There can be few more important commercial issues for airlines than the future shape of their alliances. A series of regulatory decisions about major alliances is about to be made. The outcome will determine the shape of the airline business, for the next several years at least.
At the moment, the focus is very much on the North Atlantic. The end of the long-running regulatory saga concerning the planned British Airways-American Airlines alliance appears to be in sight. The European Commission and the US Department of Transportation have finally begun to examine the issue in detail, and the final outcome should be known in the first half of 1998 - nearly two years after the alliance was first announced. At the same time, the Commission is investigating the three existing major transatlantic alliances, while elsewhere the Australian government has prevented BA and Qantas from introducing more codesharing.
It is important to note that alliances do not enlarge the market for air transport. An alliance is a competitive weapon which its members use to attract traffic from competitors. They do so primarily by building connecting hubs, but they also use codesharing, joint loyalty and lounge programmes, joint branding and 'seamless service', which encompasses areas like joint pricing, through check-in, and reciprocal flight information.
Since alliances are competitive weapons, does this make them anti-competitive? There is no simple answer to this question. On major routes, they can be anti-competitive, and this is where the regulatory attention has been focused so far. For example, Delta and Swissair have a monopoly on Zurich-New York, and BA-AA would have a monopoly on London-Dallas. However, alliances may still offer advantages in these markets, such as higher frequencies. The US solves the monopoly problem by insisting on open skies agreements and, in a small number of cases, by imposing 'carve-outs' - banning alliance activity on routes where the partners have a monopoly.
On routes which require a connection, alliances are usually pro-competitive. For example, KLM and Northwest offer 28 weekly double-hub travel options between Gothenburg and Kansas City, with connection times of less than two hours (see page 66). The Star Alliance offers 23 weekly connections, Delta-Swissair-Sabena 24 and BA-AA 14. Without alliances, it is difficult to imagine anything like this level of choice for travellers on such an obscure routing.
There is a concern that a two-tier system could evolve, whereby there is an effective price premium for people who live near hubs and for those who wish to fly nonstop, with low fares available only for passengers who are prepared to change planes. This is very much the case already in the US domestic market, except where there is competition from low-cost carriers.
Three major corporate travel agents recently stepped into the debate by criticising the Star Alliance for not delivering price benefits to consumers. Any claim by an alliance that it will cut fares ought to be treated with scepticism, but in fairness the Star Alliance does not make this claim. Alliances could provide lower fares, perhaps by offering global corporate discounts or through fares, but they need anti-trust immunity to do so.
The proponents of global alliances insist that the majority of passengers will gain, since they regularly use hub connections. They argue that it is easy to resolve the relatively small number of cases where people lose out because they only fly on alliance monopoly routes. Consider the Amsterdam-Detroit route, where 78 per cent of passengers change planes at both airports.
Of course, consumers must not lose out when airlines form alliances. But equally, airlines must have the right to choose strategies which enable them to deliver returns to their shareholders; this is the very essence of free-market economics. Bear in mind that in many industries concentration through merger is the norm; airlines form alliances instead because the bilateral system prevents most cross-border mergers.
Airlines have generally done a poor job of explaining how their alliances can benefit consumers. The argument that regulators ought to consider competition on a network basis rather than on an airport-to-airport basis should have been expressed more clearly, backed up by strong, publicly available data.
As a result, there is a very real risk that the global alliance, a cornerstone of most major carriers' strategy, could be fatally damaged by regulation. It would be better if alliances were approved, subject to sensible conditions and a review every five years, to ensure that competition is not being compromised.
As a result, there is a very real risk that the global alliance, a cornerstone of most major carriers' strategy, could be fatally damaged by regulation. It would be better if alliances were approved, subject to sensible conditions and a review every five years, to ensure that competition is not being compromised.
Source: Airline Business
