OPEN SKIES, STRATEGIC ALLIANCES, AND GLOBALIZATION: WILL COMPETITION BE IMPROVED

Abstract

Economic, technological, and regulatory changes in the international airline industry, along with corresponding changes in telecommunications and information processing, have been important contributors to the overall globalization of the world economy. The international airline industry itself has been globalizing in the past twenty years, and the pace of its globalization has accelerated in the 1990s. This paper argues that strategic alliances are an important contributor to the globalization of this industry because they allow carriers quick and low-cost access to markets globally and because they permit carriers to bypass regulatory restrictions against entry and cross-border mergers and acquisitions. However, reliance on strategic alliances as the primary vehicle for globalization may be a mixed blessing if they suppress competition. This paper explores the impact of strategic alliances on competition using several definitions of the relevant market. It also assesses the impact of the U.S. Department of Transportation's current policies on maintaining adequate competition in such markets. Our analysis suggests that strategic alliances will increase competition on a regional basis. They also are likely to increase competition on a country-pair basis as long as an open skies accord exists in that country-pair market. Their impact is less clear when the relevant market is defined as the city-pair. Passengers whose origin and destination involve at least one city that is not a hub of the two partners will likely benefit from the strategic alliance. However, any strategic alliance will inevitably create antitrust problems for true O&D passengers flying between the partners' gateway hubs. The paper then discusses several criteria that may mitigate the antitrust concerns in such markets. The paper's overall conclusion is that while strategic alliances between carriers from different countries improve the quality of service offered to many passengers, they also hold that the potential for reducing competition in some circumstance even if an open skies accord is in existence.