INTERNATIONAL

AVIATION 

DEVELOPMENTS:

GLOBAL DEREGULATION TAKES OFF

(First Report)

U.S. Department of Transportation

Office of the Secretary

December, 1999
2

INTERNATIONAL AVIATION DEVELOPMENTS

Global Deregulation Takes Off

Executive Summary:

The United States International Air Transportation Policy Statement developed in 1995 

to facilitate international aviation recognizes that the trend toward expanding 

international airline networks is an inevitable response to the underlying network 

economics of the airline industry. Since adopting that policy, the Department of 

Transportation, together with the Department of State, has successfully negotiated 

numerous open skies agreements. These have led to major changes in how 

international service is provided today.

This report provides a broad picture of how immunized alliance development has 

affected traffic and fares in the transatlantic market. The report shows that multinational 

alliances are playing a key role in the evolving international aviation economic and 

competitive environment. They are providing improved, more competitive services in 

literally thousands of markets. And alliances have provided a way for carriers to mitigate 

the limitations of bilateral agreements, ownership restrictions, and licensing and control 

regulation. As a consequence, they are:

• Stimulating demand.

• Leading pro-competitive changes in industry structure.

• Providing consumers the benefits of substantially lower prices.

Multinational alliances have fueled enormous increases in connecting traffic, both in 

markets that have historically suffered from poor quality interline service and virtually no 

competitive benefits, but also by providing service alternatives in markets that already 

have the benefit of seamless service by other individual airlines. They are just one 

important way that the airline industry has responded to aviation liberalization and the 

evolving competitive environment. They are also the only practical way to provide better 

service to thousands of passengers in long distance, low-density international markets.

Two other matters must be addressed as a preliminary matter. First, it must be 

emphasized that this report does not assert that alliances are de facto pro-competitive. 

It is fundamentally important to consider all aspects of an alliance and the market 

configuration in which it is set to operate. Each alliance must be examined on a caseby-case basis. Furthermore, the trends and conclusions identified in this report are, by 

definition, broad and require further study. We are at the very early stages of global 

aviation liberalization. We are also mindful that international aviation and its competitive 

dynamic are constantly changing and we will continue to monitor the development of 

alliances within the context of aviation liberalization to evaluate their effect on the 

aviation industry and consumer welfare.

Second, much of the rationale that supports alliances between U.S. and foreign airlines 

does not apply to alliances between U.S. airlines. International alliances are demand 

driven, particularly in large market sectors that have historically been subjected to 

inferior, noncompetitive service. Interline service accommodates only a small fraction of 

U.S. domestic passengers. Alliances between domestic airlines are not needed to 

overcome regulatory constraints, and the additional market access does not compare 
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with that provided by an end-to-end alliance with a foreign airline. The domestic market 

is by far the largest market for each of our airlines, and the domestic networks of the 

large airlines substantially overlap. Apart from the competitive implications, new market 

access for an individual airline’s passengers is much more limited. Unlike alliances with 

foreign airlines, which allow the partners to establish their first seamless services in most 

markets they subsequently serve jointly, the vast majority of markets could be operated 

seamlessly by either carrier. In fact, one or the other already does provide online 

service in most markets for a vast majority of passengers.

Background

This is the first in a series of reports that examine the effects of international air 

transportation developments. This report will focus on transatlantic markets because of 

the liberalization that has been achieved and the structural changes that have occurred 

to date as a result in that important component of the global airline system.

This report provides a broad picture of how the airline industry has reacted to the 

relaxation of regulatory constraints and the effects on traffic and fares. The report 

specifically addresses some of the effects of the larger immunized alliances, but does 

not attempt to attribute those effects to any particular feature of the alliances, such as 

antitrust immunity. There are successful alliances that have operated without antitrust 

immunity.

Future reports will explore developments in other broad market sectors, examine 

continuing evolutionary changes, and eventually investigate all international entities in 

more depth than presented in this report.

To assist us in our efforts to understand international aviation developments, we 

welcome comments on this report as well as suggestions regarding specific issues or 

tendencies we should examine and particular analyses we could undertake in future 

reports. We request that such comments be filed electronically at

Alliance.Comments@ost.dot.gov. Such comments may be made public.

Introduction

Air transportation is a large and growing part of the word’s economy. The Air Transport 

Action Group estimated the global economic impact of air transport at over $1 trillion in 

1994, accounting for 24 million jobs – 3.3 million employed by the industry, 7.4 million by 

related industries, and 13.3 million induced in other sectors of the economy. This 

organization forecast that by 2010 the economic impact would approach $2 trillion, 

accounting for over 30 million jobs.

According to a study by the World Travel and Tourism Council, travel and tourism is the 

world’s largest industry directly and indirectly driving more than 10% of global jobs, GDP, 

and investment.

Clearly, the development of an efficient global air transportation system has enormous 

consequences not just for consumers, but for local, national, and world economies as 

well. The United States’ own domestic deregulation, and the international liberalization 

experience to date as we will illustrate in this report, clearly demonstrate that the 
4

development of the global aviation market can be either significantly enhanced by 

removing government imposed restrictions or hindered by the failure to do so.

The Department of Transportation, working with the Department of State and other 

federal agencies, developed the United States International Air Transportation Policy 

Statement in 1995 to facilitate the development of international aviation. That policy 

recognizes that the trend toward expanding international airline networks is an inevitable 

response to the underlying network economics of the industry and seeks to enable U.S. 

airlines to become early and significant players in this globalization process. Our 

foremost international aviation goal, after safety, is opening up international markets to 

the forces of competition.

The airline globalization process is being driven by economic demand and 

airlines’ desire to enhance their competitive positions through better access to as 

many markets and passengers as possible in the most efficient way possible.

Airlines, like other global network industries such as telecommunications, are in many 

ways on the cutting edge of the truly global economy. They face the challenge of 

providing services to customers around the world who primarily fly from a home base 

where they live and work to a myriad of domestic and international destinations. In order 

to compete profitably by satisfying the increasingly global needs of customers, airlines 

must offer passengers as many destinations around the globe as possible.

Historically, the vast majority of international markets have been underserved due to a 

combination of restrictive bilateral agreements and the resulting lack of competition. 

Until recently, the bilateral focus has been on 3rd and 4th freedom services, that is, travel 

between the countries that are signatory to a particular bilateral agreement, augmented 

by limited ability to serve points beyond. Now, however, developing airline networks 

require market access not just between two countries, but also to large catchment areas 

behind one or both countries. Our agreements are still bilateral, but the traffic is not.

Until airlines began to link networks, the vast majority of city-pair markets in connecting 

market sectors could only be served with interline services. Such service has had

limited competitive effectiveness because it does not meet the customer’s needs of 

convenient schedules, frequency, and through check-in, and other service features. 

Interline service is therefore difficult to market and involves little lasting commitment to 

seamless customer service by the partners. Carriers, in turn, are reluctant to invest the 

time and money to enhance such service.

The airline industry, in response to consumer demand, sees the enormous growth 

potential for the over-regulated and under-served international market, and individual 

airlines are trying to position themselves to participate in that growth. The resulting 

development of large strategic alliances, together with code sharing and other marketing 

arrangements is changing the structure of the airline industry and is generating new 

pressures to overcome the limitations of restrictive bilateral agreements. They have 

provided a way for carriers to mitigate the limitations of bilateral agreements, ownership 

restrictions, and licensing and control regulation.
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Multinational alliances are playing a key role in the evolving international aviation 

economic and competitive environment.

Apart from legal and infrastructure constraints, no airline, however strong, is able to 

efficiently provide service with its own aircraft and crew to every destination its 

customers require. Using the transatlantic market as an example, there are several 

hundred cities in the U.S. and also in Europe that will never have the benefit of nonstop 

service. There are literally thousands of transatlantic city-pair markets that can indeed 

only be served by connecting services, many of which that can only be served by 

multiple connections. Thus, fully serving the transatlantic market unilaterally would 

require the development of offshore hubs, an economic and operational impossibility in 

any acceptable time frame.

Yet our domestic experience, and, indeed, the development of hub-and-spoke systems 

around the world, demonstrates that the airline industry, by its very nature, is a network 

industry and that network competition produces far better service at lower prices in the 

vast majority of markets. Carriers have learned that hub-and-spoke network systems 

are an efficient way to serve most city-pair markets – particularly longer-distance, lessdense markets. In addition to economic realities, infrastructure constraints, bilateral 

constraints, and ownership and control limitations preclude individual airlines from 

building global systems.

Airline alliances, therefore, are the only practical way to provide improved, more 

competitive services to such markets. This explains the growth in transnational 

alliances, as airlines around the world link their networks to capture the enormous 

efficiencies of larger networks and produce and market improved service to an everwider array of city-pairs.

Alliances with foreign airlines provide a number of other important advantages, such as 

market presence, experience, and expertise of the partners in their respective 

homelands. Airlines typically possess advantages in their home market through their 

local knowledge, the development of sound relationships with input suppliers, and 

specialized marketing knowledge and distribution channels. These advantages diminish 

as an airline moves operations away from its home market to areas where it competes 

with other airlines that have their own home market advantages.

Other important alternatives will supplement global alliances and compete with 

them.

Networks that are more regional in scope will continue to offer competitive service in 

many markets by using large international destinations as spokes to the various 

continental networks. We see many examples of this today in transatlantic markets. 

USAirways’ code-share arrangement with Deutsche BA at Munich, Germany has, for 

example, resulted in very strong traffic growth between those carrier’s respective 

networks. This is consistent with the U.S. domestic experience where smaller networks 

effectively compete with the broad national networks.

Our domestic experience has also shown that not all markets can be most efficiently 

served by networks. Low-cost point-to-point service is likely to evolve in international 

markets as well. This process has already begun, and is likely to rapidly expand as the 

international marketplace opens up and expands the opportunity for small new airlines to 
6

develop such service and even linear systems. Indeed, new ways of competing may 

well evolve in international markets, given the differing characteristics of many 

international markets compared with U.S. domestic markets. Again, we base this on our 

own domestic experience that conclusively demonstrates the ability of private industry to 

react to marketplace demands and competitive necessities.

The Positive Benefits of Alliances To Date

The overwhelming balance of evidence demonstrates that international deregulation 

resulting from open skies agreements has greatly expanded the well being of 

consumers. The evidence also shows that broad-based immunized alliances have been 

an important component of open skies related developments.

The Department has undertaken various analyses of the impacts of airline alliance 

development. As indicated at the outset, this particular report provides a broad picture 

of how the airline industry has reacted to the relaxation of regulatory constraints in 

transatlantic markets, and the effect this has had, to date, on competition and 

consumers.

This report uses a four-step process for examining transatlantic alliance development. 

First, we use segment traffic data to demonstrate changes in traffic flows between the 

U.S. and Europe. Second, we use origin and destination data reported by U.S. carriers 

to demonstrate that the increased traffic flows over the alliance gateways are 

predominantly in connecting markets, or where we would expect the growth to occur if it 

is, indeed, stimulated by linking networks. Third, we use origin and destination data to 

also demonstrate that much of the increased traffic moving over alliance gateways is not 

diverted traffic, but new traffic in markets that have historically suffered from poor service 

and inadequate competition. Fourth, we have examined fare changes in transatlantic 

markets, distinguishing between different market sectors, and between countries that 

have open skies agreements with the U.S. and those that do not. The results of this 

multi-step process follow.

Multinational Alliances are Stimulating Demand:

Chart 1 shows the total number of passengers flowing between the U.S. and European 

gateway cities for calendar years 1992 through 1998. Note that following growth of 

about 5% per year through 1995, the growth rate sharply increased in 1996 and then 

accelerated in 1997 and 1998. Two of the three immunized alliances received that 

authority in the spring of 1996. We are also aware that other factors have contributed to 

this growth, including the development of more limited code-share alliances, non-alliance 

expansion by some individual airlines, and global economic considerations. But each of 

these factors was facilitated by open-skies agreements that enabled airlines to react to 

marketplace demands.
7

The traffic growth by the immunized alliances has been remarkable, as illustrated in 

Chart 2. This chart shows traffic flowing between the U.S. and Amsterdam for Northwest 

and KLM, between the U.S. and Frankfurt for United and Lufthansa, and between the 

U.S. and Brussels, Geneva, Vienna, and Zurich by Delta and its three partners. The 

data are illustrated by calendar year from 1992, the year before the first alliance received 

immunity, and 1998. These data reveal a number of relevant facts.

For Northwest and KLM traffic has increased throughout this period. This illustrates that 

alliance development is a long-term process. Also, those carriers’ growth accelerated 

after the Delta and United alliances received immunity and began experiencing their own 

traffic increases. This suggests a strong reaction to the new competition by those 

alliances, and is evidence that the traffic growth achieved by those alliances was not 

merely diversion from existing carriers or alliances. In view of the relatively small local 

market between the U.S. and Amsterdam, the very rapid growth in traffic for this alliance 

Chart 1: Total Passengers US-Europe, 1992-1999

25,000,000

27,000,000

29,000,000

31,000,000

33,000,000

35,000,000

37,000,000

39,000,000

41,000,000

43,000,000

45,000,000

1992 1993 1994 1995 1996 1997 1998

Passengers

 Yearly Growth Rate

 5.2% 5.0% 5.6% 7.0% 9.4% 9.9%

Chart 2: US-Europe Traffic, By Immunized Alliance

 to European Alliance Hubs, 1992-1998 

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1992 1993 1994 1995 1996 1997 1998

Year

Passengers

NW-KL

UA-LH

DL 3
8

also suggests that the majority of the increase is in connecting market sectors, growth 

that was made possible by linking the carrier’s respective alliances.

An examination of Northwest’s traffic and capacity data confirm this. Comparing prealliance data (CY 1992) with calendar year 1998 shows that Northwest’s T-100 segment 

traffic moving between its U.S. gateway cities and Amsterdam increased more than 9-

fold, or by almost 1 million passengers annually. Northwest’s nonstop local origin and 

destination traffic moving between these same U.S. gateways and Amsterdam increased 

by only 120,000 during this same period, and most of this is from other carriers’ U.S. hub 

gateways where Northwest now offers competitive service to Europe.

For each of the other two alliances, note that their traffic growth substantially increased 

after the airlines began fully implementing the alliances after receiving immunity. An 

earlier jump in growth for United and Lufthansa, in 1994, was the result of those carriers’ 

code share arrangement at that time. It is interesting that after an initial spurt, that 

growth tapered off until they received immunity in early 1996. The fact that all three 

alliances are experiencing very strong growth rates is suggestive that a large portion of 

their new traffic is not merely diverted from other carriers.

Multinational Alliances are Rapidly Expanding

This leads into our further examination of the question of whether new alliance traffic is 

merely traffic that has been diverted from other airlines as some observers suggest. It is 

worth pointing out that even if all new alliance traffic had been diverted from other 

carriers, economists would say that the passengers had benefited since they elected a 

new service option. But the data show that not all passengers were diverted from other 

carriers; indeed, that much if not most of the new traffic represents traffic that is new to 

the system. Charts 3 through 12 assess this aspect of alliance growth.

Charts 3 through 5 reflect the development of the three alliances in terms of number of 

markets served, total passengers, and passengers connecting between the alliance 

partners from 1992 through 1998, using the third quarter of each year. The increases 

are truly phenomenal, and, in the case of Delta and United, are clearly linked to their 

receipt of immunity and full alliance implementation. (The declines shown for Northwest 

and KLM for the third quarter of 1998 likely reflect the Northwest labor dispute.)

Chart 3: US-Europe, Market Expansion through Alliance Hubs

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

923 933 943 953 963 973 983

Quarter

Number of Markets Served

DL-SN-SR-OS

UA-LH

NW-KL
9

For each of the alliances, while overall growth is quite strong, it is particularly 

pronounced for connecting passengers. In fact, in the case of each alliance, about 90 

percent of the markets in which the alliance partners carried passengers averaged one 

passenger or less per day. Yet those markets accounted for 25 to 35 percent of total 

passengers. This what networks do – move small numbers of passengers in large 

numbers of markets; passengers that collectively support substantial volumes of service 

much of which would not otherwise be economically viable.

This has important implications for industry structure. As these alliances have expanded 

geographically, they have also overlapped each other more and more. In the third 

quarter of 1995, two or more of these alliances carried just over 300,000 passengers in 

the same city-pair markets. By the third quarter of 1998, two or more of these alliances 

carried almost 800,000 passengers in over 3,000 overlap city-pair markets. This is 

strong evidence that the alliances are developing a more competitive industry structure. 

We cannot tell from this information to what extent the growth reflects better service, and 

to what extent the growth reflects more competitive prices. We address the latter 

question later.

Chart 4: US-Europe, Total Traffic by Alliance Carriers To and Through Hubs

0

100,000

200,000

300,000

400,000

500,000

923 933 943 953 963 973 983

Quarter

Passengers

DL-SN-SR-OS

UA-LH

NW-KL

Chart 5: US-Europe, Connecting Passengers through Alliance Hubs

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

923 933 943 953 963 973 983

Quarter

Passengers/Quarter

DL-SN-SR-OS

UA-LH

NW-KL
10

Chart 6 provides more evidence that newly stimulated traffic accounts for a large 

proportion of alliance growth. This chart compares traffic growth for the three alliances 

between 1992, on the one hand, and 1996, 1997, and 1998, on the other. The 

comparisons are made by four broad market sectors. These are behind-gate-beyondgate markets, (for passengers that move from behind a U.S. gateway to beyond a 

European gateway), behind-gate to gate markets, gate to beyond-gate markets, and 

gate-to-gate markets. The results are striking in three respects. First, the two 

connecting market sectors that involve passengers moving beyond European gateways 

have increased at spectacular rates. Second, with the exception of the behind-gate 

market sector in 1996, each connecting market grew at a faster rate for each of the last 

three years than did traffic in the gate-gate markets. Third, the rate of growth is 

increasing across the board, but particularly in the connecting market sectors. This is 

significant when tied back to the long-term growth trend for Northwest and KLM. 

Alliance development is a long-term process, which suggests that alliance development 

is still in the infant stage, and that we can anticipate continued expansion of alliance 

services to the benefit of consumers for years to come.

Alliance Expansion Has Fueled System Growth.

Charts 7 and 8 reinforce the suggestion that rapid growth in connecting markets reflects 

Chart 6: US-Europe Traffic, US Alliance Carrier 

Traffic by Market Sector, % Change from 1992

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Behind-Beyond Behind-Gate Gate-Beyond Gate-Gate

Percent Change

1996

1997

1998

Chart 7: US-Europe Traffic, Percent Change 1998-1992, 

US Alliance vs. Non-Alliance Carriers

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Behind-Beyond Behind-Gate Gate-Beyond Gate-Gate

Percent Change

Alliance

Non-Alliance
11

new traffic. Similar to Chart 6, these charts compare traffic by the four broad market 

sectors, but distinguish between the three alliance carriers and other U.S. carriers. 

Chart 7, which compares the change in traffic between 1992 and 1998, shows that even 

the non-alliance carriers experienced strong growth in all four market sectors. Chart 8, 

which compares 1996 and 1998, or the two years following the grant of immunity for two 

alliances, shows growth overall for the non-alliance carriers. Although the results are not 

positive in certain market sectors for the non-alliance carriers, and may suggest that they 

did indeed suffer some diversion to the alliance carriers, the rather phenomenal growth 

for the alliance carriers nevertheless indicates substantial new traffic overall.

The fact that the strongest traffic growth is in the least developed market sectors is 

evidence that alliances are not merely diverting traffic from other carriers. There is, 

however, further compelling evidence. Charts 9, 10 and 11 are structured after Chart 3, 

but include all traffic included in the Origin and Destination Survey of Airline Passengers 

reported by U.S. carriers. These are passengers traveling across the Atlantic between 

the U.S. and Europe, Africa, the Middle East, and Asia. Chart 9 reflects those 

passengers that were carried across the Atlantic by U.S. carriers, and Chart 10 reflects 

those passengers that were carried across the Atlantic by foreign-flag carriers (this 

Chart 9: US-Europe Traffic, by Market Sector, 

Percent Change from 1992, US Carriers

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Behind-Behind Behind-Gate Gate-Beyond Gate-Gate

1996

1997

1998

Chart 8: US-Europe Traffic, Percent Change 1998-1996,

 US Alliance vs. Non-Alliance Carriers

-10%

0%

10%

20%

30%

40%

50%

Behind-Beyond Behind-Gate Gate-Beyond Gate-Gate

Percent Change

Alliance

Non-Alliance
12

comparison is limited to the two market sectors for which we receive complete foreign 

carrier data). This shows that, even on an industry basis, the predominant traffic growth 

has been in the same connecting market sectors as alliance growth. Without question, 

alliances are developing new traffic in connecting markets.

Chart 11 illustrates absolute rather than relative changes in the number of passengers. 

This shows that growth in connecting passengers has far outpaced growth in local 

nonstop passengers traveling in gate-to-gate markets. While this does not distinguish 

between growth in historically underserved connecting markets and increased 

connecting passengers in markets that already received single-carrier service, either 

represents benefits for consumers.

Chart 12 is another illustration of how alliances have resulted in new passengers in 

connecting markets. In this chart we have identified the growth in traffic between the 

U.S., on the one hand, and Africa, the Middle East, and the Far East, on either the 

Northwest/KLM alliance or the alliance between Delta and its Atlantic Excellence 

partners, via their respective European network gateways. This particular increase in 

Chart 10: US-Europe Traffic, by Market Sectors,

 Percent Change from 1992, Non-US Carriers

0%

50%

100%

150%

200%

Behind-Beyond Behind-Gate

Percent Change

1996

1997

1998

Chart 11: Transatlantic O&D Traffic, Passengers Using US Carriers in Gate-toGate Markets, Amount Change: Connecting vs. Non-Stop Passengers

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

96 vs. 92 97 vs. 92 98 vs. 92

Connecting 

Gate-Gate 2.5m

2.6m

1.4m
13

traffic is important because it illustrates the so-called network halo effect. It likely is the 

direct result of linking alliances. For example, new traffic flows from the U.S. aided 

KLM’s ability to expand its Amsterdam hub service to these more distant regions. This 

increased the network efficiency of the Amsterdam hub and has likely been a factor in 

that alliance deciding to expand service to additional U.S. gateways, including 

Northwest’s smallest domestic hub, Memphis, but also non-Northwest hub cites (New 

York and Washington). In addition to the increased network benefits for transatlantic 

passengers, expanding Amsterdam hub is a benefit to domestic European passengers.

Open Skies Bilaterals Have Resulted in Major Fare Benefits for Consumers

We now turn to the question of the fare effects of alliance development. Chart 13 

compares changes in average yields, unadjusted for inflation, between 1992 and 1998, 

for the same markets and passengers contained in Chart 12. The large decline in 

average yields over this six-year period has not been adjusted for changes in market 

mix, which would likely have some effect on yields, but the reductions are nevertheless 

impressive. There are several possible reasons for the changes reflected in Chart 13. 

First, the development of immunized alliances and other code-share arrangements have 

enabled airlines to offer more complete pricing structures. Carriers are reluctant to do 

Chart 13: Change in Fares (Pax Yield-Cents) of Passengers Flowing Over European 

Alliance Gateways, Delta Partners and Northwest-KLM, 1992 vs. 1998

-40.00

-20.00

0.00

20.00

Pax Yield-Cents

923

983

Percent Change

923 15.88 15.56 14.62

983 13.17 12.78 11.10

Percent Change -17 -18 -24

Far East Middle East Africa

Chart 12: Passengers Flowing Over Alliance Gateways, 

Delta Partners and Northwest- KLM, 1992 vs. 1998

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Far East Middle East Africa

Passegers/Quarter

923

983
14

this on a purely interline basis, and, as a consequence, some of the lower, more 

restrictive discount fares typically are not made available. In addition, once such pricing 

schemes and improved seamless services are in place between alliance partners, the 

carriers are then able to market those areas. As more multinational networks serve 

these markets, increased competitive pressures probably result in price benefits to 

consumers. And liberalization has allowed carriers to significantly expand capacity 

across the Atlantic. Apart from other influences, increasing supply has the effect of 

encouraging more travel by price-sensitive passengers. 

Following is more revealing evidence of the price effects of liberalization and resulting 

alliance expansion. In order to illustrate important fare trends without violating the 

confidentiality of the data we have collected the transatlantic fare information into the 

four broad market sectors used in other graphs in this report. These are gateway-togateway markets (G-G), behind gateway-to-gateway markets (B-G), gateway-to-beyond 

gateway markets (G-B), and behind gateway to beyond gateway markets (B-B). A 

description of the methodology used in this analysis is attached.

Fare information for each of these market sectors is further segmented to distinguish 

between passengers that traveled between the US and open-skies countries and 

between the US and other countries across the Atlantic. We have also removed the 

effects of changes in traffic mix between the two years by using actual fares reported for 

each period, but weighting the various city-pair markets for both periods by 1998 traffic 

levels.

The following chart, Chart 14, compares such information for calendar years 1996 and 

1998 (nominal fares, not inflation-adjusted fares). We use 1996 as our base period 

because it was during 1996 that two of the three immunized transatlantic alliances were 

approved, and 1996 also represents the end of a period of escalating prices in 

transatlantic markets. To further protect the confidentially of the information the chart 

only reveals changes in prices, and not fare levels.

The relative changes from market sector to market sector are consistent with what we 

would expect to see as a consequence of forming alliances to link networks.

Chart 14: Transatlantic Markets, Changes in Average Fare, 1998 vs. 1996

-20.0

-16.0

-12.0

-8.0

-4.0

0.0

4.0

Percent Change

Open Skies

Non-Open Skies

Open Skies -17.5 -14.0 -15.9 -11.1 -13.7

Non-Open Skies -3.5 -6.0 -5.3 0.7 -2.7

BB BG GB GG Total
15

First, the open-skies markets, the deregulated markets where airlines have pricing and 

scheduling freedom, show much more favorable price trends.

Second, we would expect the less favorable to consumer results to be in the gateway-togateway markets where the formation of alliances reduces the number of nonstop 

competitors. The fare reductions that have nevertheless occurred may reflect a number 

of compensating factors, such as more connecting service competition (from other 

alliances), greater pricing flexibility, or the effects of added capacity in response to new 

traffic stimulated in connecting markets.

Third, we would expect the least affected connecting market sector to be the behind to 

gateway sector, since our industry has competed vigorously in these markets for years 

with their well developed hub gateways.

Fourth, and conversely, we would expect to see somewhat greater fare reductions in the 

gateway to beyond gate sector since the European gateway hubs are still developing. 

Alliance growth has greatly facilitated the development of European hubs, so we would 

expect to see competition increase more (and fares further decrease) over those 

gateways as a consequence.

Fifth, the behind-beyond market sector is where service and competition have suffered 

the most over the years, so this is where we would expect to see the greatest competitive 

benefits as a consequence of alliance development. As indicated, we know that 

continuing alliance expansion is resulting in rapid growth in the number of overlap 

markets. 

Finally, the reductions in the three connecting market sectors of non-open skies countries 

are also expected. While those markets are not deregulated, alliances nevertheless 

provide additional, competitive access to such markets.

X X X
16

METHODOLOGY FOR INTERNATIONAL FARE COMPARISONS

We first identified gate-to-gate markets between the U.S. and Europe/Middle East/Africa 

using T-100 and T-100(f) data. Gate-to-gate markets were defined as those city-pairs 

that experienced at least 100 departures during calendar year 1998. The other market 

sectors flow from this. Behind gateway cities are those U.S. cities that are not a 

gateway to any city in Europe/Middle East/Africa. Beyond gateway cities are those 

European/Middle Eastern/African cities that are not a gateway to any city in the U.S. 

Thus, the behind gate-beyond gate market sector is comprised of city-pair markets that 

involve non U.S. gateway cities and non European/Middle Eastern/African cities.

Two types of markets do not obviously fall into one of the four market sectors. The first 

are markets that consist of U.S. gateway cities and European/Middle Eastern/African 

cities where nonstop service did not exist during 1998. Thus, Memphis had nonstop 

service to Amsterdam, but not the other European gateway cities such as Frankfurt. We 

placed all such markets in the behind-gate market sector. While a case can be made 

that some should have been placed in other market sectors, we elected not to try to 

devise an approach to do so. The second group is gate-to-gate markets that are served 

nonstop only by foreign flag carriers, such as Phoenix-London, which is served nonstop 

by British Airways. The problem with such markets is that only U.S. carriers report 

Origin & Destination information, which means that the only pricing information we have 

for these gate-to-gate markets is for connecting passengers. We nevertheless left such 

markets in the gate-to-gate sector since our carriers connecting prices reflected in the 

O&D survey are probably influenced by the pricing policies of the foreign carriers on their

nonstop services.

Based on this market sector methodology we developed fare information for all of the 

city-pair markets in each market sector. We use as our base period calendar year 1996 

information. It was during 1996 that two of the three immunized transatlantic alliances 

were approved, and 1996 also represents the period when a several year trend of 

increasing fares across the Atlantic ceased. Fare levels turned down during 1997 and 

are further down during 1998. Our analysis compares the most recent O&D information 

available, calendar year 1998, with calendar year 1996. Our data source is O&D 

information taken from Data Base Products.

Because our goal was to compare fare changes, we eliminated city-pair markets for 

which passengers were reported for only one of the comparison periods. After 

eliminating city-pairs with small passenger volumes our analysis included information for 

more than 16,000 city-pair markets.

The last step in developing our city-pair groupings for comparative analysis was to 

separate the origin and destination markets in each broad market sector between those 

that involve open skies countries and those that do not.

Finally, we removed the effects of changes in traffic mix between the two years by using 

actual fares for each period, but weighting the various city-pair market groupings for both 

periods by 1998 traffic levels. 
17

DATA SOURCES

I. Charts 1 and 2:

• T-100 and T-100(f) data per Data Base Products Onboard International File.

II. Charts 3-5, 12, and 13:

• Origin-Destination Survey of Airline Passenger Traffic per Data Base 

Products Gateway File.

III. Charts 6-11:

• Origin-Destination Survey of Airline Passenger Traffic.

IV. Chart 14:

• Origin-Destination Survey of Airline Passenger Traffic perData Base 

Products O&D Plus File.