A sneak attack on airline alliances

By now, you’ve probably read about House Transportation Committee chairman Jim Oberstar’s bill calling into question granting antitrust immunity to international airline alliances. The text of the legislation (HR 831, introduced on February 3) is pretty straightforward, but its intent is masked by a more innocuous prescription.

First, it calls for the Government Accountability Office (GAO) to issue a report on these exemptions addressing these questions: What public benefits do the antitrust exemptions offer, and could they be achieved without offering the exemptions? Has granting exemptions “resulted in reduced competition, increased prices in markets, or other adverse effects”? Have there been increased fares for consumers at hub airports for international alliances? What is the minimum number of worldwide alliances to ensure competition on busy international routes? Should antitrust immunity applications be treated like proposals to merge — and thus be given stricter regulatory scrutiny? Finally, the GAO should recommend whether any existing or proposed antitrust exemptions should be revoked.

Second are the actual teeth in the measure. The bill automatically terminates antitrust exemptions after three years; they must be renewed by the secretary of transportation under new rules that are to be based on the GAO’s own recommendations. This is the most onerous section of the bill, and this is where Oberstar has placed his intentions. Three years is an awfully short time for business planning. If you’re an executive at at U S of Airlines, and you’re staking revenues and future growth on a potential agreement with Air Europe, you need confidence that the agreeement won’t be voided just a couple years down the line because of changing political winds. Political influence and uncertainty in business decisions hamper investment. (Just look at the finance sector — investors are confused because they don’t know how or when the government will next make a major intervention.)

So, if Oberstar’s aim is to hinder these sorts of deals, then even though he’s not banning them outright, he’s on the right track. And make no mistake: Oberstar is trying to crack down on international alliances. He says as much in his remarks upon the bill’s introduction.

Oberstar’s bill may request a report from the GAO, but he has already reached a conclusion: “I have become increasingly concerned with the decline of competition in international markets, particularly between the United States and Europe.” His very premise is that competition has declined . . . “which results from antitrust immunity for alliances.”

What triggered this bill at this time is that the Oneworld alliance and its principals (American, British Airways, and Iberia) are currently seeking immunity. Quoth Oberstar: “In 2008, the DOT granted the SkyTeam alliance antitrust immunity to coordinate schedules and prices, and operate as though they were one carrier. Since the granting of the SkyTeam application, Continental Airlines has filed an application to join the already antitrust-immunized Star alliance, and American Airlines and British Airways filed an antitrust immunity application for the oneworld alliance.”

Oberstar then cites some examples of the reduced competition:

[I]n 1990, the New York JFK–Paris market had six competing airlines, today there are only three. Of the three remaining carriers in the market — Air France and Delta, which are part of the immunized SkyTeam alliance — have approximately 75 percent of the market share. Another major market, Chicago to Frankfurt, is dominated by Star members United and Lufthansa, which control an 85 percent share; the Amsterdam-Atlanta market will now be controlled by newly immunized SkyTeam members Delta and KLM.

Well, the main problem here is that Oberstar is conveniently neglecting connecting itineraries. Sure, Skyteam may control all non-stop flights between Atlanta and Amsterdam. That would be expected. But a quick web search indicates available one-stop itineraries operated by (at least in part) Skyteam’s Air France, Alitalia, and not-for-long Continental; Star’s United and Lufthansa; and Oneworld’s American and BA. These flights offer many different timetables and routings through hubs on both sides of the Atlantic. Competition on ATL-AMS is not perhaps as robust as on the JFK-Paris pairing, but it’s not anything like Oberstar is suggesting.

There’s a small literature on this subject that I’ll dig into for you, but for now I’ll say that these alliances may well bring benefits to travelers. There’s functional transparency on transatlantic routes; with (virtually) only three major far and pricing systems that travelers in almost any medium-size or larger market can access. Thanks to an alliance, a traveler in (say) Dayton, Ohio, has access to the worldwide route systems of more airlines through a variety of different hubs. A traveler in Hamburg would enjoy the same. Employing network effects, airline alliances can serve more destinations, therefore bringing more competition to cities even though there may be only three major competitors.

More on this soon. Aviation blogosphere comments: Middle Seat Terminal, Things in the Sky, Things with Wings, Airline Biz, John Macilree, Swelblog.

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