Thursday, March 26, 2009

On Protectionism and Alliances

A recent inquiry to the blog took note of our recent postings on protectionism and the aviation industry and asked if international airline alliances are not also "very dangerous mechanisms for allowing market-dominating behavior, which is detrimental to the consumer, free competition and open access for new entrants."  That is a fair question, but one which would require far more than a single blog post to answer comprehensively.  Nevertheless, it is possible to address some general points concerning international alliances and why their potential anticompetitive effects ought to be distinguished from the more pervasive problem of protectionism.

When we refer to "protectionism" on the blog, we are referring to State policies which inhibit free trade in goods and services.  In the context of civil aviation, we are typically talking about such practices as States limiting foreign ownership and control of their carriers (either through national laws or in their bilateral air services agreements with other countries), restricting foreign carriers' domestic traffic rights (cabotage), or injecting public subsidies (State aid) into their flag carrier(s).  This list is by no means exhaustive.  Bilateral agreements which fall outside the "open skies" framework can have all sorts of additional protectionist provisions, from demanding 50/50 capacity sharing on routes to complex, highly-politicized route exchanges.  (Article 11 & Annex I of the now-defunct 1977 U.S./UK Air Transport Agreement, commonly known as Bermuda II, serve as the locus classicus for these restrictions.)  The U.S.'s Fly America program has been derided as protectionist by EU Member States; so, too, has the recent European Commission proposal to suspend its "use or lose" slot rule at Community airports.  It is the position of the International Aviation Law Institute (and thus this blog) that these and other forms of protectionism impede the safe and orderly development of international civil aviation and the offering of air services on the basis of equality of opportunity, operated soundly and economically.  Cf. Chicago Convention on International Civil Aviation, pmbl., 61 Stat. 1180, 15 U.N.T.S. 295.

Airline alliances, by their very nature as agreements between private entities, do not engage in protectionism.  That does not mean they or their individual members refrain from engaging in anticompetitive behavior.  An exhaustive treatment of the merits of this general charge is beyond the scope of this post.  However, when examining airline alliances--specifically the three major global alliances--it is important to look at each of their respective networks as a whole and how it does (or does not) compete with the networks of the other alliances.  It is easy to narrow the analysis down to specific city pairs and find that a particular alliance, acting through one or more of its member airlines, dominates the route.  That's inevitable for the simple fact that not every city pair demands, or can support,multicarrier competition.  But in the aggregate, how important are those city pairs?  If a consumer is looking to fly from Grand Rapids, Michigan, to Frankfurt, one can do so through SkyTeam or the Star Alliance.  SkyTeam will take them from Grand Rapids to Detroit, Michigan, on Northwest Airlines, before placing the consumer on a KLM plane bound for Frankfurt.  On the other hand, Star will take the consumer from Grand Rapids to United's hub at Chicago O'Hare and on to Frankfurt on a flight operated by Lufthansa.  For the consumer, the question is likely to come down to which alliance will get them from Point A (Grand Rapids) to Point B (Frankfurt) in the cheapest, most time convenient manner possible.  If this consumer is a frequent air traveler, they may take into account what additional "perks" are offered by one alliance or the other.  For example, if the consumer is going to Frankfurt on vacation but normally makes frequent trips between, say, Grand Rapids and St. Paul, Minnesota, on Northwest to visit immediate family, the consumer may be inclined to pick SkyTeam to maximize frequent flyer miles.   

Now, as the example loosely illustrates, despite the large networks that Star, SkyTeam, and oneworld have developed, there is not complete overlap.  Parts of each alliance's network will be dominated by one of its members.  The competition for these international alliances, however, is for the large body of consumers who want to get from their city to a distant destination and that is what produces choices for consumers and keeps overall costs down.  It is also important to bear in mind that alliance members operating between major city pairs will still face competition from airlines offering point-to-point service, including low-cost carriers.  The barriers to entry that alliances are oftentimes accused of erecting, such as slot hoarding, can be and ought to be dealt with through robust competition rules.  Alliances are not, by nature, compelled to engage in such practices and can readily be dissuaded from doing so without impeding their ability to expand their respective networks and continue to offer consumers substantial benefits.

As a final note, in most instances airline alliances are "second best" options in the face of legal hurdles which prohibit or minimize the benefits of transnational mergers.  While some analysts have argued that alliances are preferable to mergers in that they do not demand the same levels of capital investment and thus carry less risk, they have exhibited signs of instability in their relatively short history and remain the subject of political discontent (particularly in the United States).

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nice post

Posted by: Ray | Mar 29, 2009 2:18:54 PM

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