The Pocketbook Truth Of Airline Alliances

Discussion in 'General Discussion | Travel' started by sobore, Jun 1, 2011.  |  Print Topic

  1. sobore
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    sobore Gold Member

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    If you had to pay $3,400 for a round-trip, economy-class airline ticket between Atlanta and Amsterdam, would you be confident that vigorous trans-Atlantic airline competition is providing you with great value?
    I would not.
    Atlanta is both the world’s busiest airport and home base for Delta Air Lines (DAL), the world’s leading carrier last year. Amsterdam, a major European hub, is home to the KLM unit of Air France-KLM, which is Delta’s major partner in the SkyTeam global airline alliance.
    Delta CEO Richard Anderson met recently with Air France-KLM (AFLYY) executives to discuss which airline would make which cuts to their respective trans-Atlantic routes this fall. By working together to limit capacity during an anticipated slow flying season, the airlines hope to keep seats filled and fares high. This helps explain the $3,431 fare (including taxes and fees) I found on Orbitz last week when I priced a hypothetical flight departing Atlanta on Monday, Oct. 3, and returning Friday, Oct. 7. Delta and KLM are the only airlines offering non-stop service on that route.
    When businesses “coordinate” their prices and services, it is usually the companies, not their customers, who benefit. This is why the United States and many other countries have antitrust laws.
    Had representatives from Delta and American Airlines attempted such so-called coordination on domestic routes, it would have been a blatant violation. But Delta and Air France-KLM enjoy an antitrust exemption that made the meeting legal. They still compete with other trans-Atlantic providers, such as American and its Oneworld partners or United and its Star Alliance, but Air France-KLM, which is number eight among global airlines and the second-largest in Europe, and Delta can fix routes and prices among themselves without restraint. Delta recently won another exemption with Virgin Australia, allowing those airlines similar privileges in the South Pacific.
    Such exemptions, however, may not last. The Obama administration has taken a skeptical stance on antitrust immunity for airline alliances. When it was under Democratic control in 2009, the House passed legislation that would have made all previous grants of immunity expire after three years and would have tightened the standards for future antitrust exemptions. The Senate, however, did not act on the legislation.
    More recently, the Justice Department proposed ending antitrust immunity for fare-setting meetings held through the International Air Transport Association (IATA). The Department argued that changes in international air travel have made such price coordination unnecessary and that today’s more powerful international alliances reduce the need for the IATA to get involved in pricing and route determinations.
    Airlines, not surprisingly, are fighting to retain their antitrust immunity. Two Washington attorneys who represent the industry, Warren L. Dean and Jeffrey N. Shane (a former official in the Department of Transportation), set out the airlines’ case last year in an article that argued airline alliances “generate important competitive benefits.”
    “Put simply, if a combination of resources from different enterprises is necessary to compete effectively in a given market, then allowing the combination to take the most efficient form effectively lowers the barriers to entry into that market,” they wrote.
    Dean and Shane raise a good point, which is that national laws severely limit cross-border ownership of airlines, making trans-Atlantic airline mergers all but impossible. If Delta were to merge with Air France-KLM, there would be no need to collude about setting routes and rates. But American law blocks such mergers by prohibiting more than 25 percent foreign ownership for a domestic airline. Many other countries have similar rules. Of course, if aviation law permitted Delta to merge with Air France-KLM, antitrust regulators would still need to sign off on the deal.

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