Airline Industry Problems
Will congestion and treatment of passengers improve?
By Kathy Koch

In the 20 years since Congress deregulated U.S. airlines, supersaver fares, frequent-flyer programs and price wars have changed the way millions of Americans travel. But as airline traffic has skyrocketed, so have passenger complaints, airport congestion and allegations of anti-competitive behavior by major airlines. The public outcry grew so loud that Congress last spring considered legislation to. . . .

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Should the government do more to remedy anti-competitive practices in the airline industry?

Rodney E. Slater Secretary of Transportation. From “Proposed Guidelines on Unfair Competitive Practices in the Airline Industry,” April 6, 1998.	Alex C. Walker Fellow in Economic Policy, The Heritage Foundation . From “20th Anniversary of Airline Deregulation: Cause for Celebration, Not Re-Regulation,” April 22, 1998. Excerpted with permission.

Will Global Airline Alliances Hurt Consumers?

Paul Hudson is worried about the future of airline travel. He says the international marketing alliances now being formed by airlines are just the beginning of problems for consumers. In the near future, predicts Hudson, executive director of the Aviation Consumers Action Project, three or four mega-airlines will provide global airline service.

“If these alliances go through as originally conceived, we'll possibly have only four major airlines in the world within a few years,” Hudson says. “Everyone will have to line up with one of these alliances or they would be really out in the cold.”

“You don't have to look farther than the U.S. market to become alarmed,” agrees Kevin Mitchell, chairman of the Business Travelers Coalition (BTC). “Just last year we had proposals by Continental and Northwest, Delta and United, and American and US Airways. They wanted to form three alliances that would have controlled 82 percent of the domestic air travel market. And that is extremely scary.”

But government and airline officials say that rather than leading to increased consolidation, international alliances are merely extending to international travelers the same benefits -- increased service at lower prices -- enjoyed by domestic travelers since the domestic industry was deregulated in 1978. International aviation is still highly regulated by hundreds of restrictive bilateral trade agreements that prevent international air travelers from enjoying the benefits of a deregulated global market, they say.

Those protectionist policies prohibit foreign carriers from making multiple stops inside another country or owning controlling portions of foreign airlines. Such rules also prohibit U.S. airlines from merging with foreign airlines, precluding the kind of efficiencies and economies of scale that other globalizing industries enjoy.

To get around such restrictions, airlines have formed global alliances -- essentially joint ventures in which companies share flight codes, coordinate schedules and baggage-handling and honor one another's frequent-flyer programs.

But consumer groups and some industry-watchers fear that while international alliances may allow greater efficiencies and produce lower ticket prices in the short run, they pave the way for global consolidation of the industry and possibly higher prices in the future.

“Any industry that is globalizing wants to gain efficiencies,” says Mitchell, “and the airlines are being hamstrung by these [international] ownership laws. So, while I understand the momentum behind them, I think these alliances are very, very problematic.

“They are just proxies for mergers,” he continues, “but they don't receive the same competitive and antitrust scrutiny that mergers would receive.”

Indeed, U.S. officials for years have encouraged such international alliances by promising antitrust immunity for alliances between U.S. carriers and foreign national carriers -- if the foreign carrier's home country adopts liberalized “open skies” aviation policies. Negotiators reasoned that the negative impact of the short-term (usually five years) antitrust exemptions would be outweighed by the longer-term benefits of the increased competition engendered by the open skies agreements.

Aviation consultant Michael Boyd of Evergreen, Colo., sees benefits in some alliances and anti-competitive impacts in others. An alliance between Northwest and the Dutch-owned KLM airline, he contends, has been “almost without exception beneficial for everyone involved. It opened up new markets for KLM and for Northwest, and gave the consumer a wider range of choices.”

Boyd does not think alliances will promote airline consolidation, at least in the short term. “These alliances are not much of a threat incrementally. Most have totally different route systems and disparate management styles,” he says, citing United Airlines' new Star Alliance, which includes Germany's Lufthansa, the Scandinavian airline SAS, Thai Airways, Air Canada, Air New Zealand, the Japanese airline ANA, plus airlines from Australia and Brazil. “Look at all the bulls in that herd,” he says. “Who's going to run it?”

As for alliances “turning into some kind of monolith, I don't think we're there and I don't think we will be there for some time,” he says. “It's too complex.”

But David A. Fuscus, vice president of communications for the Air Transport Association (ATA), doesn't think alliances present anti-competitive worries. “They are a way for an airline to expand its route system without the huge infrastructure investments necessary if you are going to do it as a single airline,” he says. “We think it's just another form of competition and that it's healthy.”

Will alliances eventually lead to only three or four mega-carriers covering the globe? “That's silly,” he says.

[1] Quoted in Don Phillips, “Airline chairman landing after turbulent quarter-century,” Austin American-Statesman, May 24, 1998.

Footnote: 1. Quoted in Don Phillips, “Airline chairman landing after turbulent quarter-century,” Austin American-Statesman, May 24, 1998.