DOT secretary of transportation Federico Peña announced his long-awaited International Aviation Policy Statement, with codesharing a prime focus, in a speech marking the 50th anniversary of the Chicago Convention. While he endorsed codesharing as 'a cost-efficient way for carriers to enter new markets [and] expand their systems,' he said little about how DOT would deal with specific codeshare requests in either a bilateral or multilateral regulatory setting. Meanwhile the European Commission is carrying out its own codesharing study.
More regulation and bilateral negotiations on codesharing could be the end result. What else can be expected from an exercise which seeks to quantify the cost and competitive impact of codesharing? But a strong case can be made for DOT to cease regulating codesharing altogether. This would mean abandoning the requirement for US approval of individual codeshare deals and dropping bilateral negotiations over codeshare rights that are too often treated as if they represented real flights by real aircraft. Codesharing should be left to airline strategists and their marketing departments. As the former US senator George Aiken said in his recommendation on withdrawing US troops from Vietnam: 'We should declare victory and just walk away.'
But such a shift in US policy shouldn't exempt codesharing from stronger DOT consumer protection requirements to enable travellers to know which carrier they are flying with and how to choose from among the competing flight routings.
DOT's current codesharing policy is hard to pin down. In its October 1994 approval of the Continental/Alitalia codeshare, DOT found the agreement 'consistent with our codeshare policy.' The order cited benefits for consumers, competition and US cities likely to result from the codeshare, and found that these benefits out weighed the restrictive provisions of the US-Italy bilateral agreement. Nowhere did DOT explain why, with all these weighty benefits, the codeshare required five months to approve.
Reading between the lines of such orders suggests the DOT's real codeshare policy. This is to approve international codeshare agreements if approval cannot be used as leverage in bilateral negotiations with the foreign carrier's homeland to gain more US carrier rights, or there are no vigorous complaints against approval from other US carriers, or there is a combination of both. The 'policy' is a case-by-case exercise based on politics and opportunism, not clearly stated policy goals. Unfortunately nothing in Secretary Peña's Chicago speech or the International Aviation Policy Statement suggests a new approach.
Yet codesharing is little more than a glorified interline agreement which occurs when one airline operates a flight but both its and another carrier's code are used. For example, a Swissair transatlantic flight between Atlanta and Zurich is also sold as a Delta flight with the same flight number. The Delta and Swissair passengers may have different tickets and pay different fares, but they sit in the same aircraft and experience the same service.
International codesharing can also take the form of intra-US codesharing like that between British Airways and USAir. BA's code appears on USAir flights from interior US cities that connect with BA's transatlantic flights in New York, Pittsburgh, Charlotte and Philadelphia. Thirdly, there can be codesharing within Europe, where a US carrier puts its code on a European carrier's flights from its main hub. The latter is sometimes called 'third country' codesharing.
International codesharing with an overseas partner that already serves the market is a cheap way for international airlines to form worldwide networks and gain favourable flight displays on CRS screens. Codesharing converts an interline connection into an online connection, automatically giving the flight a higher CRS display priority and greater 'sales appeal' on US CRS systems.
In its simplest form, codesharing is an interline trip involving two airlines. The only difference is that when you switch from carrier A to carrier B, your ticket says you are still on carrier A. As in interlining, carrier B collects the fare for travel on its flights, and pays Carrier A a commission for the sale to the codeshare passenger. Blocked-space codeshare agreements are a slight variant and involve carrier A buying a block of seats on carrier B's flight. The difference between the wholesale price per seat paid by carrier A and the retail price it charges its passengers represents the commission paid in the classic interline case. Either way, the airline operating the aircraft keeps most of the revenue for carrying the codeshare partner's passengers.
DOT primarily regulates international codeshares in two respects. First, DOT takes the view that codeshares are 'traffic' rights. In other words, an airline can only sell a destination by codesharing if it could fly there with its own aircraft and has a licence from DOT to serve the route.
Second, DOT takes the position that codeshares are akin to a wet-lease - the charter or leasing of an aircraft with crew from another airline. Since DOT has historically required a wet-lease involving a foreign carrier to be approved on a case-by-case basis, the same conditions apply to codeshares. The approval test is a broad and elastic 'public interest' standard.
But one key question has gone unanswered in the codesharing debate: why regulate codesharing at all? Like Vietnam, the US is caught in a quagmire with codesharing and can't get out of it. It has defined codesharing as a valuable 'right' under bilateral agreements and required codeshares to be submitted for approval on a case-by-case basis. The more controversial ones are rigorously contested with approvals routinely delayed.
Codeshares are precisely the kind of commercial agreements between airlines that the US and other governments have long deregulated. The US doesn't require airlines to file their interline fare division agreements for approval. Nor does the US regulate a slew of other inter-carrier agreements such as those dealing with aircraft leases, airport ground handling, interline baggage and ticketing arrangements, frequent flyer programmes, and travel agent commissions.
Perhaps it's time for DOT to get back to basics, and stop regulating codesharing as well. There are simply no longer any grounds for distinguishing codeshares from interlining and other commercial agreements between carriers. The sole difference between an interline and a codeshare agreement is that the passenger thinks he is travelling on one airline when he is really on another.
The only justification for continuing to regulate international codesharing - aside from consumer protection concerns - is if codesharing provides some significant competitive advantage to a foreign carrier that is denied US carriers serving the foreign carrier's homeland. Of course, greater traffic gains or increased profitability per se for the foreign carrier should not be grounds for codeshare disapproval. The development of a better 'mousetrap' through codesharing by a foreign carrier in partnership with a US airline is no reason to view the transaction as unfair or discriminatory. Were this the rule, foreign airlines could complain that US airlines' lower employee wage levels, cheaper fuel costs or superior frequent flyer programmes were unfairly disadvantaging them. What evidence then is there that international codeshares require governmental regulation to protect some identifiable US interests?
Since one US airline is always a party to any particular codeshare agreement needing US approval, on each occasion at least one US airline must be receiving some commercial benefit. Other US airlines may object to a particular codeshare, but does the US government really want to be the arbiter of the international competitive playing field among US carriers? If an arrangement between a US and a foreign airline is commercially sound, and there is no evidence of discrimination or anti-competitive behaviour, the case for US government intervention becomes difficult to make.
The evidence so far that codesharing in itself causes big negative swings in traffic or profits for US carriers is sketchy. BA, one of the leading proponents of international codesharing, has argued that its codeshare alliance with USAir has resulted in an increase of only 60 passengers per day on BA/USAir codeshare flights between 36 US cities and the UK. This codeshare traffic amounts to only a minute 0.004 per cent of total US-UK traffic.
Perhaps the DOT consultants and GAO, after poring over mounds of data, will find that there is a greater impact. Of course this won't be easy since statistics identifying codeshare passengers on international flights are nonexistent or notoriously unreliable, and airlines will be loath to divulge revenue and prorate information to any government official.
And the fact that the foreign carrier has registered a traffic increase is not tantamount to a US loss. Code sharing is not a zero-sum game. For example, BA and KLM codeshare passengers are carried on USAir and Northwest flights respectively, and contribute to the revenues and profits of the US airline partner. Conse quently, trying to assess whether US interests are hurt by a particular codeshare is not easy.
Even if an adverse impact on US carriers is found, the next question is whether the codeshare is responsible or whether this is the result of the partners' closer schedule coordination, lower through fares, joint advertising, common facilities, and integrated frequent flyer programmes, that are at the heart of most of the major codesharing alliances.
The codeshare is just one element - driven to some extent by CRS display bias - of the comprehensive international airline global alliances that exist today. If the unregulated components - which do not require approval - are largely responsible for the alliance's traffic increases, why continue to regulate the codeshare itself? Surely US airline ownership and control requirements and antitrust laws are adequate regulatory tools with which to police US ownership and cooperation concerns regarding airline alliances?
The US government should opt for a simple codesharing policy along the following lines. Firstly, US and foreign airlines could codeshare on flights to and from the US if the operating carrier has the requisite route authority under the relevant bilateral agreements. So-called codeshare carriers could use their code on the operating carrier's flights once the partners have concluded a commercial agreement like those they would negotiate for the transfer of interline passengers and baggage. No underlying bilateral route authority or codeshare authority would be required and no filings for approval with DOT - other than perhaps an information only filing - would be needed. As an example this would mean that Japan Air Lines could codeshare with a US airline to any US city served by the US airline, while a US airline could codeshare with a Japanese carrier to any city in Japan served by JAL.
Such a deregulation of codesharing would not leave the US defenceless if its open codesharing policy was not reciprocated by a bilateral partner. If this occured the affected US carrier could retaliate by asking the DOT to prohibit the operation of the relevant codeshare in the US, and by filing an International Air Trans portation Competition Act (IATCA) complaint.
This is precisely the approach taken by US aviation policymakers regarding discriminatory treatment in areas like ground handling or user fees which are driven by US carrier complaints. A complaint-driven process should work just as well in dealing with discriminatory codesharing policies by foreign partners.
Any DOT regulation of codesharing should be focused on protecting consumer interests. An activist DOT policy on disclosure practices could do much to lessen the competitive pressures fuelling the run on codesharing agreements.
Clearly, better disclosure of codeshares by airlines and travel agents, as recently proposed by DOT, is a logical first step. But DOT should also deal with the issues of CRS display bias, screen padding and single flight number abuses that are encouraging carriers to embrace codeshares to gain marginal competitive advantage or match competitors.
Some US CRS displays still give online flights, including codeshares, higher screen preference than interline flights regardless of elapsed journey time. In contrast, European regulations require all CRSs operating in Europe to rank all connections according to elapsed time. DOT should require all US CRSs to adopt the ECAC display for international flights. Screen padding, or showing a single flight or connection several times in the CRS and OAG displays because it is a codeshare, is also clearly abusive.
DOT should call a truce to the codeshare wars, declare codesharing deregulated, and urge others around the world to do the same. US bilateral and regulatory control of codesharing over the last decade has been a misadventure that needs to end. It is time to treat codeshares like the enhanced interline flights they really are and recognise that the real economic benefits come not from the codeshare alone but from the web of unregulated cooperative activities between two airline partners. DOT regulation of international codesharing could then be limited to consumer protection and disclosure requirements.
Michael F Goldman is a partner in the Washington, DC-based transportation law firm of Klein, Bagileo, Silverberg & Goldman.
Source: Airline Business
