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PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.







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JUNE 25, 1997

Printed for the use of the

Committee on Transportation and Infrastructure


BUD SHUSTER, Pennsylvania, Chairman

THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
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JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
JOHN L. MICA, Florida
SUE W. KELLY, New York
RAY LaHOOD, Illinois
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
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JOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
J.C. WATTS, Jr., Oklahoma

NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
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BOB FILNER, California
FRANK MASCARA, Pennsylvania
GENE TAYLOR, Mississippi
BILL PASCRELL, Jr., New Jersey
JAY W. JOHNSON, Wisconsin
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania

Subcommittee on Aviation

JOHN J. DUNCAN, Jr., Tennessee, Chairman

ROY BLUNT, Missouri Vice Chairman
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RAY LaHOOD, Illinois
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
JOSEPH R. PITTS, Pennsylvania
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
J.C. WATTS, Jr., Oklahoma
BUD SHUSTER, Pennsylvania
(Ex Officio)

NICK J. RAHALL II, West Virginia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
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(Ex Officio)




    Anderson, John H., Jr., Director, Transportation Issues, Resources, Community and Economic Development Division, U.S. General Accounting Office, accompanied by Timothy Hannegan, Assistant Director, Aviation Competition Issues

    Davis, H. Hugh, Jr., President, Chattanooga Metropolitan Airport Authority, Chattanooga, TN

    Hancik, Robert D., Director of Aviation, City of Springfield Airport Board, Springfield-Branson Regional Airport, Springfield, MO

    Jenkins, Darryl, President, Aviation Foundation, and Director, Aviation Safety Program, George Washington University
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    LaFalce, Hon. John J., a Representative in Congress from New York

    Mitchell, Kevin P., President, Business Travel Contractors Corporation

    Morrison, Steven A., Professor of Economics, Department of Economics, Northeastern University

    Murphy, Cyril, Vice President, International Affairs, United Airlines, Inc

    Murphy, Patrick V., Deputy Assistant Secretary for Aviation and International Affairs, U.S. Department of Transportation

    Quinn, Hon. Jack, a Representative in Congress from New York

    Rolston, Fielding, Vice President, Customer Service and Materials Management, Eastman Chemical Company

    Slaughter, Hon. Louise, a Representative in Congress from New York

    Winston, Clifford, Senior Fellow, Economics Studies Program, Brookings Institution

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    Costello, Hon. Jerry F., of Illinois

    Cramer, Hon. Bud, of Pennsylvania

    LaFalce, Hon. John J., of New York

    Poshard, Hon. Glenn, of Illinois

    Quinn, Hon. Jack, of New York

    Slaughter, Hon. Louise, of New York


    Anderson, John H., Jr

    Davis, H. Hugh, Jr

    Hancik, Robert D

    Jenkins, Darryl

    Mitchell, Kevin P

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    Morrison, Steven A

    Murphy, Cyril

    Murphy, Patrick V

    Rolston, Fielding

    Winston, Clifford


Anderson, John H., Jr., Director, Transportation Issues, Resources, Community, and Economic Development Division:

Responses to post hearing questions from Rep. Shuster

Letter to Robert B. Dix, Jr., Chair, Board of Directors, Metropolitan Washington Council of Governments, and Betty Ann Krahnke, Chair, Committee on Noise Abatement at National and Dulles Airports, Metropolitan Washington Council of Governments, concerning the GAO report Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, August 15, 1997

Davis, H. Hugh, Jr. President, Chattanooga Metropolitan Airport Authority, Chattanooga, TN, report, The National Air Service Roundtable: A Consensus Report, Joseph P. Schwieterman, Ph.D., Director, Chaddick Institute for Metropolitan Development, DePaul University, March 6, 1997
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Morrison, Steven A., Professor of Economics, Department of Economics, Northeastern University, and Clifford Winston, Senior Fellow, Economics Studies program, Brookings Institution, charts:

Percentage Difference between Actual Fares and ''Regulated'' Fares by Airport Classification

Competition at the Route Level by Airport Classification

Percentage of Passenger Miles Provided by Post-Deregulation New Entrants by Airport Classification

Route Density by Airport Classification

Average Aircraft Size by Airport Classification

Percentage of Seats Filled by Airport Classification

Departures per Day by Airport Classification

Non-Stop Domestic Cities Served by Airport Classification

Percentage of Passenger Miles Flown by New Entrants at Slot Controlled and Non-Slot Controlled Airports

Murphy, Cyril, Vice President, International Affairs, United Airlines, Inc:

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Responses to a question from Rep. Blunt

Responses to post hearing questions

Murphy, Patrick V., Deputy Assistant Secretary for Aviation and International Affairs, U.S. Department of Transportation:

Update on U.S. Department of Transportation Initiatives and Outlook, speech before the BTCC Airline Competition Summit, October 3, 1997

Report to Congress of the Secretary of Transportation, Progress in Addressing Anticompetitive Practices in Air Transportation, October 1997

Responses to post hearing questions from Rep. Traficant

    Rolston, B. Fielding, Vice President, Customer Service and Materials Management, Eastman Chemical Company, response to letter from Rep. Shuster, August 21, 1997



    Coyne, James K., President, National Air Transportation Association, letter, June 24, 1997

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    Tri-Cities Airport, John K. Gillenwater, Airport Commissioner, Bristol, TN, statement

    Communities Eliminated from the EAS Program by Program-Wide Cuts Since Fiscal Year 1988, chart

North Platte Airport Authority, Kenneth L. Penney, Jr., Airport Manager, letter and report, Analysis of the Potential for Airline Service for Small Communities, December 1995

Linder, Hon. John, a Representative in Congress from Georgia, report from Lawton Roberts, Owner, Uniglobe Country Place Travel, Inc., Atlanta, (Lawrenceville and Conyers) Georgia, Profile of an Airline Industry Out of Control and its Adverse Impact on Consumers and Travel Agencies, September 24, 1997

    Landstar Express America, Inc., Michael J. Alberico, letter, June 30, 1997

    Text of bill, H.R. 2748, To amend title 49, United States Code, to provide assistance and slots with respect to air carrier service between high density airports and airports not receiving sufficient air service, to improve jet aircraft service to undeserved markets, and for other purposes



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U.S. House of Representatives,

Subcommittee on Aviation,

Committee on Transportation and Infrastructure,

Washington, DC.

    The subcommittee met, pursuant to notice, at 9:30 a.m. in room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr., (chairman of the subcommittee) presiding.

    Mr. DUNCAN. We will go ahead and call the subcommittee to order.

    Ordinarily I wait for Mr. Lipinski, but Mr. Lipinski had a bicycle accident a few days ago and will not be with us today. I'm sure, as usual, many of the other members will join us as we go through the process of this hearing.

    We want to go ahead and call this meeting to order at this time and first, let me thank all of the witnesses for being here today. We have a number of knowledgeable witnesses and we look forward to hearing from each of them.

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    We had a tremendous interest from many wishing to testify this morning. Unfortunately, we could not accommodate even half of the requests we had among those who wanted to testify. However, if there is continued interest in this subject and on this issue, we will hold a second day of hearings or a third if necessary.

    We, obviously, have benefitted in the past several years from deregulating the airline industry. For most communities across the Nation, the frequency of service has increased and ticket prices have remained stable or have even declined in some areas since the Airline Deregulation Act of 1978.

    We still have a number of communities that have seen little, if any, benefit from the Act. Some of these communities have less service and higher airfares and we will hear from a couple of these communities this morning.

    The briefing paper that was sent to members of the subcommittee has, I think, a very accurate description of what has gone on. It says, ''Airline deregulation over the last 19 years has led to lower airfares and better service for most air travelers due largely to increased competition, spurred by entry of new airlines into the industry and established airlines into new markets.

    ''However, some airports and communities have not enjoyed the benefits that deregulation has brought to other markets. Airports and communities in the west and southwest have seen the largest decreases in airfares. Those in the southeast and in the Appalachian Region have seen the largest increases in airfares.

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    ''Since deregulation, airlines have generally flown from small- and medium-sized airports to hub airports. This hub and spoke system has caused one-stop service to increase and non-stop service to decrease for the smaller-
and medium-sized airports.''

    We do have many applications for new service. ''In April 1997, TransStates requested slots at O'Hare for nonstop service from Asheville, North Carolina; Bristol, Tennessee; Chattanooga, Tennessee; and Roanoke, Virginia.

    ''In May 1997, AirTran Airways requested slots at La Guardia for nonstop service from Akron, Knoxville, Bloomington and Moline, Illinois. Also in May 1997, ValuJet applied for slots at La Guardia for service from Atlanta, in part to provide one-stop service from Atlanta to New York for many of the cities in the Southeast such as Mobile, Alabama.'' So we see some encouraging trends.

    There are still many issues related to this that I'm concerned about because it affects many communities in my State and many cities across the Nation have similar situations of higher airfares and poorer service. We're going to hear from some members in just a minute about that.

    In fact, because of the great concern, this past February over 150 aviation professionals and 35 communities from all across the country participated in a roundtable conference held in Chattanooga, Tennessee to find market-based solutions to the challenges that face these communities.

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    Moreover, the General Accounting Office has produced a number of reports that have called our attention to limits on opening competitive aviation markets. One use in these new applications, as I mentioned, involves slot restrictions at the high density airports of O'Hare in Chicago and National here in Washington, and La Guardia and Kennedy in New York.

    The National Commission to Ensure a Strong and Competitive Airline Industry in 1993 recommended that artificial limits imposed by slots either be removed or raised to the highest level consistent with safety.

    I have been encouraged that the Department of Transportation is considering exercising its authority to offer slot-controlled airport access to new entrant carriers in order to introduce competition in certain markets.

    I could go on but let me say that I hope we can find some market-based solutions that will enhance free and fair competition which is the foundation of our free enterprise system and that we can find ways to level the playing field so that every community and every American who wants to fly, regardless of the size or location of community, can afford to do so.

    Now, I wish to welcome the Ranking Member of the Full Committee who has great knowledge, experience and insight on all of these issues. We're always honored to have Mr. Oberstar with us. Mr. Oberstar?

    Mr. OBERSTAR. Thank you very much, Mr. Chairman, for those kind words and also for calling this hearing and bringing to bear the committee's scrutiny on an age old subject of this era of deregulation, one that affects you directly, that affects many of our colleagues and the constituents they represent here in the Congress.
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    I want to say first that I regret that Mr. Lipinski, the Ranking Democrat on the subcommittee, is unable to be with us today. The accident he incurred over the weekend has flared up and he's just not feeling well.

    In 1992, the subject that is the focus of this hearing was a matter of great public interest and concern. At that time, with a number of co-sponsors, both Democratic and Republican, I introduced the Airline Competition Enhancement Act of 1992.

    I introduced the legislation because of growing complaints of inadequate service, diminished competition, competitive barriers such as slots, long-term gate leases, airline ownership of computer reservation systems, and failure of the Department of Transportation to use its authority to preserve competition or to stimulate competition.

    I didn't care whether it was, as you called it today, Mr. Chairman, market-based or whether the Government was using its residual regulatory authority; I don't think any of the travelers cared which way it happened; the point is that people wanted it to happen; wanted to have competition. Five years later, the issue continues to raise its ugly, troubling head.

    There are many causes for the problem we face today. One of those can easily be traced back to 1980 when the Department of Transportation, then under the leadership of Secretary Dole, confronted with the dilemma of how to provide access to slot-controlled airports, embarked on a decision to allow airlines to sell and others to buy the slots that provide access to the Nation's four high density airports or the most desired airports in the country—National at Washington, D.C., LaGuardia and JFK and Chicago O'Hare.
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    I opposed the practice at the time. It seemed outrageous to me to allow carriers to sell for what would become millions of dollars, assets that they received free in the public interest. If there was to be a market approach, it seemed to me at the time, that the Department could allow the carriers to sell the asset they received free and the proceeds to go into the Aviation Trust Fund which would benefit all of aviation, not just a carrier who was unjustly enriched by selling the asset that had been given in the public interest to stimulate travel and serve communities.

    Those slots now go for, in some cases, tens of millions of dollars. International routes are sold, as TWA did to American, for over $400 million and the airline, TWA, is still paying for it. They are still paying American Airlines to carry on international service to London their frequent fliers. As a result, TWA has been long-term financially weakened.

    Slots are also listed on the financial statements of carriers as valuable assets. That, of course, has inhibited our ability to come up with solutions to this problem because if you do as I originally suggested, require that the sale and the proceeds of the sale go into the Aviation Trust Fund, then the airline would have lost a valuable asset and would have lost standing on the stock market, and would be injured financially.

    Those slots, on the other hand, have been a very important factor in keeping many carriers afloat. Carriers have done very creative things with the valuable asset of slots in international routes to help them through troubled times.

    Keeping a carrier afloat financially through the sale or protection of right of sale of slots or international service should not be our purpose, it should not be the Government's purpose. Carriers have to figure out a way to stay competitive through other means, not through restrictive practices that unjustly enrich a few at the cost of the many and of the traveling public.
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    The ramifications of the slot rule go far beyond the four targeted airports. One result of the buy-sell rule is that airfares east of the Mississippi are substantially higher than airfares west of the Mississippi.

    New entrant carriers do not have the financial wherewithal to buy the slots necessary to compete with incumbent carriers in the slot-controlled airports. That means that the most competitive force in the market is excluded by a government practice and by economic power of a certain few carriers from getting into and competing with carriers at the most competitive airports, those that are slot-controlled.

    Low-cost carriers or low-fare carriers such as Southwest do not serve slot-controlled airports because it would simply drive up their costs. The incumbent carriers that have slots hold them back and drive up their costs in order to keep smaller competition out.

    The hub and spoke system that developed after deregulation, no one envisioned it. I sat right over there, Mr. Chairman, in that lower row, about the third one in from the end during the vote on deregulation just wondering, is this the right vote to make, is this in the best long-term public interest?

    There were two factors that caused me to support it. One was essential air service that small towns would never be left out and the second was the concept of competition, that if one carrier came in and dominated a city with high fares, competition would come in and challenge them.

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    None of us envisioned, not even the carriers envisioned at that time, that there would be the concept of hub and spoke aviation and that has proven to be an anticompetitive force, a brilliant strategy where the carrier invests millions of dollars in slave service that draws all the traffic into the hub and then redistributes those passengers.

    How do you come in and compete with say Northwest Airlines at Minneapolis or TWA at St. Louis or with Delta in Atlanta and set up all the regional carrier service that is necessary to provide the competition? Hub and spoke service keeps that competition out. Passengers pay more to travel, cities have less service, businesses lose customers and competitive opportunities.

    Furthermore, when a new carrier, a new entrant wants to get into a market, it often has to negotiate with the very competition it wants to challenge for gate space, terminal space, as well as slots in the slot-controlled airports. That is anticompetitive.

    New entrant, low-cost carriers are the ones that provide the new energy into the aviation market, but those opportunities and that energy will never be realized, and never see the light of day if the Department of Transportation does not do its job and use its authority to open the doors of competition and provide challenges for the incumbent carriers by allowing new entrants into that market.

    Public interest demands an ever vigilant Department of Transportation to reduce competitive barriers, to eliminate predatory pricing and other market distortion practices such as powerful CRSs that are internally skewed to protect the carrier that owns them.

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    Today, we're going to see again that the benefits of airline deregulation have been unevenly distributed. We cannot direct carriers to serve certain markets like Chattanooga in your State, Mr. Chairman, or Rochester, New York or Buffalo, upstate New York, an area that I know very well. My late wife was from Rochester.

    You used to have very good service up there. You don't have that kind of service anymore simply because of the market distortions that have occurred.

    Those cities like Chattanooga, on the other hand, or like St. Cloud, Minnesota that are within a reasonable driving distance of a major hub are going to lose their air service because the competitive forces are going to drive small carriers out of those small markets.

    I want to hear what our witnesses have to say today. I apologize for taking up so much time, but this is a subject that is of vital importance our aviation industry and to our national and international aviation market.

    Of the billion passengers who travel worldwide by air annually, over half of them travel in the United States marketplace. We have nearly 600 million people traveling by air, 94 percent of all paid intercity travel in the United States is by air.

    We have an obligation, and I salute you, Mr. Chairman, for taking that opportunity again to assure that we have competition in the aviation market in the United States.

    Thank you very much.
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    Mr. DUNCAN. Thank you very much, Mr. Oberstar. That was a good synopsis of a very important issue. Certainly, it restricts the growth in many areas because one of the first questions the industries ask is what kind of air service an area has. Certainly as you said, the benefits of deregulation have been unevenly distributed. That's what we're going to look into today.

    Mr. Blunt?

    Mr. BLUNT. Thank you, Mr. Chairman.

    I want to thank you again for holding this hearing. As Mr. Oberstar has eloquently pointed out, this is a significant issue, it's an issue that affects many districts, it certainly affects my district in southwest Missouri with the Joplin Airport and the Springfield-Branson Airport. I'm particularly pleased that Rob Hancik, who is the Director of the Springfield-Branson Airport, is here today to share some things with us.

    Everybody has stories to tell on this issue. I had some people from FAA in my office yesterday on another topic. We talked briefly at the end of the meeting about this hearing today and the all too-common story of the person who had just flown to Missouri from FAA to a meeting who paid $300 to go from here to St. Louis round-trip, and paid $700 to go from St. Louis to Columbia which is less than a 2-hour drive on an interstate highway.

    The current system is full of those stories. I hope we come up with some information today that the airlines are able to take advantage of. I particularly hope that there is some reasonable marketplace solution here.
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    I'm looking forward, as you and Mr. Oberstar are, to the testimony today and I'm grateful to you for having this hearing, Mr. Chairman.

    Mr. DUNCAN. Thank you very much.

    I believe Ms. Danner was here next.

    Ms. DANNER. Thank you, Mr. Chairman.

    I have no opening comments. I do appreciate my fellow Missourian's opportunity to put in a plug for Springfield-Branson and I look forward to hearing our witnesses.

    Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you very much.

    We'll go in this manner. Does anyone else have an opening statement they wish to make? Mr. Boswell?

    Mr. BOSWELL. Just a short comment, Mr. Chairman.

    I, too, thank you for having this hearing on this subject. Yes, a lot of competitiveness has taken place since deregulation in the larger cities and service centers as Mr. Oberstar has talked about, but out there in some of the areas that Mr. Blunt, myself, Ms. Danner, many of us, don't have very good service at times and it is very, very expensive.
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    When you start thinking about cost and cents per mile and some of these things and compare it to flying from one of the hubs, for example, it is really out of step.

    I would hope either the industry will take it upon themselves to do something about this and if not, then the Department of Transportation with our encouragement will say whoa, let's reexamine this and let's get some fairness back in it because Americans are Americans wherever they live across the country. If it's good for one, it's good for all. Let's have some redistribution of fairness here.

    I anticipate that may come out of this. I thank you, Mr. Oberstar for your review of what has happened. I think you've hit the nail right on the head. Something is not right here, so let's do something about it.

    Thank you.

    Mr. DUNCAN. A very fine statement, Mr. Boswell.

    Mr. Ewing?

    Mr. EWING. Thank you, Mr. Chairman. I appreciate very much your holding this hearing.

    For those of us that have small, regional airports in our district, this is an issue that is very important. If we're going to expect to have adequate service from the small, regional airports, we certainly are going to have to have places to land those planes at the major terminals.
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    It's a problem in at least three communities in my district. I'm very, very appreciative of your looking into it and I hope that we'll be able to make some movement toward opening up additional spaces.

    Thank you.

    Mr. DUNCAN. Thank you very much.

    Ms. Johnson?

    Ms. JOHNSON. Thank you very much, Mr. Chairman.

    I simply want to express my appreciation for you holding this hearing. I think these problems obviously began at the time of deregulation and while reregulation is not an option, I think we do have a responsibility to give attention to the problem. I appreciate the fact that this is a beginning to address the issue.

    Thank you.

    Mr. DUNCAN. Thank you very much.

    Mr. Pease?

    Mr. PEASE. No.
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    Mr. DUNCAN. Mr. Metcalf?

    Mr. METCALF. No.
    [The prepared statements of Mr. Costello, Mr. Cramer, and Mr. Poshard follow:]

    [Insert here.]

    Mr. DUNCAN. I certainly appreciate all the members being present.

    I have one report that says the southeast has been hit the hardest by this and the upper midwest, but it's more than just the southeast and the upper midwest because we're honored to have three members from the great State of New York here with us. They have some concern about this issue and we appreciate each of you being here.

    Ms. Slaughter, ordinarily I would go ladies first, but my friend, Jack Quinn, is a member of this committee and in deference to that, I'm going to let him go first.

    Mr. Quinn, we're glad to have you here with us and you may proceed with your testimony.

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    Mr. QUINN. Thank you, Mr. Chairman.

    I appreciate you and the Ranking Member holding this hearing. Particularly as a member of the full committee, we hear lots of testimony from a lot of people on a lot of issues, but clearly this is one that doesn't have anything to do with politics, it's strictly a service kind of issue.

    I also appreciate the fact that you referred to the witnesses this morning as being knowledgeable about the topic. When you include us in that category, we deeply appreciate that.

    It's also an opportunity for us to say thanks as a follow-up from the hearing and discussion that was held in Tennessee earlier this year. As Mr. Oberstar provided that synopsis, and you talked about, Mr. Chairman, I think what you're going to hear from the three of us from upstate New York—Buffalo, Rochester and indeed, all the way over to Syracuse and Albany—are some comments about a particular situation that concerns all of us.

    We're here today, the three of us, from upstate New York to talk about the situation of high airfare costs and the poor service in and out of the Niagara frontier and all of upstate New York and also to highlight for you some of the things that our community is trying to do to correct them.

    More importantly, we're here today to listen to suggestions from some of the other panels that will come before you this morning.
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    We all know that airline deregulation has had many positive effects on national air service. Unfortunately, western New York has not experienced that upturn, that positive reaction. Our air service in western New York has suffered due to the highly competitive nature of the business that has been promoted by deregulation.

    Escalating fares and deterioration of service and the levels of service have eroded the Buffalo market comparable to what it was in the late 1980s. Our local airport director, at least in western New York, the Niagara Frontier Transportation Authority, has completed several studies and some cost comparisons over the past couple of years which emphasize our problem.

    Of course market considerations play into these findings and the airlines are not to blame for all of their decisions made which were sound business decisions, most of them. We realize communities must take action to help themselves. Community involvement is a key and it's essential if we're going to be successful in reversing the downward passenger and service trends.

    I'd like to focus this morning on some of the things we are doing in our community to reverse that trend.

    The NFTA, the Transportation Authority in Buffalo, has taken the first step in improving the air service situation by establishing what they are calling an Air Service Development Committee to focus on the problems.

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    The committee is comprised of key community leaders and the marketing executives from the Authority will be directly involved in marketing our new airport and enhancing the NFTA development program.

    It's important to note that with the help of our Federal Government, we're going to be opening a brand new airport in the Buffalo market in October to the tune of about $180 million. Congress, former members and all of our delegation have been very successful in making sure that airport opens on time.

    However, a $180 million investment in our community will be for naught if our constituents, our residents can't afford to fly in and out of Buffalo. The same committee will continue to work with carriers that are presently serving the western New York market in the interest of proactively assisting them in establishing discount pricing and low-cost carrier subsidiaries to compete in our market.

    In addition, they will also pursue low cost carriers in order to introduce yet more competition in our area. The committee will work to develop local support for revenue, guarantees and business incentives that are not considered a routine cost of doing business with the air carriers.

    This ''seed money'' is essential to attract better service and pricing from current carriers in the market as well as bringing in new low fare carriers.

    Overall, the Niagara frontier and upstate New York, as my colleagues will testify in a few moments, we've had to refocus our attention on the problem of high fares and poor service as a community development priority. The high cost and poor service has been directly attributed to loss of revenue in our community.
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    The Greater Buffalo Convention and Visitors Bureau has reported the loss of three conventions in the last several months which have brought almost $1.5 million to our area's economy. We are encouraging our State Development Corporation to treat these problems as a State economic development problem, as well as encouraging the expansion of service within the State to other major destinations.

    What can we do on the Federal level? We have personally been active, all of us at the witness table this morning in trying to bring airlines currently operating in western New York together with the newly established committee I spoke of earlier. Mostly notably, US Airways has been accommodating in opening these discussions for Buffalo and western New York and the upstate region.

    We've been committed, the Congress, to not reregulate the airline industry. What I have to say is as a member of Congress from western New York, it's our duty to do anything we can to revive and to protect the communities we all represent.

    Four ideas we want to have on the record this morning at least for discussion purposes and to share with the members of the committee include: one, to create a medium-size airport fund for subsidizing air service to any city which meets certain population and pricing criteria; two, to enact startup tax incentives to encourage new regional carriers to enter some noncompetitive markets as Mr. Oberstar mentioned earlier in his remarks; three, changing the way slots are allocated.

    As we all know, currently the slots are allocated to the airlines. As these slot allocation leases run out, we could turn the allocations over to the cities themselves, to the regions themselves rather than the airlines and let them, the regions, determine what carriers offer the best service at the best rates.
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    Fourth is disallowing the use of slots as collateral by the airlines.

    We're very interested in helping the committee and our Federal representatives solve this problem not only in our area of Buffalo and western New York, but all across the country.

    In closing, I'd like to thank Mr. Boswell as well for his opening remarks when he talked about the airline industry being at the table for discussion, the Department of Transportation to be at the table during discussions, and finally, the Congress to be involved with all these discussions.

    Mr. DUNCAN. Thank you very much, Mr. Quinn. Those are some very fine suggestions and we certainly appreciate your specific ideas. You certainly will be directly involved in this.

    Mr. DUNCAN. We'll go now to Ms. Slaughter. It's certainly a privilege to have you here with us.

    Ms. SLAUGHTER. Mr. Chairman, it's my privilege. I am so grateful to you for holding this hearing.

    This is an issue that is very important in my district of Rochester, New York and becoming more so every day. A recent study was reported in the New York Times that said that the four cities across upstate New York—Rochester, Buffalo, Syracuse and Albany—have lagged behind the entire rest of the United States in economic recovery. Ninety-five percent of the new jobs that were created in the State of New York were created downstate.
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    This is affecting us most grievously, Mr. Chairman. Part of that, I think, are the monopolistic airlines that are gouging our constituents when they fly.

    My district is a prime example. A recent report done by a New York State Senator found that upstate New York fliers are charged 366 percent more per ticket than anyone flying from New York City for travel to Los Angeles or Orlando, Boston and to Washington. Moreover, it cost people from Rochester twice as much to fly within New York State as it does to fly out of the State. We pay these exorbitant prices because there is virtually no competition.

    Mr. Oberstar's history he reported this morning is most important and was very enlightening to me and I'm sure to everyone else in this room as to how we got in this position.

    I know the Department of Transportation has strong responsibilities, but I am certain and I'm sure you agree that setting economic policy in the United States as to which cities would survive and which would not is not part of their charter. But indeed, Mr. Chairman, that is what has been happening.

    We talked about the problem of the slots and the fact they were given away, but at the same time, the legislation that gave them away retained the ownership for the people of the United States. So there may be something we can look at but we do know as long as one of these slots cost up to $2 million during the peak hours of flying, very few startup companies are going to be able to start up at all.

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    At four airports in the country—LaGuardia and Kennedy in New York, O'Hare in Chicago, and National here—the dominant airlines use the controlling slots to squeeze out the small carriers. My consumers and yours are getting crushed in the process.

    Is it important that we have that access? You bet. As Mr. Quinn said, Rochester, New York in the last 8 years has had a state-of-the-art airport. For years, we struggled along with a nice, little 1930s airport. Does it matter in my district? Let me tell you how important it is.

    Rochester, New York, Monroe County and the surrounding area exports more goods than all but nine States in the United States. We have enjoyed an extraordinary, thriving community of manufacturing and sending out goods to the rest of the country and that is beginning to change.

    A few years ago, the Gannett organization, which was a Rochester company, moved their headquarters to Reston, Virginia because of the problems with the airlines, the inability to get a decent schedule and to pay the cost.

    Just recently, the Atlanta Business Journal reported that Eastman Kodak is moving its Marketing Division to Atlanta because of airlines. The first issue they pointed to was the inability to get good flights in and out of Rochester.

    As I pronounce the words, Eastman Kodak is moving its Marketing Division. I can't possibly in that pronunciation say to you mentally what that means to Rochester, New York. Rochester and Kodak are synonymous.
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    If this starts to crumble and we start to see those major corporations which had been the backbone of the industry in my community since almost the beginning of time, where do we go from there?

    I recently had a letter from a man who is building a small and thriving business in Rochester. He wrote to me that because of the cost of the airline fare in and out of Rochester, he decided not to expand his job there, but is creating his new jobs in the mid-Atlantic region.

    Mr. Chairman, I cannot overreact here to say to you how important it is that we not let any part of this country economic policy be set by airlines. This is a dangerous trend that's been going on in the country that frankly we've ignored too long.

    That's why I'm so grateful to you for holding this hearing this morning. I'm happy to hear from all the members of this committee who have said you too are experiencing the same kind of problem.

    As we struggle to go into the next century, and we want our economic footing to be sound and secure, we have to recognize that a very large part of that is our access to reasonable, to efficient, and to convenient transportation.

    I really look forward to working with all of you on this committee to make sure that we see to it that we reverse this dangerous trend and not punish parts of the country or use them as cash pals to make up for lower fares elsewhere.
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    Let me leave you with one example, if I may. A recent report that we saw said that one could fly from Louisville, Kentucky, a comparable size city to Rochester, to Chicago for $79. A flight from Rochester to Chicago is almost $500. If you recall, we said it was 336 percent higher to fly out of Rochester than out of major airports. You can understand what I'm talking about when I give you that example.

    This really has to stop, Mr. Chairman. It's far too destructive to our economy.

    Thank you.

    Mr. DUNCAN. Thank you very much, Ms. Slaughter.

    It's obvious that travelers in certain areas are subsidizing travelers in other areas. Certainly this is a nationwide issue and the purpose of this hearing is not only to express our concern, but to learn more about this and hopefully encourage some action. If we don't get action through encouragement, then possibly we may have to consider some type of legislative remedy.

    Mr. DUNCAN. We'll proceed with this and we're certainly honored also to have one of the leading members of the House here, a very respected member, Mr. LaFalce. Mr. LaFalce, you may begin your testimony.

    Mr. LAFALCE. Mr. Chairman, thank you very much for those kind comments, Mr. Oberstar and other friends and members of this committee.
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    I have the pleasure of representing the citizens of both the City of Buffalo and the City of Rochester. My citizenry use both airports or one of the two airports.

    Very frequently people say when you're from New York, they think of New York City. Well, there's more to New York State than New York City. There's upstate New York. It's a very important part of the State of New York. We have cities like Albany, Syracuse, Rochester and Buffalo.

    We lost out in deregulation. Deregulation had its winners and deregulation had its losers, but all of upstate New York has lost significantly because of deregulation.

    Each and every one of your communities has at least some areas that have lost out because of deregulation. We can't accept that status quo. The concept of deregulation works in a classic market situation where there is plenty of competition, but we do not have classic market competition everywhere.

    You might have it in New York City, you might have it in Los Angeles, but you don't have it in Buffalo and you don't have it in Rochester, and you don't have it in hundreds and thousands of airport communities across the United States.

    Let me focus on my district now. DOT did a study recently, a ''Domestic Airline Fares Consumer Report.'' It was issued last week. DOT found that passengers using the Greater Buffalo International Airport pay an average of 27 cents per mile. That's the second highest airfare in the United States of America.
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    So when we say we have a complaint, boy, we have a complaint that's at the very top of the list. Charlotte, North Carolina, where US Airways is also the dominant airline, was the worst or the most expensive.

    Some examples, the lowest round-trip, walk-up fare from Buffalo to Washington, DC costs $664. One can fly from Chicago to Washington under walk-up conditions for $236. I don't have to tell you how this places a huge financial burden on Buffalo travelers frequently unable to book their flights in advance over a Saturday in order to take advantage of these specials that have huge penalties if your plans should change even a bit.

    Rochester, New York, was not included in the Domestic Airline Fares Consumer Report but had it been, I know it would have had a very similar result.

    More shocking are the fares faced by travelers to in-state destinations. The 292-mile flight from Buffalo to New York City, for example, costs more than the 1,433-mile flight from Omaha to San Francisco. A round-trip flight from Rochester to Albany, a route frequently traveled by State employees, costs $430, more than some airlines charge to fly to Europe.

    One reason for these outrageous rates is the lack of competition at our Buffalo and Rochester airports and the complete absence of low-cost carriers.

    What do we do about it? I'm going to make five specific suggestions. First, I would propose the establishment of a bipartisan legislative commission to explore how Congress can assist airlines in providing improved service and lowering fares for communities like Buffalo and Rochester.
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    Second, I suggest this subcommittee consider legislation that would pressure airlines to offer good, reasonably priced service to middle-sized cities by tying the assignment of gate slots at hub airports to an airline's service to smaller regions.

    Third, I believe that we should encourage the DOT to continue to issue domestic airline fares consumer reports, at least on a quarterly basis, and expand the report to include data on on-time performance, lost baggage and consumer complaints.

    Regular monitoring through these DOT reports will alert low-cost carriers to potential markets for entry and will spur existing airlines to improve. If I were a low-cost airline provider, I'd look at the DOT consumer report and I'd say, let me look at the worst, the second worst, the third worst, because these have to be communities crying out for another airline.

    Fourth, the Department of Transportation should use its authority to more aggressively redistribute airport slots and gate positions to new entrants. The 1996 GAO report recommended that the Secretary of Transportation create a pool of available slots by periodically withdrawing some slots that were grandfathered to major carriers and holding a lottery to distribute them to low-cost carriers.

    The report similarly recommended that the Secretary direct the FAA, when it makes decisions on airport grants, to consider an airport's efforts to have gates available to new carriers. I urge the Secretary to follow through on these recommendations and for this subcommittee to work closely with the Secretary in that effort.
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    Fifth, the DOT, the Department of Justice, and the U.S. Congress should actively investigate anticompetitive activity and predatory practices that have been alleged by smaller airlines. The Executive Branch agencies must use their authority to prosecute antitrust violations and protect the rights of consumers. The Congress should consider whether remedial legislation is necessary to deal with the problems in uncompetitive market areas.

    Importantly, all parties involved should collaborate to deal with this problem. Local travel-related industries, airlines, State and local officials must work together to develop alternatives to Federal regulation to drive down airfares.

    In conclusion, Mr. Chairman, the DOT Consumer Report and similar studies clearly show that high airfares are a serious problem for the traveling public, particularly in medium-sized cities like Buffalo and Rochester.

    It's time to take aggressive measures to promote competition and reduce fares for these communities. This subcommittee, this committee has a great responsibility to take those aggressive measures.

    I commend you, Mr. Chairman, for this hearing. I look forward to working with you in the future.

    Mr. DUNCAN. Thank you very much, Mr. LaFalce, for your testimony and your suggestions. Certainly we will consider everything you've said. We appreciate your hard work on this.
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    On this subcommittee, I generally follow a policy because we know members are so busy and because we have a chance to talk to them on the floor and at other times and also in order to get to the other witnesses more quickly, I generally request that members reserve any questions for the members panels.

    So we appreciate your coming here. I'd like to call on Mr. Oberstar though to see if he has any comments about the testimony by the members at this point?

    Mr. OBERSTAR. I agree with you we should allow our colleagues to go on about their business except for Mr. Quinn. He should stay here as a member of the committee, and my classmate, Mr. LaFalce, of the class of 1974.

    You both have offered some very thoughtful suggestions. I would say, Mr. Quinn, your suggestion of a medium-sized airport fund for subsidizing air service, we did that in 1978. It was called Essential Air Service (ESA). It was for the much smaller cities, cities like those in my district where to get there, you have to be born there if you don't have air service.

    It's an idea that we could take further, but the trouble is the Appropriations Committee has, every year, cut and cut and cut the funds for EAS, but if we get enough people like you stirred up about this, we could revive the idea.

    The slot allocation suggestions that both of you have offered create a number of procedural problems I'll just say at the outset. I can imagine United Airlines, American Airlines, big slotholders at O'Hare, just quaking in their shoes about withdrawing slots they paid tens of millions of dollars to acquire and which they are required annually to give up to international service under our international bilaterals in order to allow international carriers to come in.
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    Then what do they do, they have to turn around and buy slots from small carriers who would serve your cities and pay millions of dollars, so this is a complex problem.

    Mr. LAFALCE. Mr. Chairman, if I may refer to you in that way, the Damoclean sword of slots is a serious one, but when it hangs over someone's head, sometimes it doesn't have to be utilized in order to yield results.

    Mr. OBERSTAR. Mr. Poshard has the problem downstate Illinois of cities that can't get access to O'Hare because the small carriers serving those small towns can't buy the slots to get into O'Hare in the first place.

    You've touched on the key issues—predatory practices—the trouble is there has been no clear definition of what predatory pricing is and the Justice Department hasn't been able to pursue it.

    I got on my knees and prayed in the early days of deregulation for a vigorous antitrust investigation by the Justice Department, but the trouble is the Justice Department in the 1980s never met a merger they didn't like.

    With that, thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you, Mr. Oberstar.

    Thank you very much Mr. LaFalce and Mr. Quinn.
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    Now that we have concluded the members, we will call up the first panel and ask that each of the witnesses on the first panel please take their seats at the table.

    We have a very distinguished panel which starts with Mr. Patrick V. Murphy, Deputy Assistant Secretary for Aviation and International Affairs, Department of Transportation; Mr. John H. Anderson, Jr., Director, Transportation Issues, Resources, Community and Economic Development Division, General Accounting Office, accompanied by Mr. Timothy Hannegan, Assistant Director, Aviation Competition Issues, General Accounting Office; Mr. H. Hugh Davis, Jr., President, Chattanooga Metropolitan Airport Authority, Chattanooga, Tennessee; Mr. Robert D. Hancik, Director of Aviation, City of Springfield Airport Board, Springfield-Branson Regional Airport; and Mr. B. Fielding Rolston, Vice President, Customer Service and Materials Management, Eastman Chemical Company.

    Gentlemen, it's a privilege to have you with us. We generally proceed in the order in which witnesses are listed on the official notice of the hearing and that means that Mr. Murphy, we will start with you. Thank you for being with us once again.

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    Mr. PATRICK MURPHY. Good morning, Mr. Chairman.

    I would ask that I have my full statement entered into the record.

    Mr. DUNCAN. Yes. I should have mentioned that, but all of the witnesses today will have their full statements entered into the record and they may proceed with whatever comments they deem appropriate but the full statements will be made a part of the official record.

    Mr. PATRICK MURPHY. Let me say at the outset, that the Department of Transportation takes very seriously our primary economic policy set out in our implementing aviation statute which is the promotion of efficient and low-cost service, and the maintenance of competition in the domestic airline industry.

    As a general matter, the Department's past studies and its ongoing analysis of the domestic industry lead us to conclude that deregulation continues to be an enormous success in bringing better service and lower fares to the vast majority of consumers and cities of all sizes.

    Average inflation-adjusted fares have continued a long-term trend downward through last year. That does not mean that there are no problems, however. Our studies have demonstrated that not all travelers and markets have enjoyed the same level of benefits.

    Large communities that serve as connecting hubs for one dominant carrier tend to have high local fares. We have observed that this hub-related fare premium problem can be addressed in the marketplace where new airline entry has occurred. However, where competition from new entrant airlines has not developed, hub fare premiums persist and may, in fact, be increasing.
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    At the other end of the market size spectrum, fares and service at small communities have also benefitted from deregulation and of course, we have the Essential Air Service Program to address communities so small as to require a Federal subsidy to maintain service.

    Medium-sized communities have, in the past, tended not to be singled out in the public discussion. For the most part, medium-sized communities have done well under deregulation. They are large enough to be attractive spokes for airline networks, they generally receive good nonstop service to multiple hubs, and convenient and competitive connecting service options to most of the popular destinations around the country. In addition, the recent introduction of regional jets in the industry could further assist these mid-sized communities.

    At the national level, the Department also believes that new entry and low-fare service is a necessary element in a deregulated domestic air service market. In April of last year, the Department published a study entitled, ''The Low Cost Airline Service Revolution.'' That study documented how competition from Southwest Airlines and other new entrant airlines was growing rapidly and saving consumers an estimated $6 billion annually.

    It noted that virtually all of the domestic traffic growth in recent years was due to the competitive impact of low-fare carriers. However, over the past year, we have become aware that the spread of competition from low-fare service may be in jeopardy. We are receiving an increasing number of complaints from smaller carriers about anticompetitive activity.

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    The complaints we are hearing from small carriers typically include the larger airlines temporarily matching or allegedly undercutting the much lower fares these low-cost carriers can provide. Also, we hear about larger airlines offering increased number of seats in markets at these low fares in an alleged attempt to eliminate the new entrants from the market. This extra capacity is often accomplished by bracketing with extra flights the flight times of the new carriers.

    While the Department has not come to any definitive conclusions about these complaints, the complaints have raised a concern about the need for appropriate action. Both the Department of Transportation and the Antitrust Division of the Department of Justice are studying cases where predatory practices have been alleged by smaller carriers. Recently a senior Justice Department official noted ''The structure of the airline industry is conducive to successful predation strategies.''

    As an aid in our efforts to enhance competition, to educate the consumers and civic leaders and encourage new entry, earlier this month, the Department released the first of what is to be a regular, quarterly report on airfares using data reported to the Department by the airlines.

    This report confirms again that deregulation is working. Many more passengers are paying low fares than high fares, but the report highlights the persistent problem the Department has noted for years, high fares in some network hubs. The data show very significant differences in air fares in markets of comparable distances.

    Mr. Chairman, I must tell you that there are those in the industry who are unhappy that we released this data. They argue it is a first step towards reregulation. They also claim it will confuse the public.
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    We at DOT don't believe the public will be so easily confused. In fact, I believe this data, which has been collected for 20 years, is information the public is entitled to see. Economists have long held that competition is improved by better information for buyers and sellers. We are trying to provide that information.

    The Consumers Union of America appears to agree with our concept of providing more information. Consumer Report Magazine just out for the month of July covers the high airfare phenomenon by presenting airfare data and showing the same dramatic differences that we have shown.

    The Consumers Union last week petitioned the Department to conduct a rulemaking that would result in mandating that average fare and lowest fare information be available to consumers whenever they contact an airline or a travel agent. We are now very carefully considering this recommendation.

    Other actions we are considering to enhance competition include new policy on airport takeoff and landing slot exemptions. This policy would take competition into consideration when evaluating exemption requests. There are several applications now before the Department that could come under this new policy.

    I can assure you the charge that the Department's efforts to promote effective competition represent a step towards reregulation is without merit. The initiatives that I have described are designed to ensure that the full benefits of deregulation are available to all Americans, whether they travel from major hubs, mid-sized communities, or airports serving rural America.
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    All of the actions and policies proposed, contemplated and taken are designed to help further open the U.S. domestic aviation market to entry and competition. Many mid-sized cities around the country already receive excellent service. Encouraging the growth of new carriers and competition is the most productive thing the Department can do to help assure that more medium-sized communities realize the full benefits of deregulation.

    Mr. DUNCAN. I certainly agree with you that increased competition, easier access to markets, all of these are key things. I'm pleased you are starting to take into consideration the factor of increased competition in these slots exemptions.

    Thank you, Mr. Murphy.

    Mr. DUNCAN. We will hear next from Mr. Anderson from the GAO.

    Mr. ANDERSON. Thank you, Mr. Chairman and members of the subcommittee.

    We're pleased to be here today to talk about the problems that have occurred in some parts of the country as a result of not benefitting from the lower fares and increased service of airline deregulation.

    Our work has consistently shown that deregulation has led to lower airfares and better service for most air travelers. This is due largely to increased competition spurred by the entry of new airlines into the industry and established airlines into the new markets.
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    However, some airports, particularly those serving small and medium-sized communities in the east and upper midwest have not experienced such entry and thus have experienced higher fares and/or worse service.

    Several factors have combined to limit competition at these airports including slower economic growth and the dominance of routes to and from those airports by one or two established airlines. In October 1996, we reported that operating barriers such as slots and restrictive gate leases at nearby hub airports and incumbent airline marketing strategies such as special incentives for travel agents have fortified these dominant positions.

    Because a variety of factors have contributed to the problems some communities have experienced since deregulation, it is likely that no single action will be able to solve those problems. Instead, addressing them will likely require a range of Federal, regional, local and private sector initiatives. I'd like to now briefly discuss some of these initiatives.

    Concerning what can be done at the Federal level, our October 1996 report recommended that DOT take some actions to reduce the operating barriers and increase competition at some airports. We suggested that DOT periodically withdraw a small percentage of slots from the major incumbents at each of the four slot-controlled airports—O'Hare, LaGuardia, Kennedy and National—and redistribute those slots in a fashion that increases competition.

    We also suggested that the Congress consider revising the legislative criteria governing the granting of slots to make it easier for new entrants to obtain slots.
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    Finally, we recommended that FAA consider an airports effort to make gates available to nonincumbents when making Federal airport grant decisions.

    In its January 1997 response to our report, DOT stated that it shared our concerns about the dominant position of some established carriers in some markets. DOT indicated, as Mr. Murphy has said, that it planned to be more accommodating to new entrant requests for slots and that it would seriously consider our recommendation on slot lotteries.

    Citing DOT's response to our report, several airlines have applied for slots at LaGuardia and O'Hare in order to serve medium-sized communities in the east and upper midwest. In May, for example, AirTran Airways requested slots at LaGuardia for nonstop service from Akron, Ohio, Knoxville, Tennessee and Bloomington and Moline, Illinois. DOT is considering these applications.

    Since our report, DOT has also developed some useful initiatives. As Mr. Murphy mentioned, the agency is publishing quarterly the average airfares for 1,000 domestic routes in part to highlight for consumers those markets where dominance by one carrier has led to significantly higher fares.

    Because Federal actions alone cannot solve these problems, community leaders in the southeast and Appalachia recently initiated a coordinated effort to improve air service in their region. Their efforts include convening periodic national air service roundtables to bring together Federal, State and local officials as well as airline, airport and business representatives.
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    On February 7, 1997, the first roundtable was held in Chattanooga and a second roundtable was planned for later this year in Jackson, Mississippi.

    We attended the February 1997 roundtable and came away convinced that greater regional, State and local efforts were needed to attract new as well as established airlines to adversely affected markets.

    Businesses located in the affected communities also have a key role to play. Clearly, business leaders are becoming increasingly concerned about the quality of service in some communities and the high fares they are paying in markets dominated by one established airline.

    One innovative private sector initiative involves major corporations working with nonincumbent airlines so that they can overcome the barriers and successfully compete against the dominant airline in the market. You'll hear more about this initiative from Mr. Mitchell who is serving on the next panel.

    In addition to public and private sector initiatives, the increasing use of 50–70 seat regional jets is improving the quality of air service for a growing number of communities. If this trend continues, regional jets offer the promise of mitigating the problems of some communities adversely affected since deregulation and buttressing public and private initiatives already underway to address those problems.

    The benefits of regional jets are only beginning to emerge. As of January 1997, regional jets accounted for only about 4 percent of the more than 2,000 commuter aircraft in service. However, commuter carriers currently have on order over 200 regional jets for delivery over the next several years and have placed options to buy over 400 more.
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    Moreover, communities could accelerate this trend by providing incentives for commuter carriers to serve their airports with regional jets.

    This concludes my statement and we'll be glad to answer questions.

    Mr. DUNCAN. Thank you very much, Mr. Anderson.

    Mr. DUNCAN. The next witness is Mr. Hugh Davis, President, Chattanooga Metropolitan Airport Authority.

    Mr. Davis?

    Mr. DAVIS. Mr. Chairman and members, I thank you for a chance to meet with you today and to raise this issue.

    As you all know quite well and have heard quite eloquently from others who have already spoken, many mid-sized communities are faced with a serious challenge to their long-term economic health due primarily to air service.

    In early August 1995, Delta Airlines announced it would end a 50-year relationship with Chattanooga the following December. On that date, Atlantic-Southeast Airlines took over the connecting service to Atlanta and they got off to a horrendous start with numerous cancellations, delays and countless lost or misplaced bags.

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    At that time, we were already losing a number of passengers to Atlanta due to the competition ValuJet had brought to that market. Now the stream became a flood. Six months ago, as many as 60 percent of our potential air passengers were originating their trips primarily in Atlanta, but also thanks to Southwest, also in Birmingham and Nashville.

    In April 1996, Mr. Anderson's office released a report on the effects of deregulation. Using survey data from 112 airports, the GAO listed those cities that benefitted from lower fares and better services. Unfortunately, it listed many others, primarily in the Great Lakes area and along the Appalachian spine, that experienced diminished service and/or higher fares. Chattanooga is one of the latter.

    Our Congressman, Zack Wamp, invited Mr. Anderson and Mr. Hannegan to Chattanooga for a meeting with area leaders. They presented updated data for the report and this was very helpful in raising the awareness locally that the problem was truly national.

    We could have accepted the information and decided there was really nothing we could do. Rather, we took the report as a call to action. We sent copies of the report to many airlines, all of those who serve Chattanooga and many of those who do not. This resulted in the addition of some very competitive fares to our market and some very interesting replies from some of the carriers who do not serve us. We're grateful for that positive response.

    Concurrently, Mr. Wamp began his effort to form the Spokes Coalition. I urge you, if you have not done so at this time, to please join Mr. Wamp in this coalition.

    This past September, we were invited to testify before the Senate Aviation Subcommittee. The hearing was to be a great opportunity to raise the plight of mid-sized communities air service to a national level.
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    Unfortunately, the hearing was canceled at the last minute. Given the importance of the issue, we continued to look for a forum and with the unflagging support of Congressman Wamp and Senator Bill Frist, the idea of the National Air Service Roundtable was born.

    On February 7, 1997, nearly 150 people gathered in Chattanooga to discuss air service problems and solutions. Representatives from Washington State, Pennsylvania, Florida, Texas and points in between came together in a roundtable setting. Mr. Anderson, Mr. Hannegan, Secretary Murphy were there as well as NTSB Chairman Jim Hall and the representatives of 11 airlines.

    The consensus report from the roundtable lists six recommendations for action and they are as follows. Consumer education. We must make our airport users and our communities aware of the problems we face; encourage them to use the service we have and support new service as it comes on line.

    Local financial incentives. It has become commonplace for carriers to ask for or for communities to offer guaranteed seat sales, marketing funds or even reduced rates and charges. The DOT and the Department of Justice must address anti-competitive marketing practices.

    If we are to survive as viable air service markets, we must have competition. Its effect on airfares can be dramatic. For example, a one-way, walk-up fare from Knoxville to Washington is $345 or 80 cents per mile. From Chicago, it's $523 or 88 cents and from Duluth, $544 or 60 cents. From Pittsburgh, it's $302 or $1.20 per mile.
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    Contrast that with your fellow members who go home to Fort Lauderdale for $165 one way or 18 cents a mile; Savannah for $209, 40 cents a mile; or Louisville at $297, 48 cents a mile. The first four cities average 88 cents per mile travel; the second three average 35 cents. The difference is simply competition. It must be encouraged and should be protected from clearly predatory and anticompetitive behavior.

    The fourth suggestion is the competitive access to gates. It's already been mentioned today that in some communities, gates are dominated by one or a few carriers and access for new entrants or startup carriers is difficult if not impossible.

    New slot allocations, the Department of Transportation should review the existing slot allocation mechanism. As currently practiced, the system denies economical entry for startup carriers as well as denying direct access to the primary business markets of many communities.

    Chattanooga is currently party to an application for nonstop service to O'Hare by United Express. Also included in that application are Tri-Cities, Tennessee, Asheville, North Carolina and Roanoke, Virginia. All are cities shown by the GAO to have suffered losses due to deregulation.

    An interesting way to address the issue would be to allocate slots directly to the communities. This would empower them to negotiate for competitive fares and a level of service they found acceptable.

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    Fiscal flexibility, I mentioned earlier the incentives and marketing funds being asked for and offered for new or improved service. Many mid-sized communities are constrained by their operating income. Even finding funds to market existing service is sometimes difficult. Allowing the use of PFC funds with an increased cap for legitimate airport expenses, especially air service development and marketing, would provide a more level playing field with our larger, nearby neighbors.

    In summary, access to slots and fiscal freedom will contribute to our ability to compete.

    Finally, if we do not find solutions to declining air service in many mid-sized and smaller communities, we will see a real shift in our economy. Businesses will have to locate or relocate in or near those communities with quality air service. Those other, less fortunate communities will lose jobs, tax revenues and ultimately their life's blood.

    We're not here to ask for reregulation, just for the opportunity and the tools with which we can compete.

    Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you very much, Mr. Davis.

    We will next hear from Mr. Hancik.

    Mr. HANCIK. Good morning, Chairman Duncan, Mr. Blunt and members of the Aviation Subcommittee.
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    The City of Springfield, Missouri, which owns and operates the Springfield-Branson Regional Airport, services a 21-county area within a 60-mile radius having a population base of about 770,000 to give you an idea of the area we serve.

    I believe we all recognize the issue. I would like to provide some insight from our community which is representative of many cities our size across the country.

    I've been the Director of Aviation in Springfield for 25 years and I testified at the House hearings on deregulation of the airline industry. At that time, we did not support deregulation. However, history evidences airline deregulation has been positive for our community. We went from two to six to seven airlines, depending on when you want to count them and overall, we have excellent air service for a town our size. We can travel just about anyplace we want to go through a major hub airport.

    We do, however, have a major airfare issue. Both the perception and the reality of high Springfield airfares is that you can save hundreds of dollars by driving to Tulsa, St. Louis, and Kansas City are real.

    In February of this year, we completed an air service study which documented that 31 percent of our traffic was driving 3 1/2 hours to another airport. This is good, solid data based on 75,000 actual airline tickets written by five of our travel agencies.

    Springfield had impressive growth partly due to the tourism of Branson, Springfield just south of us of 7.6 percent from 1990 to 1995. Traffic grew by double digits from 1992 through 1994. In 1995, traffic started to decline and now it has leveled off. It can be evidenced that with growth stopped, fares dramatically had increased.
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    Communities feeding passengers to the hub are paying the price to subsidize high cost carriers so they can compete with the low cost, new entrant carriers in competitive markets. As an example, on this trip, Springfield to Washington National was over $1,175 round-trip as opposed to flying into Baltimore, Maryland, $214 round-trip, same airline, one airport with low cost competition, one without.

    A round-trip Springfield-Dallas ticket, 364 miles, $678 but by driving to Tulsa, $128; round-trip Springfield-St. Louis, 195 air miles, $862.

    I provide you with reams of fare variations to many destinations and the airlines can argue there are cheaper fares available, but the bottom line is the fares to the hub are expensive. Remember, most communities our size do not have, nor can they support, more than one airline to a particular hub. Monopolistic pricing yields three to four times the industry average.

    Analysis of the fare component of a ticket shows that fares from the spoke airport exceeds the fare from the hub to the passenger's destination. Therefore, airlines suffer a loss of revenue from passengers when they drive to other hubs as they normally don't capture that passenger. It's difficult to understand why incumbent carriers charge fares and drive passengers to their competition.

    This is interesting. Recently, an airline fare promotion was thought to be available in Springfield. A release to the media caused a mad scramble for deep discount tickets in the community overloading the travel agents and the airlines. I think it just demonstrated that there is a vast, untapped market if reasonable fares were available.
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    Submitted with the written testimony is evidence of the concern of our community. I've submitted to you numerous articles including editorials to fix the fares. Obviously we have little influence or control over airline fares. The airlines without direct competition charge what the market will bear resulting in predatory pricing forcing customers to drive.

    Although not the intention, new Federal law on air route and diversion can be used by incumbent carriers to curtail air service enhancement efforts and creative ideas through market development.

    Mr. DUNCAN. Mr. Hancik, let me apologize to you and the other witnesses. We do have a couple of votes going on on the floor right at this time and as sometimes happens, we will have to interrupt the hearing at this point. We will proceed again as soon as possible.

    We will be in recess. Thank you very much.


    Mr. DUNCAN. We are going to start back with the hearing. We are going to be joined by some other members.

    We had to interrupt Mr. Hancik in the middle of his testimony and we apologize once again. Mr. Hancik, as I mentioned earlier, is Director of Aviation for the City of Springfield, Missouri, the Springfield-Branson Regional Airport.
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    Mr. Hancik, you may proceed with your testimony.

    Mr. HANCIK. Thank you, Mr. Chairman.

    I'll start where I left off. I think this is a very important point I'd like to make that although it was not the intention but new Federal law on airport revenue diversion can be used by incumbent carriers to curtail air service enhancement efforts and creative ideas through market development of the community.

    A community such as Springfield, I believe, cannot expect to have fares offered as available in the major hubs. Obviously there is a value to our customers not having to face a 3 1/2 hour drive to and from the airport. The cost of service, however, should not be 50 to 70 percent of the total ticket cost and utilized to subsidize competitive low cost fares. Yes, there is a cost associated with living in a nonmetropolitan area, but that cost should not be discriminatory.

    Serving the public need and convenience was a textbook principle I remember back in college dealing with transportation. It has all but disappeared in the air transportation industry. Our country's mass transportation system is the tying of our communities and our Nation together with air transportation.

    Our citizens should have access to an airport within reasonable driving distance and reasonable fares. Inevitably, people driving to major metropolitan airports will result in the demise of air service as we know it in our communities today.
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    Even more critical, one can envision what happens when commerce vacates the smaller communities in favor of the metropolitan areas which have affordable airfares.

    The solution, if any, is going to be very difficult. Communities are looking to the airport boards and their airport managers for solutions. The fact is we really can't do anything about airfares, the response is unacceptable in our community.

    I am not proposing reregulation, I believe some other financial or pricing vehicle needs to be developed to balance discriminatory and unfair inequities. It seems reasonable that a fare available at a connecting hub airport should be available to our market, plus a reasonable add-on that doesn't force the passenger 2 to 3 hours to get an affordable fare.

    Communities have offered airlines subsidies for service which I believe just escalates the problem and communities have even toyed with starting their own airlines to achieve affordable airfares. You can imagine Springfield Airline running in competition with TWA and the impact that would have on our carrier.

    I think it needs to be noted that there are so many communities out there with our kinds of problems, but there are very little assets for us to go to. There aren't that many airlines out there that we can all go and get the service. I think Congress needs to look at lifting some of the barriers to allow for new and existing low-cost carriers to expand and become competitive with the historic higher cost airlines.

    Thank you.
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    Mr. DUNCAN. Thank you very much, Mr. Hancik.

    Next, we will hear from Mr. B. Fielding Rolston, Vice President for the Eastman Chemical Company.

    Mr. Rolston?

    Mr. ROLSTON. Mr. Chairman, members of the committee, I certainly appreciate the opportunity to be here today.

    I want to share with you some of the concerns that a number of us in the business community have with the quality of air service in small and medium-sized airports.

    I'm really here today in place of Wiley Bourne, the Vice Chairman of our board, who is very interested in this subject but unfortunately, due to an illness, he could not be here today and sends his regrets. I want to thank you for giving me this opportunity and I certainly commend you for holding these hearings.

    To give just a brief bit of background, Eastman is an international manufacturer of chemicals, fibers and plastics. We're headquartered in the city of Kingsford in the northeastern part of Tennessee. Our offices and manufacturing site give us the distinction of being Tennessee's largest manufacturing employer as well as Tennessee's largest exporter.

    In recent years, our business efforts have been very much hampered by consistently poor air service to Tri-Cities Regional Airport which services, at the present time, 1.5 million people in a five-State area.
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    We understand that there are underlying causes for this poor service, but it is the poor service itself that is making it difficult for us to do business in an ever growing global economy. Now, more than ever, we're trying to attract customers and suppliers to our headquarters from literally around the world. Now, more than ever, we're finding it is extremely challenging and difficult to do so.

    It is no problem for them to get to New York, to Chicago or to Miami, but it certainly is a problem for them to get to northeast Tennessee and this is becoming even more difficult.

    The problem, as we see it, began with airline deregulation two decades ago. Deregulation did exactly what it was supposed to do for a majority of the country. It lowered fares, created competition and increased service for many communities.

    One of the unintended consequences, however, has left other communities like ours in Kingsford in much worse shape. We're just now beginning to really experience the full impact of that.

    As you know, one of the legacies of deregulation is the so-called hub and spoke system. I do not claim to be an expert on the airline industry, but as a businessman I can easily see how market forces and fierce competition pushed the industry to consolidate and to streamline operations in the manner they have done.

    The result is what is important to us. The result is that with the abolishment of the Civil Aeronautics Board, small and mid-sized communities and airports no longer have a seat at the table when it comes to securing quality air service. We have been squeezed out by an airline industry that has a stranglehold on the Nation's major hubs. They control the landing times, their slots at most of the congested airports and they have secured exclusive, long-term rights to terminal gates.
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    Because they control the hubs in this manner, they also control the spoke. For us, as one of the spokes in the system, it means that they can give us good service if they want to, but if they don't, there is nothing we can do about it. Believe me, we've certainly tried.

    Our airport commission has worked diligently to secure better service but neither they nor we, as Eastman, have the power to take the necessary steps to introduce more competition. Congress can do that for us by allocating a portion of the slots and gates at major hub airports to nonhub airports as opposed to allocating to the same airlines. This should be done based on passenger counts.

    With available slots and gates, we can find regional jets to fly those routes and bring competition to areas of the country where it is most needed.

    I told you at the beginning that I'm here to represent the business community. I say that again because I want to underscore the fact that as a company in a very competitive and regulated field, we do understand how supply and demand works, we do understand marketplace realities, and we do understand the limitations of legislation and regulation in solving societal problems.

    We also understand that this is a larger question than just whether the airlines need more competition. It is a question of whether this country wants an airline industry that essentially ignores 20 percent of the communities and airports in the Nation. It's a question of whether we're willing to let the small and medium-sized communities, and all of the companies that call these communities home, fall by the wayside as they find it more and more difficult to attract and keep good businesses.
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    Deregulation has worked for 80 percent of the country and we're certainly not asking for reregulation, but we are asking that deregulation be taken one step further. By providing greater access to gates and slots, we can introduce competition and then let the market take over. In doing so, we can ensure that small and medium-sized communities again have a seat at the table and a gate at the terminal.

    Again, I want to thank you for letting me share my concerns with you and certainly commend you for holding these hearings.

    Mr. DUNCAN. Mr. Rolston, thank you very much.

    As all of you know, we've had 15 to 18 members here this morning and we've got great interest in this hearing. I've heard several comments on the floor during our earlier votes, but we are between votes now. We have another vote coming up shortly, so we're going to have other members back here later.

    At this point, I'd like my good friend, Mr. Traficant, is here with us and I would like to call on him for any comments or suggestions, opinions, thoughts or questions he has at this time. Mr. Traficant?

    Mr. TRAFICANT. I want to thank the Chairman and I also want to say I have never seen this subcommittee more active and I think you rival Mr. Oberstar in the types of things that have been done in the past. Mr. Oberstar is certainly the expert on our side. He has been called unfortunately to another meeting.
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    I think Mr. Duncan is beginning to focus in on some of the problems that exist and I have a few points and a couple of questions. I would ask in addition, Mr. Chairman, unanimous consent to submit the questions I do not ask here verbally in writing and ask those answers be returned in an expeditious manner and spread across the record.

    Mr. DUNCAN. Certainly. That may be done. Thank you.

    Mr. TRAFICANT. One of the points I'd like to make is I think it will be stated later that in 1996, fares at the larger hubs were 29 percent lower than they would have been in the regulated environment. On average, fares at medium hub airports are 32 percent lower and fares at small hub airports are 17 percent lower than they would have been under regulation.

    I want to know just briefly if this is true, and if this is the case, are the airports testifying before us today the exception to the benefits they believe have been obtained for all categories of airports under deregulation?

    Maybe I'll call upon Mr. Murphy to answer that one so we can move expeditiously move since we have a vote coming up shortly.

    Mr. MURPHY. Congressman, I think your data are consistent with what we have found, that across the board for the nearly 600 airports in this country of various sizes, deregulation has lowered fares.

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    However, in that large number of airports there are communities that have not done so well. Some have described it as winners and losers and some communities have not had the full benefit of lower fares and better service.

    Mr. TRAFICANT. On another issue, some of the incentives being discussed today include local government or corporate contributions to carrier marketing, public education, Federal redistribution of slots, the allocation of slots.

    The question I have is, when a mid-sized community is located within 2 hours of a major national hub, will any amount of incentives discourage residents from taking advantage of what they perceive at least to be, if not in fact a reality, greater service options offered at these major hubs?

    Mr. PATRICK MURPHY. The major hubs, especially if those hubs do not have large fare premiums, and there are some major hubs where the fares are very high, but the typical major hub will attract people from many, many miles and it is very difficult for small communities to thrive if they are too close.

    The one thing that we have seen that will revitalize a market no matter how close it is to a major hub is if a low fare service comes into that market and then people will reverse commute away from the big city to the smaller city to get on that low fare air service.

    Mr. TRAFICANT. I'm going to close out my comments and just state I believe we'll be looking into the option of allocating slots directly to the communities as a way of ensuring that a community retains service to important markets.
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    I know that Mr. Duncan has great interest in this and I believe he is on target in looking at an opportunity to ensure some stability to the entire Nation and its flying hubs and its flying passengers.

    I'm more interested in analyzing more or less what you say and what you do and I will be following the lead of Mr. Oberstar and Mr. Duncan. I think those two are pretty much on track.

    I want to commend you, Mr. Chairman, for this hearing and support your efforts.

    Mr. DUNCAN. Thank you very much, Mr. Traficant.

    Let me apologize once again to the witnesses. We do have to cast one vote and that will be our final interruption for quite some time.

    We will be in recess and then we will proceed with the questions after this vote.

    Thank you.


    Mr. DUNCAN. We will go ahead and get started. That should be the end of votes for at least a hour or so unless something very unexpected happens.
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    We'll ask that the witnesses take their seats at the witness table once again, please.

    I understand because of limited air service, Mr. Rolston had to go ahead and leave.


    Mr. DUNCAN. Mr. Davis, you heard me mention earlier something to the effect that questions about air service were among the first that new businesses or new industries ask when considering a move into a new area. Have you noticed that the problems the Chattanooga Airport has been having have affected the economic development of your area?

    Mr. DAVIS. Yes, sir. This past year, convention bookings in Chattanooga were down $3 million from the previous year and the number one item cited by the meeting planners that were contacted was air service, either the fare or the type of air service coming into the community.

    It's interesting in one of the other comments made from one of the members who testified earlier, talking about Eastman Kodak relocating. Just a few months ago, one of my staff and I made a call on a Chattanooga business that was founded in Chattanooga, has been there for many, many years, a name with which everyone here would be familiar, and they told us if we were unable to get some resolution on airfares fairly shortly, they would have to relocate their corporate and sales offices to another location with better air service.
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    We fortunately got a very good response from USAir to help them with a contract that has lowered the fare and at this time, they have delayed any action but those are very disturbing potential acts for a community trying to build itself and keep itself viable.

    Mr. DUNCAN. You may know that in and around Knoxville where I'm from is an area that is experiencing tremendous, unbelievable growth. That, I think, is helping our airport or helping us attract new service and so forth.

    Are you experiencing similar growth in and around Chattanooga and leading from that, do you think that growth is going to help you take care of some of these problems?

    You heard Mr. Traficant a minute ago say words to the effect that he thought there was almost nothing that we could do for an airport that was less than a 2-hour drive to some major hub. Do you feel that most of your problems stem from the fact that you are so close to the Atlanta Airport? You're what, about 100 miles or so from the Atlanta Airport?

    Mr. DAVIS. Yes, sir.

    To answer your questions in the order they were asked, yes, we are experiencing very good growth. Unfortunately, a good bit of that business growth and the traffic it generates is going to Atlanta but I would agree with Mr. Murphy and disagree with Mr. Traficant that if we had a competitive airfare market, the entry of a low-fare carrier offering alternatives which kept fares competitive—our 21-day fares or leisure fares are really very competitive. The problem we have generally speaking is with the business fare.
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    If we had a low-fare carrier making that segment of the market more competitive, then we could reverse a good bit of the trend to go to Atlanta because a great deal of the traffic going to Atlanta is out of the northwest Georgia area, not so much the southeast Tennessee area.

    Mr. DUNCAN. Let me ask a question to all of the witnesses. Mr. Hannegan didn't testify but he's in charge of airline competition issues, so this is an appropriate question for him.

    Everybody here today, the members and the witnesses basically have all said that deregulation has been a good thing, it's improved air service, it's brought down cost and so forth. I guess it was Mr. Rolston who said it had been good for 80 percent of the country, but 20 percent had suffered.

    We know from the members and others have testified this is a problem all over the entire country. It's not just isolated and yet everybody says deregulation has been a good thing but they seem to want something to be done. They don't want to call it reregulation though.

    Is some limited, very limited form of reregulation going to have to occur to solve this problem or can the suggestion about slots that Mr. Rolston made, he seemed to limit his advocacy to that? Is there something we can do that won't be called reregulation but will be action that can help solve this problem? What do you say about that? Mr. Hannegan, let's hear from you first since you didn't make a formal statement.
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    Mr. HANNEGAN. I believe that there are so many innovative ideas that haven't been tried yet that aren't even near reregulation.

    Mr. DUNCAN. Like what specifically?

    Mr. HANNEGAN. Such as what Mr. Murphy's office is putting out, consumer airfare reports, educating the consumers, tinkering with the slot rules, the slot exemptions, trying to inject competition into some of the problem markets. I think we should try these first before we go talk about reregulation.

    The way I look at it is that deregulation has benefitted 70 percent to 75 percent of the country. However, about 30 percent hasn't. How you address that 30 percent problem without ruining it for the other 70 percent is not easy. However, I think there are a number of things we can try.

    Mr. DUNCAN. That would be an extremely difficult thing to do, wouldn't it.

    Mr. Murphy, what do you say?

    Mr. MURPHY. First of all, I would agree nobody in the Department of Transportation or the Administration is thinking about reregulation. I spent my entire career working to deregulate the airline industry. What we want to ensure now is that deregulation works for as many as possible.
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    I think as Tim Hannegan said, there are a series of things that we need to look at carefully and see if we can pursue such as more vigorous enforcement of the antitrust laws and the competition rules at the Department, providing more data to consumers as we and the consumer union are thinking about, looking at slots. They were given free to the large airlines a few years ago. Maybe some of them need to be redistributed, making sure gates are not locked up through inappropriate leases; continuing to look at the computer reservation systems and those rules, as we are doing now; and ultimately continuing to encourage new entry through public actions and through private industry working with new entrants.

    Unfortunately, the ValuJet accident of last May brought a halt for new entry in this country. We were blessed with a lot of new carriers coming on line but since then the capital markets have dried up.

    Fortunately, we've licensed three new low-fare airlines in the last few months. Those are the first three for this year. We have no low-fare applications pending, however, but I think bringing those companies into the system is the most important thing that can be done.

    Mr. DUNCAN. I agree with you. I think with the tremendous increase that everyone predicts for air passenger traffic in the next 10 years or so, we need to do everything possible to encourage some new airlines to come into the market.

    Mr. Oberstar?

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    Mr. OBERSTAR. I was very pleased to hear Mr. Murphy's comment about the Department continuing to look into computer reservation systems which have in the past been a very powerful barrier to competition.

    While muted somewhat in recent years, CRS systems I think still have an internal bias to the carrier owner of the big CRS system, Sabre and Apollo. I think the Department needs to continue to apply its forces to assure that we have at least functional separation if not physical separation of the commercial CRS and the carriers on the internal reservation system.

    Those CRSs have created substantial distortions in the market and also served to undercut one of the suggestions made by our colleagues in their previous testimony and that of Mr. Davis of using local resources to increase service through marketing.

    You can do all the marketing you want but if your carrier and its service show up on page four of the travel agent's computer system, you aren't going to attract very many customers.

    I think the idea of using local marketing initiatives can be helpful provided the CRS biases don't distract and distort the marketplace and deter passengers. We have had an experience with this in my district where Northwest Airlines, on a trial basis, reduced its fares from communities at the end of the spokes leading into the hub provided that the communities engage in a vigorous effort to generate traffic to justify that fare reduction.

    So far it seems to be working quite well. People are using the air service rather than driving from outlying points into the Twin Cities which is the main hub for Minnesota.
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    Using the Department's energies and existing authorities is not reregulation. It is simply applying the existing authority the Congress vested in the Department in the Deregulation Act and subsequently just use those forces and get the Justice Department to be vigorous in pursuing issues such as predatory pricing.

    I know that the term predatory pricing is difficult to define and the Justice Department has some guidelines for divining a practice that can be called predatory and GAO has looked into this matter as well.

    Clearly, there are at least two tests where an incumbent carrier moves to meet competitive service, lowers its fare below its usual and customary fare, and only for the period of time the new entrant carrier is in the market, and secondly, increases its capacity to substantially greater number of operations on that service alone only to meet this new competition. Those are at least the beginning points of definition of predatory pricing.

    If the Department of Transportation and the Justice Department will both be vigorous in pursuing those actions, we will increase the opportunities for low fare carriers to enter fortress hubs and challenge incumbent carriers.

    Incumbent carriers don't like to hear that, but they all swear allegiance on the altar of competition but they work like heck not to have it. I guess in a sense I don't blame them.

    You all have cited numerous factors or initiatives that can be undertaken to stimulate competition. Like the Chairman, I would prefer that Justice and the Transportation Departments both use existing authorities to encourage competition and that local market interests use means other than legislation to stimulate competition and attract more service to their communities.
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    Trying to distort markets by government subsidies, Federal Government subsidies creates very serious problems. There are actions that you can take locally that will be more beneficial in the long run and I think our committee should help communities to do that. One of the ways we can help is the hearing that is underway now.

    If GAO will continue its vigorous pursuit of uncovering anticompetitive practices as you have done, you will be continuing to render a great service to the traveling public.

    Mr. Murphy, as you said, you've spent your entire career working for deregulation. It's been so successful that the Japanese try to keep us out of their market, the British want to keep us out of their market, the French have broken their bilateral.

    Our carriers are so incredibly efficient in international service that they much prefer international service to encouraging our domestic travel. I can understand why, the profitability on international routes is far greater, three, four or five times greater than it is on domestic routes.

    Let us remind our carriers that if they don't stimulate the domestic service, they'll never get people aboard their international service where they can generate great profitability.

    Let us also pursue, Mr. Murphy, Mr. Anderson and Mr. Hannegan, the cross-subsidization issue. In the days before deregulation, long-haul subsidized short-haul routes. It now seems just the other way around, short-haul routes subsidize long-haul routes. There clearly are distortions in the marketplace because of the pricing practices that in effect discourage short-haul travel.
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    I hope with the entry of jet service into regional and commuter operations, and we're seeing more jets such as Canada Air and Embraer and ATR, jets built specifically for the short-haul market and will attract more passengers and also increase profitability and passenger carriage on those routes.

    Those are helpful. Those are initiatives that the carriers can stimulate with their associated regional service operators.

    You keep up your work, you'll make our job a lot easier and we'll continue to fuel this great engine of economic growth called domestic aviation.

    Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Oberstar.

    Mr. Ewing?

    Mr. EWING. Gentleman, I'll address this to any of you but the problems out there that cause smaller communities not to have air service we think is adequate are quite varied, isn't that true?

    Mr. ANDERSON. Yes.

    Mr. EWING. It appears to me that if you have a major carrier serving your community, that carrier will probably have slots at the hub airport, correct?
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    Mr. ANDERSON. Yes.

    Mr. EWING. But if you have a new carrier out there, they may have a hard time getting into the hub airports?

    Mr. ANDERSON. Absolutely correct.

    Mr. EWING. Why is it that the one time I can buy a ticket from Bloomington, Illinois through O'Hare to New York on a major carrier and it's $30 more to start in Bloomington than to drive into O'Hare and come out, and then the next time I want a ticket out, it's $250. That doesn't help people get the pattern of coming out of the small airports through the regional hubs to wherever they're going.

    Mr. MURPHY. I'll take a stab at that. As you well know, your fare is a function of when you want to travel, how far in advance you call to make your reservation, how the airlines' yield management system, which is their sophisticated computer system, shows the flight you want to fly on is selling, whether it's selling well or not, and how much competition is in the market you want to fly on that given day. The fares are adjusted almost constantly based on those and many other factors. All of those will determine your airfare.

    Mr. EWING. I suppose they are adjusted daily. I don't think there is a whole lot of difference if I'm going to New York City or into Newark Airport whether I go on Monday of this week or Wednesday of next week. You wouldn't think there would be that big of a change in fares.
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    Mr. ANDERSON. I don't know the specific circumstances that might be driving your particular situation but it's clear from the work we've done and that DOT has done over the years, if you have some sustained competition in the market, you're going to have some sustained better fares.

    That doesn't mean there's not going to be some fluctuation from time to time, but you need somebody there constantly being able to provide the competition to help bring the prices down.

    Mr. EWING. I certainly believe in the free enterprise system and in competition to bring down the price, but many small airports won't have competition, they won't have more than one carrier, is that correct?

    Mr. ANDERSON. That's correct.

    Mr. EWING. So how do you get competition to bring the costs down?

    Mr. ANDERSON. When we went down to Chattanooga in February for their conference, we came away convinced that communities had to think a little bit bigger than their own particular area and think regionally and see if you can talk with some of your neighbors in terms of some possible regional solutions to some of the problems.

    I don't necessarily know what they are, but you might have some common things you can work together on and find some different ways to get at the problem. I think these are some of the things going on.
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    The group that's going to be on the next panel, the Business Travel Contractors Corporation is doing some things I think are breaking some new ground in how we think about this whole area of how we inject some competition.

    Mr. EWING. In all due respect, Mr. Anderson, I don't think that's much of a solution. I don't see the regional airports getting together and deciding how they're going to make competition and lower fares in my part of the world. In theory, it may have some possibilities, I don't think in practicality it has. Those airports are competing against each other.

    Mr. ANDERSON. But if you open it up and not necessarily just the airports but have the businesses and the local folks get involved in a broader perspective, that might help. There are no magic bullets here. I don't want to give any indication there are any simple solutions or we wouldn't be talking about this periodically like we do, but trying some different things is all you can do and hope it will work maybe in some places.

    Mr. DAVIS. If I could, after talking to Mr. Anderson and Mr. Hannegan last summer, they raised these issues and again in February in Chattanooga. Something we are exploring and I know other communities are exploring is pairing up with communities that are near to us but not in competition with us to help us try to attract a low fare carrier to provide maybe a circular, one-stop, non-stop type service to some markets.

    That makes our market rather than 1 million people, 2 million people with one stop included in it which does, in fact give us a little more fire power to go after some competition in the market.
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    Mr. EWING. It appears to me, just from observing the situation at one airport where they have attracted an independent lower fare carrier to go different places, they really have an uphill fight against the major carriers when it comes to getting into the airports. I think it's been pointed out it's one of the obvious ways they can make life difficult for their competition. What can we do in our major hub airports to see that there are slots for independents? Is that a function of the airport authorities, of the Department at the national level, that we could see there are going to be slots for competing airlines so they can have some competition and maybe have a positive effect on cost?

    Mr. MURPHY. Yes. This is one of the issues we addressed in our October 1996 report in some testimony we provided in May before the Senate Aviation Subcommittee.

    Because the airlines that had been the recipients of most of the slots that were given to the airlines in the first place were gaining more control of the slots through the buy-sell process and that sort of thing, we thought maybe now is the time to start considering a slot lottery of some sort where you could periodically withdraw some of those slots that had been grandfathered to some of the major airlines and redistribute them in a way that would enhance competition.

    I know DOT has indicated they are still keeping that open as an option they would pursue.

    Mr. EWING. Thank you, Mr. Chairman.

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    Mr. DUNCAN. Thank you, Mr. Ewing.

    Mr. Davis, is it true that ValuJet is considering offering bus service to Atlanta? Have you heard that?

    Mr. DAVIS. No, sir, they're not considering offering bus service, they began bus service six times a day on June 19 from a facility across the street from the airport.

    Mr. DUNCAN. Is that successful in the few days it's been in operation as far as you can tell?

    Mr. DAVIS. I have not noticed a large number of cars parked at the bus terminal to date, but then I haven't put anyone down there to see how many folks are just being dropped off rather than actually leaving their cars there. To date, I have not noticed a large number of cars there.

    If you are a ValuJet ticketholder, it is free transportation to the Atlanta Airport and after 60 days, it will be $20 each way.

    Mr. DUNCAN. How many airlines do you have operating out of your airport now?

    Mr. DAVIS. Four.

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    Mr. DUNCAN. What airlines are those?

    Mr. DAVIS. USAir is our major carrier going to Charlotte, ASA to Atlanta, ComAir to Cincinnati and Northwest Airlink to Memphis.

    Mr. MURPHY. Can I add something to the Greyhound bus service from Chattanooga?

    Mr. DUNCAN. Yes, you can.

    Mr. MURPHY. I've been working with Greyhound and ValuJet this week. That service originally the intent was you would get on the bus, your bag would be checked and you would be driven right to the airplane, literally to the airplane on the bus.

    The FAA, for security reasons, working with us is not going to allow that operation to be conducted that way. The bus will not be allowed on the tarmac and the bags will not be checked at remote locations around Atlanta. The bag will have to be carried off the bus and go through the metal detectors and go through all of the screening at the airport, so I know Greyhound and ValuJet were both disappointed that the ease of the service to customer is not going to be quite what they had hoped for. Whether the service will now be continued is an open question.

    Mr. DUNCAN. Thank you very much, gentlemen. You've given very helpful testimony on this issue. I hope we will continue to work together to see if there are some solutions or some assistance we can provide to ease these problems.
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    We'll call Panel two at this time. I'll ask each of the panelists take their seats at the table.

    As I mentioned, earlier, the full statements of each of the witnesses will be placed in the record.

    Panel two consists of: Mr. Kevin P. Mitchell, President, Business Travel Contractors Corporation; Mr. Darryl Jenkins, President, Aviation Foundation, and Director, Aviation Safety Program George Washington University; Mr. Clifford Winston, Senior Fellow, Economic Studies Program, Brookings Institution; Mr. Steven A. Morrison, Professor of Economics, Department of Economics, Northeastern University; and Mr. Cyril Murphy, Vice President, International Affairs, United Airlines.

    Gentlemen, it's a privilege to have each of you with us. We will proceed as with the previous panel and as is the practice of this subcommittee by having the witnesses testify in the order listed on the official notice of this hearing.

    That means that Mr. Kevin Mitchell, President of the Business Travel Contractors Corporation will be the first witness. Mr. Mitchell?

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    Mr. MITCHELL. Good morning, Mr. Chairman and members of the subcommittee.

    My name is Kevin Mitchell. I am President of BTCC, a corporate buying group.

    Thank you for seeking the perspective of the corporate customer today. BTCC was formed in 1994 to promote a more competitive air transportation system for business travel and today represents 45 corporations such as Black and Decker, Chrysler and Proctor and Gamble.

    The fact that there are serious airline industry competition problems was firmly established in 1997 through two national conferences, congressional hearings and analyses by the GAO and DOT. My purpose today is to propose solutions.

    Corporations are staunch defenders of airline deregulation. BTCC advocates protecting and extending the benefits of deregulation by addressing airline abuses of market power, by eliminating unnecessary Federal restrictions, and by encouraging marketplace innovation.

    However, major airlines frame customer concerns as an issue of deregulation versus reregulation. Recent statements by major airlines regarding Heathrow and Tokyo Airports are revealing. ''Airline domination at these airports keeps fares high.'' ''New access would be competitive and offer consumers and businesses better service and lower fares.'' ''Without access, we can't be competitive.''
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    Major airlines believe it is inappropriate to complain about lack of competition, rather it is appropriate to complain about lack of competition and to seek government assistance, but only when the issue is access to international markets.

    For example, discussion of domestic slot rules was acceptable when slots were grandfathered, was acceptable when it allowed incumbents to dominate slot controlled airports. Mention a change to slot rules today and major airlines scream, reregulation.

    Apparently, major airlines do not want to respond to customer concerns. Nevertheless, customers have developed market-based solutions through thousands of hours of research and industry collaboration. I would like to share three customer-related solutions with you today.

    One, BTCC is encouraging the formation of buying groups to help attract service to mid-sized communities by assuring new entrants that they can compete on equal terms for the buying groups business.

    Two, BTCC is in negotiations regarding the introduction of a corporate shuttle system to serve communities of all sizes from major hub airports utilizing 50-seat regional jets.

    Three, BTCC is inviting low fare airlines into underserved markets with a corporate commitment to purchase a specific number of seats at a price that would cover the fully burdened cost of that airline.
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    Now, I would like to suggest some recommendations for how the Government can be helpful and address airlines abuse of market power, eliminate unnecessary Federal restrictions, and encourage innovation in the marketplace.

    With respect to airline abuse of market power, Congress should consider advising the DOT to issue a policy statement identifying anticompetitive behavior that will trigger a DOT investigation, to take action against policy violators including suspension from international proceedings, to use its current regulatory authority to free up gates and facilities for long-term, exclusive lease arrangements, to investigate marketing practices such as travel agency override commissions, frequent flyer programs to determine their effect on competition and to update the 1990 study of major airline hubs.

    As a side point, we've been talking about deregulation having extended benefits to 80 percent of the country, the data upon which those assumptions or conclusions are based are on average fares. The situation is different when you look at the cost of business fares in all of these markets across the country.

    With respect to unnecessary Federal regulations, Congress should consider the GAO's recommendation for a lottery to free up slots and also greater use of DOT's exceptional circumstances authority also to free up slots for new entrants and with respect to marketplace innovation that the Congress should consider, tax incentives for purchasers of regional jets to encourage the introduction of jet service to smaller communities and purchasing air transportation services jointly with private sector buying groups to encourage their formation.

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    In conclusion, Mr. Chairman and members of the subcommittee, sustained congressional involvement in this issue is vital if the job of deregulation is to be finished for the benefit of all communities, businesses and citizens alike. Thank you for the opportunity to address you today.

    Mr. DUNCAN. Thank you very much, Mr. Mitchell.

    Mr. Darryl Jenkins is the next witness, President of the Aviation Foundation and Director of the Aviation Safety Program at the George Washington University. Mr. Jenkins?

    Mr. JENKINS. Thank you.

    My name is Darryl Jenkins. I am the President of the Aviation Foundation and Director of the Aviation Safety Program at George Washington University.

    I applaud the committee's attention to this important issue. Increasing the level of reasonably priced passenger jet service is a proven way to spur a region's economic development. It is important to consider whether public policies can promote this view.

    I want to thank you for the opportunity to present my views today because frankly I believe most of the analysis and discussion that have preceded this hearing have been a great disservice to such a critical issue.

    I'd like to address the following points. First, recent efforts by the General Accounting Office and the Department of Transportation that analyze passenger air service in specific markets have produced data that is meaningless and misleading.
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    Second, changes in passenger air service in certain regions are the result of normal adjustments to market conditions, not simply as the GAO alleges the results of barriers to entry.

    Third, because these conclusions are based on false assumptions, certain proposed solutions miss the mark.

    Finally, these reports ignore significant economic trends in the passenger air industry such as the continued efforts to control labor costs, point-to-point service by the network carriers, and the introduction of regional jets. These market factors will have the end result of bringing more affordable jet service to more communities.

    As the GAO noted in its 1996 report, deregulation spawned the creation of the hub and spoke systems that provide for more frequent flights and travel options than the direct point-to-point systems that predominated before deregulation.

    As GAO added, instead of having a choice of a few direct routes between their community and a final destination, travelers departing from a small community might now choose from among many flights by several airlines through different hubs to that destination.

    In essence, this connection to a hub provides convenient access to the world which in turn provides enormous economic benefits to a community, benefits that cannot be matched by point-to-point service.

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    A hub connection directly generates economic activity because passengers coming to a community for either business or leisure require more services, access further adds to a community's economic base by making it a more attractive place for national and international businesses that need to be in touch with distant offices, customers and markets.

    Given the powerful economic benefits, it's no wonder that every community wants to maintain, if not enhance, its level of air service. Unfortunately, most of the recent discussion of this vital issue has been set off course by flawed analyses.

    The most egregious flaw is GAO's faulty concentration on so-called average fares and the conclusion based upon this false assumption. There is nothing average about GAO's and DOT's average fares because they don't represent fares that an air traveler pays or has access to.

    You cannot call an airline and book a so-called average fare. DOT acknowledges this very problem in its quarterly report, ''Airlines tend to offer a wide variety of prices in any given market and it is unlikely that the average fares from this report will be the same as any particular fare offered.''

    To arrive at its average fares, GAO essentially totalled the revenue from all fares on a flight and without reference to the service differences, divided by the number of passengers. In effect, GAO lumped a variety of products offered by the national full service airlines, unrestricted business class, restricted business class and a variety of leisure fares and treated them as if they were they same.

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    Low fare carriers, by contrast, generally offer a restricted choice of fares on any flight. To compare the average fare of a full service airline to that of a low fare carrier is like comparing the price of a Geo to a Cadillac and declaring the Cadillac more expensive. It's an obvious but meaningless conclusion.

    Let me illustrate with a simplified example. Imagine ten seats on a plane, three unrestricted business class seats typically purchased at the last minute for unplanned business travel sell at $400 each and seven restricted leisure fare seats sell for $100 each. That produces total revenue of $1900 and by GAO's reckoning, a $190 average fare even though nobody on the plane pays anywhere near that average.

    In this instance, the data reports an average fare nearly twice the amount the typical leisure traveler would pay; 70 percent of those on board pay almost 50 percent less than the alleged average. It's as if GAO added apples and oranges and produced a kumquat. Such data is worse than useless for consumers, it is downright harmful.

    A traveler relying on DOT's quarterly average fare report might very well ignore the airline that offers them the best fare for their travel plans.

    GAO makes the observation that under deregulation some communities have not benefitted as much as others. This is hardly surprising and clearly due to market forces. In a well functioning market, passenger air service is determined by demand. GAO itself notes in general, that communities that have gained the least from deregulation are those with the weakest lowest economies.

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    Every airline, whether a national network carrier or a point-to-point carrier like Southwest, adds service in regional centers that are growing, not declining. Right now, market forces are moving to bring jet service to communities that don't have it. Efficient carriers increasingly realize they must focus on a limited number of markets so that assets and personnel can be used more efficiently.

    One development that will promote these carriers' efforts is the new regional jet which has the capacity as little as 50 passengers, the same number as popular turbo props have.

    By offering regional airlines certain tax incentives such as the investment tax credit and accelerated depreciation, regional jet service can in fact be made economic to small and medium-sized communities. We can create the kind of favorable economic environment that will bring regional jet service to an increasing number of cities.

    Using these smaller jets will mean more business and increased efficiency for the airlines. For small and mid-sized communities, the regional jet carriers offer the promise of enhanced economic growth. In short, the regional jet is good news for the airlines, their customers and the communities they serve.

    The regional jet also reminds us that the genius of deregulation is its reliance on market forces. If there is enough demand for service to assure profit, somebody will fill the niche. If a new form of equipment can create a competitive advantage, somebody will build it and somebody else will buy it.

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    I cannot emphasize enough that in aviation, the market is working. Driven by the need to match the right equipment with the right city, the aviation industry has given birth to the regional jet. Given the expense of the fully evolution from turbo props to regional jet will indeed take time, but it is underway and we should keep that in mind as we set policies.

    The bottom line is that the Federal Government should continue doing more of the same, keeping its hands off scheduling and fares and let the airlines compete in the marketplace.

    To sum up, I believe that bad data clouds reality and can lead us to make bad policy decisions. The GAO/DOT data on average fares is bad. Changes in service in some communities are a local response to changing market conditions and not anticompetitive policies.

    Good management, new work structures and better equipment like the regional jet are enabling airlines to reduce their costs and expand the number of communities where they can provide profitable service.

    The fact is the market is working, it may not be smooth, it may not be even, but it's given us a model aviation system that moves millions of people every day and also boosts the economy of every community it touches.

    I urge you to step cautiously before putting these gains at risk by reinjecting government into the airline industry.

    Thank you.
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    Mr. DUNCAN. Thank you very much, Mr. Jenkins. It is extremely hard to get a large government like ours to leave anything alone.

    The next witness is Mr. Clifford Winston who is a Senior Fellow in the Economic Studies Program at the Brookings Institution. Mr. Winston?

    Mr. WINSTON. Thank you.

    Actually, this is joint testimony with Steven Morrison, so we want to combine it and hopefully combine our time.

    Mr. DUNCAN. That's fine. Go right ahead in manner you prefer.

    Mr. WINSTON. What I'd like to do is just give you an overview of what we're going to be presenting here but in the broader context of the ongoing research program that we've had going on for at least more than a decade.

    Steve will give the details of the research that we've done in preparation for this hearing and I'll offer some conclusions.

    As I said, we've been working on problems in the airline industry for quite a long time. I think our first work was on an initial assessment of airline deregulation in 1986 when we came out with a book on that topic.

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    There were two points I want to bring to your attention from that work. One was the methodological point about how we approached the problem. This was the introduction of what we called the ''counterfactual.''

    The problems in assessing deregulation and effects are that deregulation and regulation never occurred at the same time, so you have to be very careful about attributing certain things you think are the result of deregulation when they may be something else. It's a very hard exercise to try to isolate the effects and that's largely what we tried to do in this book, pointing out what the regulation was responsible for and what other things might be responsible for.

    The major conclusion that we drew from this book was that the benefits from deregulation were quite widespread and they were quite large, $6 billion a year in 1977 dollars. That number made the rounds in the press for a while until we updated it and put it in more current dollars. These benefits were widely distributed among all sorts of travelers, non-hub, small hubs, medium hubs and large hubs.

    After we were done with that book, we pretty much thought the issue was sort of dead, deregulation has worked, the benefits have been widely distributed, there are more issues that are going to rise. We were wrong—economists tend to be that way in their projections—and a lot of problems that were thought to be problems arose.

    Computer reservation systems, travel agent commission overrides, frequent flyer programs, travel restrictions, hubs and the like all were cited as issues that were undermining the benefits from deregulation to consumers, so we went at it again and tried to analyze what the costs or effects of these things were to actually determine was there really quantitative evidence that demonstrably showed that consumers were being hurt by various practices of the airlines.
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    This resulted in our most recent book that came out in late 1995. Indeed, we found these effects, in terms of their costs, were quite small, that there were legitimate anecdotes about these matters, but with all due respect to Congressman Oberstar, the computer reservation system has had a very minor effect on travelers' welfare and certainly the majority of benefits from deregulation had not at all been undermined but were still very strong.

    One policy recommendation we did make was that the process ought to be pursued at the international level. International deregulation was extremely important to pursue, the benefits could be quite substantial, in the multibillions and could actually accelerate the benefits from deregulation.

    Today we're here with some new concerns and these have been the distributional effects of deregulation so to speak, where various people in certain communities have not shared in the benefits and have actually been hurt systematically and also whether swaps work.

    We've done some new analyses that you have in our testimony that Steve will go into detail about. Briefly, to summarize, we conclude once again that even if you cut the data by different community sizes—small hubs, non-hubs, medium hubs, large hubs—all have gained as a result of deregulation. The specific numbers were given by Congressman Traficant and Steve will go into those in detail.

    What was important to keep in mind is although there were differences, the question are these systematic and are these systematic differences something that should raise concerns? That is, if it cost more to serve certain travelers, would one expect their air fares might be higher. Indeed, we do show there are systematic differences but they are related to reasonable economic interpretations.
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    We then take a look at slots and look again at the issue about slots and the premium there and also the concern about whether there is entry at slots of the low cost carriers.

    Again, when we actually look at the evidence, we see yes, there is a problem with slot premium but the source of this is not from the lack of entry of low cost carriers, they seem to be systematically entering these airports as well as others. The problem is that slots themselves—and we've testified to this before—are just an ineffective policy. They are totally inappropriate. They should be abolished and replaced with what we call congestion pricing to deal with the congestion problem.

    Let me stop at this point and let Steve continue on with actually how we did this work and reached these conclusions.

    Mr. MORRISON. As Cliff said, we've been studying the industry for some time and the occasion of this hearing gave us the incentive or the opportunity to look at the issue a little differently, to look at the distribution effects. We generally tend to look at the system as a whole. We decided it was appropriate for this venue to look at the effects on various city sizes.

    What we're trying to do here in our breakdown of results is to see if there is a generic problem with particularly medium-sized communities, but we decided to do it for all sizes. We didn't find a generic problem. We heard testimony earlier today about what might be referred to as idiosyncratic problems at particular airports but our work did not show a problem that was endemic to a large enough number of airports to show up in our aggregate results.
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    We used the FAA's classification non-hub, small, medium, large hub to do the analysis we did. In our testimony, we have provided the data of the analysis from 1977 or 1978 up through 1995 or 1996, depending on the data that we had. I'll summarize the data for 1996 rather than to go through more of that.

    In our submission, Figure 1, we look at fares from the various hub classifications and focus particularly on medium hubs. As Congressman Traficant said, we found that fares that medium hubs were in fact the lowest of all hub classifications, a little bit surprising.

    If you compare it to the benchmark of what regulated fares would have been, which is admittedly a guess but we used the DOT's fare formula, we find fares at medium hubs are about 32 percent lower than they would have been had regulation continued, at least our best guess of what they would have been.

    Briefly, large hubs were 29 percent less, small hubs were 17 percent less, non-hubs were 4 percent less, so not much less than they had under regulation but a bit less.

    As said in the introductory remarks to these hearings, the benefits have been unevenly distributed to deregulation. We see benefits but indeed they are unevenly distributed. The question we wanted to address is why? Is it because of competition factors, lack of competition or cost factors?

    If we look at competition, the extent of competition at the root level where competition actually takes place, competition at medium hubs is 63 percent higher in 1996 than it was in 1977. There's basically 63 percent more carriers serving routes to medium-sized cities than there were in 1977.
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    That's the largest percentage gain of any hub classification. It's, in fact, almost the same amount, same level of competition as exists at large hubs. As we would expect, those small hubs have less competition and large hubs less, but in all cases, still more than they had in 1977.

    As has come up before today, rather than simply count carriers another important characteristic is not just how many there are but who they are. What we did is try to look at where the new entrants are and we include Southwest as a new entrant because it was an intrastate carrier before deregulation.

    We find that here again medium-sized communities are the prime beneficiaries of entry by the new entrants—27 percent of passenger miles provided to and from medium-sized cities are provided by so-called low cost, new entrant carriers. This is greater than at large hubs, small hubs or non-hubs. All of them have some low cost competition, but the biggest at medium hubs.

    This is not especially surprising because the new carriers try to avoid the large hubs, get the density of traffic that they need from the medium hubs but avoid the competition they would face at the large hubs.

    Besides fares, we also looked at service. Departures per day are up 71 percent at medium hubs and that's slightly less than what happened at large hubs. Nonstop cities served are up 29 percent at medium hubs. That's the greatest of any airport classification, so the bottom line based on our work there is medium-sized cities are doing quite well. In fact, in many ways, better than the large cities.
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    The question is what accounts for this is as I mentioned is it cost or is it competition? Aviation has what economists call economies of density. It's cheaper to serve a lot of people on a route than a few people. The two primary reasons for that are that big planes are cheaper per seat to fly than small planes, economies of aircraft size, and that in denser markets, the planes tend to be filled to a greater load factor, a greater percentage of seats filled.

    We show in a couple of our figures that indeed the denser the market, the bigger the aircraft, the denser the market, the higher the load factor and the reason the small communities have smaller planes and lower load factors is if they were to take advantage of bigger planes and higher load factors, they'd have an unacceptably low frequency of service.

    Just as an illustration, if non-hub routes had the same aircraft size and the same load factor as large hub routes, they would have 40 percent of the departures that they do now, so what they pay for in essence in higher fares and less efficient aircraft, filling them up less, they get back in more frequent service than they would otherwise receive.

    To try to summarize those effects, we found the differences across hub classifications and fares, 90 percent of that difference was explained by cost differences by the aircraft size and load factor and only 10 percent was explained by the relatively less competition that occurs at the non and small hubs.

    With respect to slots, we found at National, LaGuardia and O'Hare, fares in 1996 were between $17 and $22 higher relative to flights of similar distance at nonslot controlled airports. The question that arises from that is to what extent is this due to the new entrant carriers underserving those airports?
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    One thing I've learned in my research is that it is very important to consider the role of Southwest Airlines. As Congressman Oberstar said in his introductory remarks, Southwest does not serve slot-controlled airports.

    When you take Southwest out of the analysis, we find that new entrants other than Southwest provide 8 percent of the passenger miles at slot-controlled airports and 11 at non-slot controlled airports. So the thing that's not happening at slot-controlled airports is not that new entrants aren't entering there as much as they're entering elsewhere, it's Southwest isn't entering there from what I've read as part of a general corporate strategy of avoiding congested airports to the extent they can.

    Mr. WINSTON. One word you may have grasped frequently was low density and high density. We may have tried to achieve dense communication in this short presentation to summarize two books and our ongoing research. Let me at least just say what this all amounts to.

    We certainly don't dispute the anecdotes that have been mentioned. There is no question that there are certain cases where fares seem to be out of line and cannot be justified by cost differences.

    Our concern is whether there is something that is systematic about this that indicates what we call market failure and that this market failure is large and there is something the Government can do that would make things better and not create what we call government failure.
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    Our conclusion is that there is nothing, that we do not find anything systematic that has led to what we call market failure and what we call big welfare losses. We have not identified and therefore cannot sort of see government policies that would make things better, but we actually might fear some that have been mentioned that we think could actually lead to government failure and make things worse.

    The one policy that we do emphasize, and this is something actually to change what government is doing, is handling of congested airports. Eliminate slots and put in what we call congestion pricing.

    The issue has arisen on highways. The way to deal with congestion on highways is try to charge tolls during peak periods and off peak periods. The same issue arises at airports. Charge people that are landing during peak times, a peak charge for doing so. The current fees have nothing to do with that.

    Beyond that, we see that the market is the best protector to fairness for the traveling public.

    Mr. BLUNT [ASSUMING CHAIR]. Thank you very much, Mr. Winston and Mr. Morrison.

    We want to hear from you, Mr. Murphy.

    Cyril Murphy is here from United Airlines. He's the Vice President for International Affairs. We want to hear your testimony and have some time for some questions of the panel.
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    Mr. MURPHY. Thank you, Mr. Chairman.

    I'm rather tempted after hearing the last three speakers to say the defense rests but if I could add a few other things, I'd like to go on with pretty much the same theme.

    We very much believe at United Airlines that deregulation has been a resounding success. If you look at it in terms of departures; at small communities, departures are up 50 percent since 1978; medium-sized communities, 57 percent; and in large communities, 68 percent.

    At the same time, we've had an overall reduction of one-third in fare levels and 200,000 new jobs have been created by deregulation. So by any measure, we believe this has been a resounding success.

    The primary reason for that success has been innovation. It not competition, per se, it's innovation that has taken place in the marketplace. The first innovation was the development of hub and spoke systems. This was not expected by the industry; it evolved through practices in the marketplace. It proved to be highly efficient and I think DOT and GAO in their studies have demonstrated that a good deal of the benefits we've seen in fare reductions and departure increases has been through the development of the hub and spoke system.

    The hub and spoke system did create a cost for the system. That is, for short range, high volume markets, a hub and spoke system is rather inefficient or inconvenient from the passenger standpoint. Southwest Airlines moved to capitalize on that opportunity and innovated with its unique system which has produced additional benefits in the marketplace.
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    So the short range, high volume innovation that Southwest marketed very effectively was the second major innovation that took place in the marketplace and accounted for further additional benefits for the traveling public.

    The third innovation which is just beginning is the development of regional jets. The regional jets is a correlation to the development of the hub and spoke systems. The hub and spoke system works very well but when you look at smaller communities in which the demand is limited you have to look at how you can provide a more efficient supply to those communities. What regional jets are going to promise the industry is a more efficient supply of services to these communities.

    So all of these innovations were brought about essentially by the working of the free market, that is, the interaction between supply and demand. In this industry, we look at two particular aspects of supply and demand.

    Earlier today the economies of density in aviation were mentioned. The OECD earlier this year put out a study analyzing the economies of density in aviation. In layman's terms, we would refer to that as the consolidation of the demand. It is similar to the decision in locating a bus stop. Every passenger that takes a bus would like to have the bus stop in front of his house and then not stop anyplace else before he gets to his destination.

    Obviously you can't run a very efficient bus system in that fashion, so instead what a bus company does is to determine where is the best location to consolidate, i.e., where can I put the bus stop that will attract the maximum number of passengers so it can consolidate that demand and run its system most efficiently. Airports have the same effect in aviation.
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    In doing so, we consolidate demand and, as we've seen in the hub and spoke system, we've consolidated demand at a number of major cities around the country. That has provided a much more efficient network of services throughout the entire country, but if you're in one of those communities where there is not a bus stop, then obviously you've got a problem in terms of how do you get to the bus stop.

    The other principle that we look at is the efficiency of supply. That is, how efficient is the supply of services we are providing to these communities? I've mentioned before if you're a community that is not a bus stop, then the efficiency of supply becomes very important to you.

    The basic problem is getting to the bus stop, or hub in the case of aviation. For instance, if you're not at the bus stop, you may have to take a taxi. Not surprisingly, the taxi is going to cost you a great deal more to get to the bus stop than perhaps the bus fare you're going to end up paying to get to the rest of your destination.

    In effect, that's what happens to many small communities. They are paying taxi fares to get to major hubs. It is inherent in the system that requires us to determine that we are not going to put a hub in every community, that certain communities are going to have to figure out how to get to the hub.

    So if you look at these two principles, the consolidation of demand and the efficiency of supply, you can see where the innovations have occurred in this marketplace and how they have driven the benefits of deregulation.
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    When it comes to dealing with those communities that haven't achieved the same benefits as other communities, we do believe there are things that can be done to enhance services for these communities. They are not based on what we would call reregulation or government interference in the marketplace.

    As our previous speakers did a very good job of pointing out, there are costs in government interference in the marketplace, but we do believe there are some things government can do that are consistent with the principles I talked about earlier.

    For instance, in the area of consolidation of demand, smaller communities can work together to consolidate demand, i.e., create a bus stop for their regional area. We have an example of two communities—I won't mention their names but they are 14 miles apart—both have an airport, both are demanding access to a restricted hub airport, both refuse to cooperate with each other to ensure they can increase the availability of supply to both communities. Instead, they compete with each other.

    That is not an efficient way of providing services to either one of those communities and they both suffer as a result.

    Mr. Ewing, you mentioned earlier that it may not be very practical for those communities to cooperate because they compete with each other, but I suspect that competition is as much between airports as it is between communities. I think in these communities if you went to the communities and said, we can enhance your overall service to the national and international network that's available at that hub, I think there would be a great deal of community support.
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    I think government can play a role in demonstrating how that can happen. There is funding available under AIP funding for feasibility studies for airport development grants, et cetera that could be used to demonstrate the consolidation of demand in some of these regional communities would greatly enhance the service to these communities.

    On the other side of this, the efficiency of supply, there's a lot of things communities can do to look at their overall cost structure. We do believe there is something government can do and I'm talking about the Federal Government in terms of facilitating the development and deployment of regional jets.

    I know Senator Frist talked about such things as tax incentives. There are a number of devices that would accelerate the deployment of these jets throughout the communities and I would encourage this committee as well as other parties to look into those possible solutions.

    Thank you very much.

    Mr. BLUNT. Thank you, Mr. Murphy.

    I know we have some questions for you and one of the things I'll let you think about before we come back to me is the fairness of riding a bus into the bus stop at taxi prices which is what happens from lots of regional mid-sized airports to hub airports.

    Mr. Ehlers, do you want to start?
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    Mr. EHLERS. Thank you, Mr. Chairman. I have no questions at this time.

    Mr. BLUNT. Mr. Ewing?

    Mr. EWING. Thank you.

    Mr. Murphy, I was glad you were listening. The question is I think if you have the communities 16 miles apart, is that what you said?

    Mr. MURPHY. Fourteen.

    Mr. EWING. They ought to shake them and work together. I'm thinking more of communities of equal size who are an hour apart on a superhighway, meaning they are 50 or 60 miles or more apart. If they give in to the other one, then they figure all the new business and industry will go to that town and not to theirs, so there is reason for them to be competitive.

    I think if you have almost twin cities that close together, they ought to work together to make their airport the best and it would be very impractical to have two airports in that situation, not knowing what it is.

    The question to any of you is how far away from a hub airport like O'Hare should a feeder airport be located? Is there any kind of rule of thumb that if you're within 50 miles, that's too close?
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    Mr. MURPHY. Actually, it's kind of determined by where the other hubs are. If you look at a hub in Chicago and a hub in St. Louis and look at a city midway between those two hubs, then the cost of serving that community is essentially equal for both hubs, i.e., TWA can fly that passenger for essentially the same cost to St. Louis as we can fly him to Chicago.

    Assuming that the airport in that city is maybe 100 miles closer to Chicago than it is to St. Louis, then it's cheaper for us to fly that passenger to Chicago than it is for TWA to fly that passenger to St. Louis. That will largely determine what the most efficient hub airport is for that.

    It isn't really a matter of a rule of thumb in absolute terms; it's really what are the alternatives that are available.

    Mr. EWING. I guess I was thinking at some point I drive in to the hub and not try and fly out of the regional airport at some mileage, at some distance from the hub airport, it makes more sense for me just to get in the car or get on one of these buses that takes you in and go by road into the airport.

    Mr. MURPHY. I think that Mr. Oberstar made mention this morning of St. Cloud, Minnesota. That happens to be my hometown and I can remember when I was a boy riding my bicycle up and down those runways because we didn't have any air service. We had an airport with no air service whatsoever.

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    Today, we have a jet aircraft service, a Northwest airplane, that feeds their hub in Minneapolis. So the hub and spoke system provided jet airplane service to my hometown that didn't exist before.

    I would say that the majority of people still use their cars to go to Minneapolis and the reason for that is because the additional cost of providing that connecting service from St. Cloud to Minneapolis adds considerably to the indivdual's total trip cost.

    The only people that are going to use that service are people that are time sensitive, i.e., that are willing to pay that additional cost. So it really comes down to the time versus price equation for an individual passenger. How valuable is your time? For business people, time is more valuable, they are more willing to pay that cost. For a leisure passenger, time is less of a consideration, he's not willing to pay that cost and he's going to drive.

    Mr. EWING. I would just say that from my constituents' standpoint, two things tend to rile them up about service from regional airports into the hub. One, the great variation in the cost, it's up one day and down the next. I don't think that's very practical for the airline industry. It certainly doesn't build a lot of goodwill.

    The other, and this is probably something that is more with airport managers than the general public, is maybe the major airlines have every reason to control those slots, but are they using that as a competitive tool to keep competition out.

    I know in the free enterprise system, that's not a bad word and I'm not saying it's bad in this case, but I think those are two things that bother the traveling public. Are they being gouged one day and getting a good deal the next, and are we allowing the majors to squeeze out the competition so that there aren't some good prices out there for the traveling public?
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    Mr. MURPHY. I think that one of the things we done as an industry is to create an illusion that a low price should be available on every airplane every day at all times.

    Mr. EWING. Isn't that true?

    Mr. MURPHY. I'm afraid not. Often, what is in fact, a deeply discounted $30 fare available one day will be perceived by the public as the base fare if the next day the same fare is $200. In fact, the base fare may well be $200 and the discounted fare for that particular day in that particular instance is $30.

    What a yield management system does is every day constantly assess the demand in the marketplace and try to maximize the revenue on the airplane accordingly. So if it senses on a particular day at a particular time of the day there is going to be very little demand, say Wednesday afternoon at 3 o'clock, the computer will lower the fares that are available, i.e., the number of $30 fares that are available.

    So virtually everybody that comes Wednesday afternoon at 3 o'clock gets a $30 fare. A hour later, maybe the first 10 people who come get the $30 fare and everybody else is getting the $200 fare because the computer has accurately assessed the demand that's going to switch within that one hour.

    Mr. EWING. Mr. Chairman, I know my time is up but I just have one retort to that. How can the traveling public plan if they don't know until that day whether they're going to pay $200 or $30. It's very disconcerting.
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    Put yourself, and I know you travel, in the traveling public's position of not knowing until that day. There ought to be some certainty so that whether you're in business, whether it's private travel, you can plan ahead and know what it's going to cost you.

    Mr. MURPHY. I think there is another factor and that's competition. American Airlines a few years ago tried to deal with that problem and put in what was called value pricing. Very soon other carriers started seeing opportunities where they could underprice those stable fares and the system collapsed very rapidly.

    We have a very intensely competitive situation. It does produce very low fares in certain instances, but it does so at the cost of the stability of those fares.

    Mr. BLUNT. Mr. Hutchinson?

    Mr. HUTCHINSON. I appreciate the panel, I've reviewed the testimony and I'm grateful for this hearing on a very, very important subject.

    In my district in Arkansas we have Fayetteville, which is a small airport, but we also are building a regional airport in northwest Arkansas. In addition, I reside in Fort Smith in which we have an airport that is served by commuter airlines through Dallas, Memphis.

    With that background, I want to ask Mr. Jenkins a couple of questions. What if any benefits would we have if we could have commuter jet service coming into Fort Smith? How can we accomplish that?
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    Secondly, we have enormous, what appears to me anyway, costs typical of a small market where the airline costs are high compared to other areas. What could be done in a small market like Fort Smith or Fayetteville in which we can reduce the costs?

    Mr. JENKINS. A couple of things. Let's discuss that in reference to the regional jet first.

    On this panel and the other panel, we talked about regional jets in the abstract quite a bit. We've said very little specific about them.

    Every community does want to have jet service for a number of reasons, one, a jet is less noisy, they fly above the clouds so they are more comfortable, and I think there is just a public perception that jets are safer and they enjoy flying them more.

    The areas that have switched from turbo props to regional jets, we've seen an increase in enplanements in all those airports, so when they do go from a turbo prop to a regional jet, we see a boost in the local regional economy. I would think that would apply to someplace like Fort Smith very well where they have turbo props coming in and out of there.

    The truth is, however, regional jets are made for very long, thin routes. Their operating economies are at best 300 to 400 miles. That won't help you. If we're looking at this as a regional or local economic development issue rather than an airline competitive issue, then we have some solutions to your communities.

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    One, if we would change the way we depreciate the jet, if we changed the schedule to an accelerated schedule, because these jets generally are leased for a time period of 5 years. The average lease per regional jet will be 5 years, so over that 5 years, if the operator can depreciate it quicker, then the economics of operating that jet into Fort Smith and Fayetteville change and the service is now economic. That will benefit your communities and I see that as the best alternative to communities like yours in the short term.

    Mr. HUTCHINSON. And that in turn will hopefully adjust the costs downward?

    Mr. JENKINS. We hope so.

    Mr. HUTCHINSON. Thank you, Mr. Jenkins.

    I know there is a vote on, so I'll yield the balance of my time.

    Mr. BLUNT. Thank you, Mr. Hutchinson.

    Mr. Murphy, the two gentlemen by you, Mr. Morrison and Mr. Winston mentioned the whole idea of congestion pricing versus slots. Do you want to talk about that a little bit?

    Mr. MURPHY. I kind of thought I'd get that question.

    This is an idea that has been floated a number of times, peak pricing, congestion pricing, whatever you call it. The problem with it is that we're going to fly an airplane at 6:00 p.m. on Friday night regardless of what the cost is. It doesn't make any difference what the airport cost is because the demand is there for that service at that time.
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    In effect, what you do with congestion pricing is you simply raise the cost of providing that service at that time. The service is still going to be provided at that time. The overall effect, we believe is not to change the way the airlines will distribute their services at an airport, but in effect simply to raise their overall costs without having any real impact on the way the service is distributed.

    For that reason, we don't see it as a workable idea primarily because landing costs are such a small segment of our overall costs versus competition cost that would result if we didn't supply services at a particular time. The landing costs wouldn't be enough to influence the outcome.

    Mr. BLUNT. Do one of you want to respond to that?

    Mr. WINSTON. It's a rather narrow perspective. There are much broader participants of the industry besides the major carriers. The idea of congestion pricing is that all carriers, general aviation, commuters and large jets, pay peak period fees that are appropriate and off-peak fees.

    It is probably the case actually, and I'm sort of surprised at Mr. Murphy's answer because he will not be hurt by this, that large carriers' fees will not go up very much. In fact, we have research that demonstrates this because the current fees are based on weight of craft and our fees would call for congestion-based fees based on something called the influence on the value of time and congestion costs, probably not a substantial effect on those carriers.
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    It's the commuters and general aviation that would probably be hit hardest. That is where you're going to meet your political resistance, but in the process, you're going to clear out a lot of demand on capacity during peak period. That will open up slots and will increase competition and that can actually solve a lot of the problems mentioned today.

    Actually, what I would recommend is a much broader perspective on it but in the process, you'll see where your political resistance comes from.

    Mr. BLUNT. Mr. Morrison, do you want to quickly add something?

    Mr. MORRISON. Yes. I think as Mr. Murphy said, United's behavior probably wouldn't change as Cliff pointed out but what does color the views of the major carriers towards slots is with slots, they own them and in many cases were given them. With landing fees, they'd have to pay them. So it's the difference between one system where you get to land free, if you were given the slots, versus another where you have to pay.

    Of course major carriers who own slots would be against such a system.

    Mr. BLUNT. Mr. Murphy, do you want to talk about free slots versus new entrants to the system?

    Mr. MURPHY. I guess the question of slots is kind of an interesting one because it suggests that somehow we're profiting from slots. Actually, United Airlines is the only carrier in the Nation whose primary hub is slot-constrained.
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    From a competition standpoint, you generally consider that to be a liability if you're the only one that suffers from that particular disadvantage.

    I think there is a broader implication and that is that the scarity of slots somehow produces a cost-free value to the carrier that gives such carriers a unique benefit. The fact of the matter is for carriers such as United to grow at slot-constrained airports they will have to pay to acquire slots and thus pay a unique cost for growth.

    So at a slot-constrained airport, the only way we can grow is to go out and buy additional slots whereas our competitors that are not at slot-constrained airports can grow without that additional cost. Again, what a slot-constrained airport has done for us is to simply raise our costs. It has very little benefit to us in terms of any direct benefit to us in making us richer somehow.

    We are not in the business of selling slots; we're in the business of selling air services and a slot-restricted airport means it cost us more money to provide those services.

    Mr. BLUNT. Just curious, how many slots did you get for free in 1985 when the old rules were grandfathered in?

    Mr. MURPHY. I can get you those numbers. I wouldn't know them off the top of my head.

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    Mr. BLUNT. If you can get them, I'd like to see those and see how that works.

    [The information supplied follows:]

    [Insert here.]

    Mr. BLUNT. We do have a vote. We're grateful for the hearing today. Hopefully those folks in airlines are making decisions. Back to your analogy of the bus stop, I ride every week on a plane that's the same size that I take to St. Louis as the plane that comes in here and they are both full every time. The folks getting off in St. Louis pay a whole lot more than I pay to come on to Washington.

    Looking at that system, we're looking for things for industry-based solutions. I think there is a general sense in the committee that I have that we do run the risk of government failure as Mr. Winston pointed out anytime the government gets involved and we're not really looking for that solution.

    We had three members in here before the first panel, there are many members of this Congress who have all sorts of examples of what just seem to be unreasonable pricing differences. We're encouraging the industry to look for new ways to solve that, to do things that not only serve the customers that are in locations that feed hubs better, but also build more customer loyalty to the airline that makes the feeder the airport it is.

    We don't benefit when people drive to another airport in another community and maybe wind up not getting on an airline that serves the community they live in in a vital way.
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    So we are looking for industry-based solutions. Your testimony today have been very helpful. We're grateful you've been here and we're sure we'll see all of you again on another day.

    Thank you.

    [Whereupon, at 12:02 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

    [Insert here.]