Aviation Competition

Six airlines that carry about 70 percent of domestic passengers in the United States--Northwest, Continental, Delta, United, American, and US Airways--plan to form three alliances. The airlines say that these alliances will yield such consumer benefits as expanded route networks and combined frequent flier programs. Critics contend that the consolidation will undermine the benefits of deregulation by decreasing competition, which will ultimately reduce passengers' choices and increase fares. This testimony describes the competitive implications of the proposed alliances, including their potential benefits and disadvantages to consumers, and issues that policymakers need to consider in evaluating the net effects of the proposed alliances.

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.