Understand How Airline Cartels Drive Up Transatlantic Fares
The North Atlantic aviation market is the world’s largest and most lucrative long-haul route. Despite the appearance of numerous airlines and routes, a closer look reveals a landscape dominated by a few major joint ventures that function as cartels, leading to inflated airfares for consumers. This article will explain how these airline cartels operate and how regulatory exemptions contribute to reduced competition and higher prices.
The Illusion of Competition
At first glance, the number of airlines and routes between Europe and North America suggests a highly competitive market. For instance, between New York and Europe, dozens of airlines offer a wide array of destinations, from major hubs like London and Paris to smaller cities like Belgrade and Ponta Delgada. However, this diversity is largely superficial.
How Airline Cartels Function
The core issue lies in joint venture agreements between airlines. These agreements allow airlines to:
- Coordinate Schedules: Decide when and how often to fly.
- Allocate Routes: Determine which airline serves which destination.
- Fix Prices: Crucially, agree on how much to charge passengers.
These airlines, operating under a joint venture, effectively function as a single entity from an economic perspective. They pool their transatlantic revenue and distribute it according to their agreement. This means that whether a passenger flies with one airline or another within the same joint venture, the revenue is shared, and pricing is harmonized. Examples of such cartels include:
- United, Lufthansa, Swiss, and Austrian Airlines.
- Delta, Virgin Atlantic, KLM, and Air France.
- American Airlines, Aer Lingus, British Airways, Finnair, Iberia, and LEVEL.
Regulatory Exemptions and Antitrust Law
In the European Union, Article 101 of the Treaty on the Functioning of the EU prohibits agreements that fix prices. However, regulatory bodies in both the EU and the US have granted these airline joint ventures exemptions from antitrust laws. These exemptions are typically justified by arguing that the public benefits derived from the cooperation outweigh the negative impact of reduced competition.
The Justification for Exemptions
Airlines argue that joint ventures enhance consumer choice by:
- Expanding Network Coverage: Allowing passengers to connect through hubs on both continents, providing access to destinations not directly served by a single airline.
- Improving Schedule Coordination: Offering better timed connections, especially for business travelers who prioritize efficiency.
- Creating Stronger Competitors: Enabling smaller joint ventures to compete more effectively against larger, established ones.
A key argument used to secure these exemptions is the need to improve service frequency and time-of-day coverage, particularly for business travelers who are sensitive to schedules and willing to pay for premium services. For example, Delta argued that a joint venture with Virgin Atlantic was necessary to improve its service frequency and timing on the New York-London route, which was considered inadequate by corporate clients. This was particularly relevant due to slot restrictions at airports like London Heathrow, making it difficult for individual airlines to add more flights.
The Reality of Reduced Competition and Higher Fares
Despite the justifications, the practical effect of these exemptions is a significant reduction in competition. When airlines collude on pricing and scheduling, consumers face:
- Identical Pricing: Flights on the same route offered by different airlines within a joint venture are often priced identically.
- Limited Choices: The effective number of competitors is drastically reduced, especially in smaller markets where these joint ventures control a larger percentage of flights.
- Higher Airfares: Reduced competition leads to increased pricing power for airlines, resulting in higher fares. This is evident when comparing fares on routes with high competition versus those with limited competition. For example, routes to major Italian and Spanish cities with multiple competitors tend to have lower fares than routes to smaller destinations served by fewer airlines or joint ventures.
Evidence of Higher Fares
Data shows a clear correlation between the level of competition and airfare prices. Routes with more direct competitors typically have lower average fares. Conversely, routes with fewer competitors, or where competition is stifled by joint ventures, exhibit higher prices. The significant price difference between a transatlantic flight to Dublin and a domestic flight to San Diego, both operated by JetBlue with similar aircraft, further highlights this disparity, even accounting for additional transatlantic operating costs.
The Downside of Antitrust Immunity
The core benefit cited for antitrust immunity is the creation of more competitive and convenient networks. However, evidence suggests that airlines were already integrating their networks and offering similar benefits before seeking immunity. For example, United and Lufthansa began coordinating their networks in 1993 but only applied for antitrust immunity in 1996, arguing it was needed for the very cooperation they had already established.
Furthermore, airlines engage in extensive partnerships and code-sharing agreements (like American Airlines with Qatar Airways, or United with Emirates) that offer many of the same consumer benefits (network integration, schedule coordination, through ticketing) without antitrust immunity. These non-immunized partnerships allow airlines to compete on price and product, fostering a more dynamic market.
The Erosion of Genuine Competition
The consolidation of airlines into large joint ventures has also allowed them to leverage their market dominance to drive out genuine competitors. The case of Norwegian Air Shuttle’s long-haul operations illustrates this. As Norwegian expanded with a low-cost model, threatening the established players, airlines like British Airways (part of IAG) responded by launching matching routes, even if they were not strategically sound on their own, solely to undermine Norwegian. This anti-competitive behavior ultimately contributed to the demise of Norwegian’s long-haul services, further reducing competition on transatlantic routes.
Conclusion: A Flawed System
The logic behind granting antitrust immunity to transatlantic airline joint ventures appears flawed. While the initial intentions may have been to improve air service following deregulation, the system has evolved into a mechanism that allows for price-fixing and reduces consumer choice. Regulators seem to be approving new joint ventures based on the precedent of existing ones, rather than rigorously assessing the public benefit against the harm of diminished competition. This regulatory approach ultimately benefits airlines by allowing them to command higher profits, making travel across the Atlantic less accessible for consumers.
Source: The Cartels Running Up Transatlantic Airfares (YouTube)
