Aviation Competition

Early in 1998, the six largest airlines, which account for nearly 70 percent of domestic airline traffic, announced plans to form three alliances involving Northwest and Continental, Delta and United, and American and US Airways. The alliances vary from a limited marketing arrangement, such as reciprocal frequent flyer programs, to more complex agreements, such as those involving "code sharing" or one partner's ownership of an equity share in the other partner's business. The airlines contend that these alliances will benefit consumers through expanded route networks and combined frequent flyer programs. Others argue that the alliances will undermine competition, ultimately reducing passengers' choices and increasing fares. This report (1) describes the status of each of the alliances; (2) examines, for each alliance, the potential beneficial and harmful effects on consumers; and (3) examines the authority of the departments of Justice and Transportation to review these alliances and the status of their reviews.

GAO noted that: (1) all six airlines have begun implementing various aspects of their agreements; (2) Northwest Airlines completed its acquisition of equity in Continental Airlines, and the two airlines began implementing their reciprocal frequent flyer programs; (3) since GAO testified in June 1998, however, Northwest and Continental have revised their agreement; (4) under the terms of the revised agreement, Northwest altered its equity investment in Continental, agreed to forgo its right to place someone on Continental's Board of Directors, and agreed to forgo code-sharing with Continental in certain domestic markets; (5) even though Northwest and Continental have implemented their agreement, it remains under review at both DOJ and DOT; (6) the alliance between United Airlines and Delta Air Lines was originally to include code-sharing, but it has been scaled back to an arrangement involving reciprocal frequent flyer programs and access to airport lounges; (7) this arrangement, which the airlines began implementing in September 1998, is much the same as the one American Airlines and US Airways proposed and began implementing in August 1998; (8) GAO analysis of Northwest and Continental's proposed alliance showed that the alliance could result in new, possibly improved, route options, and the alliance's extended frequent flyer program may benefit members of each airline's program; (9) GAO also found that this alliance will create some new markets that are not already served by other airlines; (10) however, GAO's analysis indicated fewer new markets than the alliance partners estimated, and it showed that these new markets will serve relatively few passengers; (11) GAO's analysis indicates that if Northwest and Continental do not act independently, competition could decline in 63 markets that served 2 million passengers in 1997, and the two airlines could also increase by 5 percent in the number of markets that they dominate; (12) DOJ and DOT are separately reviewing the three alliances under different statutory authorities and have different remedies available to them; (13) on October 23, 1998, DOJ filed a civil antitrust action to prevent Northwest from acquiring or holding a majority of Continental's voting stock; (14) DOJ said in its complaint that Northwest's gaining control would lessen competition in interstate trade and commerce and unreasonably restrain trade; and (15) Congress recently authorized DOT to impose waiting periods before certain joint venture arrangements involving major airlines.