Fast Company

Technology: Alliances Make Economic Sense for Airlines and Fliers

Taking his cue from Don Quixote, James Oberstar (D-Minn.) is tilting at basic economic reality in seeking to roll back airline alliances. Evidently without analyzing whether alliances are good or bad for the airlines and their passengers, Oberstar is proceeding from the assumption that alliances strangle competition and thus must be bad for customers.

What Oberstar thinks matters, because he just happens to be the chairman of the House Transportation and Infrastructure Committee. This is a committee that makes big waves in the aviation community.

To say that Oberstar's postulate is not economically valid would be to understate things. Should the language he recently put into the House version of the FAA reauthorization bill become law, havoc would ensue.

Oberstar's legislation (HR 831) would limit airline alliances by limiting the grant of antitrust exemption that makes them possible. Exemption would last three years, after which the airlines would have to reapply for another three years. When you factor in the time that the whole Congressional application and approval process takes, Oberstar's "sunset" legislation would effectively kill airline alliances stone dead.

Which, by all accounts, seems to be the outcome Oberstar is after.

What is interesting is that the congressman seems not to be aware that airline alliances have not caused higher fares. Quite the opposite, in fact. Alliances give consumers more choices than they've ever had before. Yes, alliances account for nearly 80 percent of the total global airline capacity. But, as Martha Stewart would say, that's a good thing. One of the most obvious benefits is how global alliances enable fliers to earn and redeem frequent flier miles across airlines.

What is bothersome about Oberstar's action is, if I may use an inapt transportation metaphor, how it puts the cart before the horse. He is asking the GAO (General Accounting Office) to study the effect of alliances on competition, service, fares, and so on. He claims alliances are having an adverse impact. Hmmm. Did he do his own study? One would think the correct approach would be to request an impartial study and then draft legislation if needed, not the other way around.

What is disturbing is that the government has previously approved of the alliance concept in lieu of Congressional approval of mergers between domestic and overseas airlines. Taking the government at its word, the airlines negotiated alliances and tooled up to integrate operations, marketing, and so on. But here comes the government playing Emily Littela and saying, Wait. We didn't mean it. Never mind.

As Evan Sparks writes in "The Cranky Flier," "Unpredictability of policy making can sometimes harm businesses even more than bad policy." Chiming in is US Airways executive C. A. Howlett: "Having the sort of ex post facto law that would undo this is a very disconcerting principle to have in the business community."

What makes Oberstar's anti-alliance crusade all the more troubling is that that assumption that the big bad airlines are colluding to hike fares and fees is patently false, if you look at the study done by W. Tom Whalen and Jan K. Brueckner of the University of Illinois at Urbana-Champaign. The study states: "The main finding is that alliance partners charge interline fares that are 18-28 percent below those charged by non-allied carriers." Um, what is it that Oberstar knows that these two professors who study the airline industry don't know?

Indeed as Sparks notes in his column, Brueckner updated that 1998 study with a 2003 article in Review of Economics and Statistics, and found that alliances reduce fares by 13-21 percent. The combination of code sharing with the antitrust immunity conferred by alliances translated into fares that were 17-30 percent lower than those of non-alliance airlines. Again, this is so clearly a boon to fliers that travelers like me have to wonder where Oberstar is coming from on this issue.

The Air Transport Association leaves no doubt where it stands on the issue. It wants Oberstar to drop his legislation. The ATA says Oberstar's bill, and I quote, "could destroy important service and public benefits such as competitive fares and new routes by withdrawing previously granted rights for carriers to participate in alliances."

I would agree. How can the federal government change the rules of the game midstream? What are the airlines to think? Investment is based on trust, stability, and regulatory fairness. To introduce this level of regulatory capriciousness now, when most of the airlines are already fighting for their economic lives, is more than a little shortsighted.

Alliances create beneficial revenue-sharing models and enable airlines to give travelers options they wouldn't otherwise have. Alliances drive airline innovation across the globe. For the rug to be pulled out from under the alliances now would not benefit consumers. In fact, the results would be disastrous for the airlines and traveling public alike.






Airline Futurist • Miami • www.us.amadeus.com

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