IMPERFECT COMPETITION Are consumers getting shafted

Posted on 05/30/2017 | About Washington D.C., District of Columbia

In an open letter to Donald Trump, the Business Travel Coalition discusses the treatment of passengers by the ‘Big Four’ airlines, the violations and flaunting of the rules by those carriers and what it calls the ‘issue of imperfect competition’. Will it help? Probably not.

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The BTC letter to Donald J. Trump

Dear Mr. President,

Happy Memorial Day! I trust that you had a comfortable plane ride home from Europe this weekend and that the care and respect shown to you was what you expected and deserved. As you caught up on the news you may have noticed several media outlets ran stories about the deterioration of customer service on major US network carriers, namely Delta Air Lines, American Airlines and United Airlines (Big Three).

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One theme common to those recent news articles and op-eds was that consumers are apparently so price conscious that airlines are forced to respond with cramped seating, poor service, cheap snacks, evermore ancillary fees and outsourced, poorly paid service workers. Some writers go so far as to imply that miserly consumers are responsible for the violence toward Dr. Dao on that now infamous United Airlines flight. Mr. President, what a canard!

An obvious problem with that fallacious logic is that many of those same price-conscious consumers seek out the very lowest prices at, for example, Costco and are treated very, very well. Of course, Costco has two structural incentives that airlines do not have and their customers do not benefit from.

First, when consumers are in the market for bulk goods, Costco can fulfill virtually 100% of their needs. However, BJ’s, Wal-Mart and many others can also fulfill those same needs. So, if Costco mistreats a consumer he has the opportunity to take advantage of near perfect competition and go to BJ’s. That’s a powerful incentive for Costco to take very good care of its customers.

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In contrast, no airline can meet 100% of a typical consumer’s air travel needs. This was always the case but has become more acute after massive US airline industry consolidation. According to the US Travel Association, 74 US airports are completely monopolized by just one airline that carries all of the flights in and out. And in 155 airports, one of the "big four" [Big Three and Southwest Airlines] airlines controls over 50 percent of seat capacity.

Those same four airlines control over 80% of total domestic seat capacity, down from eleven airlines a decade ago. Likewise, the Big Three, along with their antitrust immunized foreign joint venture partners, control more that 80% of the lucrative transatlantic market. At this point, large portions of the Big Three’s customer bases are captive without true competitive choice and airlines do not have the potent incentive that Costco has to take good care of its customers.

Second, if Costco breaks consumer protection statutes, or otherwise implements unfair and deceptive practices, consumers can sue them, their state attorneys general can sue them and Costco can face class action lawsuits. This is a powerful incentive to avoid trampling on consumers’ rights and interests.

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Such a private right of action no longer exists in commercial aviation, and thus, airlines have extremely little incentive to discipline their policies and practices so that consumers are thus protected. There is no effective substitute for a private right of action. For example, in 2014 US airlines had $169 billion in revenues and civil penalties assessed by the US DOT of $2.7 MILLION for unfair and deceptive practices and unfair methods of competition. There is no incentive there, just a very slight slap on the wrist.

Sadly, the issue of imperfect competition represents an operating and strategic advantage that the major US network carriers are fighting to maintain. For evidence of a strategy of seeking to maintain their monopoly positions, one only has to look at the ongoing scorched-earth war against the Gulf carriers, or the battle to keep Norwegian Air International grounded.

Imperfect competition and no private right of action have combined to produce a failing market for commercial air transportation services. The vast majority of current legislative proposals, drafted in or outside of Congress, deal with problems that emanate from these two causes.

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Below are 10 examples (among numerous others) of probable violations of 49 USC. 41712 often occurring in the marketplace that result in injury to consumers from unfair or deceptive practices or unfair methods of competition.

When an airline:

1. fails to disclose the all-in price of travel before a consumer is locked into the purchase, e.g., a failure to tell a consumer that there is a baggage or seat assignment fee;

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2. flouts the express admonitions of DOT by renaming its fuel surcharge as a “carrier imposed charge" circumventing DOT’s Additional Guidance on Airfare/Air Tour Price Advertisements” of February 21, 2012 that requires airlines to tie fuel surcharges to actual cost;

3. imposes a $400 fuel surcharge or carrier-imposed charge when a consumer redeems miles for a trip even though the price of oil has fallen 70 percent since June of 2014, and even though DOT considers airline loyalty points as a discount for future travel in return for a consumer’s repeat business;

4. fails to make available frequent flier seats sufficient to meet demand;

5. advertises rock-bottom airfares but provides insufficient inventory to meet any reasonable definition of demand;

6. charges $200 - 6 to 7 times the cost of handling a ticket change – when the cost to airlines for customer contact with a call center to change a reservation ranges from $25 to $35 dollars;

7. mishandles the carriage of a pet leading to injury or death;

8. fails to deliver a service at a level that a consumer would reasonably expect such as (a) when an airline damages or loses a customer’s baggage and the airline fails to make a refund or there is an excessive delay of the refund, (b) when a customer cancels a flight and the airline fails to make a refund or there is an excessive delay of the refund and (c) when an airline pursues a practice of a high percentage of over-sales and involuntary bumpings;

9. fails, prior to a consumer’s purchase, to disclose that the flight being booked is on the DOT’s list of chronically late flights and is thus a highly defective product; and

10. refuses at small to medium-size airports to allow competitors access to leased gates on customary terms, maintaining its dominant market position by blocking new entrant competition.

When eleven airlines shared 80% of domestic seat capacity, this situation was unfair but tolerable. After industry consolidation, it has become unbearable and has reached a tipping point with consumers. In truly competitive markets, with customary consumer legal protections, rarely do these kinds of problems surface. When they do, justice for consumers is usually swift. In commercial aviation, the problems are now so systemic and institutionalized that there is near zero justice.

This month during airline passenger-mistreatment hearings in Congress, American Airlines was sufficiently tone deaf to splash all over the news its decision to reduce seat pitch to 29 inches in some rows. Mr. President a tall person like yourself, in a brace-for-impact position in a row with a 29-inch pitch, could be paralyzed from a head strike to the seatback in front of him. And in seeming support for American Airline’s decision, United Airline’s President told employees that customers voted with their wallets and the reduced seat pitch is what they wanted, supposedly along with associated health and safety risks. The Big Three are able to reduce seat pitch only because they are in lockstep with one another and consumers are powerless.

Mr. President, with your support this summer, during the Federal Aviation Administration reauthorization process, Republican and Democratic Members of Congress have an opportunity to at least give consumers a fighting chance in a much too heavily concentrated industry by restoring a private right of action in a bill readied for your signature. In return, Members of Congress, upon returning home this fall, will be able to point to an important accomplishment, enabled by your bipartisan leadership, to help consumers in an important national industry.

Sincerely,

Kevin Mitchell
Founder
Business Travel Coalition; OpenSkies.travel

COPIES

Vice President Mike Pence
Members of the U. Congress
Secretary of Commerce Wilbur Ross
Secretary of Transportation Elaine Chao
Secretary of State Rex Tillerson
White House Chief Strategist Stephen Bannon
Senior Advisor to the President Jared Kushner
White House Press Secretary Sean Spicer
White House Chief of Staff Reince Priebus
Senior White House Adviser Stephen Miller
Counselor to the President Kellyanne Conway
Special Assistant to the President D.J. Gribbin