testimony

Before the Subcommittee on Aviation of the U.S. House of Representatives Committee on Transportation and Infrastructure

Regarding Airline Alliances

June 11, 1997

Mr. Chairman and members of the subcommittee, my name is Kevin Mitchell.  I am President and founder of Business Travel Contractors Corporation (BTCC), a corporate buying and advocacy group located in Lafayette Hill, PA.  BTCC was formed in 1994 by a group of large corporations to promote a more rational and competitive air transportation system for business travel.  BTCC represents the interests of 45 corporations that purchase some one billion dollars in annual air transportation services.

Thank you for requesting the views of the corporate customer, who through federal excise and other taxes, has invested billions of dollars to create the world’s most advanced air transportation system.  It is encouraging to us that customer concerns will be weighed during a debate on the proposed alliance between American Airlines (AA) and British Airways (BA) that will ultimately lead to choices of immense long-term consequence.  If the wrong choices are made, some 9 million U.S. businesses will finance the mistakes for decades directly through higher fares and indirectly through lower growth if they cannot afford to travel.

Position Summary:  BTCC corporations support the principles of deregulation and open skies, and are not opposed to global airline alliances per se.  Given its size and scope, the AA - BA alliance, as currently proposed, merits close scrutiny into its possible anticompetitive potential.  That the transaction also is apparently linked as a quid pro quo for an open skies agreement with the U.K. adds to our concerns.

BTCC believes serious review must be given to whether we are pursuing a course of action that will result in greater market concentration, fewer choices and higher prices for business travelers, the opposite of the government’s intended results.  Furthermore, we maintain that a competitive analysis of the proposed alliance should not be limited to narrowly defined markets in which AA and BA currently provide service, but should include indirect competitive effects in other markets.

Indeed, by far the most pernicious effects of the alliance may be felt in corporate travel departments in the form of a higher cost of doing business across the Atlantic.  Given the size of the U.S. - U.K. business travel market, it is no exaggeration to say that, unless the alliance can be subjected to the discipline of real competition, it will be in a position to impose it own private “tax” on travel between the U.S. and the U.K.

Background:  BTCC has reviewed the studies and testimony regarding the proposed alliance presented by the airlines and the U.S. Government.  Airlines are concerned about their shareholders’ interests and take positions accordingly.  The government is concerned about consumer interests and is exploring remedies for possible market concentration problems based on theoretical principles. 

BTCC’s reaction to the proposed alliance is based on real world purchasing experiences in dealing with major airlines’ current use of their market power.  Unlike other participants in this debate, our views do not begin with the question of whether a combined AA and BA will result in a competition problem.  Rather, our position is that we already have a serious competition problem in U.S. - U.K. markets.  Our focus is how to address current problems and avoid future abuses of market power.

Moreover, we as customers do not view this transaction as analytically isolated from domestic U.S. competition issues.  We have very serious competition problems here at home that only now are beginning to be fully understood.  The future of competition in domestic business travel markets will be linked inextricably to the fate of this alliance due to the resulting leverage this and other mega alliances will achieve over corporate travel departments’ purchasing decisions.

Concerns:  BTCC’s concerns are twofold. 

(1)  Current Use of Domestic Market Power.  Airline Deregulation has brought benefits to many communities across the country.  But major airlines’ continued ability to create barriers to entry and frustrate competition has resulted in fewer choices and higher prices for many communities.  Nineteen years after deregulation became effective, domestic business airfares have increased a total of 86% over the last five years and 28% in the past year alone.  Increases of this magnitude do not occur in markets where adequate competitive alternatives exist.

In recent filings with the U.S. DOT, domestic low-fare airlines have identified various strategic offensives against them by major airlines that include: predatory pricing, capacity dumping, following low-fare airlines into new markets, double point frequent flyer awards, biased CRS systems, exclusive corporate contracts, and anticompetitive commission override programs.

With all the attention being paid to the competitive implications of the AA - BA transaction, we cannot lose sight of the major barriers to entry and competition here at home.  If the political will does not exist to address domestic abuses of major airlines’ current market power, what assurances can businesses be given that abuses of substantial additional market power will be effectively addressed, particularly in the case of an alliance involving a foreign airline and a foreign government.

(2)  Implications of an AA - BA Alliance.  As identified in previous testimony, a major pricing problem currently exists in the U.S. - U.K. market, even before the proposed AA - BA alliance is consummated.  Business class passengers can pay from 40% to 70% more on a per-mile-flown basis between the U.S. and U.K. as compared with fares between the U.S. and other more competitive business destinations in Continental Europe.  How can we possibly believe that the elimination of one major competitor in the U.S. -  U.K. market will address this problem or result in anything but skyrocketing business fares?

Based upon current industry practice, it is conceivable that AA and BA will seek to leverage their position in the U.S. - U.K. market to offer corporate discounts only when linked to guaranteed market shares in other international markets.  For example, the AA - BA alliance could insist that a corporation, in return for a 10% discount in the New York to Heathrow market, provide 75% of its business to South America in destinations where American Airlines provides service. 

Similarly, the current practice of linking domestic U.S. discounts to international market share guarantees will likely be accelerated.  Both practices would prove harmful to competition and represent one more blow to U.S. domestic low-fare airlines.  In addition, the outrageously high airfares businesses currently pay will persist and could be used to subsidize predatory pricing practices against our low-fare airlines.

Additional Questions That Should Be Addressed:  In analyzing the proposed AA - BA alliance, a number of additional issues need to be addressed.

1.   If the UK government shares our commitment to the economic principles of open skies, why is its long-sought participation in such initiatives only surfacing now and why is its participation conditioned upon approval of the AA - BA alliance?  What advantage is the U.K. Government seeking through a quid pro quo?  Why has the U.K. Government said, in effect, that BA will enjoy a veto over open skies if it’s not entirely happy with the treatment of the alliance?  Why has the U.S. Government agreed to negotiate with the U.K. under such circumstances?  

2.   Without massive restructuring at Heathrow in terms of slots, gates, terminal facilities, etc. that must be viewed as highly improbable at this time, wouldn’t an open skies agreement be another win-lose agreement based merely upon promises of future access?

3.   In past alliance cases, DOT has granted antitrust immunity only for finite periods.  What will happen if, having granted immunity to AA - BA, DOT decides after a year’s experience that the anticompetitive consequences of the alliance are unacceptable.  If DOT were to withdraw its immunity, will the U.K. Government renounce open skies at BA’s behest—just as it renounced Bermuda I twenty-one years ago?  Just how durable is this new, liberalized relationship likely to be?  Will this situation set up a conflict of interest for DOT in addressing future anticompetitive behavior?

4.  Why should the U.S. Government rush to the negotiating table at a time when momentum is building behind the successes of the multiple open skies agreements the U.S. has negotiated with other countries?  Why negotiate according to rules prescribed by the U.K.?  Won’t the U.K. Government seek an open skies agreement with the U.S., without conditions, when it realizes its global advantages are eroding?

Alternatives:  BTCC believes the U.S. Government has alternatives.

A.  Avoid a Faustian choice and separate its consideration of an open skies agreement with the U.K. from the ongoing review of an AA - BA alliance.  Once these issues are decoupled, the U.S. Government will be able to determine the most beneficial sequencing and timing of its reviews.

B.  Continue proceeding on both issues as planned, but hold the AA - BA alliance approval to the highest of standards to include evidentiary hearings, immediate competitive access to Heathrow, market “carve outs” and other market concentration remedies if necessary.  Insist that DOT have in place adequate data capturing mechanisms to monitor competitive effects and sufficient remedies agreed upon for abuses of market power.

Conclusion:  As recent U.S. GAO testimony suggests, an open skies agreement with the U.K. will seek to address frustrations and imbalances emanating from poor choices made during the Bermuda II debate some 20 years ago.  Like Bermuda II, some of the consequences of a U.S. - U.K. open skies agreement may be imperceptible at signing.  But unlike Bermuda II, the linkage of an open skies agreement to approval of an airline superpower alliance with antitrust immunity, will forever and profoundly alter the terms of global airline competition.  If the wrong choices are made, U.S. businesses will finance the mistakes for decades.