International Aviation

Competition Issues in the U.S.-U.K. Market Gao ID: T-RCED-97-103 June 4, 1997

The current bilateral aviation agreement between the United States and the United Kingdom limits competition and forces customers in both countries to pay higher fares. Approval of a proposed alliance between British Airways and American Airlines, which together accounted for 60 percent of the passenger traffic between the United States and the U.K. in 1996, would further reduce competition unless other U.S. airlines are given better access to London's Heathrow Airport. The limited number of takeoff and landing slots and a scarcity of available gates and facilities at Heathrow have prevented U.S. airlines from having adequate access to that airport. Those barriers must be addressed if competition is to be increased. Both American Airlines and British Airways have said that if they relinquish some of their slots to other U.S. airlines, they would expect to be paid the fair market value for those slots. European Union officials contend that their regulations prohibit the buying and selling of such slots, although British officials believe that they have some flexibility in the matter. Agreement would also need to be reached on facility constraints at Heathrow so new entrants would have access to gates, ticket counters, terminal space, and baggage facilities.

GAO noted that: (1) the current bilateral accord between the United States and the United Kingdom places substantial limits on competition; (2) as a result, consumers in both countries have more limited service options and likely pay higher fares than they would in a more competitive environment; (3) in addition, these limits on competition disproportionately impact U.S. airlines, most of whom are not allowed to serve Heathrow; (4) only two U.S. airlines can currently serve Heathrow, and even those two are only permitted to do so from certain designated cities; (5) by contrast, British Airways has already obtained, in previous negotiations, extensive access to the U.S. market; (6) partly as a result, U.S. airlines' share of the U.S.-U.K. market has steadily declined over the past few years, while British Airways' share has risen; (7) with little leverage with which to deal, the Department of Transportation (DOT) has achieved little success in securing increased access for U.S. airlines to Heathrow; (8) as GAO noted in its March 1996 testimony, progress would likely not occur until the United Kingdom identified something else it wanted from the United States; (9) that moment arrived 1 year ago with the announcement by American Airlines and British Airways of their planned alliance; (10) however, several difficult issues, such as the British government's insistence that an open skies agreement also contain a formal mechanism to resolve disputes, have stalemated negotiations; (11) the potential alliance of American Airlines and British Airways, the two largest carriers in the U.S.-U.K. market, raises significant competition issues; (12) in 1996, the two airlines accounted for 60 percent of the scheduled passenger traffic that flew between the United States and the United Kingdom; (13) in addition, they currently provide over 70 percent, and in some cases all, of the service between Heathrow and several key U.S. gateways, including New York, Chicago, Boston, and Miami; (14) as a result of this level of market concentration, DOT's approval of the alliance would further reduce competition unless, as a condition of the approval, other U.S. airlines are able to simultaneously obtain adequate access to Heathrow; (15) barriers exist at Heathrow in the form of a limited number of takeoff and landing slots and a scarcity of available gates and facilities that prevent U.S. airlines from having adequate access to that airport; and (16) as a result, action will be necessary to address these barriers if open skies is to result in increased competition.

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