How to encourage price competition
 

With all the talk of the airline mergers, pricing competition is a huge problem. I've got a suggestion for how to deal with this, and would love to get other people's ideas.

I think airlines should be required to submit any proposed rate increases to a holding service for 21 days before they can be rolled out. The rate increases submitted are kept secret until the end of the 21 day period, when they become active. They are, however, allowed to lower fares without any notice.

Here's why I think this might work. Any time an airline raises a fare, they know that the earliest their competitors could match it would be two weeks away. For two weeks, they're guaranteed to be non-competitive in the marketplace. This would put a huge hurt on the airlines, and they'd have to really want to raise fairs, because they know they'll lose a lot of business in those three weeks.

I seem to recall that UA said that if it got the merger with US, it wouldn't raise any fares for 2 years, but that doesn't strike me as a long term resolution...

Any other ideas?

Why should the price increase be kept a secret? Secrets and competition don't go together IMHO.

As long as the big airlines don't crush the low-fare carriers (by anti-competitive actions), a Big Three should not be a problem.

Fare increases could be route specific. An airline could choose to raise fares on routes due to consolidation that have little to no competition. Thus the 21 day rule would have no impact.

What I see as the major problem with airline consolidation is the control at certain hubs. e.g. Atlanta for DL, DFW for AA, MSP for NW, ORD for UA etc. When the FTC looks at these ariline mergers they really need to get gate concessions to open up other airlines coming in to compete. There are only so many slots allocated at an airport. Once an airport is at capacity for landings and takeoffs that's it. ATA or SW are not going to be able to get slots and the dominant airline at that hub is going to have a monopoly on certain routes. Thus you see fares of $500 for 1 hr flt from ORD to MSP. Look at LAX as an example. There are no dominant carriers there and flts from the east coast into LAX are reasonable because of the competition in and out of LAX.

In the end though, it all comes down to supply and demand. If the country does go into recession and the American public stops flying, regardless of who controls what routes, the airlines will be forced to reduce fares to increase demand. Either that or start reducing capacity. I don't see that being the trend though.

It's all about the slots and the gates. 21 days is far too short for airlines to move equipment into new routes and advertise them.

A cap on the % of slots and gates should be implemented, and the incumbent carriers could override it IF-AND-ONLY-IF no one else wants to bid on and operate the slots/gates. For example, United is not going to bid on Omaha slots and gates if they don't plan to compete with Southwest.

Airlines that are hoarding these should be forced to cough them up if they are not being used.

I wonder how, precisely, one can determine whether or not slots and gates are actually being used. I know this seems like an odd question, but UA has abundant sh*ttle flights scheduled to/from SFO but how many of these flights really do leave or arrive on a regular basis? The frequency of many of the sh*ttle flights really cannot be reasonably sustained given the conditions endemic to the SFO. In earlier threads on this topic, the more suspicious amongst us have even hypothesized that UA might have created this unsustainable sh*ttle schedule, at least in small part, as a component of a greater anti-competitive strategy.

Sorry, maybe I wasn't making myself clear. The 21 day wait-list isnt' for new routes. It's for any time a carrier wants to revise a price upward, on any existing route, on any fare class. Because there's a 21 day cycle, the earliest any other carriers could match the changed price would be 21 days later. So, for that 21 day period, the carrier initiating the change would know that it wouldn't be price-competitive.

What this would do is prevent the rapid-fire fare increase matches that having system updates 3x/day allows the carriers to do.

Right now, when a carrier raises fares, it knows within 1-2 days if the increase is going to stick. The worst case scenerio for it is that it is not price-competitive on a given route for 1-2 days. By lenghtening the window with a sealed 21 day "escrow" period, they'd be much harder pressed to raise rates on a whim.

I think one way to keep competition is to prevent established airlines / routes form lowering prices more than 3% (or so) for 90 days after a new carrier / route starts up. Then for another 90 days prevent the established from lowering priced below the new carrier.


This would allow some of the startup a chance to build clients, etc. before needing to go into "cutthroat" pricing.

Predatory pricing is already illegal. Just enforce the law (e.g., DOJ vs. AA at DFW).

Re "cartel" pricing, if all the majors raise fares concurrently, minor/discount airlines can sell more tickets. If anyone wants to fly them, that is.

So the way to encourage price competition is to put restrictions on the industry's ability to change prices?

ButcherBird, you beat me to the punchline! Thanks for saying that.

I hate the concept of regulation of competition, but I think you can regulate the operating capacity of an airport terminal to equal the cacpacity of the airport's runways. My solution is like taking a meat cleaver to the airlines.

If you want to stop a driver from taking a particular road to work and at least try a different road, wouldn't the fastest way be to just randomly start pulling vehicles over to the side of the road? I'm making the number up, but if only 220 flights can take off in an hour from O'Hare, then for God's sake the ATC should not let more than 220 pretend to take off.

We know the actual numbers, it's not like airports are a new concept. Use statistics to find out actual maximum **undelayed** capacity by day of week by month (e.g. "Tuesdays in March"). 88 takeoffs that are all 30 minutes late doesn't count.

If there are too many flights scheduled, then at 2am each day, the FAA randomly cancels flights at that airport for overscheduled hours. Each airline gets 1 flight per hour per takeoff runway that they can protect. After that, it's a lottery drawing, with results posted at the FAA's web site like Powerball results so it's harder for airlines to jerk around their customers.

To make things interesting, flights to cities where that airline has service within 2 hours on either side of the flight get double chances of getting a random flight on that airline cancelled, within 1 hour, tripled. So if UA wants to schedule semi-hourly LAX-SFO service, they're just increasing the odds that their SFO-NRT flight is going to bite the dust.

Pretty soon, carriers will find ways to stop serving hubs that are over-crowded. Purely random cancellations will wreck havoc in the airlines crew and maintenance schedules and airlines will need start to schedule rationally. Meanwhile, smaller entrants still get guaranteed departures each hour if they can afford the gate space.

Just a wacky idea...

It's not necessary to go to extremes (random cancellations?)

For slot-controlled airports now over capacity, reduce the number of slots to a level which can be sustained in weather better than "bad" (define later http://www.flyertalk.com/forum/wink.gif ), put slots on other airports near or over capacity, and spread the slots over a 24 hour period. This would require an amendment to AIR-21 (signed by Clinton). Bush won't sign a bill un-doing AIR-21, so I'm talking theoretically here.

Anyway, reserve some slots for new entrants or discount carriers. Auction the rest of the slots to the major airlines, with a limit on the number of slots for any one particular airline (keeping in mind whether that airport is a hub; e.g., UA's slot limit at ORD needs to be higher than at EWR, but don't allow UA to buy 95% of all the slots at ORD). Slot auction proceeds should be used to improve the airport and related items (or reduce PFC's).


As I wrote in a thread in the Delta forum, fare amounts should not be regulated. The government can never determine the right price for anything. What should be regulated is routes. Even with a Big Three consolidation (UA/US, AA/TW, DL/CO/NW), regulating routes would ensure all three Big Daddies are competing with one another as well as the discount carriers on all routes.

My opinion is that a Big Three with route authorities would be more competitive than what we have today. Each member of the Big Three has enough market share and aircraft to be able to serve most routes, something that even United today can't do. Plus, route authorities include serving small cities (i.e., you get fly ORD-LGA if you also fly ORD-CHO-LYH).

Flying before de-regulation was better in most respects except for the high fares. What we need is to combine the best of both worlds.

Any economist will tell you that true price reduction comes from increased productivity in competitive marketplaces. In all the discussions here we are focusing on regulation to increase competition. I think there is hope of increased price competition from productivity increases.

From JetBlue (a risky? startup) to Southwest (a proven niche player) they are attempting productivity inhancements and market segmentations. They might work afterall. Are there any ideas on how we can encourage productivity through public policy and consumer behaviour?


Ofcourse, not having true openskies agreements prevents well balanced marketplaces. I think as consumers we should demand more opening up of routes. I respect the labor perspective and pilot union concerns but there is a limit at some point -$300K to $400K a year is something you should be earning based on productivity not distorting market through limits on carriers competing freely globally.

Here is a link to an article on EU regulators' progress in increasing competition.
http://public.wsj.com/sn/y/SB979256537582399844.html

"After four years of closed-door talks, European competition authorities are closing in on a deal that promises to greatly liberalize air travel inside Europe and across the Atlantic.

Regulators and industry officials involved in the discussions warn that the exact timing isn't certain, but some say a conclusion could come as early as this spring. The talks, which began in 1996 as a European Union review of burgeoning trans-Atlantic airline alliances, cover regulatory changes that could ultimately introduce greater competition into Europe's aviation market."

WSJ Jan 12, 2001

IMHO, consolidation of the mega carriers affords exciting opportunities for Southwest to expand and keep the big guys honest.