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Airline subsidies, alliances, and code-sharing

by Edward Hasbrouck, author of "The Practical Nomad"

International airline routes are generally much more complex, and involve more choices of airlines and connection points, than domestic flights within any single country, whether Mexico or the USA. That's why, for several years after its introduction, Orbitz.com's much-hyped software for finding multi-airline connections and combinations for trips within the USA didn't work at all for international flights. For those, Orbitz.com, relied on a computerized reservation system ("CRS"), just like any other travel agent (although in Orbitz.com's case without offering any of the discounted consolidator ticket prices that give travel agencies their big advantage over buying tickets directly from the airlines).

It's a triumph of standardization and interoperability that the CRS's used by travel agents can give access to schedule and price information (although not complete price information -- no single source has that) and ticketing capabilities for hundreds of airlines, even very small ones with no offices abroad, through a single user interface. One of the things for which a CRS is most useful is booking and pricing journeys that involve flights on more than one airline.

That's essential for any trip around the world. Only four airlines (the original Pan Am, Air France, and more recently Aeroflot and United Airlines) have ever operated flights entirely around the world, and none of them currently does so. United Airlines still owns Pan Am's government-granted rights to fly a route around the world, but doesn't choose to use them. As long as governments let them get away with it, it's easier and cheaper to put their label on "code share" flights by other airlines, and just pretend to offer an around the world route system.

The best routes (best for travellers, that is) for many journeys involve travel on multiple airlines, and not necessarily ones with reciprocal agreements to promote each others' services. But you won't find those routes if you rely on the airlines themselves for advice: none of them will tell them about routes that involve travel on other airlines, except their own marketing partners. The only way you're likely to find out about those routes is to go to a travel agency -- online or offline -- that's independent of any single airline or alliance.

Why, for example, did many of the teams on The Amazing Race fly from Mexico City to London by way of Paris? That's unlikely to have been the route that would get them to London soonest. But it's the route that would have been suggested by the staff at Aeromexico, since Aeromexico is a partner in the Skyteam marketing alliance with Air France. This is exactly what airline alliances are designed to do for the airlines, and why they are bad for travellers. The racers were steered to the fastest route on a Skyteam marketing partner, rather than the fastest route on any airline.

Airlines claim code sharing and alliances enable them to offer better services like through ticketing, baggage transfers, and frequent flyer mileage credits between alliance partners. But that's a lie. None of those services requires alliances or code sharing. The international standards that the airlines themselves established decades ago through IATA permit all IATA member airlines, not just alliance partners, to publish through fares and establish interline ticketing and baggage transfer agreements. Any IATA-appointed travel agency can sell tickets on any IATA airline, including tickets at a single through fare for a multi-airline journey. And even alliance members often give frequent flyer mileage credit for travel on non-alliance airlines, without code sharing.

Code sharing is unnecessary for, indeed irrelevant to, any legitimate purpose or actual service. Code sharing doesn't enable an airline to fly to any more places. It just enables the airline to mislead travellers into thinking that they fly to places they don't. I call that fraud.

American Airlines' recent advertising campaign, for example, focused on the claim that American had increased the spacing between seats "throughout coach" on their flights. All else being equal (it usually isn't, since American is typically an expensive airline) travellers who relied on those ads as a basis for choosing a flight labeled, "American Airlines" over a flight by some other airline, had a right to expect more space. But no: thousands of code-share flights every day were being labeled with American Airlines flight numbers, despite being operated by other airlines that hadn't added more room between rows of seats.

That's not the worst of it, though. The real purpose of the major global airline alliances is to solidify the oligopoly of their participants, and to drive smaller non-participants and even large non-aligned airlines out of business -- so that the remaining airlines can raise prices, while travellers are offered fewer choices.

Exemptions from antitrust law to permit airlines to fix prices and routes together, as part of airline alliances, have gotten at least some critical scrutiny. But they are far from the worst of the government policies in favor of airline oligopolies and against the interests of air travellers, especially in the USA.

By law in the USA, licenses to carry passengers by air between points in the USA ("cabotage", in airline lingo) can be given only to "US persons". Airlines incorporated outside the USA, airlines with more than 25% ownership by non-USA entities, or airlines "controlled" by a foreign entity, regardless of actual ownership, are categorically barred from competing on routes within the USA -- the world's largest domestic airline market.

The primary victims of this xenophobia and protectionism, of course, are domestic travellers in the USA who are denied the additional competition, superior service, and lower prices that they can get from non-USA airlines on international routes.

For example, Richard Branson's Virgin Atlantic Airways already has subsidiaries operating flights within mainland Europe (Virgin Express) and within Australia (Virgin Blue). Only the restrictions on "foreign" competition prevented him from starting a similar domestic subsidiary in the USA. Having flown on Virgin Atlantic, I have little doubt that the service on "Virgin USA" would be substantially superior to that on typical USA airlines. (As of 2004, Branson is finally planning to invest in the startup of "Virgin America". But to satisfy USA law, he'll be restricted to minority ownership and to only 25% of voting rights, with a controlling majority partner in the USA.)

As for prices, figures from the Air Transport Association, the airlines' own lobbying organization, show that the average revenue per passenger mile (i.e. the average ticket price) for major USA-based airlines is substantially higher on their (protected) domestic routes within the USA than it is for those same airlines on international routes (where they might have to compete with foreign airlines). Scarcely surprising: even within the USA, a wide variety of studies have shown that airfares between any two cities since airline "deregulation" in 1978 are an inverse function of the number of airlines offering service between those cities.

Air travellers in the USA get the worst of all worlds: prices artificially inflated by protectionism, taxes increased to support government subsidies, exemption of the airlines from state and local consumer protection laws, and a hands-off attitude by the Federal government towards even the most egregious violations by the airlines of existing federal consumer fraud and truth-in-advertising laws.

I've interviewed some of the senior Federal officials responsible for policing airlines in the USA, and I'm appalled by their lack of interest in doing their duty to protect the public against airline ripoffs.

In their defense, US Department of Transportation officials claim they don't have enough staff to do the job right. That's true, but they waste their limited resources logging quality-of-service complaints, when they should be putting their priority on stopping airlines from misleading the public, on a routine basis, about basic facts like which airline operates the flight (code sharing) or how much a ticket costs (advertising "half round-trip" prices for which nothing can be bought).

Yet it's the government of the USA, and airlines based in the USA, that are whining self-righteously about "open skies", "free markets", and the "unfair" protectionism of other countries' reciprocal restrictions on access to their much smaller, much less significant, domestic airline markets. Like so much else the airlines are saying in their quest for even more special treatment and subsidies from governments, it's pure hypocrisy, motivated by pure greed.

It's particularly unfair that taxpayers are required to subsidize air travel -- directly and indirectly -- more than such other means of transportation as Amtrak trains or public mass transportation. Ordinary people in the USA could afford to travel more by air, especially internationally, but they don't. Outside of a small "jet set", most people in the USA do their regular travelling by land, and fly only rarely. Most air travellers are relatively wealthy. Government subsidies to air travel are among the most regressive taxes in the USA.

If airlines want true deregulation, they should accept truly open skies, including abolition of the restrictions on cabotage and foreign ownership, and truly free markets, including an end to government subsidies and bailouts. If, on the other hand, airlines want governments (i.e. taxpayers) to underwrite their continued operations, and grant them special privileges, they should accept a reinstatement of government regulation of prices and services (i.e. a return to regulation), to ensure that they use those government subsidies, and exercise those special privileges, in the public interest.

[Adapted in part from articles originally published here and here. Last updated 30 January 2006. See also my report and my comments filed with the USA Department of Transportation on proposed changes to the DOT regulations on airline codesharing.]