Date: Thu, 20 Nov 1997 15:55:03 GMT Server: NCSA/1.4.2 Content-type: text/html Last-modified: Mon, 14 Oct 1996 21:23:29 GMT Content-length: 31981
The proposed Alliance between American Airlines and British Airways will provide passengers and shippers with the benefits of truly global operations. In the past several decades, finance and commerce have become increasingly global. Airlines have developed on a parallel course, by expanding their networks, developing their own route systems, and linking their systems in codesharing and other types of alliances. Air transport has been a catalyst in the worldwide expansion of business, and will continue to advance the frontiers of enterprise.
The airline industry is a network business. In the past, carriers built linear route systems, and were content to transfer passengers to another airline to get them to their destinations. Following deregulation of the domestic U.S. airline industry in 1978, airlines abandoned linear route systems in favor of hub-and-spoke networks, which greatly increased efficiency and geographical scope. In the past few years, this process has begun to take root in international aviation. International air carriers now recognize that global hubs are an effective way to keep customers on their network or that of a partner, and that hub-and-spoke networks provide more choice and convenience to passengers and shippers, and more benefit to the airline.
That recognition is the impetus for the alliance between American Airlines and British Airways, and for the other major global alliances that have been formed in the past five years: Lufthansa-United-SAS, KLM-Northwest, and Delta-Sabena-Swissair-Austrian. These other alliances are already operating successfully, in large part because the U.S. Department of Transportation (DOT) has granted them immunity from U.S. antitrust laws, effectively permitting each alliance to operate as if it were a single company. The American Airlines-British Airways alliance, announced on June 11, 1996, has three main elements:
An open skies agreement with the United Kingdom will add great momentum to the growing trend toward liberalization of international air transport. Since 1992, the United States has concluded open skies agreements with Germany, the Netherlands, Sweden, and nine other countries in Western Europe, as well as with Canada, our largest trading partner. A liberalized agreement with the United Kingdom will not only add the largest intercontinental air travel market, but will send a strong message to recalcitrant trading partners, notably Japan, which have regarded Bermuda 2 as a model for continuing their own protectionist agreements.
In seeking government approval of their codesharing program and a grant of antitrust immunity, American and British Airways wish only to secure the same ability to compete globally that is now enjoyed by United, Northwest, and Delta.
The American-British Airways alliance is fully consistent with U.S. Government policy. The U.S. International Air Transportation Policy Statement, which the DOT issued on May 3, 1995, explicitly encouraged the development of such global alliances:
"Just as U.S. carriers developed hub-and-spoke systems to tap the broad traffic pool in the domestic market and to provide the most cost-efficient service for hundreds of communities that could not support direct service, international air carriers are developing world-wide hub-and-spoke systems to tap the substantial pool of international city-pairs . . . [O]ur international aviation strategy should provide opportunities for [global networks] so that we realize the benefits from maximum competition among them."
The Federal aviation statute, 49 USC 41309, provides an unequivocal basis for approval of the Alliance. It requires the Secretary of Transportation to approve an inter-carrier agreement, such as the American-British Airways alliance, "that is necessary to meet a serious transportation need or to achieve important public benefits (including international comity and foreign policy considerations)." The law requires DOT to balance public benefits against any possible anticompetitive harm. This was the same test that DOT used in evaluating the first request for antitrust immunity, when it granted the application of KLM and Northwest in 1993. Subsequent DOT grants of immunity to Lufthansa-United-SAS and Delta-Sabena-Swissair-Austrian have relied on this same foundation of balanced assessment.
The founding document of the European Union, the Treaty of Rome, which governs many aspects of competition in the EU, requires a similar evaluation. Article 85 requires officials to weigh public benefits against possible damage to competition, and comprises the test for evaluation of the Alliance by the competition authorities of the United Kingdom.
The benefits of the American-British Airways alliance are significant and compelling. The Department of Transportation should approve the Alliance and grant it antitrust immunity.
There are four main benefits: competition with existing global alliances, which will provide more and better service to passengers and shippers; new services on less-traveled routes; reduced costs; and, for the first time ever, open competition in an important market.
The Alliance will, when fully developed, offer coordinated service between over 36,000 combinations of origin and destination cities, making more of the world more accessible to consumers, and providing substantial new competition for the three major global alliances that are operating today. A traveler between, for example, Kansas City and Vienna can now choose to fly via the KLM-Northwest, Lufthansa-United-SAS, or Delta-Sabena-Swissair-Austrian alliances; the American-BA alliance will provide yet another choice.
The significance of itineraries like Kansas City-Vienna or Syracuse-Helsinki is frequently overlooked, because many of us live in or near gateway cities with a wide array of transatlantic services. However, airlines are a network business, and they depend on four types of international traffic flows:
International alliances seek to maximize the number of passengers traveling wholly on the services of the partners by offering large numbers of origin-and-destination possibilities, and combining customers at hubs in the U.S. and overseas.
In a network business, big is good, because customers can take advantage of a wider choice of routings, flights, and fares than would be offered on an interline basis. These greater choices can only be offered by airlines that enjoy antitrust immunity, which enable them to make joint decisions and combine operations to provide conveniences equal to those a passenger would get if traveling on a single carrier.
Here's how this will work once the American-BA alliance is in operation. If customers need to travel between Tucson and Berlin, the Alliance can take them all the way. Their travel agent sees a Tucson-Chicago-London-Berlin itinerary displayed in her computer reservation system as a convenient single-airline service, and she can issue advance boarding passes for all three legs of the journey. They need only deal with baggage once, in Tucson. American and British Airways have coordinated their schedules at Chicago and London, to minimize connecting time. Interconnected information systems have relayed requests for special meals. Signs and personnel responsible for connecting passengers direct them through the airports in Chicago and London. And, of course, they earn AAdvantage or Executive Club miles for their entire journey, which are good for free travel on either carrier, or on many affiliated airlines.
A second advantage for consumers is that by combining their marketing capabilities and distribution networks, the two airlines will also be able to operate new nonstop services on many routes that heretofore could not sustain profitable operations. Provided that sufficient demand exists, the Alliance will offer new services that bypass the U.S. hubs of American or BA's London gateways.
These new and expanded services will bring substantial benefits to communities and regions worldwide. Improved air services will increase inbound tourism, encourage exports, and promote general economic development, thereby generating growth in employment and tax revenues.
A third benefit is that the synergies and efficiencies of joint Alliance operations will reduce costs at both airlines, with savings that will be passed along to travelers and shippers. These efficiencies will flow primarily from five sources:
A fourth benefit is that the Alliance will make possible an open skies agreement between the United States and the United Kingdom. As noted above, the existing agreement, Bermuda 2, imposes a range of burdensome restrictions on which airlines can offer service, what routes can be flown, how many flight frequencies can be offered (sometimes even dictating the type of aircraft to be used), and what prices can be charged. As a result, competition in the U.S.-U.K. air travel market, the largest intercontinental market in the world, has been limited.
Since 1977, the Bermuda 2 agreement has been revised several times in ways that greatly favor U.K. airlines. Despite the proliferation of open skies agreements between the United States and many other countries in Western Europe, including Germany, the United Kingdom has not been amenable to an open agreement, because it could not see net benefit to U.K. interests. Nor did the United Kingdom see the need to make further incremental changes to Bermuda 2, because it believed that it had secured all that was needed. Now, however, the United Kingdom understands that the winds of liberalization are gathering speed, and the U.K. wants British Airways to have the benefits of the Alliance. Thus, the Alliance presents an historic opportunity to secure a balanced, pro-consumer aviation agreement.
What will an open skies agreement make possible? Because the limitations on designation-which airlines can operate-will disappear, as will controls on routes, new airlines will be flying new routes. Indeed, a forthcoming study of the effects of U.S.-U.K. open skies predicts that as many as 20 new U.S.-U.K. routes will be opened up during the first five years of the agreement, with up to 463 new flights per week in each direction. This will benefit not only the gateways that will receive nonstop service, but also hundreds of smaller communities that will enjoy many new connecting possibilities to the United Kingdom and to the rest of the world.
Because the stringent restrictions on access to Heathrow Airport will also disappear, many U.S. airlines will join American and United there. Because there will no longer be controls on flight frequency, there will be new services on existing routes, to match consumer demand, not bureaucratic whim. And because government pricing controls will be eliminated, the United Kingdom will no longer have the right to disapprove fares it decides are too low. With respect to price, the fundamental laws of supply and demand clearly will operate: with abundant new service and reinvigorated competition, prices will decline.
An open skies agreement will also give U.S. airlines the right to carry local passengers originating in the United Kingdom to points beyond in Europe, Africa, the Middle East, and Asia. For example, Delta will have the right to carry a business traveler from London to Zurich, either with its own aircraft or through its alliance with Swissair. Bermuda 2 contained almost none of these opportunities, known as Fifth Freedom rights, and this has been a contentious issue for many years.
It is important to note that unlike previous open skies agreements with European countries, which have not generated substantial new services, there is substantial unmet demand for U.S.-U.K. services. Most other open skies markets are 1) not large enough to enable profitable new operations, or 2) the national airline of the European country has been allied with a U.S. carrier, and the strength of the alliance combined with the limited size of the local market has discouraged new entry. For example, since the 1992 open skies agreement with the Netherlands, no new U.S. service has started, except that offered by KLM's partner, Northwest. These conditions will not apply in the large U.S.-U.K. market, where solid demand and a growing market will provide significant opportunities for greatly expanded services under an open skies agreement.
Since announcement of the American-British Airways alliance on June 11, 1996, other U.S. and U.K. airlines have criticized the proposed transaction. Their arguments reduce to three:
None of these arguments is valid.
When fully developed, the Alliance will provide on-line convenience to approximately 36,000 city-pair markets, directly benefiting consumers and communities, and providing substantial global competition with the existing alliances operated by United, Northwest, and Delta. Potential city-pair markets is an appropriate measure of alliance size, because in a network business each origin-destination market is a unique product, and the success of an alliance depends on maximizing the numbers of products that can be offered.
In terms of worldwide city-pair markets, the American-British Airways alliance is smaller than the Lufthansa-United-SAS alliance, which will offer over 55,000 potential city-pairs (over 50 percent larger than American-BA); smaller than the KLM-Northwest alliance, which will offer over 36,500; and only slightly larger than Delta-Sabena-Swissair-Austrian, which will offer over 33,500.
American and British Airways will initially have a smaller share of operations at Heathrow Airport, 41 percent, than Lufthansa-United-SAS at Frankfurt (54 percent), KLM-Northwest at Amsterdam (56 percent), or Delta-Sabena-Swissair-Austrian at Brussels (56 percent), Zurich (64 percent) or Vienna (54 percent). Even more significantly, the 41 percent AA-BA share at Heathrow will decline as new carriers enter the U.S.-Heathrow market.
The Alliance is approximately the same size as Lufthansa-United-SAS in revenue passenger miles (RPMs) and smaller in the following measures:
Measure | Lufthansa-United-SAS | American-BA |
Revenue passenger miles | 160.4 billion | 165.3 billion |
Worldwide destinations | 472 | 388 |
Jet aircraft operated | 903 | 878 |
Total employees | 161,000 | 137,000 |
To inflate the size of the American-BA alliance, some critics have included USAir in their comparisons. USAir should not be included. In announcing the Alliance in June, American welcomed USAir's participation. Since then, however, USAir has publicly stated that it has no place in the proposed Alliance, and has sued British Airways in order to terminate the BA/USAir relationship. In these circumstances, it is misleading to include USAir in statistical comparisons of the various alliances.
Critics who claim that the Alliance will dominate the U.S.-U.K. air travel market simply take the current highly regulated and restricted environment, and project it into the future, when open skies will prevail. The illogic is plain.
An open skies regime will produce far more competition, and will reduce significantly the current market share held by American and British Airways. A forthcoming study of the likely effects of U.S.-U.K. open skies projects that after five years, the combined share of American and British Airways in the U.S.-London market will decline from the 61 percent under today's restrictions, to 41 percent under open skies, a drop of 20 points. A combined market share of 41 percent would be substantially smaller than the current market shares of other transatlantic alliances at their European gateways, and only slightly larger than Lufthansa-United-SAS to Germany:
Market | Alliance Share* |
U.S.-Germany United-Lufthansa-SAS | 40% |
U.S.-Netherlands Northwest-KLM | 61% |
U.S.-Switzerland Delta-Sabena-Swissair-Austrian | 64% |
U.S.-Belgium Delta-Sabena-Swissair-Austrian | 74% |
U.S.-Austria Delta-Sabena-Swissair-Austrian | 100% |
* Measured in frequencies
A U.S.-U.K. open skies agreement will be the first of its kind that produces not just more frequencies, but several new routes as well. Many U.S. cities have sufficient local demand to London to justify nonstop service that bypasses current U.S. gateways.
Other U.S. airlines assert that British Airways' Heathrow hub gives it an unfair advantage in the U.S.-U.K. market. However, after an open skies agreement is concluded, these airlines will seek to commence Heathrow services from their own U.S. hubs, thus establishing offsetting competition between their hub network and that of BA at London. As noted below, several carriers have already applied to DOT to provide this service.
Some critics have complained that the Alliance's combined frequencies on U.S.-London routes would give it too much market strength, citing theoretical economic literature from the domestic U.S. airline industry. The notion is that high frequency service enables airlines to capture the high-yield business passenger, who values the convenience of multiple flights. However, most U.S.-U.K. routes only have one or two departures per day, which precludes frequency as a competitive factor. Even at New York, where American and BA operate multiple flights, several other airlines already compete effectively, and more are likely to enter the market.
Critics have said that if the Alliance is approved, fares will rise. Such a forecast is nonsense. Basic economics teaches that when supply rises, prices fall. An open skies agreement will free five new U.S. carriers to serve Heathrow; the price pressure they will exert will cause prices to decline, not increase.
British Airways has built its market share under the protective conditions of Bermuda 2. Those restrictions will disappear in an open skies environment. Our critics cannot decry the existing, restrictive competitive situation without acknowledging the open skies environment which will replace Bermuda 2 as a precondition for approval of the Alliance.
Critics have also focused attention on six U.S.-London routes that American and British Airways both operate, and have predicted a range of adverse consequences for consumers flying those routes. Opponents of the Alliance ignore the fact that under an open skies agreement, any U.S. or U.K. carrier will be able to operate on any or all of these six routes, from New York, Boston, Miami, Chicago, Dallas/Fort Worth, and Los Angeles-or on any other route to London.
Listed below are cities that would almost certainly gain new service to Heathrow after the two Governments sign an open skies agreement:
Airline | Gateway |
Continental | Newark Houston Cleveland |
Delta | Atlanta Cincinnati |
TWA | New York |
USAir | Boston Charlotte Philadelphia Pittsburgh |
Northwest | Detroit Minneapolis/St. Paul |
In fact, in September, DOT tentatively granted new authority (which presently exists under 1995 changes to Bermuda 2) to a low-cost, start-up airline, Vision Air, to fly between New York and London/Stansted. Anticipating the new bilateral agreement, TWA has already applied for New York-London/Heathrow authority, and USAir has applied to serve Boston-London/Heathrow. At Chicago, Virgin Atlantic is eligible for designation, even under Bermuda 2, and has expressed interest in the route. Also at Chicago, United will be permitted under existing rules to add service to London in January 1997. At New York, Boston, Miami, and Los Angeles, Delta currently has a blocked-space codesharing arrangement with Virgin Atlantic, which it could convert to its own operations. At Fort Lauderdale, Laker Airways, which once operated as a U.K. carrier but is now owned and controlled by U.S. investors, began operations to London this year.
Our critics have attempted to inflate the relative importance of the six overlap markets that both American and British Airways serve. In previous analyses of the probable competitive impact of global alliances, the U.S. Justice Department has been most interested in the time-sensitive business passenger. For American, in the year ended June 1996, only six percent of its total transatlantic passengers were time-sensitive business customers traveling on these six overlap routes. Given the competitive alternatives that exist today-including numerous one-stop connecting routings for passengers traveling to London from Los Angeles, Dallas/Fort Worth, Chicago, and Miami-and the certainty of more nonstop and more connecting itineraries under an open skies regime, neither American or British Airways will be able to raise prices on these or any other U.S.-London routes. Other airlines, including many of our critics, operate many nonstop U.S.-London routes today without any other nonstop competition, such as Delta on the Cincinnati-London route and TWA on the St. Louis-London route. These carriers cannot exercise monopoly pricing because of convenient competing service via numerous other U.S. gateways.
The final criticism of the proposed Alliance is that even if the U.S.-U.K. agreement is liberalized, no meaningful competition will result, because the most desirable U.K. airport, Heathrow, is "full".
Despite the rhetorical focus on Heathrow, more than one-third of all U.S.-London passengers fly to or from London/Gatwick, and U.S. airlines have successfully operated at Gatwick for many years. That said, we recognize the importance of Heathrow, and the need to look at the facts about that airport.
Once again, our critics wish to portray a static situation. However, Heathrow is not "full", in terms either of slots or of available passenger facilities. BAA PLC., the operator of Heathrow, NATS, the U.K. air traffic control service, and others have steadily increased operational efficiency in the air and on the ground, which has permitted significant increases in available slots (a slot is a reservation for an aircraft to land or take off at a specific time on a specific day). In fact, since spring 1991, 45 new airlines have been able to secure viable slots and begin operating at Heathrow, and 32 of these are still providing service. In 1995 alone, seven new carriers commenced Heathrow operations. Between 1992 and 1996, 71 daily peak-hour slots were added at Heathrow.
Diligent airlines that work to increase their operations at Heathrow have been successful. For example, between 1992 (American's first full year of Heathrow operations) and 1995, American increased its slot holdings by 33 percent. Every year since 1992, American has been able to add one daily flight. Virgin Atlantic, which has opposed the proposed Alliance and which has complained frequently about the alleged inequities of slot allocation, has increased its slots by 171 percent between 1992 and 1995, a growth rate five times faster than American's, and thirteen times greater than that of British Airways.
Our critics claim that the American and British Airways have a "pool" of slots at Heathrow that give the Alliance a present and future advantage. However, the other global alliances also have access to substantial slot holdings at Heathrow that could be reallocated to U.S.-U.K. service. For example, United-Lufthansa-SAS control approximately ten percent of Heathrow slots, and some of these, which are currently allocated for relatively short-haul services, could be reassigned to transatlantic flights.
Further increases in Heathrow slots are likely. A 1994 report prepared by BAA, NATS, and the International Air Transport Association concluded that Heathrow runway capacity could increase substantially and with relatively small, already proven changes in operating procedures.
For perspective, the approximately 600 daily round-trip operations at Heathrow this year compares with the over 750 daily round-trip operations at Miami International Airport, an airport with broadly comparable runway configuration and which operates at approximately 62 percent of capacity.
American has urged the U.K. Government to take a proactive position that supports the buying and selling of slots. The current policy of the European Commission, which governs slot allocation in the United Kingdom and elsewhere in the EU, does not explicitly prohibit the sale of slots. Clearly, this market-based action would be the instant solution to the problem of slot availability.
Nor are terminal facilities static. Indeed, BAA has embarked on an enormous development scheme to create a fifth terminal at Heathrow, which is expected to be completed by 2001. Contrary to our critics, BAA, which controls gate allocation (rather than using the more familiar U.S. practice of long-term gate leases for the exclusive use of one carrier), has not designated Terminal 5 to be the exclusive province of British Airways. In addition, BAA is continuously renewing and expanding the other four passenger terminals.
The proposed alliance between American and British Airways, coupled with the prerequisite open skies agreement between the United States and the United Kingdom, will greatly improve consumer convenience and choice, produce operating efficiencies that will produce greater value for passengers and shippers, increase competition in thousands of city-pair markets, and generate economic benefits for communities across the worldwide networks of both airlines. The Department of Transportation has already approved and granted antitrust immunity to the global alliances of United, Northwest, and Delta. Consistent with established DOT policy, the American-British Airways alliance should likewise be approved and immunized in the interest of consumer benefits and enhanced competition.