduled inter-island service using its single Stage 2 aircraft; (3) however, after a formal inquiry from Aloha Airlines and a broader assessment of the legislation's intent, FAA revised its interpretation of turnaround service; (4) this revised decision held that the flight AIC was operating in November 1990 did not constitute turnaround service because it included points outside Hawaii; (5) GAO's review of relevant legislation and the legislative history found FAA's revised interpretation to be legally sound; (6) in particular, the flight that AIC conducted at the time the federal noise legislation was passed does not qualify as turnaround service--defined in a 1991 amendment as consisting of the operation of a flight between two or more points, all of which are within the state of Hawaii--and therefore does not render the airline exempt from statutory noise requirements; (7) AIC's November 1995 entry into Hawaii's inter-island markets has enhanced competition markedly by providing new services to a variety of customers; (8) for instance, since that date, AIC has offered scheduled daytime flights using large cargo containers--a service that its competitors do not offer; (9) this service has facilitated the delivery of time-sensitive express cargo and has helped to create new mainland markets for some of Hawaii's agricultural producers, who previously had to rely on ocean transportation; (10) in addition, although the airlines and their customers could not provide GAO with sufficient data to determine AIC's overall impact on rates, anecdotal information indicates that the company has introduced some price competition into inter-island markets; (11) consequently, while there could be a discernable effect on the breadth of services provided if AIC exits Hawaii's inter-island markets after September 30, 1998, the extent to which rates might increase remains unclear; (12) AIC told GAO that it wishes to continue serving Hawaii's inter-island markets after this date; and (13) however, absent federal legislation extending AIC's right to use Stage 2 aircraft, the airline will need to use Stage 3 aircraft to remain in these markets.