Allies Drop Interline Fares

<B> Allies Drop Interline Fares</B>

By Jay Campbell

A study released last month by the University of Illinois found that while airline alliances may increase fares for nonstop flights by up to 5 percent, their fares on interline itineraries are 18 to 28 percent lower than non-allied carriers.

Calling the 5 percent "statistically insignificant," the study's authors, economists Jan Brueckner and Tom Whalen, said their results "do not provide evidence that alliances reduce competition."

Using United Airlines' partnerships with Lufthansa and SAS as an example, the report said that "if UA's alliances were terminated, fares would rise substantially and the welfare loss to interline passengers would range between $50 million and $82 million" a year.

Brueckner, a professor, and Whalen, a Ph.D. candidate, studied third-quarter 1997 data from the U.S. Department of Transportation's Passenger Origin and Destination Survey. Focusing on roundtrip international itineraries that use two carriers and involve three or fewer route segments in each direction, the sample contained 46,620 itineraries. They studied 1,137 nonstop itineraries, measuring the effect of alliances on nonstop, or gateway-to-gateway, pricing.

The two economists explained the results by noting that "under cooperative pricing, each alliance partner recognizes that asking for a high return for its portion of an interline ticket raises the overall fare, which in turn hurts the other partner by depressing traffic in the market. Taking the other partner's interests into account, each alliance partner thus moderates its pursuit of higher revenue, and the result is a lower interline fare."

Taking issue with the study, Hickory Travel Systems vice president of international rates and tariffs Joe Broesler, a 25-year travel industry veteran, said it failed to compare apples to apples.

"They really should have compared alliance interline fares and non-alliance interline fares with the routing and non-routing fares that were common years ago," he said. Interline fares, Broesler explained, traditionally came in two forms: routing fares, which were special rates negotiated by certain carriers in a kind of partnership; and mileage-based fares, which Brueckner and Whalen are referring to when they argue that "nonallied carriers set interline fares through a noncooperative choice of 'subfares.' The subfare gives the amount earned by a carrier for its portion of an interline trip, with the sum of the subfares giving the interline fare."

Broesler said the alliance interline fares in today's market are no different than the traditional routing fares. While United may have had routing fares with four airlines in the past, now it has them only with its alliance partners. "What you don't know is whether there are actually fewer possible routings now," Broesler said.

United Airlines welcomed the study. "These academic analyses confirm what our customers already know--our alliance is pro-competitive and provides a wide range of tangible benefits for air travelers," said vice president for international and regulatory affairs Michael Whitaker. "This study demonstrates that the existing international airline alliances are having a dramatic, positive impact and deserve the full support of regulatory authorities.