In announcing their proposed alliance, American Airlines and British Airways emphasized that they are at a competitive disadvantage with these alliances because the airlines in those alliances can, among other things, better coordinate service and jointly set fares. In addition, they also likely result in higher airfares. European Reviews Considering a Range of Competitive Issues; U.S. The European regulatory agencies have nearly completed their reviews, and the formal U.S. review has yet to get under way. European Commission’s Review Forthcoming

In July 1996, because of concerns about the anticompetitive effects of the alliances, the European Commission’s Directorate General for Competition initiated a review of the proposed AA/BA alliance and three other ongoing alliances: United/Lufthansa/SAS; Delta/Swissair/Sabena/Austrian Airlines; and Northwest/KLM. United Kingdom Awaiting European Commission’s Draft Remedies

The U.K. Department of Trade and Industry is conducting its own review of the proposed AA/BA alliance. U.S. As with the other international code-sharing alliances that the United States has approved, DOT officials explained that they will not approve AA’s and BA’s proposed code-sharing alliance with antitrust immunity unless the United States has reached an open skies agreement with the United Kingdom. For the month of March 1998, an analysis of Official Airline Guide data indicates that AA and BA account for nearly 58 percent of the seats available on scheduled passenger flights between the United States and London. Moreover, as of March 1998, the two airlines account for 37 of the 55 total daily roundtrips (67 percent) between the United States and Heathrow offered by scheduled U.S. and British airlines. Our review of current competitive conditions in the New York-Heathrow (Kennedy and Newark) market indicates that substantial new entry would need to occur to provide competition because of the (1) size of the market, (2) large share of that market currently held by AA and BA, (3) frequency of service in that market—15 flights a day—provided by the two airlines (compared with 3 daily flights by United and 3 daily flights by Virgin Atlantic), and (4) substantial portion of the market accounted for by time-sensitive business travelers. This time, some were not as clear on the number of slots they would need to be competitive. If the proposed alliance is approved and the regulatory agencies decide how many slots and gates should be made available, it is uncertain how long it would take the British Airports Authority, which owns and operates seven U.K. airports, including London’s Heathrow and Gatwick airports, to actually make them available to new airlines. DOT will have to address this issue because it will be critical for new carriers to obtain access to commercially viable slots, as well as needed gates and facilities, at the same time as the proposed alliance begins joint operations. Airline Sales and Marketing Practices May Further Enhance Market Dominance Over Smaller, Nonaligned, and New Entrant Carriers

According to airline officials, aviation experts, and consumer groups we interviewed, restrictions on access to slots and gates at Heathrow Airport are the most significant barriers to competition in U.S.-U.K. markets, but sales and marketing practices—which include frequent flier programs, travel agent commission overrides, multiple listings on computer reservation systems, and corporate incentive programs—may also reduce competition. However, measuring the impact of these practices on fares is difficult, and limiting them would involve a trade-off between their anticompetitive effect and the consumer benefits that some of them bring. If an airline is already dominant in a given airport, these programs will serve to reinforce this dominance. Frequent flier programs encourage travelers to chose one airline over another on the basis of factors other than price. 14, 1996). 6, 1995).
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed the United States' aviation relations with the United Kingdom, focusing on the: (1) status of the various reviews of the proposed American Airlines/British Airways (AA/BA) alliance being undertaken by the European regulatory agencies and the Departments of Transportation and Justice; (2) competitive impact of the proposed alliance; and (3) extent to which sales and marketing practices of American Airlines and British Airways should be considered in reviewing the alliance.

What GAO Found

GAO noted that: (1) European regulatory agencies have nearly completed their reviews of the proposed AA/BA alliance; (2) they are considering a range of issues that would have to be addressed as a condition of approving the alliance, including the number of slots and gates that other airlines would need at London's Heathrow Airport to compete, as well as American Airlines' and British Airways' marketing practices; (3) the United Kingdom, which is also reviewing the proposed alliance, is waiting for the European Commission to announce its draft remedies; (4) in contrast, the Department of Transportation (DOT) has not yet begun its formal review of the proposed alliance because neither airline has filed all the documentation requested; (5) DOT has reiterated that it will not approve the alliance until the United States successfully negotiates an open skies agreement with the United Kingdom; (6) the proposed AA/BA alliance raises significant competition issues; (7) currently, the two airlines account for nearly 58 percent of the available seats on scheduled U.S. and British airlines between the U.S. and London; (8) in addition, they provide over 70 percent--and in some cases all-of the available seats on scheduled U.S. and British airlines between Heathrow Airport and several key U.S. airports, including Chicago, Boston, and Miami; (9) as a result of this level of market concentration, DOT's approval of the alliance would further reduce competition unless, as a condition of approval, other U.S. airlines were able to obtain adequate access to Heathrow; (10) although slots, gates, and facilities are most important, most experts and some airline officials with whom GAO spoke also recognize that American Airlines' and British Airways' sales and marketing practices may make competitive entry more difficult for other airlines; (11) practices such as frequent flier programs and travel agent commission overrides encourage travelers to choose one airline over another on the basis of factors other than obtaining the best fare; (12) such practices may be most important if an airline is already dominant in a given market or markets; (13) ultimately, this may lead to higher fares than would exist in the absence of these marketing practices; (14) even so, the experts agreed that measuring the effect of these practices is nearly impossible; and (15) mitigating their effect without banning them is difficult, and banning them involves a trade-off between their anticompetitive effect and the consumer benefits that some of them bring.