A recent series of failures around the world has once again highlighted the precarious nature of life as a small independent carrier. As the majors buy up or shut down their would-be challengers should competition authorities act tough? The answer is: not necessarily
These are apparently risky times to be an independent carrier. Witness the failure of Canada's Roots Air, Australia's Impulse Airlines and Qantas New Zealand. All were fighting against their local major network carrier and lost out. At the same time American Airlines saw the US courts throw out charges that it had unfairly killed low cost competitors. But while shedding a tear for the demise of the brave new entrants, it is worth also sparing a thought for the competition authorities which have struggled to create rules to define exactly what level of competition is fair.
Of course, the recent failures have their differences. Roots, named after one of Canada's most popular retail brands, had aimed to compete in the business market guessing that an alternative would be needed to the giant Air Canada. It caved in after only six weeks, bravely admitting defeat quickly rather than prolonging the agonies. The owners of Roots are now attempting to set up a deal with Air Canada.
Impulse Airlines had switched from regional airline services to become a low-cost competitor on trunk routes last year. It then fell victim to the country's fare wars. To avoid receivership it is giving up its name and has sought refuge within Qantas - previously one of its main competitive targets.
Regional carrier Qantas NZ(formerly Ansett ANZ)had also hoped to emerge from the upheavals in the Australasian market as domestic competitor to Air New Zealand. In the end even a Qantas franchise could not save it.
Finally in May, American saw off a long-running predatory pricing lawsuit which had hung over from the previous US administration at the Department of Justice (DoJ). The complaints centre on the fight it put up in the mid-1990s against low-cost competitors WestPac, SunJet and Vanguard. Of those only Vanguard survived. A couple of years ago American had also swallowed up another low-cost hopeful when it absorbed Reno Air.
The sight of network monsters eating their way through the low-cost challenge can be an emotional sight for onlooking politicians and public alike. A major offering to "rescue" the failed start-up (and so save jobs)may ease the emotions but the market result is the same. Competition authorities may feel obliged to do something. But the tough question is what?
A starting point may be to take a cool look at what exactly the world has lost by the failure in question. In most cases a spunky low-cost rival has ceased to exist but it is far from clear that any of the recent, or indeed the US failures, would have thrived if it had remained in business for itself. The majors may argue that other low-cost competitors have managed to survive, such as AirTran Airways and of course Southwest Airlines - currently the most profitable in the USA. As American's former president Bob Crandall was fond of repeating, competition is by its nature "messy and hard".
So should the authorities at least hope to define the rules of the airline game? The US market provides a glimpse of the difficulties as the failed lawsuit against American shows.
Regulators at the US Department of Transportation (DoT) had promised three years ago to develop a complex formula that would define unfair responses to new entrants. However, it was then pulled back for "further study" and then in the dying days of the Democrat administration Rodney Slater finally said that there would indeed be no rules. Instead, the DoT published case studies pointing out the kind of behaviour that should be watched.
Acquisition, says the final study, may well be predatory. And indeed it may well be cheaper to acquire a competitor than to drive it from the market with predatory pricing. But even here the DoT economists made room for such deals provided that the acquired company is still small and has not yet reduced the market power of the major airline in a significant way.
In short, after years of study the most sophisticated and experienced of the world's aviation markets is more or less back where it started on competition rules. Surely it is better to apply the existing tests of antitrust law to the air transport industry. But that may not always give neat political answers. As the judge in the recent American case pointed out, the defendant's determination to meet the prices of its competitors, however low, was "precisely the sort of activity the antitrust laws are intended to encourage".
Perhaps the question should be this: are there other, systemic ways to increase competition? Rather than help the weak to survive in a hostile environment, it could be better to give the strong more room to compete. And the best way that they could do that would be to tackle the fundamental lack of airport and airspace capacity and to further loosen, rather than tighten, the regulatory regime.
Source: Airline Business
