Star Alliance CEO Jaan Albrecht announced that more airlines than ever want to become members of alliances. The reason: economics. Alliances now have the power to bargain with suppliers as a monolithic entity. They are wielding that power.
Semi-monopolistic actions by the two main alliances with antitrust immunity — Star Alliance and SkyTeam — must be particularly galling to James Oberstar who has introduced an amendment to the FAA Reauthorization Act of 2009 to curb the power of the alliances. These united bargaining efforts are exactly some of the activities that the Oberstar bill strives to curtail.
Airline alliances are beginning, more than they ever dared before, to use the power of size to drive better bargains with suppliers. The new Delta/Air France/KLM joint venture is another alliance that has morphed into a single entity for bargaining purposes.
The result of better prices and significant economies for the airlines in alliances is clear. With lower supplier prices, profits will rise. However, when the airlines win, the suppliers and business travelers who now have to bargain with a dominant entity find themselves at a disadvantage.
Presently, the savings are being racked up on smaller items. According to the trade publication Air Transport World, “Recent projects include sourcing of the priority bag tag by Star for 14 members, reducing the collective bill from $600,000 per year to $90,000 with savings of up to 90% for some participating airlines.”
Airports now have to move airlines together to common sections of the airports. When each airline was negotiating individually, the airports had the power to make airlines stay with the gates they originally leased. Now, with the alliances having a significant concentration of power, the airports are holding the short end of the stick.
Travel agents have felt the wrath of Delta after it consolidated power by taking over Northwest. These same heavy-handed methods will carry over to transatlantic routes now that Delta has entered its joint venture with Air France/KLM.
Next: Alliances will force corporations to negotiate with them as a single entity rather than making pacts with individual airlines when bargaining for prices and perks (and eventually cargo). With only three main players in the international air transportation business, these will be tough bargaining sessions for business travel managers.
Representative Oberstar’s current bill, H.R. 831, seeking to sunset the airline alliances is still running through Congress and the airlines are howling about any limitation of their new-found alliance powers.
Importantly, this legislation would sunset all immunity grants three years after the date of enactment. This is necessary to ensure that if the GAO finds that policy changes are needed, DOT will have the time to examine and implement them. U.S. and foreign air carriers can then reapply for antitrust immunity under any new policies adopted.
The GAO study will focus on the impact of immunized alliances on competition and customer service. It is important to assess whether these immunized alliances have resulted in a reduction of competition, increase in prices or other adverse effects or have used their market power to foreclose rival airlines from competing at alliance dominated hubs. Moreover, the GAO will be tasked with analyzing whether network size plays a role in adversely affecting competition and whether there is sufficient competition among immunized alliances to ensure consumers will receive benefits similar to those conferred by non-immunized alliances.
Competition is out of whack. Plus, I suppose the alliances are making hay while the sun shines, just in case Oberstar’s bill becomes law. Or, perhaps, the airlines are counting on their millions of dollars of lobbying cash to carry the day on Capitol Hill.
