Airlines: A Radically Changed Industry

The airline industry has changed fundamentally in the past several years, with airlines dramatically increasing their market power vis-à-vis consumers, while federal preemption gives airlines essentially a free ride from a legal perspective. This spells double trouble for consumers and is why the Department of Transportation's role has grown so important in the area of consumer protections. Airlines seem emboldened to reduce transparency, undermine DOT's consumer-protection and Open Skies authorities, and erect a fence around the U.S. to frustrate new entry by foreign carriers.

The Business Travel Coalition (BTC) welcomed the opportunity to file extensive comments on Sept. 29 to the U.S. Department of Transportation regarding the DOT's Notice of Proposed Rulemaking (NPRM). The full document can be found here. Below are essential points from that filing.

• As the U.S. airline industry has consolidated to just three mega network carriers, those airlines have to worry far less about customers' needs and concerns. Airlines know that the customer has dramatically fewer airline choices than in past years. Importantly, because of the federal preemption doctrine in the Airline Deregulation Act of 1978, consumers have no private right of action at the state or federal levels if harmed by airlines. Furthermore, state consumer protection statues do not apply to airline passengers, and the Federal Trade Commission has no authority in this industry.

• Price transparency is vitally important for the competitive process to function properly. However, airline industry consolidation has been accompanied by carriers aggressively unbundling their products, charging fees for services previously included and paid for by consumers in the price of their tickets. While unbundling is generally pro-competitive, it is unlikely to be beneficial without transparency in prices that is typically intended to accompany it. Indeed, airlines have been increasingly able __ without competitive repercussions __ to ignore the demand for ancillary fee data even from their largest, most sophisticated corporate, university and government customers. Moreover, airlines have inadequately responded to the concerns of Congress and DOT over lack of transparency and transactability of ancillary fees.

• In eschewing true price transparency, airlines increasingly mask the all-in price of air travel, with two major adverse effects. First, lack of price transparency prevents consumers from efficient comparison-shopping of air travel offerings across multiple airlines – a hallmark of U.S. airline industry deregulation. A second consequence of the deterioration in price disclosure is that ancillary fees go largely undisciplined by market forces. Likewise, base fares are today not exposed to the full discipline of the marketplace and represent unreliable comparative benchmarks for consumers and regulators alike because some fares contain specific services that others do not. Arguably, to the extent that airlines are in a commodity business, it is to their advantage to attempt to differentiate themselves by making meaningful price comparisons difficult.

As airlines have grown larger and more powerful relative to consumers through consolidation, they have increasingly been able to refuse to provide consumers with ancillary services and associated fee information. This supports the notion that rivalry creates incentives for sellers to fully inform consumers about the pricing, quality and availability of their products. Conversely, the loss of competition through airline industry consolidation has diminished those incentives. With fewer players in the market, the need for sellers to reach agreement on matters such as how to deal with baggage fees is minimized because it can be handled by the airlines "tacitly."

• The most pernicious effects of such radical consolidation may not be the most easily observable ones, e.g., higher prices. Airlines' newfound power is being projected not in the traditional practice against supply chain participants, but rather against DOT, their regulator.

Examples include:

1. Drafting H.R. 4156, the Transparent Airfares Act of 2014, to reduce fare transparency and undermine DOT's consumer protection authority;

2. Blocking Norwegian Airlines International's application to provide new low-cost services to the U.S. by seeking to intimidate DOT and seeking Congressional intervention to block foreign carrier new entry;

3. Frustrating Middle Eastern carriers by restricting efficient access to U.S. markets;

4. Fighting to eliminate the Ex-Im Bank to keep modern new Boeing planes out of the fleets of foreign carriers that would introduce new services to the U.S.; and

5. Endeavoring, it would appear, to intimidate DOT in an August 2014 meeting comprising some 14 airline lawyers concerning this very rulemaking.

Consumers need strong protections more than ever, so long as all such protections are consolidated at the DOT, unlike all other industries where consumers can sue companies for damages or state attorneys general can intervene on behalf of their citizens.

I welcome your comments on this important topic.

Kevin Mitchell is founder of the Business Travel Coalition (610-999-9247; [email protected]), established in 1994 to interpret industry and government policies and practices and provide a platform so that the managed travel community can influence issues of strategic importance to their organizations.