Global Route Alliances Could Lower Some Ticket Prices

U of Ideas of Business ó October 1998 University of Illinois at Urbana-Champaign

Contact: Mark Reutter, Business & Law Editor (217) 333-0568; [email protected]

AIRLINES

Global route alliances could lower some ticket prices, economist says

CHAMPAIGN, Ill. -- The push by airlines to team up in global route alliances, which has raised the specter of higher fares in government circles, may be overall good news for consumers, according to a University of Illinois economist. Alliances among airlines to sell tickets for travel across their own and their partnersí networks have become highly controversial. Several international linkups have been established, but approval of an agreement between AMR Corp.ís American Airlines (AA) and British Airways (BA) has been stalled on both sides of the Atlantic by regulators.

ìLittle evidence exists on the effect of airline alliances on fares,î says Jan K. Brueckner, a U. of I. economist and expert on airline economics. To generate such evidence, Brueckner examined a large sample of tickets and concluded that international alliances lead to lower fares in many markets.

But the impact on prices is subtle. The chief goal of international alliances is to boost traffic in ìbehind-the-gatewayî markets rather than in markets linking major hubs. The Kansas City-Munich market, which has no single-airline service, would benefit if served by partners such as AA/BA.

Using a sample of tickets collected by the U.S. Department of Transportation for the third quarter of 1997, Brueckner found that existing alliances charge 18 percent lower fares than non-allied carriers in the Kansas City-Munich and other behind-the-gateway markets.

But in markets connecting gateway airports, fares were 5 percent higher when two alliance partners serve the market, a result of lower competition. Bruecknerís results predict that the Chicago-London market would experience a 5 percent fare hike if the AA/BA alliance were approved.

ìThe data reveal the pros and cons of airline alliances -- lower fares in the behind-the-gateway markets and higher fares in gateway-to-gateway markets,î he said. ìBecause there are many more behind-the-gateway markets, there should be an overall consumer gain from international alliances even without regulatory intervention.î

There are ways to reduce anti-competitive behavior in the gateway markets. ìAs a condition for approval of the AA/BA alliance, the European Union has served notice that it will require the carriers to forfeit a large number of landing slots at London Heathrow Airport. That should allow the entry of new competitors. U.S. regulators may impose similar conditions here.î

The proposed alliance between Northwest and Continental Airlines and other alliances involving domestic carriers pose more serious economic issues, Brueckner said. ìBecause these companies compete more extensively than the international alliance partners, the anti-competitive impact may be more widespread. Regulators must bear this fact in mind in scrutinizing the proposed alliances.

W. Tom Whalen, a U. of I. economics graduate student, assisted in the study.

-mr-