August 23, 2003
Thank You for Flying Whatever Airline This Is
By ROBERT CRANDALL
ORT WORTH — As summer vacationers know, airline travel is full of the unexpected. Some surprises are inevitable, but others come with government approval. Several of the largest airlines in the United States, with permission from the Department of Transportation, are now allowed to woo the public by advertising that they fly to places their airplanes never go. This arrangement may be good for these airlines, but it's bad for the industry and worse for the public interest.
Using a technique called code-sharing, cooperating airlines put their two-letter codes (UA for United, AA for American and so on) on flights operated by other carriers. The purpose is to make travelers believe they are making the entire journey on a single airline, a distinct marketing advantage. United and US Airways, which account for almost a quarter of the industry's revenues, now work together, as do Continental, Delta and Northwest, which together account for more than a third of industry revenue, as measured in passenger miles.
The adverse consequences of these alliances have been amply demonstrated in international markets, where United States airlines are less important than they were a decade ago and far less dominant than they would have been had these alliances not been allowed. The government approved these partnerships to help struggling airlines survive, and while they may have succeeded in that objective, they have not helped foster competition.
International code-sharing got its start back in 1983, when Pan American, seeking to support its international route structure from New York, allowed Empire Airlines, a small commuter carrier offering regional service to John F. Kennedy International Airport, to advertise some of its flights as Pan Am's. The purpose was to suggest to consumers that they could fly on a single airline from a place like Rochester, N.Y., to Europe. Of course, they weren't really flying the whole way on Pan Am, since the first leg of the journey was flown on small aircraft operated by Empire Airlines, a far cry from one of Pan Am's 747's.
Despite the vigorous opposition of every major airline, this arrangement was permitted. The government sought to help Pan Am, then in deep financial distress, become more competitive. Yet Pan Am's problems were due, in large part, to the government's refusal to allow it to operate domestic flights.
The agreement did not save Pan Am, which went out of business in 1991. But the pattern had been set. The next application came from KLM Royal Dutch Airlines, which sought an alliance with Northwest, thus giving itself the right to advertise that it flew to many American destinations. Northwest, meanwhile, could pretend that it flew to the many European destinations served by KLM.
Since Northwest was financially unstable at the time, and since KLM was willing to make a substantial investment in exchange for code-sharing rights, the United States approved the proposal. Subsequently, in response to strong appeals from the German government, the United States approved a similar arrangement between United and Lufthansa — also at a time when the German carrier was in substantial difficulty.
After that, it was off to the races. United States carriers realized that they could not successfully compete across the Atlantic without the benefit of a code-sharing alliance. The results have been both appalling and predictable.
In 1993, before the Northwest-KLM transaction was approved, United States carriers flew 52.4 percent of all flights across the Atlantic. More important, United States airlines were rapidly expanding their international operations and, because United States hubs are larger and better designed than European hubs, American carriers were well on their way to a position of real dominance in the North Atlantic. Today, United States carriers fly only 46.8 percent of trans-Atlantic flights, and European carriers are growing faster than United States carriers on these routes.
One of the reasons for this is that American carriers often cannot get access to major European airports because of constraints imposed or supported by European governments. Even if a United States airline manages to get access, it will often be prohibited from flying at the most popular times and will find there are few European carriers willing to form an alliance.
One result has been the elimination of thousands of American jobs and untold millions in profits. Moreover, the number of trans-Atlantic routes on which there is real competition — that is, competition between unaffiliated airlines — has declined.
All this has happened despite the fact that there are precious few consumer benefits to code-sharing. The main beneficiaries of these arrangements are the airlines, which can mislead passengers into believing that they will be flying a complete itinerary on one carrier, when in fact, they will be using several airlines.
The Department of Transportation has approved two such code-sharing agreements this year, both of which took effect in time for the summer travel season. The consequences for the domestic market will be disastrous.
Independent carriers will lose business. Over time, those airlines outside the consortiums will withdraw from routes on which they cannot compete, as has already happened in some trans-Atlantic markets. The result will be fewer competitive offerings, higher prices and less service.
Moreover, those airlines that do participate in alliances, shielded from true competition, will delay — until it is too late — the difficult task of becoming competitive with the low-cost airlines now springing up on both sides of the Atlantic. When the day of reckoning arrives, as it surely will, the United States will find itself with far fewer airlines than it would prefer.
The turmoil that has affected commercial aviation during the past few years seems to have blinded many in Washington to the long-term consequences of their actions. A policy that leads to a lesser international role for United States carriers, and which will inevitably result in the failure of still more of its established airlines, is not in the national interest.
Robert Crandall was chief executive of American Airlines from 1985-1998.
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