Aviation Competition

The Department of Transportation (DOT) issued a proposed policy statement last year designed to address unfair competitive practices by major airlines against "new entrants"--new low-fare airlines that entered their markets. DOT decided to develop its policy statement after 17 new entrant airlines complained that major airlines were unfairly lowering their fares, boosting capacity on some routes, or both. Also, DOT investigated two of the complaints and analyzed industrywide data on pricing and capacity activities by major airlines. DOT's investigations and analyses found possible unfair competitive practices by at least five major airlines. DOT followed an informal process and began developing the proposed policy statement in the summer of 1997. DOT did not consider the policy to be a rule requiring notice and comment. DOT's proposed policy statement generally addresses the complaints dealing with price cuts or capacity increases that the Department received as well as the practices that DOT identified in its investigations and analyses of industrywide data. In addition, the proposed policy describes practices that would trigger enforcement action.

GAO noted that: (1) DOT decided to develop its proposed policy statement after: (a) receiving 17 complaints from new entrant airlines alleging that major airlines were unfairly lowering their fares, increasing capacity on certain routes, or both; (b) investigating two of those complaints; and (c) analyzing industrywide data concerning pricing and capacity activities by major airlines; (2) DOT's investigations and analyses indicated possible unfair competitive practices by at least five major airlines; (3) DOT concluded that the best approach for addressing its concerns about this conduct was to issue policy guidance on what, in its view, constituted unfair competitive practices warranting departmental action; (4) DOT did not intend for the policy to discourage major airlines from competing against new entrants; rather, it wanted to prevent extreme behavior that was intended to drive a new entrant from the market; (5) by issuing the proposed policy, DOT expected to initiate a national debate on the issues surrounding unfair competition; (6) in addition, DOT officials believed that this approach would help with future enforcement regarding unfair competitive practices by major airlines in response to new low-fare airlines; (7) DOT followed an informal process and began developing the proposed policy statement in 1997; (8) DOT did not consider the policy to be a rule requiring notice and comment under the Administrative Procedure Act; (9) the act provides an exemption from certain notification requirements when an agency issues a general statement of policy; (10) however, DOT published the proposed policy in the Federal Register for public notification and to obtain comments; (11) DOT's proposed policy statement generally addresses the complaints dealing with price cuts or capacity increases that the Department received as well as the practices that DOT identified in its investigations and analyses of industrywide data; (12) in addition, the proposed policy described practices that would trigger enforcement action; (13) the policy described these practices as a major airline expanding its capacity and selling a large number of seats at very low fares in response to a low-fare airline entering its hub market; and (14) the Department would consider such practices unfair competition if they resulted in lower revenue for the major airline in the short term than would result from a reasonable alternative strategy for competing with a new entrant airline, such as matching the new entrant's low fares on a limited basis and not significantly increasing capacity.