No Room At the Inn: Airport Access And The Public Interest

Transcript

Mark Dunkerley:Well, it's great to be here once again at CAPA. As is my custom, I'm not actually going to spend any time talking about Hawaiian Airlines. Once I get started doing that, there'll be no end to how long I'd be at the podium. So instead, I'm just going to canter through the last couple of presentations that I gave here at this forum. In 2014, I focused my comments on how consolidation in the US industry was changing the landscape for foreign airlines. My thesis was that with fewer US airlines to choose from, foreign airlines were going to have a much greater difficulty in accessing behind traffic that they needed to compete. Furthermore, since the merger synergies of the US airlines were largely around creating seat scarcity, it was apparent that some fraction of demand that they used to vie for, they were now going to be very happy not to take on at all. And I postulated that that marginal traffic that would become unseated in a, tight capacity regime was most likely to be connecting traffic from their foreign partners. In 2015, when I came back, I expanded on this question of behind-gateway access by discussing how foreign airlines, non-US airlines, were responding to this new world order. Under the heading of, if you can't beat them, then join them, I discussed the emerging trend of antitrust-immunized joint ventures involving US and foreign carriers. The consequence of this has been a dramatic increase in market concentration in the geographies where this has taken place. And this is a slide that I showed the last time I was here a couple of years ago, and it shows the North Atlantic, and you can see how now 3 airline groupings dominate that marketplace. And along with it has become an increase in fares for the consumer, on average, in those geographies that have seen this increase in concentration. And that upper line, this is all indexed to 100, indexed back to the year 2000, I think, and brought forward. And you can see how transatlantic fares are much higher than they are between the US and Latin America, which is a region of the world is yet relatively unaffected by joint ventures. And in addition, access to behind-gateway traffic is being systemically denied to independent competitors interested in providing travelers with choice. And this diagram shows that in a world in which you have multiple airlines, none of which have complete networks, there is an interest in all airlines in finding ways of transferring passengers between their networks. If you allow dominant airlines to create an all-embracing network, that incentive goes away. And this impact is felt not only by travelers originating and destined for points behind gateways, A and B in this particular example, but also between gateways. And that's because the connecting traffic available to one airline combination is a powerful competitive advantage on trunk routes when such, uh, traffic is not available to a competitor. And we suggested that, uh, the denial of market access, therefore, should be a concern to regulatory agencies seeking to maintain a semblance of competition and choice. So those are the last couple of years. So today I want to expand on this theme of market access. No 2 markets are alike, and so it shouldn't be— it shouldn't come as any surprise that the issue of market access for competing airlines calls for different solutions in different markets. And today I want to cover the emerging problem of airport access. It's a truism that in most of the largest metropolitan areas, airport capacity has not grown as quickly as has demand. With few exceptions, there's little reason to believe that this condition will change over the years ahead. Increasingly, airports are full, if not throughout the day, then certainly at those times of day that are most attractive to travelers. And this is most easily appreciated at airports where the ability to land and depart is governed by having a slot. At airports in London, Mexico City, and Shanghai, to name a few, a carrier wishing to start new service has no prospect of being able to do so during the commercially feasible parts of the day, if indeed at all. In addition, there are airports, principally in the United States, where slots aren't the constraint, but access to competitive airport facilities I'm not going to wade into the argument of whether the public interest is best served by increasing airport capacity or not. I understand the arguments on both sides, and I'm myself firmly committed to the belief that air service and the infrastructure needed to support it are vital ingredients to economic prosperity. Instead, however, the most pressing public policy question is whether, given that airports in the major cities around the world are increasingly full, the existing rules governing the allocation of that scarce capacity serve the public interest. And it's my firm conviction that they do not. Before I explain why, I should detail how the current rules work. At most airports, the IATA slot allocation rules apply. And these rules provide that so long as an airline has used the slot in the prior season, the prior period, that airline can continue to enjoy the use of that slot going forward. New slots or unused slots are returned to the slot pool for distribution. And under the IATA rules, 50% of the available slots that have been returned to that pool, or sitting in that pool, are distributed first to any airlines that are new entrants, and then, under a complex mechanism, to other airlines that have applied for them. The concentration of airport capacity in the hands of airlines, which through mergers and JVs have become ever more dominant, is rapidly becoming a tool of competitive advantage used to insulate these airlines and their combinations against competitive pressure. At the margin, regulators have begun to stir themselves to this problem. And in a number of cases involving mergers or JVs, they've extracted a slot price to be paid by the happy couple on their wedding day. A recent example of this would be the U.S. government's insistence that as a condition of approving the joint venture between Delta and Aeromexico, the combination be required to cough up 24 slot pairs, which thereby enabled competitive entry into this severely slot-constrained airport. So it's clear that some regulators have recognized the need to take action, but crucially, when confronted with airlines seeking to further concentrate markets. What they have thus far not addressed is airport constraints to market access, in those cases where the status quo is already a problem. To demonstrate this, let me use the Hirschman-Herfindahl Index, which I referred to the last time I had this opportunity to address this group. The HHI Index is a measure of concentration in any industry, and it's calculated by summing the squares of the market shares of the participants. It is perhaps the most widely used metric of market concentration by regulators and economists around the world when they assess whether a market is unhealthily concentrated and the interests of the consuming public are being damaged. So the U.S. Department of Justice has published its guidelines for what it considers problematic levels of concentration. Under its guidelines, the HHI market concentration scores of less than 1,500 indicate a competitive market. Between— those between 1,500 and 2,500 indicate a moderately concentrated market, and above 2,500, a very highly concentrated market. The Australian competition authorities recognize an HHI score of 2,000 and above as being problematic, As do the authorities in the U— EU and the UK. Bear in mind that when these regulators are considering HHI scores, they're doing so in the context of markets without any physical barriers to entry. They're essentially saying that when you have that level of concentration, even when physical barriers to entry don't exist, there is an overwhelming competitive advantage that accrues to the, to the market participants with the highest market shares. Yet they still believe, so they still believe that when you see an HHI index score of 2,500 above, that the conditions for a truly competitive market do not exist. So now add the fact that barriers to competitive entry do exist at many of the most important airports of the world, and the issue of anti-competitive levels of concentration becomes much more acute. So let's see how the large airports look under this microscope. So as you can see, there exists a prima facie case to argue that the current distribution of airport capacity at the— many of the world's most important airports is today a problem. This is true even before consideration is given for many of these airports having absolute physical barriers to entry. To make matters worse, it's in the nature of how travelers make travel decisions that the density of service is an important ingredient in their travel selection. Airline planners are familiar with the so-called S-curve, which we've put on this slide here. What this slide shows is that when an airline is providing over 50% of the frequencies in a market, it is likely to get more than 50% of the traffic. The reason for this is simple. Since travelers buy round-trip tickets, the carrier that— with the greatest schedule density is much more likely to have the schedule that meets the traveler's preference on the way out and on the way back. encouraging him or her to choose that airline. To see it in another way, if Airline A serves a market 5 times a day and Airline B serves it just twice, then a passenger is, by a ratio of much greater than 5 to 2, more likely to go with the airline that flies every 2 hours than with the airline that flies every 10 hours. The power of the S-curve exists even with— even when access to airports is not a constraint. When it is a constraint, it's, it's an advantage that becomes insurmountable to airlines seeking to provide competitive balance. So this is an extremely useful weapon in the arsenal of the dominant airline at the slot or facility-controlled airport. If a new entrant threatens, then the upgauging of some services can be used to free up slots, which are then used to be deployed against the new entrant. unleashing the full impact of the S-curve. Because airport constraints prevent other airlines from backfilling service, the short-term reduction of— in frequencies in one market, uh, to help another does not lead to a loss of overall market position by the dominant carrier. Where airports are not slot constrained, but are facility constrained, The same principles hold. In a world where airports are full, the quality of facility used by one airline when competing with a less endowed competitor can be a telling competitive advantage. If it were not so, airlines would not be so passionate about the facilities they operate from at the airports that they serve. Now, I'm likely to hear the argument that under the IATA slot distribution rules, new entrants get preference over the allocation of whatever slots are available. And that this represents a proactive measure to ensure that competition is being encouraged. Well, one can certainly argue whether this is sufficient in an environment where additional slots routinely do become available, but as I have said, the core problem is that the airports are full. Increasingly, slots or airport facilities at airports in the world's largest metropolitan areas are simply not available at peak times or at all. Having competition-enhancing rules for distributing available slots is utterly meaningless if there are no available slots to allocate. And the same holds true for airport facilities. The intersection of growing airline concentration in the largest metropolitan areas and the declining willingness and ability of communities to build airport capacity to meet travel demand is a serious problem, and it needs attention by regulators today. So what can be done? To kick off the debate on possible corrective measures, I think it would be feasible for the slot allocation rules to be— to provide the following. For each hour of the day that a constrained airport is open, at least 3% of the slots would be made available for distribution. In those instances where airports cannot generate new slots to meet the 3% requirement, by lottery, 3% would be taken from existing holders and returned to the pool for redistribution. A constrained airport for this purpose would be any airport whose HHI score was above 2,500. In the US, where only 3 airports are slot-controlled in the traditional sense, airports should be subject to a federal mandate to make sure that airlines have access to facilities no inferior to those being used by other airlines on the sectors that they have in common. Today, the rules speak to providing nondiscriminatory access, but are open to interpretation as to the equivalence of that access. And furthermore, the rules lack a specific enforcement mechanism. Over the 3 CAPA conferences that I've had this, uh, pleasure of addressing, I've taken my speaking opportunity to explore the growing problem of market access. We've talked about how mergers and JVs can inhibit market access. And today, we've expanded that discussion to cover the anti-competitive impact of major airports in major metropolitan areas becoming constrained. It's my sense that there is a dawning recognition that consumers are seeing their travel choices curtailed by the growth of increasingly dominant airlines and their partners, and the impact of constraints to market impact— access. Few things stir the passions of consumers more than the air travel experience. And so I believe that in the years to come, this problem is going to become the staple of the policy debate in our industry. Thanks again for taking the time to listen to me. Thanks again for hearing from Hawaiian Airlines. And it's a great pleasure to be here. Aloha. Thank you, Mark. Mahalo.

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