International Aviation: Competition Issues in the U.S.-U.K. Market
(Testimony, 06/04/97, GAO/T-RCED-97-103).
GAO discussed U.S. aviation relations with the United Kingdom, focusing
on the: (1) current status of airline competition in the U.S.-U.K.
market and of negotiations between the United States and the United
Kingdom; (2) potential competitive impacts of the proposed alliance
between American Airlines and British Airways; and (3) obstacles that
might prevent U.S. airlines from having adequate access to Heathrow
Airport.
GAO noted that: (1) the current bilateral accord between the United
States and the United Kingdom places substantial limits on competition;
(2) as a result, consumers in both countries have more limited service
options and likely pay higher fares than they would in a more
competitive environment; (3) in addition, these limits on competition
disproportionately impact U.S. airlines, most of whom are not allowed to
serve Heathrow; (4) only two U.S. airlines can currently serve Heathrow,
and even those two are only permitted to do so from certain designated
cities; (5) by contrast, British Airways has already obtained, in
previous negotiations, extensive access to the U.S. market; (6) partly
as a result, U.S. airlines' share of the U.S.-U.K. market has steadily
declined over the past few years, while British Airways' share has
risen; (7) with little leverage with which to deal, the Department of
Transportation (DOT) has achieved little success in securing increased
access for U.S. airlines to Heathrow; (8) as GAO noted in its March 1996
testimony, progress would likely not occur until the United Kingdom
identified something else it wanted from the United States; (9) that
moment arrived 1 year ago with the announcement by American Airlines and
British Airways of their planned alliance; (10) however, several
difficult issues, such as the British government's insistence that an
open skies agreement also contain a formal mechanism to resolve
disputes, have stalemated negotiations; (11) the potential alliance of
American Airlines and British Airways, the two largest carriers in the
U.S.-U.K. market, raises significant competition issues; (12) in 1996,
the two airlines accounted for 60 percent of the scheduled passenger
traffic that flew between the United States and the United Kingdom; (13)
in addition, they currently provide over 70 percent, and in some cases
all, of the service between Heathrow and several key U.S. gateways,
including New York, Chicago, Boston, and Miami; (14) as a result of this
level of market concentration, DOT's approval of the alliance would
further reduce competition unless, as a condition of the approval, other
U.S. airlines are able to simultaneously obtain adequate access to
Heathrow; (15) barriers exist at Heathrow in the form of a limited
number of takeoff and landing slots and a scarcity of available gates
and facilities that prevent U.S. airlines from having adequate access t*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-RCED-97-103
TITLE: International Aviation: Competition Issues in the U.S.-U.K.
Market
DATE: 06/04/97
SUBJECT: Airline industry
Airports
Commercial aviation
Competition limitation
Foreign governments
International agreements
International economic relations
Restrictive trade practices
Air transportation operations
Airline regulation
IDENTIFIER: Heathrow Airport (United Kingdom)
Gatwick Airport (United Kingdom)
United Kingdom
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Cover
================================================================ COVER
Before the Subcommittee on Aviation, Committee on Commerce, Science,
and Transportation, U.S. Senate
For Release
on Delivery
Expected at
2:00 p.m. EDT
Wednesday
June 4, 1997
INTERNATIONAL AVIATION -
COMPETITION ISSUES IN THE
U.S.-U.K. MARKET
Statement of John H. Anderson, Jr.,
Director, Transportation Issues,
Resources, Community, and Economic
Development Division
GAO/T-RCED-97-103
GAO/RCED-97-103T
(341526)
Abbreviations
=============================================================== ABBREV
DOT -
============================================================ Chapter 0
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to testify on U.S. aviation relations
with the United Kingdom, our largest aviation trading partner
overseas. As we testified before this Subcommittee in March 1996,
access to London's Heathrow Airport is important to any airline that
desires to be a major participant in the transatlantic market.\1
Unfortunately, our bilateral aviation agreement with the United
Kingdom restricts the number of U.S. airlines that can serve
Heathrow to two carriers--American Airlines and United Airlines. In
June 1996, American Airlines and the United Kingdom's largest
airline, British Airways, announced that they intended to form an
alliance that would allow both carriers to market each other's
flights as their own (referred to as "code-sharing") and that they
would seek immunity for the alliance from U.S. antitrust laws. Such
alliances must be approved by the Department of Transportation (DOT),
and as a matter of U.S. policy, DOT only grants antitrust immunity
to such alliances if there is an "open skies" agreement.\2 Since July
1996, DOT has been negotiating with the British government but the
two sides have yet to agree on such an accord.
Over the past several years, we have issued a number of reports on
international aviation issues, including our April 1995 report on the
competitive impacts of code-sharing alliances.\3 As requested, we
will draw on this body of work to discuss the (1) current status of
airline competition in the U.S.-U.K. market and of negotiations
between the United States and the United Kingdom, (2) potential
competitive impacts of the proposed alliance between American
Airlines and British Airways, and (3) obstacles that might prevent
U.S. airlines from having adequate access to Heathrow.
In summary,
The current bilateral accord between the United States and the
United Kingdom places substantial limits on competition. As a
result, consumers in both countries have more limited service
options and likely pay higher fares than they would in a more
competitive environment. In addition, these limits on
competition disproportionately impact U.S. airlines--most of
whom are not allowed to serve Heathrow. Only two U.S. airlines
can currently serve Heathrow, and even those two are only
permitted to do so from certain designated cities. By contrast,
British Airways has already obtained, in previous negotiations,
extensive access to the U.S. market. Partly as a result, U.S.
airlines' share of the U.S.-U.K. market has steadily declined
over the past few years, while British Airways' share has risen.
With little leverage with which to deal, DOT has achieved little
success in securing increased access for U.S. airlines to
Heathrow. As we noted in our March 1996 testimony, progress
would likely not occur until the United Kingdom identified
something else it wanted from the United States. That moment
arrived a year ago with the announcement by American Airlines
and British Airways of their planned alliance. However, several
difficult issues, such as the British government's insistence
that an open skies agreement also contain a formal mechanism to
resolve disputes, have stalemated negotiations.
The potential alliance of American Airlines and British
Airways--the two largest carriers in the U.S.-U.K.
market--raises significant competition issues. In 1996, the two
airlines accounted for 60 percent of the scheduled passenger
traffic that flew between the United States and the United
Kingdom. In addition, they currently provide over 70
percent--and in some cases all--of the service between Heathrow
and several key U.S. gateways, including New York, Chicago,
Boston, and Miami. As a result of this level of market
concentration, DOT's approval of the alliance would further
reduce competition unless, as a condition of the approval, other
U.S. airlines are able to simultaneously obtain adequate access
to Heathrow. Specifically, the available evidence suggests that
to ensure increased competition, the other major U.S. airlines
that fly internationally would need to serve Heathrow from their
principal hubs.
Barriers exist at Heathrow in the form of a limited number of
takeoff and landing slots and a scarcity of available gates and
facilities that prevent U.S. airlines from having adequate
access to that airport. As a result, action will be necessary
to address these barriers if open skies is to result in
increased competition. However, both American Airlines and
British Airways have indicated that even if they agree to
relinquish some of their slots to the other U.S. airlines, they
would expect to be paid the fair market value for those slots.
European Union (EU) officials believe that their regulations
governing the transfer of slots at airports in EU-member
countries prohibit the buying and selling of slots. British
officials, however, believe that flexibility may exist to
accommodate the payment to the potential alliance partners for
any slot transfer. In addition to a transfer of slots,
agreement would be needed to address the facility constraints at
Heathrow so that new entrants have access to the gates, ticket
counters, terminal space, and baggage facilities they would
need. Over the past few years, local community opposition and
environmental concerns have delayed plans for expansion in these
areas.
--------------------
\1 International Aviation: DOT's Efforts to Increase U.S. Airlines'
Access to International Markets (GAO/T-RCED-96-32, Mar. 14, 1996).
\2 Generally, an open skies agreement removes all restrictions on air
travel between two countries and allows airlines to fly between the
countries when they want, where they want, and set fares in response
to market forces.
\3 International Aviation: Airline Alliances Produce Benefits, but
Effect on Competition is Uncertain (GAO/RCED-95-99, Apr. 6, 1995).
Other related GAO products are listed at the end of this statement.
BACKGROUND
---------------------------------------------------------- Chapter 0:1
In the international sector, the routes that airlines can fly, the
frequency of their flights, and the fares they can charge are
governed by 72 bilateral agreements between the United States and
other countries. Many of these agreements, including the accord with
the United Kingdom, are very restrictive. Since the late 1970s, U.S.
policy has been to negotiate agreements that substantially reduce or
eliminate bilateral restrictions. DOT's Office of the Assistant
Secretary for Aviation and International Affairs, with assistance
from the State Department, is responsible for negotiating these
agreements and awarding U.S. airlines the right to offer services
provided for in those agreements.
In April 1995, DOT issued the U.S. International Aviation Policy
Statement in which the agency reiterated its desire for open skies
agreements and endorsed the growing trend toward alliances between
U.S. and foreign airlines. Since issuing that statement, DOT has
negotiated a number of more liberal agreements, including open skies
accords with Germany and numerous smaller European countries. In
conjunction with these agreements, the agency granted antitrust
immunity in 1996 to the alliances between United and Lufthansa, which
is Germany's largest airline, and between Delta and several smaller
European carriers.\4 In 1992, DOT granted antitrust immunity to the
Northwest/KLM alliance in conjunction with the U.S.-Netherlands open
skies accord. In announcing their proposed alliance, American
Airlines and British Airways emphasized that they are at a
competitive disadvantage to these alliances because the airlines in
those alliances can, among other things, better coordinate service
and jointly set fares.
Despite success in negotiating open skies agreements throughout much
of Europe, DOT has had very little success with the United Kingdom.
The current U.S.-U.K. accord, commonly known as "Bermuda II," was
signed in 1977 after the British renounced the prior agreement.
Since that time, DOT has expressed increasing dissatisfaction with
Bermuda II and attempted to negotiate increased access for U.S.
airlines to Heathrow. Negotiations with the British also take on
particular importance because of the size of the U.S.-U.K. market.
In 1996, 12 million passengers travelled on scheduled service between
the United States and the United Kingdom, which is more than twice
the U.S.-Germany market and three times the U.S.-France market.
--------------------
\4 Our April 1995 report on code-sharing alliances found that DOT's
ability to monitor the impact of alliances on airfares was limited
because foreign airlines are not required to report data from a
sample of their tickets involving travel to or from the United
States. We reported that DOT's data provided information only from
tickets sampled by U.S. airlines, and thus the agency only had fare
data for trips that at some point involved a U.S. carrier. We
recommended that DOT require that foreign airlines report ticket data
to DOT. Since our report, DOT has required foreign airlines in
alliances that have been granted antitrust immunity to report such
data.
CURRENT ACCORD'S LIMITS ON
COMPETITION CONTINUE TO HURT
CONSUMERS AND U.S. AIRLINES,
WHILE EFFORTS TO NEGOTIATE NEW
ACCORD PERSIST
---------------------------------------------------------- Chapter 0:2
Competition is restricted in the U.S.-U.K. market because Bermuda
II, among other things, (1) sets limits on the amount of service
airlines can provide, (2) prevents all U.S. airlines except American
and United from flying to and from Heathrow\5 , (3) does not allow
American to serve Heathrow from its primary hub in Dallas, and (4)
severely restricts United in the amount of service to Heathrow it can
provide from its primary hub at Chicago O'Hare. These restrictions
on competition result in fewer service options for U.S. and British
consumers. In addition, they also likely result in higher airfares.
However, the extent to which this is the case is uncertain. Because
DOT has generally not required foreign airlines to report data from a
sample of their tickets, as it requires U.S. airlines to do, the
agency does not have data on fares paid by passengers flown by
British Airways or Britain's other major transatlantic airline,
Virgin Atlantic, if those passengers' itineraries did not involve a
connection with a U.S. carrier.
Bermuda II's limits on competition also disproportionately affect
U.S. airlines. In contrast to the continuing restrictions placed on
U.S. airlines, the United Kingdom was successful in negotiating
increased access for British carriers to the U.S. market in the
early 1990s. Partly as a result, between 1992 and 1996, the British
carriers' share of the U.S.-U.K. market rose from 49 percent to 59
percent. As figure 1 shows, this gain by British Airways and Virgin
Atlantic has come primarily at the expense of the U.S. airlines who
are not allowed to serve Heathrow.
Figure 1: Share of Scheduled
Passenger Traffic Between the
United States and the United
Kingdom by Airline, 1992, 1994,
and 1996
(See figure in printed
edition.)
Source: GAO's analysis of DOT's international traffic data.
British carriers' increased access to the U.S. market largely came
as a result of a revision to Bermuda II in 1991 that allowed American
and United to replace TWA and Pan Am as the U.S. carriers allowed to
serve Heathrow. In exchange, British Airways gained the right to
code-share with a U.S. airline. In 1993, British Airways entered an
alliance with USAir and began exercising its right to market as its
own USAir's domestic flights that connected to British Airways'
transatlantic service.\6 As we reported in April 1995, British
Airways' exercising of its code-sharing rights was yielding
substantial traffic gains, largely at the expense of U.S. airlines.
Similarly, Virgin Atlantic's access to the U.S. market has grown
substantially. Prior to 1991, the airline was not allowed to use
Heathrow but instead was required to use Gatwick. As part of the
revision to the bilateral agreement in 1991, Virgin Atlantic was
allowed to transfer much of its service from Gatwick to Heathrow.
Recognizing Heathrow's importance, DOT over the past few years has
engaged in numerous negotiations with the British in an effort to
increase U.S. airlines' access to that airport. In light of the
extensive access to the U.S. market that British Airways and Virgin
Atlantic had already secured, DOT has had little leverage. It only
secured direct access to Heathrow for United from O'Hare in 1995
(limited to one flight per day prior to April 1, 1997, and currently
limited two flights per day). Expressing frustration with the lack
of progress in negotiations, Delta in 1995 implemented an alliance
with Virgin Atlantic under which it code-shared on Virgin Atlantic's
flights between the United States and Heathrow.\7
With the announcement by British Airways and American Airlines in
June 1996, DOT had apparently been given the leverage it had long
sought. According to DOT officials, the agency's approval of the
alliance and granting of antitrust immunity would be based, at a
minimum, on the conclusion of an open skies agreement. The latest
round of negotiations, however, ended in mid-February without such an
accord.
Issues that have proved problematic in the past continue to stymie
talks between the two countries. In particular, DOT does not share
the British view that a formal mechanism is needed to resolve
disputes that may arise or that the governments need to retain the
right to monitor fares set by the airlines and disapprove them if
they are too high or too low. Disagreement also exists over whether
British Airways and Virgin Atlantic would be able to bid for the
right to carry U.S. government workers under an open skies regime.
Despite these disagreements, DOT and British officials told us they
are confident that they will eventually be able to reach an open
skies accord.
--------------------
\5 Continental Airlines, Delta Air Lines, Northwest Airlines, and TWA
are prohibited from flying to Heathrow and instead must use London's
Gatwick Airport. Gatwick is less desirable to business travelers
than Heathrow because it is located farther from downtown London and
provides fewer connecting flights to Europe, the Middle East, and
Africa. US Airways (which changed its name from USAir effective
February 27, 1997) currently has no service to either Heathrow or
Gatwick.
\6 As a condition of approval of the USAir/British Airways alliance,
USAir agreed to divest itself of its three U.S.-U.K. routes. USAir
had been serving Gatwick from Baltimore, Charlotte, and Philadelphia.
As a result of the proposed American/British Airways alliance, US
Airways terminated its alliance with British Airways in March 1997.
In May 1997, British Airways sold its 24.6 percent stake in US
Airways.
\7 In March 1997, Delta and Virgin Atlantic announced that they would
terminate their code-sharing alliance. Also in March 1997,
Continental and Virgin Atlantic indicated that they planned to seek
approval from the U.S. and British governments for a code-sharing
alliance. The proposed Continental-Virgin Atlantic alliance has not
yet been approved by either government.
UNDER OPEN SKIES, ALLIANCE
WOULD DOMINATE AND COMPETITION
WOULD DECLINE FURTHER UNLESS
SUBSTANTIAL NEW ENTRY OCCURRED
---------------------------------------------------------- Chapter 0:3
While the proposed American/British Airways alliance would likely
increase competition in markets between the United States and the
European continent, the Middle East, and Africa because the number of
alliances competing in these markets would increase from three to
four, it raises serious competition issues in the U.S.-U.K. market.
This is because rather than competing with each other, under the
alliance the two largest airlines in the U.S.-U.K. market would in
essence be operating as if they were one airline. In 1996, American
Airlines and British Airways accounted for 60 percent of the
scheduled passenger traffic that flew between the United States and
the United Kingdom. Moreover, as of June 1997, the two airlines
account for 38 of the 55 total daily roundtrips (69 percent) between
the United States and Heathrow offered by scheduled U.S. and British
airlines.\8
American Airlines and British Airways currently compete with one
another in five key U.S. gateways to Heathrow, including the two
largest--New York and Los Angeles, and one gateway to
Gatwick--Dallas. New York's importance is underscored by the fact
that the market between it and Heathrow accounts for one-fifth of all
U.S.-London service and is nearly three times the size of the Los
Angeles-Heathrow market. At 5 of the 6 gateways where American
Airlines and British Airways compete--New York, Chicago, Boston,
Miami, and Dallas--they account for over 70 percent of the service,
and at Los Angeles they account for over 60 percent. In addition, in
the Boston and Miami markets, American Airlines and British Airways
currently are the only carriers that serve Heathrow, and in the
Dallas market they are the only nonstop competitors.
At another eight U.S. cities, either British Airways or American has
a monopoly on nonstop service to either Heathrow (two cities) or
Gatwick (six cities). As a result, the proposed alliance would
account for over 70 percent of the service in 13 U.S. gateways to
London (fig. 2).\9 In our October 1996 report on domestic
competition, we found that competition was most limited and airfares
highest in markets dominated by one airline.\10
Figure 2: Markets in Which
American and British Airways
Either Currently Compete with
Each Other and Provide Over 70
Percent of the Service or One
of the Carriers Has a Monopoly
on Nonstop Service, 1997
(See figure in printed
edition.)
Note: "H" denotes service to
Heathrow; "G" denotes Gatwick.
According to American and
British Airways
representatives, under open
skies the alliance would likely
switch much of the current
Gatwick service to Heathrow.
(See figure in printed
edition.)
As figure 3 shows, if the other six major U.S. airlines that fly
internationally had access to Heathrow from their primary and
secondary hubs, competition would be enhanced in nearly all of these
markets.\11 This would provide consumers with a wide range of service
to Heathrow that would compete with the alliance. Specifically, 6 of
the 13 gateways would have new nonstop service.\12 In each case, the
airline providing the service would be supported by its domestic
network: New York (Delta and TWA), Chicago (United), Philadelphia
(US Airways), Charlotte (US Airways), Boston (US Airways), and
Pittsburgh (US Airways).
Figure 3: U.S. Airlines'
Potential Nonstop and One-stop
Service That Would Compete
Against the American-British
Airways Alliance if They Could
Serve Heathrow from Their
Primary and Secondary Hubs
(See figure in printed
edition.)
Our analysis of current competitive conditions in the New
York-Heathrow market indicates that because of the (1) size of the
market, (2) large share of that market currently held by American
Airlines and British Airways, (3) frequency of service in that
market--13 flights a day--provided by the two airlines (compared to 2
daily flights by United and 2 daily flights by Virgin Atlantic), and
(4) substantial portion of the market accounted for by time-sensitive
business travellers, both airlines (Delta and TWA) that have hubs at
New York JFK--as well as Continental from its hub at nearby
Newark--would need to enter the market with several flights a day to
ensure a sufficient number of competing flights. In the Boston and
Chicago markets, new nonstop service would offset the effect on
competition caused by the joining of the two largest competitors in
those markets. In addition, new nonstop service in the Philadelphia,
Charlotte, and Pittsburgh markets would increase competition because
British Airways currently has a monopoly on nonstop service to London
from those gateways.
In addition, as figure 3 also shows, consumers in the other seven
gateways would have several new one-stop options competing with the
alliance's nonstop service in those markets. Because British Airways
currently has a monopoly in four of these markets (Baltimore,
Phoenix, Seattle, and Tampa) and American a monopoly in another
(Raleigh), this increase in the number of one-stop options would
produce an increase in competition in those five markets. For
example, if Northwest Airlines, which is one of the largest carriers
in Seattle, could serve Heathrow from its hub in Minneapolis,
consumers in Seattle would have more and better connecting
opportunities to Heathrow and hence there would be more competition
than today. Similarly, consumers in nongateway cities, such as Des
Moines or Fargo, would experience an increase in the number of
one-stop options offered by competing airlines to Heathrow than are
available today.
While the increase in one-stop service options would increase
competition in five of the seven gateways, for the other two
gateways--Dallas and Miami--it would likely not offset the reduction
in the number of competitors providing nonstop service. In the
Dallas-London market, American Airlines and British Airways are
currently the only competitors providing nonstop service. In the
Miami-London market, the number of nonstop competitors would fall
from four to three, and the alliance would bring together not only
the two largest carriers in the market but the only carriers in the
market currently serving Heathrow.\13 In both Dallas and Miami, Delta
is the second largest carrier next to American and thus is best
positioned to provide one-stop service via Atlanta and/or Cincinnati.
Nevertheless, time-sensitive business travelers in the Dallas-London
and Miami-London markets will have fewer nonstop options and thus
will likely pay higher fares for nonstop service. As a result, DOT
will need to be well-positioned to monitor competition in these and
other markets, and as we have recommended, collect the data necessary
to do so.
While acknowledging that new entry by U.S. carriers is critical to
ensuring competition, Britain's Office of Fair Trading (OFT) recently
concluded that U.S. carriers would only need 12 daily roundtrips to
Heathrow--service that would be phased in over the next few years.\14
OFT focussed its analysis on service that would be needed to ensure
that the alliance does not reduce competition, and therefore only
considered the six gateways where both American Airlines and British
Airways compete with one another.
Based on our discussions with representatives of the six U.S.
airlines seeking access to Heathrow to compete with the
American/British Airways alliance, the cumulative number of daily
roundtrips to Heathrow that they believe they would need to
effectively compete totals 38 daily roundtrips. DOT analysts
indicated during the early stages of negotiations that U.S. airlines
would need at least 30 daily roundtrips to Heathrow to ensure that an
open skies agreement resulted in an increase in competition. Because
it is the subject of ongoing negotiations, we do not believe it would
be appropriate for us to specify a precise number of daily roundtrips
to Heathrow that may be needed. Ultimately, DOT will have to make
this determination through its review and negotiation process. Our
analysis of existing DOT international traffic data and review of the
analyses conducted by the six U.S. airlines as well as by the
potential alliance partners and other interested parties suggests to
us that the basis for an agreement that increases competition would
likely have to accommodate--but not necessarily be limited to--the
following simultaneous to the alliance's approval:
at least three daily roundtrips to Heathrow for each of the three
U.S. airlines with primary hubs in the New York
area--Continental, Delta, and TWA;\15
at least two daily roundtrips to Heathrow for each of the other
three U.S. airlines--Northwest, United, and US Airways--from
their primary hubs (Detroit, Chicago, and Philadelphia,
respectively) to effectively utilize those hubs' competitive
strengths;
at least two additional daily roundtrips to Heathrow for Delta for
use from Atlanta and/or Cincinnati in order to maximize the
one-stop competition for consumers in the Dallas-London and
Miami-London markets;\16
at least one additional daily roundtrip to Heathrow for US Airways
from each of its three secondary hubs--Boston, Charlotte, and
Pittsburgh--that would otherwise be dominated by the alliance;
and
at least one daily roundtrip to Heathrow for Continental,
Northwest, and TWA from their secondary transatlantic hubs
(Houston, Minneapolis, and St. Louis, respectively).
Regardless of the precise number that may ultimately be agreed upon,
because of the size of the U.S.-U.K. market and the fact that the
market has been heavily regulated for 2 decades, significant new
entry would likely provide substantial benefits for consumers in both
countries in terms of lower fares and better service and for the U.S.
airline industry in terms of increased revenues.
--------------------
\8 As of June 1997, British Airways has 24 daily roundtrips and
American Airlines has 14 daily roundtrips between the United States
and Heathrow.
\9 These 13 gateways account for about 54 percent of all U.S.-London
service. There are a total of 25 U.S. gateways to London.
\10 Airline Deregulation: Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18,
1996).
\11 The other six major U.S. airlines' primary hubs for
transatlantic service are Chicago (United), Detroit (Northwest),
Newark (Continental), New York (Delta and TWA), and Philadelphia (US
Airways). In general, these airlines' secondary transatlantic hubs
are Atlanta (Delta), Houston (Continental), Minneapolis (Northwest),
Charlotte (US Airways), St. Louis (TWA), and Washington Dulles
(United). However, exceptions to this exist. For example, Delta
currently serves Gatwick from both Atlanta and its other
international hub, Cincinnati. In addition, US Airways operates hubs
in two other gateways--Boston and Pittsburgh--that would otherwise be
dominated by the alliance. United already serves Heathrow with three
daily flights from its secondary transatlantic hub at Dulles.
\12 The current bilateral limits the amount of service United can
provide between Chicago and Heathrow.
\13 Starting June 30, 1997, however, Virgin Atlantic will begin
serving Miami from Heathrow. Currently, Virgin Atlantic serves Miami
from Gatwick.
\14 A roundtrip requires two slots--one for arrival at Heathrow and
one for a return departure. Thus, 12 daily roundtrips is equivalent
to 24 daily slots or 168 weekly slots. As of June 1997, the
potential alliance partners operate a total of 38 daily roundtrips
between the United States and Heathrow, which is the equivalent of
532 weekly slots.
\15 In our recent report on barriers to entry in the domestic airline
market, we reported that new entrants generally needed a minimum of
three daily roundtrips to effectively compete in the New York market.
See Airline Deregulation: Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-13, Oct.
18, 1996).
\16 As discussed earlier, Delta is the second largest carrier in
Dallas and Miami after American. In 1996, Delta accounted for about
20 percent of all enplanements at Dallas and about 10 percent at
Miami.
BARRIERS TO ENTRY EXIST AT
HEATHROW THAT ARE DIFFICULT TO
ADDRESS
---------------------------------------------------------- Chapter 0:4
Even if agreement can be reached on the number of daily roundtrips to
Heathrow that the six U.S. airlines would need to ensure increased
competition, capacity constraints exist at Heathrow that do not exist
at the airports in the countries where the United States has
previously signed open skies agreements. As a result, the limited
number of available takeoff and landing slots, gates, and facilities
makes a large-scale influx of new service unlikely at Heathrow.
Officials of the airport authority that manages Heathrow emphasized
to us that the airport is generally operating at capacity and that
airlines' demand for slots during peak-period times of the day
exceeds the available supply. Similarly, they told us that because
of facility constraints, the airport authority announced plans
several years ago to build a fifth terminal at Heathrow. These
officials noted that under open skies, U.S. airlines seeking to
serve Heathrow for the first time would be given priority as "new
entrants" and would be allotted slots as they came available. They
emphasized that while some slots may come available in the
short-term, it would likely take several years under current slot
allocation procedures for the number of slots needed to accommodate a
significant amount of new entry by the six U.S. airlines to come
available.
As a practical matter, therefore, in addition to acquiring some slots
under current procedures, the six U.S. airlines will likely need to
have slots transferred to them from American Airlines and British
Airways.\17 While such a transfer may involve a substantial portion
of the over 500 weekly slots currently used by American Airlines and
British Airways in the U.S.-Heathrow market, British Airways could
draw from its holding of about 3,000 weekly slots that it uses to
serve the domestic U.K. market, the European continent, Africa, and
the Middle East, to replace those slots lost via a transfer to U.S.
airlines as well as to increase service in some U.S.-Heathrow
markets. To counter the alliance's ability to draw on British
Airways' substantial slot holdings, most U.S. airlines could also
potentially draw on their alliance partners' slot holdings at
Heathrow and all six U.S. airlines could acquire additional slots
over time as they become available under current procedures.
Nevertheless, slots provided to the six U.S. airlines will need to
be at commercially viable times, such as peak morning times, to
better ensure competitive service. Finally, in addition to obtaining
slots, the other U.S. airlines will need sufficient access to
existing gates and facilities at Heathrow, because the planned
construction of the fifth terminal has been delayed.
However, significant obstacles exist that make it difficult to
resolve these issues. Both American Airlines and British Airways
have indicated that even if they agree to give some of their slots to
new entrants, they would expect to be paid the fair market value for
those slots. Requiring the new entrant U.S. airlines to purchase
slots from American Airlines and British Airways has competitive
implications because it increases the costs of market entry.
Furthermore, EU officials interpret their regulations, which apply to
Heathrow, as prohibiting the buying and selling of slots. British
officials contend, on the other hand, that flexibility may exist in
the rules to accommodate the payment to the alliance partners for any
slot transfer and that the EU should consider allowing the buying and
selling of slots at high-demand airports such as Heathrow in the
long-term. This disagreement, and the existence of the respective
authorities of the United Kingdom and the EU to ensure competition,
has sparked a major debate between the United Kingdom and the EU.
It is uncertain whether EU officials will ultimately agree to
accommodate a one-time transfer of slots from the proposed alliance
to U.S. airlines. However, EU officials told us that their decision
as to whether to adopt a buy-sell rule in the longer term is a
separate issue. Our October 1996 report on domestic competition
found that DOT's adopting such a buy-sell rule in 1985 at the four
U.S. slot-controlled airports resulted in a decrease in competition
at three of those airports.\18 We reported that a few of the large,
incumbent carriers were allowed to purchase most of the available
slots and increase their slot holdings to such an extent that they
could limit other airlines' access to domestic routes beginning or
ending at National, LaGuardia, and O'Hare. This has contributed to
higher fares at these airports. Specifically, we found that,
compared to 33 other large U.S. airports, fares in 1995 were 46
percent higher at National, 35 percent higher at LaGuardia, and 24
percent higher at O'Hare.
In addition to slots, facility constraints at Heathrow persist. The
airport authority's plans for a fifth terminal have been delayed by
local community opposition and environmental concerns. The British
government began holding public hearings in May 1995 on the need for
and potential noise and environmental impacts of constructing the new
terminal but, according to British officials, the government will not
complete its work until mid-1998 due to the strong opposition. As a
result, according to airport authority officials, the first phase of
the new terminal will likely not open until the fall of 2004, which
is 18 months later than originally planned. In the short term,
therefore, the planned new terminal will not have a bearing on
efforts to ensure that adequate facility space is available for U.S.
airlines if an open skies agreement is reached in the near future.
As a result of the challenges inherent in addressing the barriers to
entry at Heathrow, significant intergovernmental agreement will be
needed well beyond the scope of a traditional open skies accord. In
particular, additional agreement will be needed between the United
States, United Kingdom, and EU on issues regarding the transfer of
Heathrow slots and use of its facilities to ensure substantial new
entry by U.S. airlines at the same time American Airlines and
British Airways commence joint operations. Otherwise, consumers in
both countries will likely not enjoy the full benefits of lower fares
and better service that open skies agreements are designed to bring.
--------------------
\17 In some cases, other sources of slots for U.S. airlines may also
exist. For example, Lufthansa is currently using slots of its
alliance partner United to accommodate three daily roundtrips by
Lufthansa between Heathrow and Germany.
\18 The four U.S. slot-controlled airports are Chicago's O'Hare, New
York's JFK and LaGuardia, and Washington's National.
-------------------------------------------------------- Chapter 0:4.1
Mr. Chairman, this concludes our prepared statement. We would be
glad to respond to any questions that you or any member of the
Subcommittee may have.
RELATED GAO PRODUCTS
============================================================ Chapter 1
International Aviation: DOT's Efforts to Promote U.S. Air Cargo
Interests (GAO/RCED-97-13, Oct. 18, 1996).
Airline Deregulation: Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18,
1996).
International Aviation: DOT's Efforts to Increase U.S. Airlines'
Access to International Markets (GAO/T-RCED-96-32, Mar. 14, 1996).
International Aviation: Better Data on Code-Sharing Needed by DOT
for Monitoring and Decisionmaking (GAO/T-RCED-95-170, May 24, 1995).
International Aviation: Airline Alliances Produce Benefits, but
Effect on Competition is Uncertain (GAO/RCED-95-99, Apr. 6, 1995).
International Aviation: DOT Needs More Information to Address U.S.
Airlines' Problems in Doing-Business Abroad (GAO/RCED-95-24, Nov.
29, 1994).
International Aviation: New Competitive Conditions Require Changes
in DOT Strategy (GAO/T-RCED-94-194, May 5, 1994).
International Aviation: Measures by European Community Could Limit
U.S. Airlines' Ability to Compete Abroad (GAO/RCED-93-64, Apr. 26,
1993).
Airline Competition: Impact of Changing Foreign Investment and
Control Limits on U.S. Airlines (GAO/RCED-93-7, Dec. 9, 1992).
Airline Competition: Effects of Airline Market Concentration and
Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991).
*** End of document. ***