LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

OCTOBER 21, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 4209 words

HEADLINE: PREPARED TESTIMONY OF
DAVID Z. PLAVIN
PRESIDENT
AIRPORTS COUNCIL INTERNATIONAL-NORTH AMERICA
ON BEHALF OF AIRPORTS COUNCIL INTERNATIONAL-NORTH AMERICA
AND AMERICAN ASSOCIATION OF AIRPORT EXECUTIVES
BEFORE THE HOUSE TRANSPORTATION AND INFRASTRUCTURE COMMITTEE
SUBCOMMITTEE ON AVIATION

BODY:

Mr. Chairman, Congressman Lipinski, I am David Z. Plavin, President of Airports Council International-North America (ACI-NA), and I appreciate the opportunity to appear this morning on behalf of ACI-NA and the American Association of Airport Executives (AAAE).
As you know, ACI-NA represents local, regional, state and national governing bodies that own and operate commercial airports in the United States and Canada. ACI-NA member airports enplane more than 97 percent of the domestic and virtually all the international airline passenger and cargo traffic in North America. ACI-NA associate members represent a wide variety of businesses that provide products and services to the air transportation industry. AAAE is the world's largest professional organization representing the men and women who manage airports. AAAE members manage primary, commercial service, reliever and general aviation airports, which enplane 99 percent of the passengers in the United States.
Mr. Chairman, we recognize that airports have a role to play in promoting airline competition. Let me assure you that airports have, in the past, and continue to take this responsibility seriously. Today I will be talking about what the role is - and what it is not - and the best tools you can give airports to allow them to play a useful role.
I have appeared before this subcommittee a number of times before; in just about every case, I think, I have talked about capacity and competition, which go hand in hand. I have told you that airports view it as their primary purpose to promote airline competition and service at their facilities and for their communities. It is in every airport community's interest to have airlines providing the maximum viable air service and competing freely. Airport board members and commissioners, the governing bodies at many of our airports, are individuals who come out of the community, and are appointed to airport boards to set policies and goals that reflect and best serve the community's interests.
Airports are on the front lines of the "air wars." Airport managers work in the trenches every day to balance the competing interests of airlines - and other airport users - those who serve the airport and those who seek to serve the airport, along with the community and air travelers who are served by the airport.
Airports constantly and actively seek to build and expand so that they have sufficient capacity and facilities to accommodate all carders wishing to provide service, whether they are wellestablished carders or new entrants, hub carders or low-fare carders, growing carders or niche carriers. Airport managers who fail to address all these opportunities for service to their communities will soon find themselves in search of employment.
Airport operators must plan now for the capacity they will need both in the short-term, and longterm. Airports are constantly seeking to attract new service to more destinations, international service, jet service, non-stop service, greater frequency of service, and the lowest possible fares and fare options for air travelers and consumers. All of these goals depend on facilitating and promoting airline competition.
Given the overriding interest airports have long demonstrated in promoting and maximizing competition for their communities, the airport community was quite surprised by the Department of Transportation's sudden investigation into "Airport Business Practices and Their Impact on Airline Competition." DOT has called into question whether airport managers are doing what they need to do to ensure competitive access to their facilities and to promote competitive opportunities for new entrants. From what we have learned of the investigation and report, we are concerned that it leaves one with the demonstrably false impression that airports are in collusion with the dominant airlines at their airport -- or at best, their unwitting accomplices -using long-term lease agreements and other legitimate business arrangements to keep potential competitors out of their airport.
The ironies surrounding these conclusions are staggering.
Because of a few isolated instances of difficulties faced by new entrant carders in their dealings with other carriers, and because airports are both visible and highly regulated by the federal government, the DOT has apparently decided to shift the onus for promoting competition to airports, while sitting on its proposed "Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transportation Industry," which was issued in the Federal Register on April 10, 1998, with the intent of issuing guidelines for DOT investigation and possible intervention in anti-competitive practices by dominant carriers aimed at driving out low-fare competition.
DOT has apparently chosen to ignore the real culprits that constrain competition. DOT policy has encouraged consolidation in the form of mergers throughout the domestic industry -- they have never met a merger they didn't like -- and continues, encouraging all forms of code sharing and alliances, which only serve to reinforce already excess market power, by virtue of sheer size. They have done nothing to curb the anti-competitive impact of CRS systems, frequent flier programs, and predatory practices such as undercutting the low fares of a new competitor and dumping extra seat capacity in the market to wage a war of attrition and drive the competitor out or their fares up.
So, despite the total lack of evidence that airport practices are significant obstacles to competition, that's where DOT is focussing its attention, ignoring real anti-competitive practices all around them. These are practices which they already have ample authority to address, without involving the federal government in regulation of practices that they clearly do not understand which the market is addressing successfully, without such intervention.
Not only has DOT turned its head away from anti-competitive airline practices, but the report on airport practices fails to acknowledge the role the federal government has played thorough either misguided federal policies and decisions, or through unintended consequences that have arisen as a result of federal actions or inaction. Many of these have tied the hands of airport director in their efforts locally to expand and promote airline competition.

Although we could spend all morning exploring and discussing these, I'll just briefly highlight of few of the most significant ones. These include:
- long-standing federal limits on the number of landings and take-offs allowed at the "High-Density Rule" (HDR) airports;
- the federal "buy-sell" policy which gave established, dominant carriers the valuable and scarce slots at the HDR airports for free, thereby ensuring their control of the most attractive and lucrative airport markets and forcing new entrants to pay the dominant carriers for the right to use those slots and enter those markets;
- approving countless airline mergers, which have contributed to greater industry concentration and fewer competitors;
- airport revenue diversion prohibitions which are so overly far- reaching that they constrain airports and their local governments and business community in their traditional marketing efforts to attract airlines and travel and tourism to the community;
- federal policies and regulatory requirements which are biased in favor of dominant airline interests, encouraging, even requiring airports to negotiate resolutions of issues within their carrier communities;
- pending Policy on Airport Rates and Charges which restrict charges airports may impose on airlines for airport facilities and, in effect, hinder airports from building additional capacity.
It should be no surprise that many of these policies and regulations - which have or will have anti-competitive consequences - were instigated or supported by the dominant airlines to protect their interests and give them greater control over airport development and the access new competitors have to the airport and aviation system. Federal policies and restrictions on local and state government airport operators are, at best, neutral in their effect. But, more often they are skewed against local airport control, airport expansion, and airline competition.
No where is this more evident than in the perpetual under-funding of aviation, in general, and airport development, in particular. The federal government's inability to fund at adequate levels the Airport Improvement Program (AIP), and it unwillingness to allow airports to generate the capital improvement dollars they require locally, through Passenger Facility Charges (PFCs), for example, has been a major contributor to the capacity and competition problems we face today. The July, 1999 report by the Transportation Research Board on Entry and Competition in the U.S. Airline Industry: Issues and Opportunities identifies "federal restrictions on the ability of airports to raise and invest funds for expansion" among the most critical causes of capacity shortages that limit new competition, particularly entry and expansion by low-cost carders.
The lack of investment in airport capacity and expansion -from the runways and taxiways, through the terminals and gates, and in the roadways and access systems - is the most serious threat to airline competition at our nation's airports.
Through the leadership of this Subcommittee, the Congress made great strides in 1990 to give airports greater means to expand and build gates and other facilities that will increase air service and competition. Among the many important purposes for which it was created (capacity, safety, security, noise mitigation, and competition) the PFC program was recognized then, and has proven to be now, a very effective tool for airports to build gates and related facilities for new entrants and growing incumbent carriers.., to promote competition and help reduce air fares. Since 1992, many airports have relied on PFCs to build gates and attract lowfare carders, such as Southwest, which has resulted in lower fares and greater competition in many markets.
The link between PFCs and competition is really very straightforward. PFCs are used to build gates and related facilities for new airlines to come to an airport. It has happened at airports across the United States, including Baltimore-Washington, Providence, Oakland, St. Louis, Washington Dulles and Tampa, to name a few, and the result is better air service and lower ticket prices for air travelers. For example, at Washington Dulles, PFCs funded the new Midfield Terminal B, a 20-gate facility used by 10 carriers, including low fare carriers such as Metro Jet and Delta Express. At St. Louis, PFCs funded gates for Southwest, and at Tampa, PFCs partially funded 15 gates, some of which were retained under the airport's control as common use gates, which means they will be available for new entrants. In comments recently filed with DOT, Wayne County, Michigan has indicated that it is entering into an agreement at Detroit with Southwest and Spirit Airlines to build 6 new gates for those carriers, with the costs to be reimbursed with PFCs. Spirit had previously been unable to obtain its own gates at the airport.
Many of these gates and capacity-enhancing projects simply could not have been built without PFCs, as the incumbent carders resisted or opposed adding new capacity that would bring in new competitors and lower fares. PFCs are collected for and controlled by airports for their use on specific projects that are approved by the FAA. In the PFC approval process, airlines are consulted by the airport on the projects the PFC will be used for, and I can tell you from my own experience that their comments are considered. But at the end of the day, the fact that the incumbent airlines cannot veto a PFC project - only the FAA can deny the application means that PFCs can be used for common-use or shared-use facilities for benefit new entrants and low cost carders, which benefits the travelers who use that airport.
Today, however, airports are constrained by the $3.00 federal cap on PFCs, which has been in place since the program's inception in 1990, but is no longer adequate to meet the needs of airports or the airlines requiring additional gates and capacity to grow and expand service. This Committee recognizes the importance of the PFC and thanks to the leadership of Chairman Shuster, Congressman Oberstar, Chairman Duncan and Congressman Lipinski, the House passed FAA Reauthorization bill contains a provision increasing the federal limit on locally imposed PFCs from $3 to $6, giving local airports greater flexibility to meet their own needs and promote competition at their airports. We strongly urge the conferees to H.R. 1000 to insist on the House provision on PFCs - and of course the provision to unlock the Aviation Trust Fund - during the conference now underway.
The single most important action this Congress can take to promote competition is to enact this provision and allow airports to raise PFCs, which are available to be used to increase capacity and competitive opportunities.
THE STATE OF AIRPORT GATE AVAILABILITY AND OPPORTUNITIES FOR NEW ENTRANT/LOW-FARE AIRLINE COMPETITION
Over the past ten years, the Airports Council International-North America has conducted numerous surveys of airport operators throughout the U.S. to:
(1) assess the competitive opportunities at U.S. airports for new entrants airlines, particularly the availability of aircraft gates and other essential facilities on competitive terms that would be required to establish new or expand service; and
(2) determine the degree of airline control over gates and airport expansion, which may allow dominant airlines to inhibit competition or engage in anti-competitive practices.
In 1989, the Airport Gate Availability Survey of the 30 largest U.S. airports found the following disturbing conditions:
- Competitive aircraft gates available for new airline service were extremely scarce at the largest airports
- Airports had very limited ability to provide gates directly to a new entrant carrier, or to compel dominant or incumbent carders to provide or share gates on competitive terms.
Only 6 of the top 30 airports surveyed reported that they were able to provide a minimum of three gates during the airport's busiest peak hour to enable a new entrant carrier to start-up service.
Commercial air passengers had nearly doubled in the ten years following airline deregulation in 1978. Total passengers traveling through the top 30 airports had increased from 170 million in 1977 to 320 million in 1987 - an 87 percent increase. Much like today, airports then were ill-equipped to handle that magnitude of air passenger growth.
The 1989 survey revealed that many airports had insufficient and inadequate gates to handle growing aircraft operations and passenger levels.

Airports also reported they were unable to provide or build gates and gate-related facilities (e.g., baggage claim, passenger hold rooms, and airline ticket counters) that a new entrant or growing airline would require during peak hours, primarily because of lack of funding and because of contractual requirements in long-term use-and-lease agreements with the airlines already serving the airport.
Before airline deregulation, airports and airlines had a symbiotic relationship: they were stuck with each other. Airlines could not go elsewhere and others were restricted from entering those markets. But, some long-term agreements were entered into shortly after airline deregulation, as well. Since airlines were free to come and go at airports, and airports were largely dependent on the financial support of the airlines to build and expand, through landing fees and other facility rental charges, these agreements enabled airports to obtain the long-term commitment of the airlines to serve the airport and support it's continued operation and development. In exchange, the airlines demanded a measure of control over future airport development and costs through "majority-in-interest" clauses, which give the airlines various types of approval or veto power. At that time, these were legitimate business arrangements, reflecting the economic realities of their day, they were key to building hubs and to the major airport expansion that did occur.
Today, however, those agreements that remain from that period, now create the potential - absent other airport funding tools, like PFCs - for incumbent carriers to block or veto capacity expansion projects and the provision of gates for new entrant competitors.
In fact, airports are doing something about that. With increasing economic independence and market strength, gate leasing terms, conditions, practices, and provisions have evolved significantly over time, toward fewer airline financed gates, many fewer gates with exclusive and unrestricted occupancy, and much shorter lease terms.
On the funding side, recognizing the serious problems of inadequate airport capacity and the lack of available gates for new entrants, this Subcommittee and the Congress enacted the Airport PFC program, partially restoring to airports the right to raise capital funds from passengers (up to $3.00 per enplanement). PFC funds are raised locally at the airport and controlled by the airport, so that the airport can apply the funds to eligible projects that increase capacity, safety, security, reduce aircraft noise and promote airline competition. Unlike other airport revenue sources, PFCs are not subject to airline control or veto - by intent of Congress and the Administration - so that dominant carders cannot block airport expansion projects or additional gates that would benefit new entrant carriers or other competitors.
The Availability of Competitive Aircraft Gates At U.S. Airports Has Improved Substantially Due to the Pro-Competitive Use of PFCs
As mentioned earlier, many airports have used PFCs effectively to build or expand terminals and make more gates available on competitive terms for new entrant carriers and growing incumbent competitors. This has been corroborated by our most recent survey in 1998 of Airport Gate Availability and the Use of PFC, the data from which was used by the DOT in its assessment of airport practices and PFCs, and the role they have played in promoting airline competition. DOT has relied extensively on the data made available to them from our survey of U.S. airports in forming the conclusions and recommendations in their report.
Our preliminary analysis of the Gate Availability survey indicate that, since 1989, the number of gates available during peak hours at large hub airports has increased by more than 60%, while off-peak gates available have increased by about 250%.- Large hub airports were able to construct 400 gates between 1989 and 1998, and project they will build another 400 by 2004. PFCs have helped construct or refurbish over 300 gates since 1992.
Airports are Regaining Control Over Terminal Gate Facilities To Promote Airline Competition, Increase Air Service Choices and Reduce Air Fares
Another key finding of the ACI-NA survey is that airports across the country are taking proactive steps to regain greater control over the allocation and use of gates by the airlines, and to ensure that greater numbers of new gates will not be exclusively controlled by one carrier and that adequate gates can be provided to new entrant and low-fare carriers.
The 1998 Gate Availability Survey found that:
- At Large Hubs, only about 55% of the gates are leased to airlines on an "exclusive-use" basis today, compared to approximately 63% in 1992.
- The percentage and number of "exclusive" gates are expected to decline even further to approximately 40% by the year 2004.
- Large Hub airports plan a 100% increase by 2004 in the number of gates that will be under "shared airline use" and "airport- controlled," compared to 1992. Airports are doing this by converting existing gates that are tied-up "exclusively" by one carder to "common" or "shared" use, and by ensuring that additional gates the airport builds are not controlled by one dominant carrier. This is important to give the airport more flexibility to respond to the changing and growing needs of all carders, particularly new entrants, and to prevent dominant airlines from blocking access to gate facilities on competitive or reasonable terms, such as when a new entrant must sublease gates from a dominant carder.
Medium Hub airports report that their terminal expansion plans will double the number of "airport-controlled" gates they had in 1992 by year 2004.
Other significant findings of the 1998 survey are:
- More than 70% of large and medium hub airports reported experiencing greater airline demand for gates in 1998 versus 1992.
In addition to gates, it is equally true that, unless a new entrant or low-fare airline can obtain these essential facilities and services either directly from the airport, or from another airline on reasonable and competitive terms, they will have great difficulty starting up and sustaining a viable, competitive service.- More than 75% of the large hub airports and 66% of the medium hub airports who responded to the survey reported they can require incumbent airlines at their airport to provide gates to other carders on competitive terms and conditions.
The 1989 Gate Survey also revealed that at many airports, airlines wield considerable power over airport development and capacity expansion, through long-term exclusive use agreements and socalled Majority-in-Interest (MII) clauses.
In 1989, 83% of the Large Hubs (25 of the top 30) had at least one form of MII clause in their airline use-and-lease agreements, through which incumbent or established airlines serving the airport have the authority to approve or veto whether the airport may:
- undertake capital development projects above a certain cost;
- adjust landing fees or terminal rental fees to pay debt service and operating costs;
- issuing bonds to raise funds to build new gates and other facilities, or
- impose additional rates, fees and charges needed for the airport's development and operation, among others.
By 1998, the percentage of Large Hubs having airline MII's declined to about 65%.
CONCLUSION
It is difficult to review this survey data and understand how DOT can draw the conclusions they have drawn, or make the specific recommendations they have, calling for greater federal intrusion in local airport management and business practices.
DOT is right to be concerned about the potential for dominant airlines to abuse their negotiated, contractual powers at airports and market power to block access to airport facilities or thwart competition. Yet it is these same agreements that DOT has acknowledged - and even encouraged - airports to enter into in order to reach agreement with airlines on rates and charges and airport development plans. Further, DOT/FAA's own policies, rules, regulations, pronouncements are either silent, skewed against competition, or contradictory.
We believe that the problem of competition at airports is not prevalent, as DOT submits, but that there may be legitimate pockets of competitive problems. The solution is not to "bring in the feds" and trample over local airport proprietary rights, but to give the local airports greater tools, freedom to operate in the marketplace, and funding independence so that they can expand their facilities, attract new air service, and build sufficient capacity that will ensure competitive opportunities for all carriers. Increasing the federal cap on PFCs is a very important step towards greater competition, which must be taken now, if we are to continue the progress that has been made in expanding airport gates and competitive access.The DOT report does recognize:
- "the pervasiveness of exclusive-use leases is declining in any event";
- the airport bond market is no longer as reliant on airports having long-term, exclusive leases with carriers to guarantee airport's financial integrity;
- when current leases expire or the opportunity to renegotiate arises, more and more airports are moving to attain greater control over their facilities, gates and future expansion; and,
- "the utilization of the PFC program at many large and medium commercial hub airports has effectively facilitated the conversion of exclusive-use into preferential use leases, potentially subject to greater airport control."
Unfortunately, DOT's recommendations appear to be solutions in search of a problem. Such federal intrusion is clearly not warranted - and the unintended consequences potentially disastrous--based on the clear evidence and the isolated new entrant access problems that may have occurred at times.
Mr. Chairman, since DOT's report is being issued today, we obviously have not had the opportunity to review it in detail to prepare for today's hearing. I would appreciate the opportunity to submit additional materials for the record. I am available for any questions you or your colleagues may have.
END

LOAD-DATE: October 23, 1999