FTC Staff Comment Before the Department of Transportation Concerning Proposal to Give Limited Antitrust Immunity to Discuss Scheduling Overlaps at Congested Airports

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BEFORE THE 	A PPR 0 V'~ 	~DEPARTMENT 	OF 	TRANSPORTATIOP 	i;;,D;'WASHINGTON, 	D.C. 	~"
DISCUSSION 	AUTHORITY 	FOR
AGREEMENT 	TO 	SHIFT 	SCHEDULES
)
)
)
----------------) Docket No. 	44634
Comments 	of 	the 	Bureaus 	of 	Economics, 	Competition, 	ard
Consumer 	Protection 	of 	the 	Federal 	Trade 	Commission
Introduction
In 	these 	comments, 	the 	Federal 	Trade 	Commission 	staff
addresses 	a 	Department 	of 	Transportation 	(DOT) 	proposal 	that 	air
carriers 	be 	given 	limited 	antitrust 	immunity 	to discuss
scheduling. overlaps 	at 	congested 	airports. 	We 	urge 	that 	this
proposal 	not 	be 	implemented. 	We 	believe 	that 	scheduling 	overlaps
•
could 	be 	eliminated 	more 	efficiently 	if 	the 	DOT 	imposed 	limits 	on
takeoff 	and 	landing 	operations 	as 	needed, 	and 	then 	made 	the
resulting 	operating 	rights, 	or 	·slots,· 	marketable 	through 	cash
sales. 	We 	suggest 	that 	this 	approach 	would 	be 	more 	consistent
with 	the 	Federal 	Aviation Act's 	preference 	for 	market-oriented
solutions, 	and 	would 	better 	serve 	the 	interests 	of 	the 	flying
public.
1 	These 	comments 	represent 	the 	views 	of 	the 	Federal 	Trade
Commission 	staff, 	and 	do 	not 	necessarily 	represent 	the 	views
of 	the 	Commission 	itself 	or 	of 	any 	individual 	Commissioner.
The 	Commission 	has, 	however, 	voted 	to 	authorize 	the 	Bureaus
to 	submit 	these 	comments.

The 	Federal 	Trade 	Commission 	(WFTC Wor 	wCommission W) 	is 	an
independent 	regulatory 	commission, 	created 	in 	1914 	by 	the 	Federal
Trade 	Commission Act, 	and 	empowered 	to 	prevent 	unfair 	methods 	of
competition 	and 	unfair 	or 	deceptive 	acts 	or 	practices 	in 	or
affecting 	commerce. 	One 	of 	the 	Commission's 	principal
responsibilities 	is 	enforcement 	of 	the 	antitrust 	laws.
Government 	regulations 	that 	create 	barriers 	to 	entry 	or 	that
weaken 	competition 	are 	of 	particular 	concern 	to 	the 	Commission.
The 	Commission's 	Bureaus 	of 	Economics, 	Competition, 	and
Consumer 	Protection 	have 	a 	continuing 	interest 	in 	policy 	issues
involving 	airport 	access, 	including 	the 	allocation 	of 	slots 	to
airlines 	at 	restricted 	airports. 	FTC 	staff 	research 	has 	led 	to
the 	publication 	of 	a 	report 	on 	slot 	allocation,2 	and 	the 	FTC
staff 	has 	also 	participated 	in 	earlier ·administrative 	proceedings
raising 	many 	of 	the 	same 	issues 	involved 	here. 	We 	filed 	written
comments 	before 	the 	Civil 	Aeronautics 	Board 	in 	1984 	in 	response
to 	Eastern Airlines' 	request 	for 	antitrust 	immunity,3 	and
2
3
The 	Report 	presents 	evidence 	that 	competition 	in 	air
transportation 	markets 	would 	be 	encouraged 	and 	that 	consumers
would 	receive 	significant 	net 	benefits 	if 	restrictions 	on 	the
transfer 	of 	slots 	are 	removed. 	See 	D. 	Koran 	and 	J.D. 	Ogur,
Airport Access 	Problems: 	Lessons 	Learned 	from 	Slot
Regulation 	by 	the 	FAA, 	Bureau 	of 	Economics 	Staff 	Report 	to
the 	Federal 	Trade 	Commission, 	May 	1983 	(FTC 	Staff 	Report).
Such 	restrictions 	were 	ended 	by 	DOT 	in April 	of 	1986 	(Docket
No. 	24105, 	50 	Fed. 	Reg. 	52180).
See 	Application 	for 	Discussion Authority 	and 	Prior 	Board
Approval 	of 	Carrier 	Agreements 	to 	Integrate 	Schedules, 	Docket
No. 	42410, 	Answer 	of 	the 	Bureaus 	of 	the 	Federal 	Trade
Commission 	(August 	27, 	1984).
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1-
, 	. 	participated 	that 	same 	year 	in 	response 	to 	an FAA 	notice" of
proposed 	rulemaking 	concerning 	airport 	delays.4
The 	current 	proceeding 	is 	similar 	to 	the 	1984 Eastern
Airlines 	request. 	Both 	proposals 	share 	the 	common 	goal 	of
reducing 	the 	frequency 	of 	delayed 	flights. 5 The 	tentative 	DOT
plan, 	like 	the 	Eastern 	Airlines 	request, 	would 	grant 	air 	carriers
an 	antitrust exemption 	to 	discuss 	scheduling 	overlaps 	as 	a
temporary 	means 	of 	reducing 	airport 	flight 	volume 	during
congested 	periods.
Adoption 	of 	the 	DOT 	proposal 	is 	likely 	to 	harm 	both
competition 	and 	consumers. 	To 	avoid 	these 	undesirable 	effects,
we 	offer 	the 	following 	recommendations: 	1) 	DOT 	should 	not 	grant
antitrust 	immunity 	for 	carrier 	schedule 	discussions: 	2) 	instead,
DOT 	should 	adopt 	the 	less 	anticompetitive 	and 	more 	efficient
alternative 	approach 	of 	imposing 	slot 	limitations 	whenever
4
5
Federal 	Aviation Administration, 	Notice 	of 	Proposed
Rulemaking 	Regarding 	Elimination 	of 	Airport 	Delays, 	49 	Fed.
Reg. 	33082 	(1984).
According 	to 	statistics 	complied 	by 	the 	FAA, 	over 	417,000
flights 	had 	a 	departure 	or 	arrival 	qelayed 	by more 	than 	15
minutes 	in 	1986. 	About 	75 	percent 	of 	the 	total delays 	for
1986 	(313,568) 	occurred 	at 	ten 	of 	the 	nation's 	largest
airports. 	Moreover, 	according 	to 	the 	Official Airline 	Guide
schedule 	tapes, 	carriers 	have 	scheduled 	operations 	at 	a 	much
higher 	level 	that 	FAA Engineered 	Performance 	Standards 	would
indicate 	are 	possible 	at 	Atlanta, 	Boston 	and 	Newark
airports. 	S7e 	DOT Order 	87-1-54, 	pp. 	1-3.
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necessary 	to eliminate 	congestion, 	and 	then 	making 	these 	slots
transferable 	by 	expanding 	the 	existing 	cash 	market. 6
Both 	restrictions 	on 	slots 	and 	their 	subsequent marketing
have 	been 	successfully 	implemented 	in 	the 	past. 	Slot
restrictions 	on 	total 	operations 	per 	hour 	were 	originally 	imposed
at 	four 	airports 	in 	the 	late 	1960's. 	In 	response 	to 	the 	air
traffic 	controllers' 	strike 	in 	1981, 	the 	FAA decreased 	the 	number
of 	slots 	at 	the 	four 	original 	locations 	and 	imposed 	slot
restrictions 	at 	18 	additional 	airports. 	In 	1982, 	the 	FAA
modified 	the 	program 	by 	permitting 	implementation of 	a 	barter
system 	for 	the 	trading 	of 	slots 	at 	all 	slot-constrained
airports. 7 Shortly 	thereafter, 	it 	permitted 	cash 	slot 	sales 	on
an 	experimental 	basis 	for 	six 	weeks. 	During 	that 	period 	over 	190
slots 	were 	bought"and 	sold.
As 	ATC 	system 	capacity 	slowly 	increased 	following 	the 	PATCO
strike, 	restrictions 	were 	removed 	at 	most 	airports. 	In 	1984, 	the
FAA 	imposed 	slot-like 	restrictions 	on 	operations 	during 	specified
time 	periods 	at 	certain 	major 	airports. 	Two 	years 	later, 	DOT
permitted 	the 	buying 	and 	selling 	of 	slots 	at 	the 	four 	original
slot-restricted 	airports. 	We 	believe 	that 	more 	extensive 	use 	of
6
7
Our 	recommendations 	follow 	from 	our 	responsibilities 	to
promote 	competition 	and 	the 	interests 	of 	consumers. 	We
recognize 	that 	there 	may 	be 	other 	concerns 	of 	public 	policy
which 	should 	be 	taken 	into 	account 	in 	a 	proceeding 	such 	as
this 	one. 	However, 	Order 	87-1-54 	made 	no 	finding 	that 	safety
is 	affected 	by 	the 	current 	situation.
By 	Rslot-constrained R we 	mean 	that 	there 	are 	legal
restrictions 	on 	the 	number 	of 	takeoff 	and 	landing 	operations
that 	are 	allowed 	to 	be 	scheduled.
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this 	market 	approach 	will 	be 	a 	better 	solution 	to 	airport
congestion 	problems 	than 	DOT's 	proposed 	solution. 8
The 	Proposal
The 	DOT 	proposal 	arises 	out 	of 	the 	apparent 	scarcity 	of 	air
traffic 	control 	(-ATC-) 	capacity 	at 	several 	u.s. 	airports 	at
certain 	times 	of 	the 	day. 	In 	other 	words, 	at 	the 	prevailing
(zero) 	price 	for 	the 	use 	of 	ATC 	services, 	airline 	demand
sometimes 	appears 	to exceed 	supply. 	The 	Order 	observes 	that
delays 	have 	recently 	increased 	sharply 	and 	asserts 	that 	in
certain 	peak 	periods 	airline 	scheduling 	has exceeded 	airport
capacity. 	(Order, 	pp. 	1-3). 	This 	excess 	demand 	results 	in 	the
imposition 	of 	congestion 	costs 	on 	carriers 	and 	travelers.
In 	its 	Order, 	DOT 	proposes 	to 	grant 	antitrust 	immunity 	to
carriers 	to 	allow 	them 	to engage 	in 	multilateral 	discussions 	for
the 	purpose 	of 	integrating 	their 	schedules 	in order 	to 	reduce 	the
number 	of 	flights 	during 	congested 	periods 	and 	thus 	reduce 	the
incidence 	of 	delayed 	flights. 	The 	Order 	covers 	thirteen
airports, 	ten 	of 	which 	are 	not 	now 	slot-constrained. 	The 	grant
of 	antitrust 	immunity 	would 	apply 	to 	the 	following 	airports:
Atlanta, 	Boston, 	Chicago O'Hare, 	Denver, 	Minneapolis-St. 	Paul,
8 	An 	alternative 	solution 	would 	impose 	a 	congestion 	charge 	on
carriers 	during 	peak 	periods 	to 	equate 	marginal 	private 	cost
and 	marginal 	social 	cost. 	See 	Borins, 	-Pricing 	and
Investment 	in 	a 	Transportation 	Network: 	The 	Case 	of 	the
Toronto Airport,- 	Canadian Journal 	of 	Economics, 	November,
1978.
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New 	York 	LaGuardia 	and 	Kennedy, 	Newark, 	St. 	Louis, 	San 	Francisco,
Dallas-Forth Worth, 	Philadelphia, 	and 	Washington 	Dulles. 9
The 	DOT's 	proposed 	plan 	would 	place 	both 	substantive 	and
procedural 	limitations 	on 	any 	multilateral 	agreement 	reached 	by
carriers. 	Carriers 	would 	not 	be 	authorized 	to determine 	the
maximum 	number 	of 	flights 	that 	could 	be 	operated 	within 	any
specific 	time 	period. 	Rather, 	their 	discussions 	would 	be
confined 	to 	spreading 	flights 	over 	a 	longer 	period 	of 	time 	or 	to
distributing 	them more 	evenly 	within 	current 	peak 	periods.
Carriers 	could 	not 	discuss 	fares 	and 	other 	pricing 	matters; 	nor
could 	they discuss 	services 	in 	individual 	city-pair 	markets.
All 	scheduled 	carriers 	serving 	an 	airport 	and 	any
prospective 	entrants 	would 	be 	permitted 	to 	participate. 	Notice
·of ~eetings would 	be 	given 	to 	all·carriers 	serving 	an 	affected
airport 	and 	to 	the 	airport 	proprietor, 	the 	Department 	of 	Justice,
the 	FAA 	and 	the 	DOT. 	Meetings 	would 	be 	opened 	to 	all 	interested
parties, 	including 	government 	agencies, 	and 	reports 	listing 	the
attendees 	and 	summarizing 	the 	discussions 	for 	all 	meetings 	would
be 	filed 	with 	the 	DOT. 	In 	order 	to 	better 	facilitate 	government
oversight, 	the 	meetings 	would 	be 	held 	in 	the 	Washington, 	D.C.,
metropolitan 	area.
The 	Problem 	and 	Its 	Solution
Airport 	congestion 	is 	an 	example 	o~ 	a 	·common 	property"
resource 	problem, 	which 	has 	the 	essential 	element 	that 	no 	one
9 	DOT 	Order 	87-1-54, 	p.4.
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entity 	controls 	access 	to 	a 	resource 	(in 	this 	case, 	the 	ATC
system) 	that 	is 	available 	only 	in 	fixed 	supply. 	As 	a 	result,
competing 	users 	(air 	carriers) 	overuse 	the 	resource. 	This 	causes
an 	inefficiently 	high 	level 	of 	congestion. IO The 	end 	result 	is
that 	each 	airline 	imposes 	costs 	on 	other 	airlines. ll 	For
example, 	each 	carrier 	with 	an 	aircraft 	in 	a 	queue 	waiting 	to 	take
off 	imposes 	congestion 	costs 	on 	carriers 	with 	aircraft 	further
back 	in 	the 	queue 	and 	on 	the 	passengers 	in 	those 	other 	aircraft.
An 	efficient 	solution 	to 	a 	common-property 	resource 	problem
includes 	setting 	a 	limit 	on 	the 	use 	of 	the 	resource 	and
allocating 	the 	use 	rights 	to 	parties 	who 	value 	those 	rights 	most
highly. 	The 	DOT 	proposal 	embodies 	one 	method 	of 	making 	this
allocation. 	It 	suffers, 	however, 	from 	two disadvantages. 	First,
10
11
When 	we 	speak 	in 	this 	comment 	of 	reducing 	congestion, 	we 	do
not 	necessarily 	imply 	that 	DOT 	should 	attempt 	to 	reduce
congestion 	and 	delays 	in 	all 	cases 	to 	zero. 	Such 	a 	course
might 	not 	be 	in 	the 	best 	long-term 	interest of 	consumers.
While 	eliminating 	the 	last 	increment 	of 	congestion might 	be 	a
benefit 	to 	them, 	the 	costs 	to 	them 	of 	attaining 	it, 	including
the 	costs 	of 	expanding 	ATC 	capacity or 	of 	eliminating 	desired
flights 	in 	order 	not 	to 	exceed 	current 	capacity, 	may 	well
exceed 	those 	benefits. 	We 	will 	accordingly 	speak 	here 	of 	the
optimal 	level 	of 	congestion, 	which 	weighs 	all 	these 	factors
and 	maximizes 	net 	consumer 	welfare. 	Put differently, 	the
optimal 	level 	of 	congestion 	exists 	when 	carriers 	are 	paying
all 	the 	costs 	they 	create, 	inclUding 	the 	congestion 	costs
they 	impose 	on 	other 	carriers.
In 	other 	words, 	the 	marginal 	social 	cost 	of 	each 	use 	is
greater 	than 	its 	marginal 	private 	cost. 	Private 	users 	make
decisions 	regarding 	use 	based 	on 	marginal 	private 	cost 	and
thus 	overuse 	the 	resource 	from 	society'S 	point 	of 	view.
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it 	may 	create 	market 	power, 	and 	second, 	it 	may 	lead 	to 	an
inefficient 	allocation 	of 	operating 	rights. 12
Anticompetitive 	Effects
The 	first 	drawback 	to 	the 	proposed 	plan 	is 	the 	risk 	that 	an
agreement 	might 	produce 	anticompetitive 	results. 	The 	carriers
could 	use 	the 	planned 	discussions 	as 	a 	forum 	for 	reaching
agreements 	to 	reduce 	capacity, 	which 	would 	enable 	all 	of 	them 	to
reap 	higher-than-competitive 	profits, 	at 	least 	as 	long 	as 	DOT
acted 	to 	enforce 	the 	agreement. 13
12
13
As 	a 	further 	threshold 	problem, 	the 	carrier 	discussions
provided 	for 	in 	the 	Order 	may 	not 	produce 	agreement 	in 	any
event. 	Evidence 	to 	support 	this 	concern 	is 	provided 	by 	the
experiences 	of 	the 	scheduling 	committees 	at 	the 	high 	density
airports 	and 	the 	committees 	set 	up 	to deal 	with 	flight 	delays
in 	1984. 	After 	deregulation 	opened 	entry 	into 	air
transportation 	markets, 	committees 	at 	the 	high 	density
airports 	experienced 	increased 	difficulty 	in 	reaching
agreement. 	In 	some 	instances 	the 	result 	was 	total
stalemate. 	In 	1984, 	under 	the 	threat 	of 	an 	imposed 	shifting
of 	flights 	by 	the' FAA, 	the 	carriers 	were 	finally 	able 	to
reach 	agreements, 	but 	only 	after 	extensive 	discussions.
Because 	the 	committees 	created 	by 	the 	DOT 	Order 	would 	operate
under 	the 	same 	decision 	rule 	(that of 	voluntary 	agreement 	or
unanimity) 	and 	because 	the 	possible 	enforcement 	role 	of 	the
FAA 	is 	less 	clear 	than 	it 	was 	in 	1984, 	the 	proposed
committees 	may 	experience 	similar 	difficulties. 	In 	the 	event
of 	stalemate, 	the 	committees 	would 	obviously 	provide 	no
solution 	to 	the 	problem of 	congestion.
The 	DOT Order 	does 	not 	clearly 	address 	the 	question of
enforcement. 	Private 	enforcement 	of 	agreements 	would
probably 	be 	ineffective, 	however. 	Each 	participating 	carrier
would 	have 	an 	incentive 	to 	cheat 	on 	the 	agreement 	by
restoring 	flights 	that 	it 	had 	dropped, 	since 	this 	would
increase 	that 	airline's 	profits. 	Other 	airlines 	would 	have
an 	incentive 	to 	enter 	with 	new 	flights. 	While 	such 	cheating
might 	be 	easily detected 	by 	the 	airlines 	that 	were 	faithful
to 	the 	agreement, 	they 	would 	lack 	DOT's 	power 	to 	punish 	the
violators.
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The 	proposed 	DOT 	Order 	addresses 	this 	potential 	danger, 	by
providing 	that 	carriers 	may 	not 	discuss 	or 	agree 	on 	the 	maximum
number 	of 	flights 	in 	any 	time 	period. 	It 	is 	not 	clear, 	however,
that 	this 	prohibition 	can 	be 	effectively enforced. 14 Any 	process
of 	reducing 	peak-period 	congestion 	necessarily 	implies 	shifting
some 	flights 	to 	other, 	adjacent, 	and 	less 	desirable 	time
periods. 	In 	turn, 	the 	supply 	of 	flights 	in 	the 	~ore desirable
peak 	periods 	is 	reduced. 	To 	the 	extent 	that 	off-peak 	travel 	is
not 	a 	perfect 	substitute 	for 	peak-period 	travel, 	this 	situation
may 	permit 	airlines 	holding 	peak-period 	slots 	to 	raise 	prices.
If 	coordination 	is 	perfect, 	then 	the 	number 	of 	flights 	will 	be
14 	We 	recognize 	that 	the 	procedural 	limitation 	which 	DOT 	would
impose 	on 	carrier 	discussions 	are 	intended 	to 	strengthen 	its
prohibition 	against 	agreements 	setting 	the 	maximum 	number 	of
flights. 	Should 	Order 	87-1-54 	be 	issued, 	we 	would 	encourage
vigorous 	oversight 	of 	carrier 	discussions 	by DOT 	and 	other
government 	agencies. 	However, 	for 	reasons 	set 	forth 	in 	the
text, 	we 	nevertheless 	believe 	that 	anticompetitive 	results
would 	be 	difficult 	to 	avoid, 	due 	to 	the 	inherent 	nature 	of
the 	situation 	and 	despite 	the 	best 	efforts 	of 	the 	DOT. 	The
order 	acknowledges 	the 	problem 	where 	it 	states 	that 	DOT 	is
-reluctant 	to 	authorize 	carrier 	schedule 	discussions 	since
they 	could 	affeqt 	airline 	competition.- 	Order 	87-1-54, 	p.4.
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reduced 	to 	the 	monopoly 	level, 	and 	each 	carrier 	will 	share 	in 	the
monopoly 	level 	of 	profits. ls
In 	sum, 	scheduling 	discussions 	could 	enable 	carriers 	to
exe"rcise 	(or 	at 	least 	move 	in 	the 	direction 	of) 	monopoly 	power,
something 	that 	they 	are 	otherwise 	unlikely 	to 	accomplish. 	The
result 	would 	be 	fewer 	flights 	than 	necessary 	to 	reduce 	congestion
to 	the 	optimum 	level, 	and 	an 	increase 	in 	fares. 16 The 	loss 	to
consumers 	from 	higher 	fares 	and 	fewer 	flights 	could 	outweigh 	the
current 	costs 	of 	congestion-related 	delays.
Any 	market 	power 	exercised 	by 	the 	committees 	will 	be
augmented 	if 	the 	newly 	limited 	operating 	rights 	cannot 	be 	freely
bought 	and 	sold. 	In 	the 	FTC 	Staff 	Report 	(pp. 	17-25), 	and 	in
· 	15
16
This 	result 	follows 	most 	easily 	if 	each 	carrier 	maintains 	its
relative 	market 	share 	unchanged. 	In 	that 	case, 	each 	carrier
cancels 	the 	same 	number "of 	flights," a 	result 	that 	may 	be
easier 	to 	achieve 	than 	one 	involving 	unequal 	sacrifices.
With 	the 	same 	share 	of 	the 	larger 	total 	group 	profits,
individual 	carrier 	profits 	will 	also 	be 	higher. 	If 	shares
are 	unequal, 	coordination 	may 	be 	less 	than perfect, 	but 	still
good 	enough 	to 	achieve 	supracompetitive 	profits. 	For
example, 	if 	carriers 	give 	up 	the 	same 	percentage 	of 	their
original 	(differing) 	numbers 	of 	flights, 	each 	carrier 	can
earn 	higher 	profits. 	In 	any 	case, 	the 	requirement 	that
agreements 	be 	voluntary 	gives 	each 	carrier 	the 	power 	to 	veto
any 	agreement 	that 	does 	not 	increase 	its 	profits.
The 	incentive 	of 	some 	carriers 	to 	restrict 	flights 	below 	the
level 	that 	would 	reduce 	congestion efficiently 	at 	one 	airport
is 	constrained 	by 	the 	ability 	of 	other 	carriers 	to 	add
flights 	at 	competing 	airports. 	For 	example, 	carriers 	at
O'Hare 	would 	not 	increase 	their 	profits 	as 	much 	by
restricting 	flights, 	if 	other 	carriers 	could 	readily 	add
flights 	serving 	the 	same 	cities 	fro~ Midway, 	or 	through
alternative 	hubs. 	The 	ability 	to 	add 	flights 	at O'Hare
during 	off-peak 	hours 	further 	constrains 	the 	incentive 	to
engage 	in 	monopolistic 	restriction 	of 	flights 	during 	peak
hours. 	However, 	because 	off-peak 	flights 	and 	flights 	using
other 	airports 	are 	probably 	less 	than 	perfect 	substitutes 	for
peak-period 	flights, 	carriers 	will 	probably 	have 	the 	ability
to 	raise 	fares 	above 	the 	efficient 	level 	to 	some 	extent.
-10-

previous 	comments 	before 	the 	FAA 	(Slot Transfer 	Methods, 	Docket
No. 	24105, 	Comments 	of 	the 	FTC 	Bureaus, 	pp. 	6-12), 	we 	have 	shown
that 	barriers 	to entry 	are 	greatest 	where 	each 	newly 	created 	slot
is 	allocated 	to 	a 	specific 	carrier 	and 	cannot 	be 	transferred 	to
another 	carrier 	at 	all. 	Carrier 	entry 	barriers will 	be 	lower,
but 	still 	present, 	if 	the 	FAA 	permits 	the 	slots 	to 	be 	transferred
through 	barter 	but 	not 	for 	cash.
Barter 	systems 	are 	an 	imperfect 	solution 	because, 	in
contrast 	with 	cash 	sales, 	new entrants 	will 	be 	forced 	to 	incur
supracompetitive 	costs 	for 	the 	slots 	they 	need. 	Costs 	will 	be
supracompetitive 	because 	the 	transaction 	costs 	of 	barter
arrangements 	are 	higher 	than 	for 	cash 	purchases, 	and 	because, 	in
some 	instances, 	a 	more 	valuable 	slot must 	be 	exchanged 	to 	obtain
a 	slot 	necessary 	for 	entry 	into 	a 	particular 	city-pair 	market
(see 	FTC 	Bureaus Comments, 	pp. 	8-10). 	The 	net 	result 	is 	that
carriers 	already 	in 	that 	market 	may 	be 	able 	to 	raise 	fares 	above
the 	competitive 	level 	without 	inducing 	entry.
Inefficient 	Allocation
The 	second 	drawback 	to 	the 	proposed 	plan 	is 	the 	risk 	that
the 	carrier 	agreements 	will 	lead 	to 	an 	inefficient 	allocation 	of
operating 	rights. 	Unless 	those 	newly 	restricted 	rights 	can 	be
bought 	and 	sold, 	the 	flights 	that 	remain 	after 	reducing 	the 	total
number 	may 	not 	be 	those 	of 	greatest 	val~e 	to 	consumers.
Assume 	for 	the 	sake 	of 	illustration 	that 	two 	carriers 	have
ten 	flights 	each 	during 	a 	time 	period 	when ATC 	capacity 	can
handle 	only 	sixteen 	flights 	efficiently. 	Even 	if 	congestion 	is
-11-

reduced 	efficiently 	at 	a 	level 	of 	sixteen 	flights, 	thrs 	outcome
is 	optimal 	only 	if 	the 	four 	cancelled 	flights 	were 	the 	lowest
valued 	of 	the 	original 	twenty 	flights. 	If 	carrier A has 	three
flights 	that 	are 	lower 	in 	value 	than 	carrier 	B's 	least 	valuable
flights, 	for 	example, 	an 	optimal 	reduction 	would 	cancel 	those
three 	carrier 	A 	flights 	and 	only 	one 	of 	carrier 	B's 	flights.
However, 	this 	result 	will 	probably 	not 	be 	reached 	by 	voluntary
agreement 	between 	the 	carriers. 	Carrier 	A is 	likely 	to 	insist 	on
preserving 	its 	50 	percent 	market 	share 	by 	sacrificing 	only 	two
flights. 	If 	A could 	receive 	payment 	in 	return 	for 	surrendering
an 	additional 	flight, 	the 	efficient 	result 	would 	more 	easily 	be
achieved. 17
Because 	carrier 	B can 	provide 	a 	more 	valuable 	flight 	than
carrier 	A, 	B will 	be 	willing 	to 	pay A more 	for 	its 	third 	slot
than A can- earn 	using -that 	slot 	for 	its 	relatively 	low-valued
flight. 	Hence, 	A will 	sell 	its 	slot 	to B and 	cancel 	its 	third
flight, 	while 	B will 	cancel 	only 	one 	flight. 	Both 	carriers 	would
gain 	from 	the 	transaction, 	congestion 	would 	be 	reduced, 	and
consumers 	would 	receive 	the 	flights 	they 	value 	the 	most.
However, 	unless 	the 	existing 	slot 	market 	is 	extended 	to 	the 	ten
airports 	covered 	by 	the 	proposed 	order 	that 	are 	not 	currently
slot 	constrained, 	such desirable 	results 	will 	not 	be 	possible.
•
17 	In 	the 	absence 	of 	the 	possibility 	of 	such 	payments, 	this
situation 	is 	equivalent 	to 	two 	rival 	firms, 	one 	less
efficient 	than 	the 	other, 	attempting 	to 	maximize 	joint
profits 	without 	side 	payments. 	See 	F.M. 	Scherer, 	Industrial
Market 	Structure 	and 	Economic 	Performance, 	Rand 	McNally,
1980, 	pp. 	159-160.
-12-

A Procompetitive, 	Efficient Alternative 	Proposal
The 	procompetitive, 	efficient 	solution 	to 	airport 	congestion
is 	for 	DOT 	to 	impose 	additional 	limits 	on 	the 	number 	of 	slots
during 	peak 	periods 	at 	the 	affected 	airports 	as 	needed,18 	and 	to
permit 	carriers 	to 	buy 	and 	sell 	the 	restricted 	slots. 	The
anticompetitive 	effects 	and 	inefficiencies 	of 	the 	proposed 	DOT
plan 	would 	be-avoided 	because 	carriers 	would 	not 	meet 	in
committee, 	and 	DOT 	would 	not 	be 	involved 	in 	enforcing 	carrier
agreements.
The 	benefits 	of 	permitting 	slot 	sales ·are 	illustrated 	by
comparing 	the 	results 	of 	the 	FAA's 	administrative 	allocation
after 	the 	Professional 	Air 	Traffic Controllers 	(PATCO) 	strike
with 	the 	allocation 	that 	a 	free 	market 	in 	slots 	would 	have
achieved. 	In 	the 	FTC 	Staff 	Report 	(pp. 	10-14), 	we 	performed 	this
comparison 	for 	certified 	carrier 	slots 	at 	St. 	Louis." 	Some 	cost
to consumers 	was 	unavoidable 	after 	the 	strike, 	because 	the 	FAA
reduced 	the 	number 	of 	certified 	carrier 	flights 	to St. 	Louis 	by
27 	percent. 	This 	reduction 	was 	needed 	due 	to 	the 	decreased
capacity 	of 	the 	ATC 	system. 	FTC 	staff 	estimated 	the 	unavoidable
loss due 	to 	the 	reduction 	in 	the 	number 	of 	flights 	at 	$12 	million
per 	year. 	However, 	according 	to our 	estimates, 	an 	additional
consumer 	loss 	of 	approximately $4 	million 	per 	year 	resulted
because 	the 	FAA's 	administrative 	methods 	of 	allocation gave 	slots
18 	At 	the 	three 	airports 	subject 	to 	the 	DOT 	Order 	where 	slots
are 	already 	limited, 	further 	restrictions 	may 	entail
tightening 	the 	time 	period 	during 	which 	a 	slot 	is 	usable.
For 	example, 	slots 	that 	are 	now 	usable 	for 	takeoffs 	between 	9
and 	10 	a.m. 	at 	O'Hare 	might 	be 	restricted 	to 	(say) 	a 	15-
minute 	period 	during 	that 	hour.
-13-

to 	some 	relatively 	low-valued 	flights, 	and 	certificated 	carriers
were 	unable 	to 	switch 	those 	slots 	to more 	highly 	valued
flights. 	Because 	St. 	Louis 	was 	one 	of 	22 	slot-constrained
airports 	at 	the 	time 	of 	the 	strike, 	the 	total 	consumer 	loss 	due
to 	the 	persistence 	of 	low-valued 	flights 	was 	some 	multiple 	of 	$4
million. 19 If 	slot 	sales 	had 	been 	permitted, 	consumers 	would
have 	been 	spared 	this 	loss.
We 	have 	not estimated 	the 	benefits 	of 	the 	slot 	market 	that
has 	been 	in 	operation 	since 	April 	1986. 	However, 	we 	expect 	that
such 	benefits 	have 	been 	and 	will 	continue 	to 	be 	substantial. 	An
example 	of 	the 	competitive 	benefits 	of 	the 	existing 	slot 	market
is 	the 	entry 	of 	the 	Pan Am 	shuttle 	between New 	York 	and
Washington, 	which 	was 	facilited 	by 	the 	purchase 	of 	slots 	in 	the
cash 	market.
Long-Term 	vs. 	Short-Term Solutions
Because 	the 	proposed 	DOT 	plan 	calls 	for 	a 	prompt 	solution 	to
current 	concerns 	regarding 	airport 	congestion, 	it 	is 	appropriate
to 	address 	whether 	slot 	restrictions 	and 	a 	slot market 	can 	be
implemented 	quickly. 	The 	evidence 	indicates 	that 	both 	slot
restrictions 	and 	a 	slot 	market 	have 	been 	implemented 	in 	the 	past
without 	great delay. 	For 	example, 	the 	FAA 	rapidly 	expanded 	slot
restrictions 	from 	four 	to 	twenty-two 	airports 	in 	response 	to 	the
PATCO 	strike 	in September 	1981 	(see 	SFAR'No. 	44-1, 	46 	Fed. 	Reg.
19 	These 	estimates 	are 	for 	the 	period 	immediately 	after 	the
PATCO 	strike 	when FAA 	slot 	restrictions 	were 	the 	tightest.
Estimates 	for 	a 	period 	of 	lesser 	scarcity 	would 	be 	smaller,
other 	things 	equal.
-14-

44424). 	This 	indicates 	that 	the-extension of 	slot 	restrictions
is 	a 	feasible 	short 	run 	response 	to 	congestion 	problems.
There 	is 	also evidence 	that 	the 	existing 	slot market 	can 	be
extended 	rapidly 	to 	handle 	transactions 	in 	these 	newly 	created
slots. 	In May 	1982, 	the 	FAA 	temporarily 	removed 	restrictions 	on
slot 	sales 	(SFAR 	NO, 	44-3, 	47 	Fed. 	Reg. 	19989). 	In 	the 	following
six 	weeks, 	carriers 	bought 	and 	sold 	over 	190 	slots 	without
apparent 	difficulty, 	and 	despite 	the 	simultaneous 	existence 	of 	a
slot 	barter 	alternative 	(FTC 	Staff 	Report, 	pp. 	9-10). 	In April
1986, 	the 	FAA 	permanently ended 	restrictions 	on 	slot 	sales 	at
four 	airports 	to 	permit 	a 	cash 	market 	(Docket 	No. 	24105, 	50 	Fed.
Reg. 	52180). 	Between 	that 	time 	and 	mid-December 	1986, 	nearly 	700
slots 	were 	exchanged 	in 	uneven 	transfers. 20 Extensive 	experience
thus 	suggests 	that 	a 	slot 	market 	solution 	to 	congestion 	problems
can 	be 	implemented 	quickly.
The 	Legal 	Test 	for 	Antitrust 	Immunity
Finally, 	a 	program of 	transferrable 	slots, 	such 	as 	we 	have
suggested, 	is 	the 	approach 	best 	in 	keeping 	with 	the 	philosophy 	of
the 	Federal 	Aviation Act. 	Any 	decision 	on 	the 	proposed 	plan 	must
be 	judged 	in 	light 	of 	section 	412(a) (2) (A) (i) 	of 	the 	Act. 	That
section 	states 	in 	pertinent 	part 	as 	follows:
20 	An 	example 	of 	an 	·uneven· 	transfer 	is 	a 	trade 	of 	3 slots 	by
carrier 	A for 	1 	slot 	of 	carrier 	B. 	Such 	transfers, 	which
often 	involve 	cash 	on 	the 	side, 	are 	recorded 	by 	the 	FAA.
Data 	on 	cash 	transactions 	are 	not 	broken 	out 	by 	the 	agency.
-15-

[T]he 	Board 	may 	not 	approve 	••• 	any 	•••
agreement 	• 	• 	• 	which 	substantially 	reduces 	or
eliminates 	competition, 	unless 	it 	finds 	that
the 	• 	• 	• 	agreement 	• 	• 	• 	is 	necessary 	to 	meet
a 	serious 	transportation 	need 	or 	to 	secure
important 	public 	benefits 	••• 	and 	it does
not 	find 	that 	such 	need 	can 	be 	met 	or 	such
benefits 	can 	be 	secured 	by 	reasonably
available 	alternative 	means 	having 	materially
less 	anticompetitive 	effects.
DOT 	should 	thus 	ensure 	that 	the 	most 	procompetitive 	and 	market-
oriented 	means 	are 	employed 	to 	alleviate 	airport 	congestion.
Indeed, 	in 	reviewing 	section 	412 	of 	the 	Act 	in 	the 	context 	of 	a
joint 	operating 	agreement, 	the 	Eighth 	Circuit 	stated 	that
antitrust 	immunity 	wis 	the 	exception 	and 	not 	the 	rule.- 	Republic
Airlines 	v. 	CAB, 	756 	F.2d 	1304 	(8th 	Cir. 	1985). 	Moreover, 	in
1982 	the 	Civil Aeronautics 	Board 	itself 	recognized 	that 	there 	was
a 	wcl ear 	presumption w that 	competition can 	be 	relied 	on 	to 	serve
the 	public 	interest. 2l
Such 	a 	presumption 	reflects 	the 	national 	policy 	favoring
competition 	that 	is 	embodied 	in 	many 	other 	statutes, 	including
21 	~ generally CAB 	Docket 	No. 	36595, 	Investigation 	into 	the
Competitive 	Marketing 	of 	Air 	Transportation 	-- Agreements
Phase, 	Slip 	Ope 	at 	25 	(served 	December 	29, 	1982).
-16-

·. 	.:
the 	antitrust 	laws. 	Restrictions 	on 	output 	and 	higher 	prices 	are
the 	core 	target 	of 	the 	antitrust 	laws. 22
Modern 	antitrust 	jurisprudence 	also 	recognizes 	that 	some
restraints 	and 	joint 	activities 	may enhance 	competition. 	The
Supreme 	Court, 	for 	example, 	has 	stated 	that 	a 	joint 	selling
arrangement 	may 	be 	procompetitive 	if 	it 	increases 	sellers'
aggregate 	output,23 	and 	noted 	that 	a 	restraint 	in 	a 	limited
aspect 	of 	a 	market 	may 	actually 	enhance 	marketwide
competition. 24 	These 	exceptions 	are 	not 	applicable 	here,
however. 	Carrier 	negotiations 	respecting 	non-transferrable 	time
. slots 	could 	unnecessarily 	restrict 	output, 	exacerbate 	barriers 	to
entry, 	and 	lead 	to 	higher 	prices 	for 	consumers. 	Such 	risks 	need
not 	be 	accepted 	when, 	as 	here, 	a 	less 	restrictive 	and 	more
practical 	alternative 	is 	available.
22
23
24
Senator 	Sherman, 	for 	one, 	sought 	to 	act 	against:
[c]ombinations 	and 	individuals 	••• 	forming 	a
league 	and 	covenant 	• 	• 	• 	with 	power 	to
suspend 	the 	production 	of 	some 	and 	enlarge 	the
production 	of 	others, 	and 	absolutely 	control
the 	supply 	of 	the 	article 	which 	they
produce 	• 	• 	• 	•
21 Cong. 	Rec. 	2457 	(1890). 	Modern 	antitrust 	jurisprudence
adheres 	to 	this 	same 	durable 	standard:
A restraint 	that 	has 	the 	effect 	of 	reducing
the 	importance 	of 	consumer 	preference 	in
setting 	price 	and 	output 	is 	not 	consistent
with 	this 	fundamental 	goal 	of 	antitrust 	law.
NCAA 	v. 	Board 	of 	Regents, 	104 	u.S. 	2948 	(1984) 	(citation
omi ttted) •
Id.
-17-

The 	most 	practical 	alternative 	is 	the 	use 	of 	transferable
slots. 	Such 	an 	approach 	is 	most 	beneficial 	to 	consumers, 	and 	is
just 	the 	sort of 	market-oriented 	solution 	that 	section 	412 	was
intended 	to 	encourage.
Conclusion
In 	1986, 	DOT/FAA 	permitted 	cash 	sales 	of 	slots 	at 	the 	four
high-density 	airports. 	In 	its 	current 	order, 	DOT 	seeks 	to 	reduce
congestion 	at 	thirteen 	airports, 	including 	ten 	that 	are 	not 	now
slot-constrained. 	We 	recommend 	that 	the 	FAA 	impose 	additional
slot 	restrictions 	as 	needed, 	but extend 	the 	benefits 	of 	market
competition 	to 	all 	airports 	that 	require 	slot 	restrictions. 	As
shown 	in 	the 	FTC Staff 	Report, 	permitting 	a 	market 	for 	slots 	is 	a
procompetitive 	approach 	that 	would 	yield 	significant 	net 	benefits
to 	consumers. 	By 	contrast, 	the 	proposed 	DOT Order 	is 	likely 	to
yield 	an 	inefficient 	and 	possibly 	anticompetitive 	outcome. 	For
these 	reasons, 	we 	recommend 	that 	the 	DOT 	not 	grant 	antitrust
immunity 	for 	carrier 	schedule 	discussions.
-18-