Aviation Competition:

International Aviation Alliances and the Influence of Airline Marketing Practices

T-RCED-98-131: Published: Mar 19, 1998. Publicly Released: Mar 19, 1998.

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Pursuant to a congressional request, GAO discussed the United States' aviation relations with the United Kingdom, focusing on the: (1) status of the various reviews of the proposed American Airlines/British Airways (AA/BA) alliance being undertaken by the European regulatory agencies and the Departments of Transportation and Justice; (2) competitive impact of the proposed alliance; and (3) extent to which sales and marketing practices of American Airlines and British Airways should be considered in reviewing the alliance.

GAO noted that: (1) European regulatory agencies have nearly completed their reviews of the proposed AA/BA alliance; (2) they are considering a range of issues that would have to be addressed as a condition of approving the alliance, including the number of slots and gates that other airlines would need at London's Heathrow Airport to compete, as well as American Airlines' and British Airways' marketing practices; (3) the United Kingdom, which is also reviewing the proposed alliance, is waiting for the European Commission to announce its draft remedies; (4) in contrast, the Department of Transportation (DOT) has not yet begun its formal review of the proposed alliance because neither airline has filed all the documentation requested; (5) DOT has reiterated that it will not approve the alliance until the United States successfully negotiates an open skies agreement with the United Kingdom; (6) the proposed AA/BA alliance raises significant competition issues; (7) currently, the two airlines account for nearly 58 percent of the available seats on scheduled U.S. and British airlines between the U.S. and London; (8) in addition, they provide over 70 percent--and in some cases all-of the available seats on scheduled U.S. and British airlines between Heathrow Airport and several key U.S. airports, including Chicago, Boston, and Miami; (9) as a result of this level of market concentration, DOT's approval of the alliance would further reduce competition unless, as a condition of approval, other U.S. airlines were able to obtain adequate access to Heathrow; (10) although slots, gates, and facilities are most important, most experts and some airline officials with whom GAO spoke also recognize that American Airlines' and British Airways' sales and marketing practices may make competitive entry more difficult for other airlines; (11) practices such as frequent flier programs and travel agent commission overrides encourage travelers to choose one airline over another on the basis of factors other than obtaining the best fare; (12) such practices may be most important if an airline is already dominant in a given market or markets; (13) ultimately, this may lead to higher fares than would exist in the absence of these marketing practices; (14) even so, the experts agreed that measuring the effect of these practices is nearly impossible; and (15) mitigating their effect without banning them is difficult, and banning them involves a trade-off between their anticompetitive effect and the consumer benefits that some of them bring.

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