The Benefits Of Alliances--A Fare Value?

<B> The Benefits Of Alliances--A Fare Value?</B>

By Jay Campbell and Barbara Cook

As airline alliances have begun offering contracts to the largest of corporate clients, smaller companies still are asking, "What's in this for me?" Said one buyer, echoing the thoughts of a number of his colleagues, "The alliances are nothing more than frequent flyer programs."

Airline analyst Julius Maldutis at CIBC Oppenheimer in New York said he believes the purported consumer benefits of airline alliances never existed in the first place. "The reason alliances are so successful is that they are less competitive. They raise prices," he said in a speech late last month. "Alliances are surrogates for mergers."

Maldutis is not the only Wall Street airline watcher to feel that way. Agreed Sam Buttrick of Paine Webber, "Alliances are not good for the consumer. They don't reduce your travel budget because they're not pro-competitive," he said. "Preferred GDS display does not add value. I'd personally like to see codesharing prohibited because it's not a value-added process."

To date, there has been little definitive study on whether alliances increase or reduce fares. A recent paper by the University of Illinois (<I>BTN,</I> Jan. 25) found that airline alliances may increase fares for nonstop flights by up to 5 percent. The study also found that alliances offer fares on interline itineraries that are 18 to 28 percent lower than non-allied carriers. But an international rate expert sharply criticized that point, noting that it did not account for additional fare types that were available before the alliances.

John Anderson, director of transportation issues at the General Accounting Office, said, "The jury is still out on international alliances and their effect on fares and services. It's begging for further study."

One thing's for sure: Alliance airlines are raking in some serious cash. Maldutis said a recent meeting he had with Air Canada revealed that the airline added $300 million in incremental revenues in 1998 without generating a single new passenger. And Austrian Airlines' head of airline cooperations Paul Paflik noted that while the four major alliances control 52 percent of the world's airline revenues, they earn 73 percent of its profits. "Clearly, the airline industry needs a higher profit margin to survive," he said.

So, while the benefit to the airlines is clear, the benefit to passengers, beyond "more places to earn and redeem your miles and more lounges to sit in," is not. Maldutis, like former American Airlines CEO Robert Crandall, believes alliances do nothing better than interline agreements did--and that those traditional systems were needlessly destroyed.

Others have noted that the advantages of so-called "seamless service" have nothing at all to do with alliances. For example, many partnerships cite the ability to check bags through as a big draw. But "there is no reason through checkin has to be only with codesharing partners," said Mark Bergsrud, vice president of revenue programs for Continental Airlines. "I predict it will be available with everyone within five years."

Continental negotiated such a through-checkin agreement with United Airlines in 1998. "Regardless of which airline you fly, they should have the capability of checking your bags through," agreed Continental vice president of national sales Dave Hilfman.

European Union competition commissioner Karel van Miert is hard-pressed to find the consumer benefits in airline alliances. "The argument made to the consumers is that they can now finally go anywhere in the world," he said. "Alliances are presented as a universal panacea in this respect, as if 20 years ago it was not possible to travel around the world, and as if in pre-alliance times luggage got lost more often than since the existence of alliances. To quote an intervening third party in a recent Commission hearing: 'The alliance has not given access to 100 new cities, but has reduced access to a mere 100. A functioning interlining system provides far more city options.' "

Still, some regulators continue to maintain that alliances add value. "Cross-border alliances are providing better service," said Charles Hunnicutt, who recently resigned his post as the U.S. Department of Transportation's assistant secretary for policy and international affairs (<I>BTN,</I> Feb. 22). "It's sad but true that trying to run a global network through the bilateral structure is like trying to get on the Internet with a very slow modem."

The General Accounting Office and the European Union are offering a more cautious view. The GAO recently warned that the impact of domestic alliances between Continental and Northwest, Delta and United, and American and US Airways cannot yet be clearly determined. "The alliances may have both beneficial and harmful effects on consumers," GAO said.

The Continental-Northwest agreement, which is moving forward but remains under review at both the departments of Justice and Transportation (<I>BTN,</I> Nov. 2, 1998), will result in "possibly improved" route options and more benefits for members of each airline's frequent flyer program, GAO said. It also will create some new markets that aren't flown by competing carriers.

However, GAO's analysis indicated that the new markets the alliance will serve will benefit relatively few passengers. "It is difficult to determine whether the partners in the alliance will continue to compete or whether the alliance will encourage them to act in a manner that may reduce competition," GAO said. "Airline officials have said that the partners will continue to compete. However, industry experts have raised concerns that competition will likely decline over time as firms recognize their interdependence and maintain prices above the competitive level."

If Continental and Northwest do not continue to behave as competitors on other routes, competition could decline in 63 markets that served two million passengers in 1997, and the two could boost by 5 percent the number of markets they dominate, GAO said. The partnership will not appreciably change the level of concentration at slot-controlled and gate-constrained airports, where they already control a majority of the leases in their gate-constrained hubs.

<CENTER><B>The European Viewpoint</B></CENTER>

According to van Miert, certain global aviation alliances resemble "cartels" more than the pro-competitive partnerships they claim to be. "We are being told that alliances might lead to a decrease in competition between the alliance partners, but that these alliances will enter into fierce competition between each other," he said. "I am still waiting for a first confirmation of this fierce competition between alliances. I rather see the risk of a closing up of the market around the hub, with some limited competition at the margin for those geographical zones which are subject to the influence of several hubs."

The European Union has proposed remedies to lessen its concerns over any potential anti-competitive effects of alliances. For airline partnerships that would reduce competition on certain routes, the EU proposes encouraging the entry of new competitors by opening up slots at major airports and requiring alliance carriers to reduce frequencies for a limited period.

Van Miert also said that the EU may prohibit alliance carriers from combining their frequent flyer programs for transatlantic routes, or, if they do allow them to combine, open them up to participation by non-alliance carriers.