April 30, 1998
Chairman Duncan, Ranking Member Lipinski, and Members of the Subcommittee, thank you for the opportunity to present my views on the problems of lack of competition at fortress hubs and the resulting higher air fares charged the American public - particularly the business traveler. In these good economic times, some may argue that Congress should ignore the high air fares charged the business traveler. But these high fares have at least two negative effects:
My concern over the anticompetitive effects of fortress hub monopolies arises from two perspectives. First, I serve as Chairman of the House Judiciary Committee which has responsibility for the oversight of the nation's antitrust laws. From that perspective, the Judiciary Committee shares your concerns about the fortress hub monopoly problem and the resulting high air fares. We examined these problems at some length in our oversight hearing on the antitrust enforcement agencies last November.
Apart from that, I have an even more direct interest in this problem. My district encompasses O'Hare International Airport - which we proudly call the world's "busiest" airport. Despite our pride, it is O'Hare's very status as the world's "busiest" airport - and our inability to build new airport capacity in the Chicago metropolitan region - that have created the anticompetitive conditions that allow the majors to shut out new competitors in the fortress hub markets. The saga of the failure to build a major new airport in Chicago to increase capacity so that new competitors can challenge the dominance of American and United at O'Hare is a case study for Congress about the anticompetitive conditions in our air transportation system.
After considerable study of the problem, I have concluded that the federal airport subsidy programs authorized by Congress, including the Airport Improvement Program (AIP) and the Passenger Facility Charge (PFC) program, have, in some instances, actually worsened fortress hub dominance and the resulting monopoly fares because they have been misused. When Congress passed these programs (and I voted for them), we assumed that these federal subsidy funds would be used to expand airport capacity thus creating opportunity for more competitors to enter each market. Instead, in Chicago, the airlines dominating O'Hare have effectively controlled these funds - not only to enhance and subsidize their own monopoly position - but to prevent new airport capacity from being built. Rather than creating new airport capacity and competition, the procedural controls Congress created to manage these subsidies have effectively defeated and frustrated new construction. I am also concerned that, in some instances, the FAA has not adequately prevented the anticompetitive use of these federal subsidies, but rather has actually joined with the dominant airlines in discouraging new airport capacity.
Having seen these problems in Chicago, I want to propose some ideas for Congress to consider to correct these problems. I emphasize that my suggestions are ideas only - designed to highlight and possibly solve the competition problems in our air transportation system. If others have better ideas, I encourage them to bring those ideas forward. I and my colleagues on the House Judiciary Committee stand ready to work with this Committee to reach solutions to these problems.
I am a proponent of a strong commercial aviation system. My suggestions are intended to help the aviation system grow - not retard it. But unless we candidly address and solve the problems facing our aviation system today, the system will become ever more congested. The problems that are straining the system, the nation's economy, and the quality of life of millions of airport neighbors threaten to overwhelm us. Congress must address the problems that our own aviation policies have inadvertently helped to create.
Capacity, Capacity, Capacity
Most observers agree that a principal cause of high fares at fortress hubs has been the lack of additional airport capacity that would permit low cost competitors to enter those markets. O'Hare exemplifies this common syndrome. O'Hare, located and designed more than forty years ago, currently handles far more air traffic than anyone ever predicted. These unexpectedly high traffic levels today stretch the safety margins of the airport and create noise and toxic air pollution for surrounding residential communities. More importantly, today's problems pale in comparison with the pressures that will occur when projected growth in demand hits these already strained resources.
Recognition of these safety, environmental, and public health concerns led to the adoption of the High Density Rule (HDR) at several of the nation's busiest airports, including O'Hare. Indeed, two years ago, the FAA reexamined the HDR and concluded that the negative environmental effects of lifting it outweighed any economic benefits.
Let me weigh in as strongly as I can on this point. Some have suggested that adding more slots at O'Hare will solve the problems of capacity and competitive access to key markets. That suggestion is wrong for several reasons:
Fortunately, another more desirable alternative -- building a third airport in Chicago --will add significant new airport capacity thereby creating new competition and enabling our air transportation system to grow. My colleague, Congressman Jesse Jackson, Jr., eloquently stated the reasons why we need a new airport in Chicago before this committee last week. I heartily endorse his testimony. A new airport would add the capacity needed to bring significant new competition to Chicago. It would allow smaller cities around the country to have access to Chicago - access that they have increasingly lost as scarce O'Hare slots are shifted to more lucrative routes. It would allow Chicago to retain its role as a vital link in our air transportation system and would provide the essential new capacity to accommodate projected traffic growth. Finally, it would accomplish these objectives with the latest in environmental and safety design, including a large land buffer designed to avoid the noise and air pollution problems that have plagued O'Hare. Mr. Jackson and I have authored a detailed report on the subject entitled Metropolitan Chicago's Airport Future: A Call For Regional Leadership which I am providing to the Committee with this statement.
Why No Major New Airport Capacity In Chicago?
Given the enormous national and local benefits that a new airport would bring, one would think that everyone would support building the new airport. Instead, sadly, local gridlock has stalled the new airport for more than a decade. The reasons for the deadlock show us why we need to reform Congress's program for building new airport capacity.
Many do support the new airport. The State of Illinois strongly favors it. The south suburbs - where the project will be located - almost unanimously support it. Dozens of communities throughout the collar counties around Chicago have endorsed it.
Where's the rub? The airlines, who have a vested interest in maintaining their monopoly pricing power at Fortress O'Hare, have joined with the City of Chicago to block construction. In addition, the FAA has placed roadblock after roadblock in the project's path. Finally, those who oppose the new airport have used our own programs for building new airports to fight it.
United and American have understandably opposed the new airport. They want to continue maximizing their monopoly profits by enhancing Fortress O'Hare which they dominate. Their conduct is rational, but it is not good for the Chicago's air transport needs or its economic growth. They are using every resource at their command to defeat the new airport and the new competition it would bring to Chicago.
Having said that, let me also say that I like United very much. It is headquartered in my district. I appreciate its providing jobs for the thousands of United employees who live in my district. I will defend United when it is right, but I will also speak out against it when it is wrong. For all the reasons Congressman Jackson and I have given, I believe that what is good for my district is the third airport.
Although United and American are the lead commercial opponents to a new airport, they are by no means alone. The Air Transport Association has weighed in against a new airport. ATA members - many of whom enjoy the same fortress hub monopoly pricing advantages at their home airports (e.g. Northwest at Minneapolis and Detroit, Delta at Atlanta, US Air at Pittsburgh) - all have opposed construction of the new airport. They have also said that they would not enter the Chicago market at the new airport to compete with United and American.
Such conduct certainly appears suspicious from an antitrust perspective, and it raises questions that deserve further review by this Committee and by the Judiciary Committee. Why are large carriers - with hub markets where they enjoy monopoly pricing power - forming marketing alliances in which they stay out of each other's hub markets? Why aren't they willing to enter the Chicago market and compete with United and American if there is a new airport?
Unfortunately, it appears that even some relatively new entrants like Southwest Airlines share this aversion to competition. Having bitterly complained about American's early attempts to squeeze it in the Dallas-Ft. Worth market, Southwest's chairman has campaigned against the competition that the new airport would bring for Southwest's Midway operation. Secure in its dominant niche at Midway and providing some, but not significant, competition to United and American, Southwest appears to have caught the same anticompetitive disease as its larger brethren.
The last opponent blocking new airport development has been the City of Chicago. Though at one time the City argued that a major new airport was needed for metropolitan Chicago, it now opposes the new airport. The City unfortunately shares the view of the dominant airlines in Chicago.
Moreover, the City has used its considerable political and financial power - financial power that Congress unwittingly gave it - to block new airport construction. Again, please do not misunderstand my criticism of the City. I work closely with the City and have supported it when I felt it was right. Indeed, I supported its efforts to have Congress pass the PFC legislation that it said it needed to build a new airport.
However, my concern is that the City has used the financial power that Congress gave it in the PFC legislation to choke the new airport. As Congressman Jackson pointed out, this anticompetitive alliance has serious adverse local and national impacts. It keeps monopoly fares high at O'Hare, causes increasing numbers of communities around the country to lose access to Chicago, and threatens the new capacity essential to the growth of our aviation system.
The Federal Role In Supporting Gridlock and Preventing
The Construction of New Capacity
Despite reams of paper studies declaring the need for a third airport in Chicago - including many studies authored by the FAA - the federal government has actively helped the airlines and the City to block a new airport. The federal government plays several roles in new airport development, and it has used each of them to block the new airport.
The Funding Role
The key role of the federal government is that of financial assistance. Congress has recognized that state and local governments are not likely to assume major tax debt to build airports. Therefore, the principal vehicle for funding construction of airports has been federal financial assistance supplemented by airline funded airport revenue bonds (General Airport Revenue Bonds or "GARBs"). The Congress further subsidizes the airlines by allowing the bonds (although airline debt) to be issued as tax exempt municipal bonds.
These two mechanisms have financed the construction of virtually all of the nation's airports - including O'Hare and Midway. Through these mechanisms, the federal government necessarily controls new airport construction. The amount of direct federal financial assistance received greatly influences the willingness of airlines to take on revenue bond obligations for a new airport. The greater the direct federal assistance, the smaller the debt and the operating cost of the airlines will be. Indeed, given that new market entrants face higher risks at a new airport seeking to compete against well-established majors, the federal government should provide a higher than usual ratio of direct government assistance to airline revenue bonds to induce the new competitors to enter hotly contested markets.
Congress passed the AIP and PFC taxes to fund new airport capacity. Unfortunately, federal budgetary deficit control agreements have restricted the use of much of the AIP funding. The Administration's ability to issue major long-term commitments of AIP funds (called "letters of intent") reached its zenith at the new Denver airport. Since that time, the availability of significant amounts of AIP funds has become increasingly limited. AIP funds, if available at all, will likely be a small percentage of the overall funding of a new airport, leaving a much higher ratio of the cost to be borne by airline revenue bonds. Unless some other major federal funding source provides a significant portion of the capital financing, it is unlikely that any airline - either a startup or a strong existing carrier - will be willing to provide a high percentage of capital funding through airline revenue bonds.
Congress thought it created a solution to this problem through the 1990 passage of the PFC, a new three dollar per head tax to be used as a new funding mechanism for the construction of new airports. Unfortunately, Congress also created a key flaw in how PFC revenue was handled. It bypassed the Governors of the states and gave the control over these federal tax revenues directly to the airport operators. Airport operators convinced Congress that they would use these funds to create major new airport capacity.
However, instead of using these funds to build a new airport, the City of Chicago is now using PFC revenues generated at O'Hare to strengthen United and American's monopoly power and defeat the new airport. First, the City is taking the $115 million in PFC revenue generated annually and using much of it to pay City bond obligations which subsidize American's and United's monopoly position through terminal enhancements at O'Hare.
For the future, the City has committed $800 million of PFC supported bond proceeds to pay for O'Hare terminal enhancements that benefit United and American's operations. Absent this subsidy, United and American would have had to pay for these expenses through airline financed bonds.
Congressman Jackson has correctly observed that this use of the subsidy creates no new airport capacity and no new competition to accommodate projected growth. Instead, we have a stream of federal tax funds - created by Congress to build new airport capacity - being given to two of the nation's wealthiest airlines to enhance their monopoly position. This alone is corporate welfare at its worst. In addition, however, undertaking this indebtedness for United and American's benefit ties up PFC revenues from O'Hare for decades to come - effectively guaranteeing financial defeat of the new airport.
The City argues that these federal funds belong exclusively to it. When I supported the creation of these federal taxes, I thought Congress was providing a resource for national needs - not a fund to oppose competition. But the City is nothing if not creative. While it says PFC funds collected at O'Hare cannot be used for new airport construction in Chicago, it funnels the same PFC funds to the City of Gary, Indiana. The two cities have signed a federal compact that purports to block any new airport development across the entire northern tier of the State of Illinois. The City of Chicago drafted state legislation that would have funneled PFCs collected at O'Hare to a new regional airport in Chicago. Now it sends those revenues to Gary to block new airport development in Illinois and says they cannot be used for the new airport.
The FAA Role
Sadly, the FAA has willingly participated in this campaign to block the new airport. The FAA has the supervisory power to block Chicago's misuse of these federal funds and to require that they be used as intended - for construction of a new airport. Instead, it supports the City's abuses and stands mute while the new airport is starved for critical federal funding.
FAA's failure to police funding abuses is not its only sin. Instead of speeding the regulatory approval of the paperwork for the new airport, FAA has been engaged in a multi-year stall. Moreover, even though AIP funding is rapidly diminishing, FAA took the new regional Chicago airport off the National Plan for an Integrated Airport System (NPIAS). What was the reason given? The City of Chicago opposes the airport and that therefore there is no regional "consensus" - a requirement found nowhere in federal law.
Finally, the FAA is perceived in our community - from an environmental, public health, safety, and competition perspective - as an ally of the status quo. We who support environmentally sound new airport development are faced with an FAA that fights a new airport; that affirmatively supports expansion of United and American's fortress hub at O'Hare; that looks the other way on toxic air pollution in O'Hare communities caused by the volume of current flights; and that tries to jam more and more flights into an airport where safety margins are already stretched thin. We are faced with an FAA that "cooks the books" one way to defeat the new airport, and then cooks them a different way to help its airline and political allies.
Congressman Jackson has given you but one example the FAA's arrogance and indifference. An important letter that we jointly sent to various Administration officials last October 1 remains unanswered by the FAA or anyone else. I and my constituents can give you chapter and verse about how the FAA plans piecemeal expansion of O'Hare in secret meetings with the airlines and the City and then misleads the public about these plans.
If Congress wants significant new airport capacity built in Chicago and elsewhere in the country, it needs to instill a new attitude at the FAA. Without a new attitude that opposes monopoly attempts to stifle competition; without a new attitude that aggressively favors new, environmentally sound airport construction; without a new attitude that supports environmental and public health protection, I believe that the FAA will continue to thwart Congress's desires for major new airport construction.
Suggestions for the Future
I have several suggestions for this Committee's consideration that I believe will spur the construction of environmentally friendly new airports. Such new airport construction - of which Chicago could be the model - would enhance new competition and provide the new capacity needed to meet our growing aviation needs.
1. Stop the abuse of the PFC system which is stifling new airport construction.
2. New airports must be environmentally friendly.
3. The FAA must champion environmental quality and public health.
4. Congress should create, and police the progress of, a major new airport development program. The FAA should give regular progress reports to Congress on the pace of new airport development and the efforts to provide financially attractive conditions for new competitors to use these airports.
Thank you for the opportunity to present this statement today. I look forward to working with you to insure the development of major new airports around the country.