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Airline alliances Open the skies Regulators have been too soft on the big transatlantic carriers Nov 12th 2011 GIVEN that flying people around the world is the ultimate globalised industry, there is oddly little competition in the airlines business. Passengers who are prepared to change planes once or twice to get to their destinations have lots of choice, but on transatlantic routes between hubs there are often only one or two carriers to choose from.   This lack of competition is partly the result of collusion sanctioned by regulators. On transatlantic routes members within each of the world’s three big alliances—Star, oneworld and SkyTeam—share costs and agree on prices. They are spreading their tentacles around the world (see article). The expected purchase by BA (a oneworld member) of a smaller rival, bmi, from Lufthansa (a Star member), may boost oneworld’s position by adding bmi’s Heathrow slots to oneworld’s already dominant position in transatlantic flights.   America’s Department of Transportation (DoT), which has some antitrust powers, has not only given its blessing to the rise of alliances, but actually requires airlines to collude fully within each of their groupings, and to share costs and agree on prices. The DoT’s apparently perverse position was prompted by studies which found that, for passengers taking connecting flights with two airlines that are only loosely allied, each carrier has an incentive to ramp up the price on its leg of the journey, even if this results in lower overall demand for such flights. By forcing the carriers to pool their operations and offer a common price for the full journey, such incentives disappear, and the ticket costs less as a result. The DoT is now requiring collusion on some transpacific, as well as transatlantic, flights.   America’s main antitrust regulator, the Department of Justice (DoJ), is rightly sceptical of the notion that collusion benefits consumers. It objected to the creation and expansion of the three transatlantic cartels, only to be ignored by the DoT, which it cannot overrule on such matters. Earlier this year an unofficial study by two of the DoJ’s economists crunched the most recent data available, and reached the opposite, and more plausible, conclusion: that fewer competitors means higher fares, as one would expect. The proponents of consumer-friendly cartels still find that the data support their theory. But if such drastically opposing conclusions can be drawn simply by shuffling the figures a different way, it is surely best to believe the outcome that most accords with common sense. A pity, then, that the DoT shows no sign of doing so.   The European Commission, the EU’s regulator, has been a bit tougher on the airlines than have the American authorities: before approving oneworld’s transatlantic venture, it made its members surrender slots at Heathrow, some of which were snapped up by Delta, a SkyTeam member. But it seems curiously reluctant to make progress on its investigation of the Star and SkyTeam cartels, perhaps for fear of opening a row with the United States. The 2007 “open skies” agreement between Europe and America has done some good: for instance, it has allowed BA to go head-to-head with Air France, flying from Paris to New York and Washington, DC (although it recently suspended the Washington route), and Aer Lingus to compete with Iberia between Madrid and Washington. But the blessing America has given the three cartels has more than undone this good work. BA’s struggle to establish itself in Paris shows that it is hard for a competitor, even a powerful one, to achieve critical mass in a hub dominated by a rival alliance. And the remaining independents flying across the pond—such as Virgin and Aer Lingus—are looking vulnerable.   Sit back, relax and enjoy the competition   Blessing the cartels across the Atlantic and Pacific was a mistake, and should be reversed. Since the DoT seems unlikely to do that, Congress should hand its remaining antitrust powers to the more pro-competition DoJ. Regulators should also be actively seeking ways to make the three alliances compete with each other more vigorously, and to help the remaining independents survive, for instance by freeing up more slots. Britain’s Competition Commission has rightly undone the dominant position that BAA, the country’s main airport operator, inherited when it was privatised. It has shown how regulators can, if they choose, take vigorous action to shake up uncompetitive bits of the aviation business. Letting the airlines join together in global alliances brings a number of benefits to passengers: frequent-flyer points, smoother transfers and so on. But travellers should be asking themselves: at what cost?