Cranky is on vacation, but I’ve lined up some excellent guest bloggers for you while I’m gone. Today I have Aviation Policy Blog author Evan Sparks.
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One of the big stories in aviation thus far in 2009 is how international airline alliances have come under heavy fire on Capitol Hill. The “big three”–Star, Skyteam, and Oneworld–have added members and expanded their global reach in recent years. “I have become increasingly concerned with the decline of competition in international markets, particularly between the United States and Europe,” said Jim Oberstar (D-Minn.), the powerful chairman of the House Transportation Committee. “Combined, the . . . alliances account for almost 80 percent of the total world airline capacity, 78 percent of world revenue passenger kilometers and 73 percent of passengers carried. These three alliances control over 87 percent of the traffic between the United States and Europe.”

Back in February, Oberstar introduced legislation to limit the power of these alliances. The international alliances offer more than just codesharing and interline connections. They cooperate in marketing, scheduling, and route planning, and (with an exemption from antitrust regulation granted by the federal government) ticket pricing. The key partners in Skyteam (Delta, Northwest, KLM, and Air France) and Star Alliance enjoy immunity on transatlantic routes. Just last week, the Department of Transportation tentatively approved Continental to join United, Air Canada, and Lufthansa in fare-setting immunity. American, British Airways, and Iberia, the core carriers of Oneworld, are seeking an antitrust exemption themselves.

Oberstar’s legislation–which, according to Aviation Week, was recently inserted into the House version of the FAA reauthorization bill–would constrain these international alliances by limiting the grants of antitrust exemptions to three years, after which the airlines would have to reapply for another three years. This would insert politics into airline regulation decisions. The actual effect would be to discourage airlines from seeking to form alliances, period. Unpredictability of policymaking can sometimes harm businesses even more than bad policy. “Having the sort of ex post facto law that would undo this is a very disconcerting principle to have in the business community,” US Airways executive C. A. Howlett said recently.

By now, you may be thinking that airlines in alliances collude on prices to gouge the little-guy traveler, and that’s certainly the sort of rhetoric you hear coming out of Washington. But that’s not what studies of international codesharing indicate. In a 1998 paper [PDF here], Jan K. Brueckner and W. Tom Whalen found that “alliance partners charge interline fares that are 18-28 percent below those charged by nonallied carriers”–although they found a slight but statistically insignifant uncompetitive effect on flights between “gateway” cities. Why? “First, joint pricing internalizes the negative externalities from the uncoordinated choice of subfares, leading to lower fares. This fare reduction then stimulates traffic, which in turn lowers marginal costs via economies of traffic density, leading to further downward pressure on fares. Our results, which confirm this prediction, are extremely robust to changes in the measurement of competition and the handling of market-specific effects.”

Basically, it works like this: Delta sets fares on the Atlanta-Louisville route on its own, as does its alliance partner KLM for the Amsterdam-Bratislava run. Then, the immunized partners collaborate (or collude) on pricing the Atlanta-Amsterdam run. If they didn’t have immunity, they wouldn’t be able to collaborate and individual fares would stand. But because KLM needs passengers on the transatlantic flight from Louisville and because Delta wants to send its passengers on to Bratislava, they need to set an overall fare that makes sense for both carriers in the market. If Delta set its fare on ATL-SDF too high, it would depress feed traffic for the transatlantic flight and thus hinder the joint efforts of both airlines. “Cooperative behavior, however, internalizes the externality, so that a lower fare is chosen.”

Brueckner’s 2003 article in the Review of Economics and Statistics, “International Airfares in the Age of Alliances: The Effects of Codesharing and Antitrust Immunity,” [PDF of early version here] updates his earlier model and finds that “the presence of antitrust immunity reduces the fare by 13-21 percent,” and that the “combined effect [of codesharing and immunity] ranges between 17 and 30 percent.” And what would happen if, as Oberstar wants, alliances were to risk losing immunity every three years? “The estimates show that, when the DOT grants antitrust immunity, substantial benefits arise for an alliance’s interline passengers. . . . [T]he aggregate loss [modeled for Star Alliance passengers] from withdrawal of immunity ranges between $17 and $22 million per quarter, suggesting that the annual gain to the STAR alliance’s interline passengers from the presence of immunity is on the order of $80 million per year.”

Bottom line: airline alliances don’t drive up fares. They do the opposite. Given that alliances actually smooth the travel experience, allowing greater ease in baggage transfer, terminal transfer, through ticketing, and other amenities, it is striking that they actually reduce fares in most cases. Why would policymakers want to change that? Well, that’s a question for another post.

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Evan Sparks writes the eponymous Aviation Policy Blog at www.evansparks.com. He lives in Washington, D.C., where by day he is an editor at the American Enterprise Institute. Evan’s writing on aviation policy and other subjects has appeared in the Wall Street Journal, Forbes.com, and The American.

I may be out of town, but that doesn’t mean I don’t have plenty of posts from BNET this week. I also had to pre-publish three a week while I’m gone, so you can still expect weekly wraps for the next couple Saturdays.

Continental and US Airways Report Steep Revenue Declines
March revenue reports are coming out and the news is very bad. Revenues are way down, as predicted.

International Traffic Causes Steep Load Factor Drops
March traffic reports are starting to com out as well, and the load factor drops aren’t pretty. Digging in, however, we can see that the international side is really hurting things.

Orbitz Follows Rivals, Drops Booking Fees with a Twist
Orbitz has finally followed the others and dropped booking fees, but there is a very important twist on how they did it.

Alaska Challenges Allegiant with Bellingham – Las Vegas Flights
Looks like Alaska wants to pick a fight with Allegiant. Will it work? I’m not so convinced.

March Airline Traffic Numbers
The full March traffic numbers are out, and I’ve got my monthly rundown. How do you spell “ugly”? See inside.

The time has finally, mercifully, come. We’re off to the South Pacific. In just about 24 hours, this (or something like it) will be our view:

We’re heading to four islands, and on three of those, we’ll be in overwater bungalows. I have to thank the folks at Pearl Resorts for offering up a media rate, because otherwise, that would have been just about impossible to afford. (Even with a media rate, it’s a stretch, but hey, it’s our honeymoon, and if we’re ever going to splurge . . . .)

As promised, I’ve got guest posts lined up each weekday for the next two weeks. Many of those are from blogger friends of mine, as I said earlier. But the response to my request for posts from you all was fantastic, so you’ll see a couple of those as well. For those I don’t post, I must apologize. I know you all worked hard on them, and I appreciate the effort.

I should note that the opinions expressed by everyone in these posts are theirs and theirs alone. I may agree with some but others I may not. Either way, it should be a highly entertaining couple of weeks for you, I hope.

I’m unplugging on this trip completely, so my cell phone won’t turn on, and I won’t check email. I’m sure I’ll face an avalanche of emails when I return, but that’s ok. I’ll do my best to get caught up then. The blog is on autopilot, so please understand if a comment accidentally gets snagged in a spam filter or other problems arise. There’s nothing I can do until I return.

So with that, I hope you enjoy the guest posts and I’ll see you back here in a couple of weeks!

[Original photo from crylov via Flickr]

For those of you who don’t live in the LA area, the interview with Dave Barger I published last week is probably a distant memory. But for those living in this area, and especially those in Long Beach, this has become a very hot topic indeed. A couple nights ago, the city council got together to discuss the issue, and I found myself shaking my head more often than not at some of the reactions from the council.

First, let me refresh your memory. In my interview, Dave said that Long Beach needed to make good on its promises to build the terminal improvements and parking garage that have been in the works for years. I asked if JetBlue would leave the airport if that didn’t happen and he responded that he “wouldn’t take any option off the table.”

This didn’t spark much response from the community until the local newspaper, the Press-Telegram picked up on the interview. Soon, JetBlue had confirmed that the comments were reported accurately. The LA Times, local television news outlets, and USA Today picked up the story as well. That was enough to get things moving.

The frenzy reached a point where the city council took notice. Three councilmembers, including the Vice Mayor, added a recommendation to this week’s council agenda (PDF) to “request City Manager to report to the City Council with timelines on the Long Beach Airport terminal enhancement status including parking structure construction update.”

That set the stage for what ended up being an odd set of statements. You can watch it for yourself on the city’s video archive site (click on item 15 at the bottom left to skip ahead).

All of them at least paid lip service to the idea that they understood the frustration with such a lengthy delay, but some were more convincing than others. On one side, we had a group, including the Vice Mayor, that tried to extend the olive branch to JetBlue. They wanted to see the project move forward, and you could tell that they were feeling the frustration as well. I think councilman Gary DeLong said it best:

Hopefully everyone can agree that reality is this has taken far too long . . . . We have been in this nine years and we have yet to break ground on anything. We’ve had lots of process but very little results . . . . We won’t agonize over why it’s taken nine years but let’s see if we can’t make up for some of that long delay by getting this project off the ground.

Amen. Let’s not look back, but let’s just get things moving now. I couldn’t agree more. New Airport Director Mario Rodriguez was there, and he tried to stay above the fray completely by focusing on the importance of cost control. That is certainly something airlines like to hear, but these are conversations that should have been had long ago (not his fault, he’s brand new). He did say that meetings are being held again with JetBlue in New York in a couple of weeks. Just one little helpful piece of advice before you go, Mario . . . it’s Dave Barger, not “Berger.”

On the other side of the fence we found a more concerning viewpoint. Some councilmembers went on the attack, and more than than one thought it would be a good idea to attack the media, including blogs. Oh yeah, that’s constructive.

Councilwoman Gerrie Schipske said, “I do think that the reporting of the comment that was, by the way, leaked directly from somebody at JetBlue to the blogger and then sent directly to the Press-Telegram and the District Weekly . . . I think the reporting was irresponsible.”

Wrong. The comment was not leaked by anyone at JetBlue. I was invited to have a one-on-one sit down interview with CEO Dave Barger himself at the Phoenix Aviation Symposium (as were other media attendees at the conference). Everything you read came directly from him. In fact, once I turned my chicken-scratch into a transcript, I sent it to JetBlue to make sure I hadn’t mistakenly misquoted him. I didn’t, however, send it to the Press-Telegram or the District Weekly at any point.

Councilwoman Tonia Reyes Uranga seemed to think that the issue was somehow less valid because it originated in a blog. “This is a blog, give me a break. If we start spending this much time on a blog, we’re really in trouble. So I would like to ask the Press-Telegram to go beyond blogness and get into real news stories. . . let’s stay positive.”

Mayor Bob Foster jumped on the bandwagon as well. “I agree. We should not take blogs as professional journalism. The professional journalists should take that as well.”

Is this a joke? It doesn’t matter if this was written on a bathroom wall. It came directly from the CEO of the largest airline at this airport. Does it really do any good to try to discredit blogs or traditional media in the process? No. It also shows that they’re quite out of touch with the current state of reporting. There are many reputable blogs and discrediting them with a blanket statement like that will most certainly not serve them well.

In the end, the most mind-boggling part of all of this was the hostility toward JetBlue for taking this out in to the media in the first place. It was none other than Mayor Bob Foster himself who closed the discussion by giving JetBlue a stern talking-to.

The one thing I would ask from everybody involved in this is professional conduct. . . . I would ask JetBlue, everyone from the CEO on down, let’s conduct ourselves as real partners, as real professionals. If you have a problem, if you have an issue, bring it to my office or bring it to a councilmembers office, don’t do it in the press. That serves no purpose and believe it or not . . . you probably have made this harder to finance . . . . It can be dealt with but it’s not the way to conduct business.

Does anyone believe that JetBlue would have taken this to the press if they were having success through other channels? I highly doubt it. The facts are this: It’s been nine years since this process began and no ground has been broken. The bulk of the discussion of substance last night centered around how to make this a fiscally responsible project. I understand the state of the economy puts this at the top of everyone’s mind, but these things should have been decided long ago. If that’s the type of discussion that’s happening right now, it doesn’t sound like something that is going to be ready any time soon.

I’d like to think that this little dust-up will at least spark something to happen, but watching the mayor and some of the councilmembers throw barbs last night hardly instills confidence. Hopefully it’s just grandstanding for the cameras, and the mayor and council have a different tune in face-to-face discussions with the airline.

In the end, the group did unanimously approve (except for the one absent councilmember) the motion to have the city manager report on the project. If I heard correctly, this should happen in early May, so there is some hope that this will receive renewed focus.

If you’re interesting in reading more, the Press-Telegram has a good recap of the meeting.

Yesterday, Southwest finally announced its schedule for New York/LaGuardia beginning June 28, and it’s an interesting one. The slots they acquired from defunct ATA allowing seven daily roundtrips have been split into four daily to Chicago/Midway and three daily to Baltimore. They were also able to add a fifth daily Midway flight by scheduling a late night arrival and early morning departure outside of the slot-controlled time period. But what’s interesting is how these flights are set up. Here’s the schedule:

The only surprise about the Midway flights is that they didn’t schedule more of them. That’s a market that has Delta in there with nine flights a day in direct competition, and there are a ton of flights on American and United into O’Hare as well. With that backdrop, Southwest needed a healthy schedule, and they’ve got one. There are a couple of holes, however, so I would have thought they’d do more, but it does a decent job of covering the business traveler. It will be interesting to see how long Delta sticks with this schedule under the price pressure that Southwest has introduced. Maybe they can sell some of those slots over to Southwest.

The Baltimore flights are a little more interesting. With only three flights a day, that doesn’t appeal to a business traveler at all. Let’s not forget that there are easy train options to run that route as well, so I don’t see this as competitive at all. I assume they did this for the connecting opportunities, and that’s why I thought I’d see something like we see in Dallas where there are plenty of one-stops to major markets, but that’s not what they’ve done.

Everyone is well aware of the operational issues at LaGuardia. Things get jammed up quite easily so Southwest appears to have isolated the airplanes here, at least after they leave LaGuardia.

If you look at my diagram above, you’ll see that six of the eight flights into LaGuardia start somewhere else, and a seventh definitely will be starting its day in Chicago at 640a. But only one of the flights out of LaGuardia goes beyond its next destination, and that’s the first flight in the morning which will probably be reasonably on-time since it will have the whole night to sit before leaving.

Where exactly are those other six airplanes going when they land at Midway and Baltimore? They’ll have to continue on to other places, but I bet they aren’t using the same flight number because they’ve probably built in a pretty big time cushion in Midway before they send them out again. For that reason, they won’t want to sell them as through flights.

It’s an interesting strategy in that it allows them to build a bigger buffer so that planes that are late leaving LaGuardia won’t screw up the rest of the system. But it makes it a harder sell for them to appeal to passengers flying out of New York. There are plenty of nonstop flights on other airlines to many of Southwest’s cities, and now they’ll just show up as connections at the bottom of the heap.

If, however, you assume that Southwest isn’t trying to cater to business travelers in New York but rather those going to New York, then this isn’t that bad of a plan. The flights into New York will show up as direct flights, and they can worry about the return options later. Still, I’m surprised to not see direct options into LaGuardia from strongholds like Houston, Nashville, Denver, and Oakland, among others.

What I think we can all assume is that Southwest isn’t done here. At some point, they’ll get more slots, and they’ll start connecting the dots better, but for now they at least have their foot in the door.