The airline industry: Predatory practices?<\/p>\n
Lalu A. Damanhuri, Infrastructure Planning & Development Specialist,
\nCommittee for Infrastructure Development Policy (KKPPI), Jakarta<\/p>\n
With the promulgation of government regulation PP No. 40\/95
\nconcerning air transportation -- followed by a few ministerial
\ndecrees -- a comprehensive legal framework for the development of
\nthe airline industry is now in place.<\/p>\n
The policy initiative and the legislation have paved the way
\nfor new entrants in the air transportation industry. The ability
\nto serve new and growing markets, to fashion more extensive route
\nnetworks and to charge low fares had been severely constrained by
\nregulations.<\/p>\n
These reconfigured services could be implemented in no small
\ndegree due to innovations in technology that enabled the
\ndevelopment of sophisticated yield management systems.<\/p>\n
Such systems allow airlines to offer and quickly change the
\nmix of high and low-fare seat capacity on any given flight, as
\nwell as to manage both origin and destination traffic flow over
\nthe entire network.<\/p>\n
As the constraints on airline operations were lifted by
\nderegulation and the airlines quickly exercised their new route
\nand fare freedoms, consumers in many markets reaped substantial
\nbenefits.<\/p>\n
The benefits became less attributable to the actions of the
\nmajor network airlines and more attributable to the actions of a
\nsmall number of low-fare carriers. By the late 1990s, the major
\nairlines' domestic route networks had become fairly stable and
\nwere built around hub airports dominated by a single or double
\ncarrier.<\/p>\n
These hub-based networks established geographic areas in which
\neach major network airline has substantial presence and market
\npower, especially in short-haul, smaller markets. Thus the
\nbenefits of deregulation have increasingly come from competition
\namong major network carriers in long-haul markets and from lower
\nfares in short-haul markets served by low-fare carriers.<\/p>\n
In many of the markets not served by low-fare carriers, the
\nbenefits of deregulation may well be eroding. Entry by a low-fare
\ncarrier either into the industry or into a new market is not
\neasy. New business ventures in all industries have a high failure
\nrate, and new airlines are no exception.<\/p>\n
However, new airlines -- or established airlines entering new
\nmarkets -- must have an opportunity to compete for business on
\nthe basis of the product or services they offer, rather than be
\nforced to contend with predatory practices by the incumbent
\ncarriers.<\/p>\n
An analysis of predatory practices has focused on predatory
\npricing -- usually defined as a company pricing its product below
\nan appropriate measure of cost with the intent of driving a
\nfinancially weaker competitor out of business and establishing or
\nre-establishing monopoly power.<\/p>\n
Defining the appropriate price to compare with the marginal or
\naverage variable cost is also difficult. Airlines, of course,
\ncharge multiple prices for the seats on a single flight.<\/p>\n
Some differences in price are due to markedly different
\nservice, such as first class, business class and economy class.
\nOther differences reflect discount fares and their various
\nrestrictions.<\/p>\n
The most common restriction requires an advance purchase, such
\nas Garuda. These restrictions mostly reflect attempts at price
\ndiscrimination by airlines to maximize revenue from a particular
\nflight by segmenting passengers according to their flexibility,
\nand charging those with less flexibility higher fares.<\/p>\n
Because airlines have the potential to compete with multiple
\ntools, of which the ticket price is only one, a narrowly defined
\npredatory-pricing standard is almost certainly inadequate. Were
\npublic policy to focus only on the ticket price, airlines would
\nhave ample ways to engage in what are clearly predatory practices
\nwithout violating a narrow predatory pricing standard.<\/p>\n
Similarly, because airlines compete through networks rather
\nthan just in single city-pair markets, focusing only on the
\nmarket without considering the potential network effects is also
\nlikely to be inadequate.<\/p>\n
Conceptually, an airline could even engage in predatory
\npractices by making use of its network -- without changing its
\nbehavior in any way in the specific city-pair market entered by
\nthe new carrier.<\/p>\n
The following table shows the fare offerings of the airlines
\nproviding service on the Jakarta-Surabaya route. What is striking
\nis the degree of similarity in the fares offered by these major
\ncarriers, particularly in the low-fare range.<\/p>\n
While each airline uses different fare codes, the
\ncorresponding fares are remarkably similar. In this market,
\nGaruda, Mandala and Bouraq offer several fares that do not seem
\nto have a counterpart with the other airlines, such as Indonesian
\nAir, Star Air and Pelita Air to a lesser extent. Also, Mandala
\ndoes not seem to offer the very highest first class fares. A
\nsimilar pattern prevails in other markets that were examined.<\/p>\n
How can the airlines achieve this uniformity in their fare
\nofferings? The answer would appear to lie with the computer
\nreservations systems that allow competitors' prices to be
\nobserved.<\/p>\n
These fares are posted on the reservations systems well in
\nadvance of any bookings made for these flights. The time lag
\nbetween posting the fares and booking any substantial number of
\npassengers gives each airline an opportunity to see what the
\nother airlines are charging and to make any needed adjustments.<\/p>\n
There is no benefit from predatory behavior because the
\nairlines do not have the market power necessary to recoup the
\nlosses incurred while driving a competitor out of the market. The
\nevidence clearly suggests that there is market power at some of
\nthe major carriers' large hubs.<\/p>\n
Some evidence of this market power is the persistence of fare
\npremiums at these hubs. Hub premiums represent the extent to
\nwhich fares to and from hub cities are higher than average fares
\non similar routes throughout the domestic route system.<\/p>\n
The characteristics of our airline industry, and the
\npersistence of market power at hub airports, make predatory
\npractices a recurring possibility in the domestic airline
\nindustry. As such, they are a legitimate concern for competition
\npolicy.<\/p>\n
Because the presence of low-fare carrier service has such a
\ndramatic effect on hub premiums, predatory practices are
\nspecially likely to be targeted at low-fare new entrants,
\nalthough such practices need not be confined to these situations.
\nSince many of the continuing gains from airline deregulation come
\nfrom the presence of low-fare carriers, an industry characterized
\nby vigorous opportunities for entry is essential for continuing
\nconsumer gains.<\/p>",
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