Aviation Competition: Proposed Domestic Airline Alliances Raise Serious
Issues (Testimony, 06/04/98, GAO/T-RCED-98-215).

GAO discussed the potential impact of the alliances proposed by the
nation's six largest airlines, focusing on the competitive implications
of the proposed alliances, including: (1) their potential benefits to
consumers; (2) their potential harm to consumers; and (3) the issues
that policymakers need to consider in evaluating the net effects of the
proposed alliances.

GAO noted that: (1) the primary potential benefits of the proposed
alliances for consumers, according to airline officials, are the
additional destinations and frequencies that occur when alliance
partners join route networks by code-sharing; (2) with code-sharing, an
airline can market its alliance partner's flights as its own and,
without adding any planes, increase the number of destinations and the
frequency of the flights it can offer; (3) airline officials also
predict that increased frequencies and connection opportunities will
spur additional demand, allowing for even more frequent flights and
additional destinations; (4) the primary source of potential harm to
consumers from the proposed alliances is the possibility that they will
reduce competition on hundreds of domestic routes if the alliance
partners do not compete with each other or compete less vigorously than
they did when they were unaffiliated; (5) GAO analyzed 1997 data on the
5,000 busiest domestic airport-pair origin and destination
markets--markets for air travel between two airports--to determine how
these markets could be affected by the proposed alliances; (6) if all
three alliances occur, GAO found that the number of independent airlines
could decline on 1,836 of the 5,000 most frequently traveled domestic
airline routes and potentially reduce competition for about 100 million
of the 396 million domestic passengers per year; (7) in weighing the net
effects of the proposed alliances, policymakers in the Department of
Justice and the Department of Transportation have a difficult task
because each alliance varies in its level of integration and in the
scope and breadth of the combined networks; (8) however, GAO believes
that if several key issues are addressed, policymakers will be better
able to determine whether an alliance benefits consumers overall; (9)
the first issue is whether airline partners' assumptions concerning the
additional traffic and other benefits generated by the alliance are
realistic; (10) second, it will be critical to determine if an alliance
retains or reduces incentives for alliance partners to compete on price;
and (11) if an alliance agreement reduces the incentives for partners to
compete with fares in markets they both serve, then policymakers may
want to examine the overlap in the alliance partners' route structures
to determine whether that alliance would lead to a significant number of
routes with fewer independent airlines.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-98-215
     TITLE:  Aviation Competition: Proposed Domestic Airline Alliances 
             Raise Serious Issues
      DATE:  06/04/98
   SUBJECT:  Airline regulation
             Competition
             Airline industry
             Antitrust law
             Marketing
             Airports
             Commercial aviation
             Air transportation operations
IDENTIFIER:  Ronald Reagan Washington National Airport (DC)
             LaGuardia International Airport (New York, NY)
             Newark International Airport (NJ)
             Detroit Metropolitan Wayne County Airport (Detroit, MI)
             
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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
2:15 p.m.  EDT
Thursday
June 4, 1998

AVIATION COMPETITION - PROPOSED
DOMESTIC AIRLINE ALLIANCES RAISE
SERIOUS ISSUES

Statement by John H.  Anderson, Jr.,
Director, Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-215

GAO/RCED-98-215T


(348106)


Abbreviations
=============================================================== ABBREV

  DOJ -
  DOT -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify about the U.S.  domestic
airline industry in light of the alliances proposed by the nation's
six largest airlines.  Our prior work has shown that the deregulation
of the airline industry in 1978 has generally been successful,
resulting in lower fares and better service for most air travelers,
largely because it increased competition, with both the entry of new
airlines into the industry and the movement of established airlines
into new markets.  Now, the six airlines that carry about 70 percent
of domestic passengers have announced plans to form three alliances. 
These airline pairs are Northwest Airlines and Continental Airlines,
Delta Air Lines and United Airlines, and American Airlines and US
Airways.  The airlines say that these alliances will produce such
consumer benefits as expanded route networks and combined frequent
flier programs.  Critics, however, say that this consolidation will
undermine the benefits of deregulation by decreasing competition,
which will ultimately reduce passengers' choices and increase fares. 

Because of their concerns over the potential anticompetitive impacts
of these proposed alliances, the departments of Justice (DOJ) and
Transportation (DOT) are reviewing them, and you and other Members of
Congress have announced your intention to review them as well.  To
evaluate these alliances, decisionmakers will have to determine
whether the potential benefits to consumers from these alliances will
exceed the potential harm. 

At your request, we have just begun to evaluate the potential impact
of these alliances, and today we can offer some preliminary results
of our work.  In my testimony, I will describe the competitive
implications of the proposed alliances, including (1) their potential
benefits to consumers, (2) their potential harm to consumers, and (3)
the issues that policymakers need to consider in evaluating the net
effects of the proposed alliances.  We will continue to study the
competitive implications of these alliances for the full Committee
and this Subcommittee and report on the results of our review in more
detail later this year. 

In summary: 

  -- The primary potential benefits of the proposed alliances for
     consumers, according to airline officials, are the additional
     destinations and frequencies that occur when alliance partners
     join route networks by code-sharing.  With code-sharing, an
     airline can market its alliance partner's flights as its own
     and, without adding any planes, increase the number of
     destinations and the frequency of the flights it can offer.  For
     example, under the proposed alliance between United Airlines and
     Delta Air Lines, passengers would be able to fly under one
     airline's code from Sioux Falls, South Dakota, to Bangor, Maine,
     even though Delta does not fly from Sioux Falls and United does
     not fly to Bangor.  Airline officials also predict that
     increased frequencies and connection opportunities will spur
     additional demand, allowing for even more frequent flights and
     additional destinations.  All the proposed alliances plan to
     allow consumers the opportunity to acquire and use frequent
     flier miles on both partners, which airline officials say will
     increase their benefit to consumers. 

  -- The primary source of potential harm to consumers from the
     proposed alliances is the possibility that they will reduce
     competition on hundreds of domestic routes if the alliance
     partners do not compete with each other or compete less
     vigorously than they did when they were unaffiliated.  We
     analyzed 1997 data on the 5,000 busiest domestic airport-pair
     origin and destination markets--markets for air travel between
     two airports--to determine how these markets could be affected
     by the proposed alliances.  If all three alliances occur, we
     found that the number of independent airlines could decline on
     1,836 of the 5,000 most frequently traveled domestic airline
     routes (which account for over 90 percent of the total U.S. 
     domestic traffic) and potentially reduce competition for about
     100 million of the 396 million domestic passengers per year. 
     These potentially negative impacts would be partially offset by
     potential benefits to about 30 million passengers on the 338
     routes where two alliance partners could combine to compete with
     other airlines on those routes.  However, the potential for
     reduced competition may be particularly acute for one-stop
     (connecting) routes because hundreds of such routes are
     currently served by airlines that would join the same alliance. 
     Furthermore, operating barriers, such as takeoff and landing
     constraints, at 10 major airports make entry by new competitors
     difficult on routes to and from these airports, and, as a
     result, any increase in concentration may lead to an increase in
     airfares.  Our prior work has shown that fares at these airports
     tend to be higher than at airports not similarly constrained. 
     The proposed alliances would likely increase the barriers at two
     of these airports--Washington's Reagan National and New York's
     LaGuardia--where the alliances' market share would increase
     substantially. 

  -- In weighing the net effects of the proposed alliances,
     policymakers in DOJ and DOT have a difficult task because each
     alliance varies in its level of integration and in the scope and
     breadth of the combined networks.  However, we believe that if
     several key issues are addressed, policymakers will be better
     able to determine whether an alliance benefits consumers
     overall.  The first issue is whether airline partners'
     assumptions concerning the additional traffic and other benefits
     generated by the alliance are realistic.  Second, it will be
     critical to determine if an alliance retains or reduces
     incentives for alliance partners to compete on price.  If an
     alliance agreement reduces the incentives for partners to
     compete with fares in markets they both serve, then policymakers
     may want to examine the overlap in the alliance partners' route
     structures to determine whether that alliance would lead to a
     significant number of routes with fewer independent airlines. 
     In addition, we believe that a number of other issues will be
     important to an analysis of these proposed alliances.  These
     include whether the alliances may exacerbate or ameliorate fare
     and service problems being reported by business travelers and
     certain small and medium-sized communities; the impact that the
     proposed alliances may have on international travelers; and,
     should some combination or all of the proposed alliances go
     forward, the overall implications for competition in the airline
     industry from this substantial restructuring. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Six major domestic airlines have proposed alliances in 1998.  These
alliances are significant in scope but vary in extent, and their
details are still emerging.  In sum, the three alliances would
control about 70 percent of domestic traffic, as measured by the
number of passengers that board a plane--enplanements.  Table 1
summarizes the size and characteristics of the proposed alliances.  A
key characteristic of two of the alliances is extensive code-sharing. 
According to officials at DOJ and DOT, code-sharing agreements are
forms of corporate integration that fall between outright mergers,
which involve equity ownership, and traditional arm's length
agreements between airlines about such things as how they will handle
tickets and baggage. 



                                Table 1
                
                 Summary of Airline Alliances--Size and
                            Characteristics

                                             Nature of relationship
                                          ----------------------------
                          1997
                      domestic
                       traffic
                        (total      1997  Combined
                      passenge    market  frequent
                            rs     share     flier
                      enplaned  (percent  programs
                          , in  of total  and club              Equity
                      millions  passenge  faciliti     Code-  ownershi
Airline or alliance        )\a       rs)        es   sharing         p
--------------------  --------  --------  --------  --------  --------
Delta 97.3 17.6
----------------------------------------------------------------------

United 72.9 13.2
----------------------------------------------------------------------
======================================================================
Delta-United             170.2      30.8         x         x

American 66.1 12.0
----------------------------------------------------------------------

US Airways 57.4 10.4
----------------------------------------------------------------------
======================================================================
American-US Airways      123.5      22.3         x

Northwest 47.1 8.5
----------------------------------------------------------------------

Continental 34.2 6.2
----------------------------------------------------------------------
======================================================================
Northwest-                81.3      14.7         x         x         x
 Continental

Alliance subtotal 375.0 67.8
----------------------------------------------------------------------

All other 107.6 19.5 majors\b
----------------------------------------------------------------------

Other large 70.2 12.7 airlines\c
----------------------------------------------------------------------

Total 552.8 100.0
----------------------------------------------------------------------
----------------------------------------------------------------------
\a "Passenger enplanements" represent the total number of passengers
boarding aircraft.  Thus, for example, a passenger that must make a
single connection between his or her origin and destination counts as
two enplaned passengers, because he or she boarded two separate
flights. 

\b The other major passenger airlines are Alaska, America West,
Southwest, and Trans World. 

\c This category includes such airlines as Reno, Midwest Express, and
AirTran.  We are excluding commuter airlines because they tend not to
compete for the same passengers as the larger airlines and carry a
relatively small percentage of the total number of passengers that
fly domestically within the United States. 

Source:  GAO's analysis of DOT's data. 

Continental Airlines and Northwest Airlines announced in January 1998
that they were entering into a "strategic global alliance" that would
connect the two airlines' route systems.  Under this alliance, the
airlines plan to code-share flights and include each of their
respective code-share partners, such as America West, Alaska
Airlines, and KLM Royal Dutch Airlines.  In addition, the airlines
will establish reciprocity between their frequent flier programs,
which means that travelers who belong to both programs will be able
to combine miles from both to claim an award on either airline.  The
airlines will also undertake other cooperative activities, including
coordinating flight schedules and marketing.  Certain aspects of the
alliance agreement are contingent on the successful conclusion of
negotiations with Northwest's pilots' union.  Northwest plans to buy
an equity share in Continental and place it in a voting trust.\1

In April 1998, United Airlines and Delta Air Lines announced a
tentative agreement to enter into a global alliance.  The
United-Delta alliance would be the largest alliance in terms of its
market share of passengers, but it would have no exchange of equity. 
Under the terms of the agreement, the two airlines plan to engage in
code-sharing arrangements, reciprocal frequent flier programs, and
other areas of marketing cooperation.  The alliance will be
implemented on the airlines' domestic routes and expanded
internationally only after obtaining the concurrence of the airlines'
alliance partners and approval by governments, where applicable. 
Code-sharing on flights to Europe is not currently part of the plan
for this alliance because of complex governmental and alliance
issues, particularly linking two current competitors--Lufthansa and
SwissAir--under the same alliance.  According to airline officials,
the code-sharing planned for the U.S.  domestic markets will probably
not occur before early 1999 and is contingent on the approval of
pilots at both airlines. 

Also in April 1998, American Airlines and US Airways announced that
they had agreed on a marketing relationship that would give the
customers of each airline access to the other airline's frequent
flier program.  In addition, the two airlines agreed to allow
reciprocal access to all domestic and international club facilities
and are working to make final arrangements to cooperate in other
areas.  The airlines expect to implement the linkages between the two
frequent flier programs by late summer 1998.  The alliance will also
include code-sharing by the airlines' regional partners, American
Eagle and US Airways Express, and may seek broader code-sharing,
pending pilots' approval, at a later date.  The chief executive
officers of both airlines have also announced that if the other two
alliances are implemented, they would seek a code-sharing arrangement
as a competitive response. 

DOJ and DOT have somewhat different statutory authorities to review
the proposed alliances.  In 1989, DOT's long-standing authority to
review domestic mergers and alliances transferred to DOJ.  DOJ's
Antitrust Division uses its authority under the Clayton, Sherman, and
Hart-Scott-Rodino acts to examine domestic alliances in which a
change in ownership or code-sharing occurs.  If DOJ believes an
alliance is anticompetitive in whole or part, it may seek to block
the agreement in federal court.  Alternatively, DOJ may negotiate a
consent decree that would restructure the transaction to eliminate
the competitive harm.  DOJ has been reviewing the
Northwest-Continental alliance proposal, which was announced in
January 1998.  In May 1998, DOJ indicated that it also is looking at
the other two alliance proposals. 

DOT has stated that, later this year, it also intends to study the
proposed alliances under its broader authority to maintain airline
competition and protect against industry concentration and excessive
market domination, as well as its specific authority to prohibit
unfair methods of competition in the airline industry.  It will
coordinate with DOJ on the alliance reviews.  DOT does not have prior
approval authority over an alliance.  On the basis of a
recommendation from an administrative law judge, DOT could issue a
cease-and-desist order. 


--------------------
\1 According to Northwest and Continental officials, the voting trust
means that Northwest's shares will be voted in proportion to the
votes of non-Northwest shareholders and, therefore, except in
exceptional circumstances, will not affect the outcome of a vote. 
Northwest's equity purchase equates to slightly more than 50 percent
of the voting rights.  After 6 years, the voting trust ends, and
Northwest could exercise the full power of its ownership, which would
mean that Northwest would effectively control Continental. 


   ALLIANCES MAY OFFER SOME
   BENEFITS TO CONSUMERS
---------------------------------------------------------- Chapter 0:2

Alliances could benefit consumers by increasing the number of
destinations and the frequency of flights available through each
partner.  The airlines believe that these increases will in turn
attract new passengers, allowing them to offer more frequent flights,
and, if demand is substantial, more new destinations. 

In an alliance that includes code-sharing, such as those proposed by
United and Delta and Northwest and Continental, airline route
networks are effectively joined, expanding possible routings by
linking two different hub-and-spoke systems.  The service provided
through code-sharing replicates the "seamless" travel that would be
provided by a single airline, known as "on-line service." This type
of service is generally preferred by airline passengers because it
allows the convenience of single ticketing and check-in.  Airlines
have had interline agreements, which offer many of the same services,
for some time.  Interline agreements provide for the mutual
acceptance by the participating airlines of passenger tickets,
baggage checks, and cargo waybills, as well as establish uniform
procedures in these areas.  However, with on-line service, connecting
flights between the two code-sharing airlines are shown in the
computer reservation system as occurring on one airline. 

Officials for the airlines see advantages to on-line service for
their customers.  For example, with on-line service under the
alliance proposed by United and Delta, airline passengers would be
able to travel from Sioux Falls, South Dakota, to Bangor, Maine, on
one airline's code, even though neither airline currently serves the
entire route between these two cities.  In this example, a passenger
could purchase a ticket from Delta and fly on a United plane from
Sioux Falls to Chicago, then to Boston, and then, on a Delta flight,
to Bangor.  The passenger would earn Delta frequent flier miles for
the entire trip.  According to Northwest and Continental executives,
their alliance would result in more than 2,000 new destinations that
each airline could begin marketing as its own.  The American-US
Airways alliance plans to initially offer only limited code-sharing
on regional airline flights, and not on each partner's flights. 

In addition to new destinations, combining airlines' hub-and-spoke
route networks would also result in a substantial increase in the
number of flight options that each airline could offer travelers to
existing destinations.  Airlines contend that these expanded service
options may also attract new passengers, which would then allow the
airlines to offer even more frequent flights and, if demand is
substantial, more new destinations. 

Airline officials also note that additional routing options can
create some better on-line connections by substituting one airline's
connection for its partner's when the partner has closer connection
times for the customer.  This could reduce travel time for some
travelers.  However, this benefit may be limited.  For example,
through the proposed alliance, Northwest and Continental officials
predict shorter travel times for about 250,000 passengers, or 0.3
percent of the 81.3 million passengers potentially affected in 1997. 

Critics of code-sharing point out that the practice is inherently
deceptive because consumers may believe they are flying on one
airline only to discover that they are on another airline's flight
and because code-sharing does not necessarily expand consumer choice. 
These critics charge that airlines take advantage of consumers'
preferences for on-line connections by making an interline code-share
connection appear in computer reservation systems to be an on-line
connection.  Code-share flights also have the advantage of being
listed more than once on computer reservation systems.  For example,
in our examination of flight listings for 17 international
city-pairs, we found that 19 percent of the time code-share flights
were listed at least three times (once under each airline and another
as an interline connection) on the first screen of the display,
giving the partners a competitive advantage over other airlines
operating on those routes.\2 Even the former chairman of American
Airlines and the current chairman of US Airways are reported as
calling code-sharing deceptive for consumers, but have said that they
will also propose a code-sharing alliance as a competitive response
if the other alliances are approved. 

In addition to the anticipated benefits of code-sharing, all three of
the proposed alliances would offer their passengers reciprocal
frequent flier benefits--that is, earning and using frequent flier
points on either alliance partner--and the reciprocal use of club
facilities.  Airline officials believe that these reciprocal benefits
would increase the value of frequent flier programs by allowing
consumers to pool their points and choose from more destinations and
frequencies.  One critic counters, however, that unless the airlines
substantially increase the number of seats available for use by
frequent fliers, the additional demand created by combining the
programs will reduce the availability of seats and therefore the
value of the frequent flier programs. 


--------------------
\2 International Aviation:  Airline Alliances Produce Benefits, but
Effect on Competition Is Uncertain (GAO/RCED-95-99, Apr.  6, 1995). 
Also see Computer Reservation Systems:  Action Needed to Better
Monitor the CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130,
Mar.  20, 1992). 


   ALLIANCES MAY REDUCE
   COMPETITION, WHICH WOULD HARM
   CONSUMERS
---------------------------------------------------------- Chapter 0:3

While the proposed domestic alliances may benefit consumers, they
also have the potential to decrease competition in dozens of nonstop
markets and hundreds more one- and multiple-stop markets because,
even though the alliances are not mergers, they may reduce the
incentive for alliance partners to compete with each other.  Many
longer routes that include one or more stops are currently the most
competitive because they offer the greatest number of airlines from
which consumers can choose.  These same routes are likely to see the
largest reduction in choices among totally unaffiliated airlines and,
correspondingly, the greatest potential loss in competition.  Our
prior work on mergers in the 1980s showed that when such competition
declines, airfares tend to increase.  Unlike international alliances,
which largely extend domestic airlines' route networks into areas
that they could not enter by themselves, the networks of the domestic
airlines generally overlap to a much greater extent, and therefore
the proposed alliances pose a greater threat to competition.  Because
travel to and from small and medium-sized cities usually involves a
stop at one or more hubs, travelers to and from these cities
potentially face reduced competition and higher fares.  Existing
operating barriers, such as constraints on the number of available
takeoff and landing slots, are likely to make any increases in
concentration problematic because such barriers reduce the likelihood
that other airlines will be able to enter the market and provide a
competitive response. 


      COMPETITION COULD DECLINE IN
      MANY MARKETS
-------------------------------------------------------- Chapter 0:3.1

The proposed alliances could harm consumers because they may reduce
the incentive for alliance partners to compete with each other.  If
this were to happen, airfares would likely increase and service would
likely decrease.  We analyzed 1997 data on the 5,000 busiest domestic
airport-pair origin and destination markets--markets for air travel
between two airports--to determine how these markets could be
affected by the proposed alliances.  If the airlines do not continue
to compete on prices, we found that the number of independent
airlines could decline in 1,836 of these 5,000 markets,\3

possibly affecting the fares paid by nearly 101 million passengers
out of a total of 396 million passengers.  For example, the number of
effective competitors between Detroit Metro Wayne County Airport and
Newark International Airport would decline from two to one if
Northwest and Continental do not compete with each other.  In 1997,
this reduction in competition would have affected the roughly 429,000
passengers who traveled on that route. 

While the airlines have said that their alliances have relatively few
nonstop routes that overlap, these routes often serve many
passengers.  For example, even though the proposed alliance between
United and Delta has only 34 nonstop routes that overlap, the two
airlines carry about 9.7 million passengers per year on these routes. 
Moreover, we believe that it is important to focus on the alliances'
potential harm to competition in the hundreds of additional one-stop
and two-stop markets that have overlapping routes.  These routes
account for most of the 1,836 markets that could be negatively
affected by the proposed alliances.  In our prior work on the
TWA-Ozark merger, we found that after the merger, the total number of
cities with direct service declined and competition decreased in many
markets.  The number of routes served by two or more airlines fell by
44 percent, and fares increased between 7 and 12 percent in constant
dollars within 1 year.\4 To the extent that the proposed alliances
tend to behave as a single entity, similar results could occur. 

In contrast to this potential for harm to consumers, competition
could increase in 338 of the 5,000 largest markets, affecting about
30 million passengers per year, according to our analysis of 1997
data.  In these markets, two alliance partners that individually have
a market share of less than 5 percent would combine to form a
potentially more effective competitor against other airlines on these
routes.  However, the number of markets where this could occur is
substantially less, and they serve substantially fewer passengers,
than the markets where consumers could be harmed by the proposed
alliances.  Table 2 summarizes the market and passenger information
for the proposed alliances. 



                                Table 2
                
                    Domestic Markets and Passengers
                 Potentially Benefiting From and Harmed
                       by Each Proposed Alliance

                             Total                   Total
                        markets in       Total  markets in
                             which  passengers       which       Total
                        competitio  potentiall  competitio  passengers
                          n\ could           y    n \could  potentiall
Proposed alliance       increase\a  benefiting  decrease\a    y harmed
----------------------  ----------  ----------  ----------  ----------
Northwest-Continental          199  15,180,910         359  15,544,467
United-                         89   8,898,921       1,038  60,155,470
 Delta
American-                       50   6,378,279         439  25,208,592
 US Airways
Total                          338  30,458,110       1,836  100,908,52
                                                                     9
----------------------------------------------------------------------
\a For the purposes of this analysis, competition would increase if
another competitor entered the market through forming an alliance,
and would decrease if a competitor left the market after forming an
alliance with another airline.  We are defining a "competitor" as an
airline that carries at least 5 percent of the enplaned passengers in
a particular airport-pair market.  In this analysis, we also assume
no reaction by airlines to each other's behavior and no change in the
airlines' route structures. 

Source:  GAO's analysis of data provided by Data Base Products, Inc.,
on the top 5,000 origin and destination markets in 1997. 

In our prior work, we stated that some international alliances may
bring benefits to passengers because international and domestic
airlines are able to extend their networks.  However, domestic
alliances are more likely than international alliances to cause
concerns about competition because they often have many more
overlapping routes.  In a typical international alliance, a domestic
airline with a domestic route network will form an alliance with a
foreign airline that has a route network in its home territory. 
These alliances frequently contain only a few routes where the
networks overlap on either a nonstop or a one-stop basis.  As a
result, these alliances can benefit consumers by extending the route
structure for both airlines without posing a threat to competition on
overlapping routes.  For example, prior to the alliance between
Northwest Airlines and KLM, those airlines had only two nonstop
routes that overlapped, and because neither airline had a route
network in the home territory of the other, there was no significant
overlap of one-stop routes.  In contrast, domestic airlines' route
networks tend to overlap much more.  As a result, domestic alliances
are potentially more harmful to consumers because competition could
decline on many more routes. 

Service to and from small and medium-sized cities may also be harmed
because the number of competing airlines would likely decline in many
cases.  Most routes to and from these cities involve changing planes
at one or more hubs.  The number of effective competitors may decline
in these markets when such passengers have more than one choice of
hub airports.  For example, currently, four airlines travel between
Appleton, Wisconsin, and Reagan Washington National Airport.  Two of
those airlines are Delta and United.  If these airlines were to
compete less because of their alliance, passengers traveling between
these two cities could be harmed. 


--------------------
\3 Over 359 million passengers traveled on these 5,000 origin and
destination markets in 1997.  These passengers account for over 90
percent of the total 396 million domestic passengers who flew that
year. 

\4 Airline Competition:  Fare and Service Changes at St.  Louis Since
the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept.  21, 1988). 


      EXISTING BARRIERS AT KEY
      AIRPORTS INCREASE THE
      LIKELIHOOD THAT MORE
      CONCENTRATION WILL HARM
      CONSUMERS
-------------------------------------------------------- Chapter 0:3.2

Barriers that restrict entry at key airports may increase the
potential for harm from the proposed alliances because they remove
the threat that high fares or poor service will attract competition
from established or new entrant airlines.  As we have reported in the
past, barriers such as slot controls--limits on the number of
takeoffs and landings--at four airports in Chicago, New York, and
Washington, D.C., and long-term exclusive-use gate leases at six
additional airports have led to higher fares on routes to and from
these airports.  Such barriers make entry at those airports difficult
because the incumbent airlines frequently control access to the
airport's gates.  Nonincumbent airlines generally would have to
sublease gates from the incumbent airline, often at less preferable
times and at a higher cost than the incumbent pays.\5

At two of the four slot-controlled airports--New York's LaGuardia and
Washington's Reagan National--the levels of concentration by the
existing dominant airline would increase substantially following the
alliance.  The increase at Chicago's O'Hare and New York's Kennedy,
on the other hand, would be much more modest.  Similarly, with the
six airports that are gate-constrained, because the dominant airlines
already control such large percentages of the available gates, the
increases in concentration that would occur following the alliances
are also relatively small, averaging less than 2 percent.  (See table
3.)



                                Table 3
                
                Alliance Partners' Combined Market Share
                at Slot-Controlled and Gate-Constrained
                                Airports

                 (Market share expressed as percent of
                total 1997 enplanements at each airport)

                                                 Post-alliance market
                                                        share
                                                ----------------------
                                          Pre-
                                        allian
                                            ce
                                        market
                                         share
                                            of
                                        domina
                                            nt
                                        airlin
                                            e,
                                        percen          Americ  Northw
                                            t/  United   an-US    est-
                                        airlin       -  Airway  Contin
Constraint          Airport                  e   Delta       s   ental
------------------  ------------------  ------  ------  ------  ------
Slot                Chicago O'Hare       48.3/    51.7    40.1     4.2
                                        United
                    Reagan Washington    35.4/    24.0    49.0    14.4
                     National               US
                                        Airway
                                             s
                    New York Kennedy     30.0/    28.9    30.1   1.1\a
                                        Americ
                                            an
                    New York LaGuardia   27.0/    34.3    44.5    10.1
                                            US
                                        Airway
                                             s
Gate                Charlotte            83.8/     3.3    85.3     1.4
                                            US
                                        Airway
                                             s
                    Cincinnati           76.8/    77.9     0.9     1.4
                                         Delta
                    Detroit              77.8/     4.8     4.8    79.4
                                        Northw
                                           est
                    Minneapolis          80.5/     5.9     3.9    81.5
                                        Northw
                                           est
                    Newark               60.8/    15.0    12.1    64.6
                                        Contin
                                         ental
                    Pittsburgh           82.2/     3.6    83.1     2.5
                                            US
                                        Airway
                                             s
----------------------------------------------------------------------
\a Continental did not serve New York's Kennedy airport in 1997. 

Source:  GAO's analysis of DOT's data. 

To the extent that there is an increased concentration of slots and
gates, entry may become more difficult, which would further limit
competition on routes to and from these airports and likely lead to
higher airfares.  Our previous work has shown that airlines that
dominate traffic at an airport generally charge higher fares than
they do at airports that they do not dominate.\6

We have also reported that several airlines' sales and marketing
practices may make competitive entry more difficult for other
airlines.\7 Practices such as airlines' frequent flier plans and
special travel agent bonuses for booking traffic on an incumbent
airline encourage travelers to choose one airline over another on the
basis of factors other than the best fares.  Such practices may be
most important if an airline is already dominant in a given market or
markets.  Together, operating and marketing barriers increase the
likelihood that increases in concentration will harm consumers by
discouraging entry by other established or new entrant airlines, thus
allowing airlines to raise their fares or reduce services. 


--------------------
\5 For example, see Airline Deregulation:  Barriers to Entry Continue
to Limit Competition in Several Key Domestic Markets (GAO/RCED-97-4,
Oct.  18, 1996). 

\6 See Airline Competition:  Higher Fares and Less Competition
Continue at Concentrated Airports (GAO/RCED-93-171, July 15, 1993). 

\7 See, for example, Aviation Competition:  International Aviation
Alliances and the Influence of Airline Marketing Practices
(GAO/T-RCED-98-131, Mar.  19, 1998). 


   DECISIONMAKERS NEED TO CONSIDER
   A NUMBER OF COMPLEX ISSUES IN
   EVALUATING THE ALLIANCES
---------------------------------------------------------- Chapter 0:4

Many dimensions of each of the proposed alliances deserve close
scrutiny so that decisionmakers can assess whether the potential
benefits of each particular alliance outweigh its potential harmful
effects.  Though not an exhaustive list, we believe analysis of
several key issues will help determine the extent to which each of
the proposed alliances may be beneficial or detrimental, overall, to
consumers.  These key issues are how substantial the benefits to
consumers may be, whether incentives to compete are retained, what
the potential impact of the proposed alliances on certain classes of
consumers and certain communities are, how international travel may
be affected, and what the overall implications of the proposed
alliances for competition may be. 

First, DOJ and DOT need to scrutinize each alliance's claims about
the benefits each brings to the public, including the underlying
assumptions that each alliance is using to estimate consumer
benefits.  Some of the estimated increases for the growth in traffic
may depend on questionable assumptions about how much new traffic can
be generated by marginal additions in the frequency of flights and
the number of destinations or about how many additional travelers
will choose to fly to destinations through a code-sharing arrangement
that is currently available through an interline connection.  In
addition, DOT and DOJ need to assess the competitive response by
other airlines or other alliances to determine how much new traffic
may be generated rather than how much passengers shift from one
airline or alliance to another. 

Second, it is important for decisionmakers to examine the issue of
whether each alliance's partners will continue to compete with one
another on price.  The amount of competition may vary by alliance. 
Officials with United, Delta, Northwest, and Continental told us
that, because the airlines will remain separate companies, they
expect to set prices independently and thus compete for each
passenger.\8 The three alliances have not specifically explained
their financial arrangements or how they will ensure that price
competition will be preserved.  If the six airlines do compete
vigorously on pricing, then this competition may alleviate many of
the concerns about whether consumers would be harmed by dominant
airlines in particular markets using their monopoly power to raise
fares.  On the other hand, if the alliances reduce incentives to
compete on prices,\9

then DOJ and DOT will need to carefully examine the overlap in the
alliance partners' route structures and assess whether an alliance
would create a significant number of routes with less, or no,
competition.  Determining the incentives will, at a minimum, likely
require a review of the exact terms of the alliances' agreements,
which may be contained in proprietary documents that DOJ and DOT have
access to. 

We also believe that a number of other issues will be important for
DOT and DOJ to analyze in their reviews of these proposed alliances. 
These include the following: 

  -- The potential impact of the proposed alliances on certain
     classes of consumers and certain communities.  Some business
     travelers have recently complained about fare increases, and
     consumers from some small and medium-sized communities have not
     experienced the lower fares and/or improved services that
     deregulation has delivered to other parts of the country.  It
     will be important for policymakers to determine whether these
     alliances could exacerbate or ameliorate these fare and/or
     service problems. 

  -- The impact each alliance could have on consumers who travel
     internationally.  Both of the code-sharing alliances have
     indicated that eventually they would like to include their
     international partners, thereby allowing them to offer improved
     service to international destinations through such benefits as
     new service, increased flight frequency, and better
     connections.\10 International code-sharing alliances are a way
     of opening foreign markets to U.S.  airlines that otherwise
     would not be able to serve these markets because of restrictions
     in the bilateral agreements that govern service between
     countries.  Northwest, United, and Delta have international
     strategic alliances that not only feature code-sharing and other
     types of integration but that also have immunity from U.S. 
     antitrust laws.  This immunity has been granted in the framework
     of Open Skies agreements, whereby all bilateral restrictions are
     eliminated.  We have found that partners in these strategic
     code-sharing agreements have had increased traffic and revenues,
     and that passengers benefit through decreased layover times. 
     However, we also have found that insufficient data exist to
     determine whether consumers are paying higher or lower fares as
     a result of the alliances and what effect the alliances will
     have on competition and fares in the long term.\11 Given the
     increasing size and scope of the alliances' international reach,
     the questions we raised in our earlier report about the
     alliances' effect on fares and competition could become even
     more urgent. 

  -- The potential sources of new competition if any combination, or
     all, of the alliances move forward.  As we mentioned earlier,
     the three alliances would represent about 70 percent of the
     domestic aviation industry.  Other industries, such as
     automobiles, have been similarly dominated by a few firms.  That
     industry was widely regarded as not being competitive until new
     sources of competition emerged from outside the domestic
     industry.  As we noted in our previous work, new airlines may be
     at a disadvantage in competing with the large alliances because
     of the incumbents' large route networks and other barriers
     resulting from their marketing practices and slot and gate
     constraints at major U.S.  airports.  Should any combination, or
     all three, of the alliances go forward, there may be
     considerable uncertainty about the ability of new airlines to
     compete in many markets.  The same may hold true for existing
     U.S.  airlines that lack alliance partners, whether they are
     older, established airlines, such as Trans World Airlines, or
     new entrant airlines, like Frontier. 


--------------------
\8 We did not discuss the issue with American Airlines and US Airways
because, at the time of our work, they had not announced plans to
code-share except with their regional affiliates. 

\9 For example, equity positions and revenue sharing provide
incentives to cooperate rather than compete, and specific mechanisms
may have to be put into place before policymakers might consider
alliance partners as competitors.  Other arrangements, such as fees
paid for selling seats on an alliance partner's flights, if
substantial, may also provide sufficient financial incentive not to
compete.  An examination of previous domestic code-sharing
arrangements between Northwest and Continental, which have limited
code-sharing with Alaska and America West, respectively, may be
illustrative of the extent of competition between major U.S. 
airlines on code-share routes. 

\10 For the time being, however, in discussing whether their proposed
code-sharing will extend to each airline partner's existing
international code-sharing partners, officials from both the
Northwest-Continental and United-Delta alliances specifically
excluded their European destinations and code-sharing partners at
least partly in deference to the uncertainty of the European
Commission's draft remedies for existing international alliances. 

\11 International Aviation:  Airline Alliances Produce Benefits, but
Effect on Competition Is Uncertain (GAO/RCED-95-99, Apr.  6, 1995). 


-------------------------------------------------------- Chapter 0:4.1

Mr.  Chairman, this concludes my prepared statement.  Our work was
conducted in accordance with generally accepted government auditing
standards.  To provide data for this testimony, we contracted with
Data Base Products, Inc.  Data Base Products, Inc., used information
submitted by all U.S.  airlines to DOT for 1997 and produced various
tables to our specifications.  Data Base Products, Inc., makes
certain adjustments to these data to correct for deficiencies, such
as those noted by the DOT's Office of the Inspector General.  We did
not review the company's specific programming but did discuss with
company officials the adjustments that they make.  We also
interviewed officials with DOT, DOJ, and each of the six major
airlines contemplating domestic alliances. 

We would be pleased to respond to any questions that you or any
Member of the Subcommittee may have. 

RELATED GAO PRODUCTS

Domestic Aviation:  Service Problems and Limited Competition Continue
in Some Markets (GAO/T-RCED-98-176, Apr.  23, 1998). 

Aviation Competition:  International Aviation Alliances and the
Influence of Airline Marketing Practices (GAO/T-RCED-98-131, Mar. 
19.  1998). 

Airline Competition:  Barriers to Entry Continue in Some Domestic
Markets (GAO/T-RCED-98-112, Mar.  5, 1998). 

Domestic Aviation:  Barriers Continue to Limit Competition
(GAO/T-RCED-98-32, Oct.  28, 1997). 

Airline Deregulation:  Addressing the Air Service Problems of Some
Communities (GAO/T-RCED-97-187, June 25, 1997). 

International Aviation:  Competition Issues in the U.S.-U.K.  Market
(GAO/T-RCED-97-103, June 4, 1997). 

Domestic Aviation:  Barriers to Entry Continue to Limit Benefits of
Airline Deregulation (GAO/T-RCED-97-120, May 13, 1997). 

Airline Deregulation:  Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct.  18,
1996). 

Domestic Aviation:  Changes in Airfares, Service, and Safety Since
Airline Deregulation (GAO/T-RCED-96-126, Apr.  25, 1996). 

Airline Deregulation:  Changes in Airfares, Service, and Safety at
Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr.  19,
1996). 

International Aviation:  Airline Alliances Produce Benefits, but
Effect on Competition Is Uncertain (GAO/RCED-95-99, Apr.  6, 1995). 

Airline Competition:  Higher Fares and Less Competition Continue at
Concentrated Airports (GAO/RCED-93-171, July 15, 1993). 

Computer Reservation Systems:  Action Needed to Better Monitor the
CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar.  20,
1992). 

Airline Competition:  Effects of Airline Market Concentration and
Barriers to Entry on Airfares (GAO/RCED-91-101, Apr.  26, 1991). 

Airline Competition:  Industry Operating and Marketing Practices
Limit Market Entry (GAO/RCED-90-147, Aug.  29, 1990). 

Airline Competition:  Higher Fares and Reduced Competition at
Concentrated Airports (GAO/RCED-90-102, July 11, 1990). 

Airline Deregulation:  Barriers to Competition in the Airline
Industry (GAO/T-RCED-89-65, Sept.  20, 1989). 

Airline Competition:  Fare and Service Changes at St.  Louis Since
the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept.  21, 1988). 

Competition in the Airline Computerized Reservation Systems
(GAO/T-RCED-88-62, Sept.  14, 1988). 

Airline Competition:  Impact of Computerized Reservation Systems
(GAO/RCED-86-74, May 9, 1986). 

Airline Takeoff and Landing Slots:  Department of Transportation's
Slot Allocation Rule (GAO/RCED-86-92, Jan.  31, 1986). 

Deregulation:  Increased Competition Is Making Airlines More
Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov.  6,
1985). 


*** End of document. ***