How New Airline Alliances Can Add To Competition

<B> How New Airline Alliances Can Add To Competition</B>

By Rolfe Shellenberger

<i>Rolfe Shellenberger is a senior consultant for Rochester, Wis.-based Runzheimer International.</i><hr>

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Everywhere, it seems, people involved in corporate travel are clamoring for disallowance of major airline alliances, claiming that alliances will reduce competition and allow even higher airfares. Few contrarian voices other than airlines are being heard. My view: Alliances will increase competition and soon reduce fares.

American Airlines, at my instigation back in 1973, put pianos in coach lounges on its 11 B747s. It was such a success that a New Yorker cartoon, showing a traveler at an airline counter, carried the caption: "Just don't stick us anywhere near the damned piano bar!" Soon afterward, Delta Airlines filed a series of fares $5 cheaper than what might be offered on aircraft equipped with coach lounges. American knew that controllers in business firms would force a switch of traffic to Delta if the fare were approved, so we reluctantly tore out our music makers.

An axiom of airline economics: You must be price-competitive.

Other airlines, led by Delta's success using Atlanta as a hub, decided to build hub networks to foil competitive inroads. When "hubbing" became a marketing strategy, frequency throughout the day was its hallmark. If American, for example, wanted to dominate a city-pair like Little Rock-Dallas/Ft. Worth, all it needed to do was schedule six flights a day to discourage competition. However, local traffic on that city-pair might have been only 100 passengers a day each way, so American had to schedule connecting trips at Dallas/Ft. Worth to every point beyond where Little Rock had any level of demand.

Today, American has ten nonstop flights to Little Rock, all of them on that Little Rock-Dallas/Ft. Worth city-pair, affording frequent connections to 91 other airports. American's only competitor is Southwest, with seven daily flights between Dallas Love Field and Little Rock. Southwest's 70 percent share of all local traffic amounts to 721 passengers, leaving American with an average of only 309 passengers, hardly enough to justify three daily departures, never mind ten. Frequency assures American of protection against Southwest or another airline offering, say, nonstop flights between Little Rock and Los Angeles, where total demand is 175 passengers a day. Traffic density isn't great enough for multiple frequencies, so Southwest, knowing that American is only averaging 11 cents a mile on Little Rock-Los Angeles, has better places to put its equipment.

Hubs discourage competition because of overwhelming frequencies. Hubs have been major airlines' biggest defensive weapon against competitive inroads. Frequent flyer programs reinforce market control generated by hubs. Thus, airlines have been scheduling to deter competitive entry, not only from new low-fare airlines, but also from majors. Hubs have really helped travelers who live in hubs by offering them almost unlimited choices of nonstop service to virtually every city in the U.S. and to many overseas business centers. However, if you live in a non-hub city like Des Moines or Richmond, your only nonstop schedules are to hubs. To go anywhere else you have to change planes.

Up to now, U.S. airline post-deregulation expansion has focused on two geographical factors: international routes and hub saturation. International routes are typically more competitive than domestic because yields are high for business travel and seasonal demand for leisure travel assures a year-end profit, as long as economic recession does not occur. Domestic hub saturation is usually more profitable than breaking into some other airline's hub. As long as hubs are less than saturated, airlines will expand frequencies and destinations into and out of them.

If government regulators and unions don't prevent the air alliances of American-US Airways, Continental-Northwest and United-Delta, effective competition may decline on a maximum of only 34 domestic routes and, because competitors share the Chicago and Dallas/Ft. Worth hubs, seven of them will be minimally affected.

Assuming that both members of these two-carrier partnerships will insist on retaining a competitive presence, reduced competition probably will occur on fewer than 25 routes. If competition between alliance partners is reduced on lucrative routes, either a new airline or a member of a competitive alliance will fill the gap.

Airline hubs are now pretty well saturated. Thus, growth must come from routes outside of hubs. We already have seen this on Boston-San Francisco and Boston-San Jose, where longtime monopolies by United and American respectively have been saddled with competition from each airline's most detested rival.

The table below shows monopolies just waiting to be challenged, mainly because even half of their traffic is a lot more than any new destination from a hub could generate.