Predation, Competition and Antitrust Law: Turbulence in the Airline Industry Paul Stephen Dempsey
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Journal of Air Law and Commerce Volume 67 | Issue 3 Article 4 2002 Predation, Competition and Antitrust Law: Turbulence in the Airline Industry Paul Stephen Dempsey Follow this and additional works at: https://scholar.smu.edu/jalc Recommended Citation Paul Stephen Dempsey, Predation, Competition and Antitrust Law: Turbulence in the Airline Industry, 67 J. Air L. & Com. 685 (2002) https://scholar.smu.edu/jalc/vol67/iss3/4 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in Journal of Air Law and Commerce by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. PREDATION, COMPETITION & ANTITRUST LAW: TURBULENCE IN THE AIRLINE INDUSTRY* PAUL STEPHEN DEMPSEY** TABLE OF CONTENTS I. INTRODUCTION .................................. 688 II. EMPIRICAL EVIDENCE OF PREDATION ......... 692 A. HUB CONCENTRATION .......................... 692 B. MEGACARRIER ALLIANCES ....................... 700 C. EXAMPLES OF PREDATORY PRICING By MAJOR AIRLINES ........................................ 702 1. Major Network Airline Competitive Response To Entry By Another Major Network Airline ...... 715 a. Denver-Philadelphia: United vs. U SA ir .................................. 716 b. Minneapolis/St. Paul - Cleveland: Northwest vs. Continental ............. 717 2. Major Network Airline Competitive Response To Entry By Southwest Airlines .................. 718 a. St. Louis-Cleveland: TWA vs. Southwest .............................. 719 * Copyright © 2002 by the author. The author would like to thank Professor Robert Hardaway for his contribution to the portion of this essay addressing the essential facility doctrine. The author would also like to thank Sam Addoms and Bob Schulman, CEO and Vice President, respectively, of Frontier Airlines for their invaluable assistance in reviewing and commenting on the case study contained herein involving monopolization of Denver. This research was made possible by a grant from the Hughes Research Foundation. ** Paul Stephen Dempsey is Tomlinson Professor of Law, and Director of the Institute of Air & Space Law at McGill University. From 1979-2002, he was Professor of Law and Director of the Transportation Law Program at the University of Denver. He is also Vice Chairman and Director of Frontier Airlines, Inc. He formerly served as an attorney with the U.S. Civil Aeronautics Board. Dr. Dempsey holds the following degrees: Bachelor of Arts (1972) and Juris Doctor (1975), University of Georgia; Master of Laws (1978) George Washington University; Doctor of Civil Laws (1987) Institute of Air & Space Law, McGill University. He is admitted to practice law in Colorado, Georgia and the District of Columbia. 685 686 JOURNAL OF AIR LAW AND COMMERCE b. St. Louis-Detroit: Northwest vs. Southwest .............................. 720 3. Major Airline Predatory Response To New Entrant Airlines ...... ................. 721 a. Atlanta-Memphis: Northwest vs. V alujet ................................. 722 b. Atlanta-Newark: Continental vs. Kiwi .. 723 c. Dallas/Ft. Worth-Wichita: American vs. Vanguard ........................ 724 d. Dallas/Ft. Worth-Colorado Springs: Delta vs. Western Pacific ............... 726 4. United Airlines' Response To MarkAir's Entry A t Denver ................................... 727 a. Denver-Seattle: United vs. MarkAir .... 728 b. Denver-San Francisco: United vs. M arkAir ................................ 728 c. Denver-Atlanta: United vs. MarkAir .... 729 5. United Airlines' Response To FrontierAirlines' Entry At Denver ............................. 730 a. Denver-Tucson: United vs. Frontier .... 730 b. Denver-Phoenix: United vs. Frontier... 731 c. Denver-Las Vegas: United vs. Frontier. 733 d. Denver-Billings: United vs. Frontier ... 734 6. United Airlines' Response To Reno Air's Entry A t Denver ................................... 735 D . SUM MARY ....................................... 735 III. MONOPOLIZATION OF DENVER: A CASE ST U DY ............................................. 738 A. INTRODUCTION ................................. 738 B. THE DEMISE OF THE ORIGINAL FRONTIER AIRLINES ........................................ 739 C. THE DEMISE OF CONTINENTAL AIRLINES' HUB AT D ENVER ......................................... 744 D. MONOPOLIZATION OF THE CONNECTING PASSENGER MARKET ............................. 752 E. SUMMARY OF FRONTIER'S ALLEGATIONS OF PREDATORY BEHAVIOR .......................... 760 F. THE DEMISE OF MARKAIR ....................... 766 G. THE AFTERMATH OF MARKAIR .................. 768 H. THE DEMISE OF WESTERN PACIFIC AIRLINES ..... 782 I. THE PRICE OF MONOPOLIZATION ................ 786 IV. LEGAL ANALYSIS OF PREDATION ............... 789 A. THE FEDERAL AVIATION ACT .................... 789 2002] PREDATION, COMPETITION & ANTITRUST LAW 687 B. MONOPOLIZATION UNDER THE ANTITRUST LAW S ........................................... 800 1. Expansion of Output or Capacity ............. 802 2. Predatory Pricing ............................ 804 3. Price Discrimination ......................... 811 4. Monopoly Leveraging ........................ 811 5. Refusal to Deal with a Competitor............. 814 6. Refusal to Share an "EssentialFacility" ....... 815 7. Raising Rivals' Costs ........................ 824 8. Exclusive Dealing Arrangements .............. 831 V. POLICY ANALYSIS ................................ 832 VI. CONCLUSIONS ................................... 836 CHARTS Chart 1 - Airline Concentration at Fifty Largest Airports. 694 Chart 2 - Denver-Philadelphia Average Fares ............. 717 Chart 3 - Minneapolis/St. Paul-Cleveland Average Fares. 718 Chart 4 - St. Louis-Cleveland Average Fares .............. 720 Chart 5 - St. Louis-Detroit Average Fares ................. 721 Chart 6 - Atlanta-Memphis Average Fares ................ 723 Chart 7 - Atlanta-Newark Average Fares .................. 724 Chart 8 - Dallas/Ft. Worth-Wichita Average Fares ........ 725 Chart 9 - Dallas/Ft. Worth-Colorado Springs Average Fares ........................................... 727 Chart 10 - Denver-Seattle Average Fares .................. 728 Chart 11 - Denver-San Francisco Average Fares .......... 729 Chart 12 - Denver-Atlanta Average Fares ................. 730 Chart 13 - Denver-Tuscon Average Fares ................. 731 Chart 14 - Denver-Phoenix Average Fares ................ 732 Chart 15 - Denver-Las Vegas Average Fares .............. 733 Chart 16 - Denver-Billings Average Fares ................. 734 Chart 17 - Denver-Reno Average Fares ................... 735 TABLES Table 1 -Airline Concentration at Major U.S. Airports by M arket Share % ................................ 693 Table 2 - Upstart Airlines ................................. 705 Table 3 - A Tale of Two Cities: United's Lowest Regular Fares ............................................ 734 Table 4 - United Airlines Domestic Boeing 737-300 Available Seat Mile Costs ....................... 770 Table 5 - Comparison of United Airlines' Costs vs. Prices (D ec. 9, 1996) .................................. 772 Table 6 - United Airlines and Affiliates Market Share in Denver City-Pairs ................................ 779 688 JOURNAL OF AIR LAW AND COMMERCE Table 7 - Summary of United Airlines and Affiliates Market Share at Denver ........................ 781 Table 8 - Distance-Based Costs for Dominant Airlines at Selected Cities .................................. 782 I. INTRODUCTION T HOUGH THE EARLY 1990s brought about a proliferation of new entrant airlines, the late 1990s was an era of bank- ruptcies, liquidations and retrenchments for upstart airlines. Five new airlines per year emerged from 1990 to 1995. But from 1995 until early 1999, not a single new airline began service.1 New entrants like Air South, Pan Am (which included Carnival Airlines), Western Pacific, Kiwi, and Sun Jet International fell into bankruptcy, while others were facing enormous financial difficulty. By 1999, new entrants accounted for only 1.3% of the total market. While hub concentration was growing, competi- tive service declined 28% in city-pairs between 1994 and 1999.2 Several new entrant airlines came together in 1996 to form the Air Carrier Association of America. The Air Carrier Associa- tion of America was initially formed to deal with the effort of the major airlines to shift the excise tax burden away from the larg- est airlines and onto the smaller, affordable airlines. But as they came together, the new entrants learned they had something else in common. The major airlines appeared to be on a homi- cidal mission to destroy the low-fare airlines. The window of opportunity opened after the Valujet catastro- phe in the Everglades, in May of 1996. The U.S. Department of Transportation [DOT] had been a champion of the competi- tion brought to bear by the new entrant airlines, praising their annual $6 billion contribution to consumer savings as a clear success of deregulation. But the Everglades crash occurred in an election year, and for political reasons, DOT soon found it- self neutralized. The Federal Aviation Administration grounded ValuJet's 53 aircraft. The question in the industry became, "Why did Delta allow Valujet to grow so large? Why didn't Delta kill off Valujet when it had the chance?" I Address by DOT Deputy General Counsel Steven Okun before the Nova Uni- versity Annual Conference on International Travel & Tourism (Ft. Lauderdale, FL, April 13, 1999). 2 [d. 3 DOT, THE Low COST AIRLINE SERVICE REVOLUTION (1996). 2002] PREDATION,