Table 1 summarizes the size and characteristics of the proposed alliances. Airline officials also note that additional routing options can create some better on-line connections by substituting one airline’s connection for its partner’s when the partner has closer connection times for the customer. In addition to the anticipated benefits of code-sharing, all three of the proposed alliances would offer their passengers reciprocal frequent flier benefits—that is, earning and using frequent flier points on either alliance partner—and the reciprocal use of club facilities. Airline officials believe that these reciprocal benefits would increase the value of frequent flier programs by allowing consumers to pool their points and choose from more destinations and frequencies. Alliances May Reduce Competition, Which Would Harm Consumers

While the proposed domestic alliances may benefit consumers, they also have the potential to decrease competition in dozens of nonstop markets and hundreds more one-and multiple-stop markets because, even though the alliances are not mergers, they may reduce the incentive for alliance partners to compete with each other. We analyzed 1997 data on the 5,000 busiest domestic airport-pair origin and destination markets—markets for air travel between two airports—to determine how these markets could be affected by the proposed alliances. If the airlines do not continue to compete on prices, we found that the number of independent airlines could decline in 1,836 of these 5,000 markets, possibly affecting the fares paid by nearly 101 million passengers out of a total of 396 million passengers. In a typical international alliance, a domestic airline with a domestic route network will form an alliance with a foreign airline that has a route network in its home territory. Decisionmakers Need to Consider a Number of Complex Issues in Evaluating the Alliances

Many dimensions of each of the proposed alliances deserve close scrutiny so that decisionmakers can assess whether the potential benefits of each particular alliance outweigh its potential harmful effects. These key issues are how substantial the benefits to consumers may be, whether incentives to compete are retained, what the potential impact of the proposed alliances on certain classes of consumers and certain communities are, how international travel may be affected, and what the overall implications of the proposed alliances for competition may be. Some of the estimated increases for the growth in traffic may depend on questionable assumptions about how much new traffic can be generated by marginal additions in the frequency of flights and the number of destinations or about how many additional travelers will choose to fly to destinations through a code-sharing arrangement that is currently available through an interline connection. On the other hand, if the alliances reduce incentives to compete on prices, then DOJ and DOT will need to carefully examine the overlap in the alliance partners’ route structures and assess whether an alliance would create a significant number of routes with less, or no, competition. The potential sources of new competition if any combination, or all, of the alliances move forward.
Why GAO Did This Study

GAO discussed the potential impact of the alliances proposed by the nation's six largest airlines, focusing on the competitive implications of the proposed alliances, including: (1) their potential benefits to consumers; (2) their potential harm to consumers; and (3) the issues that policymakers need to consider in evaluating the net effects of the proposed alliances.

What GAO Found

GAO noted that: (1) the primary potential benefits of the proposed alliances for consumers, according to airline officials, are the additional destinations and frequencies that occur when alliance partners join route networks by code-sharing; (2) with code-sharing, an airline can market its alliance partner's flights as its own and, without adding any planes, increase the number of destinations and the frequency of the flights it can offer; (3) airline officials also predict that increased frequencies and connection opportunities will spur additional demand, allowing for even more frequent flights and additional destinations; (4) the primary source of potential harm to consumers from the proposed alliances is the possibility that they will reduce competition on hundreds of domestic routes if the alliance partners do not compete with each other or compete less vigorously than they did when they were unaffiliated; (5) GAO analyzed 1997 data on the 5,000 busiest domestic airport-pair origin and destination markets--markets for air travel between two airports--to determine how these markets could be affected by the proposed alliances; (6) if all three alliances occur, GAO found that the number of independent airlines could decline on 1,836 of the 5,000 most frequently traveled domestic airline routes and potentially reduce competition for about 100 million of the 396 million domestic passengers per year; (7) in weighing the net effects of the proposed alliances, policymakers in the Department of Justice and the Department of Transportation have a difficult task because each alliance varies in its level of integration and in the scope and breadth of the combined networks; (8) however, GAO believes that if several key issues are addressed, policymakers will be better able to determine whether an alliance benefits consumers overall; (9) the first issue is whether airline partners' assumptions concerning the additional traffic and other benefits generated by the alliance are realistic; (10) second, it will be critical to determine if an alliance retains or reduces incentives for alliance partners to compete on price; and (11) if an alliance agreement reduces the incentives for partners to compete with fares in markets they both serve, then policymakers may want to examine the overlap in the alliance partners' route structures to determine whether that alliance would lead to a significant number of routes with fewer independent airlines.