Commentary: How Northwest Gives Competition A Bad Name

With the Justice and Transportation Depts. scouring the airline business for predatory behavior, the big carriers are already screaming about "re-regulation." Indeed, in mid-March DOT is due to unveil controversial new guidelines on what constitutes anticompetitive behavior and the remedies DOT might demand.

Despite the airlines' protests, regulators have good reason to take a hard look at competitive tactics. And if they want a quick lesson, they could hop a flight to the Detroit Metropolitan Wayne County Airport. It's as good a place as any to learn how a dominant carrier can head off upstart rivals.

At Metro, Northwest Airlines commands 73% of the traffic, and new competitors say its behavior there strengthens their case that such "fortress hubs" can be immensely anticompetitive. Northwest spokesman Jon M. Austin says the nation's fourth-largest airline--now seeking approval to take a controlling stake in No.5 Continental Airlines Inc.--is competing "fairly but aggressively."

"BLOOD IN THE WATER." Upstarts like Spirit Airlines and Reno Air Inc. would beg to differ. Spirit tiptoed into the Detroit-Philadelphia market in December, 1995, with one round-trip flight a day, says Vice-Chairman Mark S. Kahan. Northwest's average one-way fare when the tiny Spirit entered was more than $170. Spirit's introductory unrestricted fare: $49 one way. For a time, the strategy seemed to work. For the most part, Northwest ignored tiny Spirit, which filled its 117-seat plane and made a profit, claims Kahan.

But after the May, 1996, ValuJet crash led to a drop in bookings for other discount carriers, Northwest "saw blood in the water," says Kahan. On June 30, 1996, Northwest slashed its fares to Philadelphia to $49 on virtually all seats at all times, he says. And it poured on capacity, adding nearly 30% more seats. On Sept. 30, Spirit abandoned the route. Says Northwest's Austin : "We're being criticized for matching a competitor's action, which I view as pro-consumer."

Executives at many big airlines say cutting fares and adding capacity is good for consumers. True, but only if it lasts. By the first quarter of '97--just a few months after Spirit withdrew--Northwest's average one-way fare on the route had climbed to more than $230, says Kahan. And the number of seats available from Northwest on the Detroit-Philadelphia run dropped, too.

Reno Air describes similar Northwest tactics in an antitrust suit filed in federal court in Nevada last March. Reno alleges that when it announced nonstop service in December, 1996, from Reno to Detroit--which Northwest had never served on a nonstop basis--Northwest immediately retaliated by announcing daily nonstop service. When Reno said in March, 1997, that it would offer two flights a day, Northwest jumped to three daily flights. Northwest also undercut many Reno fares, the small airline contends, pricing "below an appropriate measure of its cost in providing such service," according to court documents. On Sept. 15, Reno cut back to one flight a day to Northwest's two. Northwest denies any wrongdoing.

Even two-plane Pro Air Inc., which flies from Detroit City Airport, about 25 miles from Metro, hasn't escaped Northwest's notice. Northwest dropped its fee for changing tickets from $75 to $25--matching Pro Air's--but only in the markets where it competes with the startup, says Pro Air President Craig E. Belmondo. And, he claims, Northwest is offering 20% commissions to travel agents in Pro Air's markets, vs. the typical 8% elsewhere. "There is no doubt that Northwest does not want competition in this market," says Belmondo.

The startups in Detroit are hoping that the mere threat of litigation and a government crackdown will deter their big rival. But they're not counting on it. Indeed, small airlines nationwide feel seriously threatened by their larger rivals' practices. Economist Alfred E. Kahn, one of the fathers of airline deregulation 20 years ago, says rising prices and aggressive tactics could backfire for the big carriers. "The behavior of unrestricted fares in the last couple of years has been outrageous," he says. "It's not even in the interest of the carriers themselves to create such hostility and resentment." Sure, distinguishing between hard-nosed competition and outright predation won't be easy. But that doesn't mean the regulators shouldn't try.

Before it's here, it's on the Bloomberg Terminal.