In the international sector, the routes that airlines can fly, the frequency of their flights, and the fares they can charge are governed by 72 bilateral agreements between the United States and other countries. Many of these agreements, including the accord with the United Kingdom, are very restrictive. Since the late 1970s, U.S. policy has been to negotiate agreements that substantially reduce or eliminate bilateral restrictions. DOT’s Office of the Assistant Secretary for Aviation and International Affairs, with assistance from the State Department, is responsible for negotiating these agreements and awarding U.S. airlines the right to offer the services provided for in those agreements. In January 1993, DOT granted antitrust immunity to the Northwest/KLM alliance in conjunction with the U.S.-Netherlands open skies accord. In April 1995, DOT issued the U.S. International Aviation Policy Statement in which it reiterated its desire for open skies agreements and endorsed the growing trend toward alliances between U.S. and foreign airlines. Since issuing that statement, DOT has negotiated a number of more liberal agreements, including open skies accords with Germany and numerous smaller European countries. In 1996, the agency granted antitrust immunity to the alliances between United and Lufthansa, which is Germany’s largest airline, and between Delta and several smaller European carriers. In announcing their proposed alliance, American Airlines and British Airways emphasized that they are at a competitive disadvantage with these alliances because the airlines in those alliances can, among other things, better coordinate service and jointly set fares. Despite success in negotiating open skies agreements throughout much of Europe, DOT has had very little success with the United Kingdom, our largest aviation trading partner overseas. The current U.S.-U.K. accord, commonly known as “Bermuda II,” was signed in 1977 after the British renounced the prior agreement. Bermuda II restricts the number of U.S. airlines that can serve Heathrow to two carriers—currently American Airlines and United Airlines. DOT has expressed increasing dissatisfaction with Bermuda II and attempted to negotiate increased access for U.S. airlines to Heathrow. Negotiations with the British take on particular importance because of the size of the U.S.-U.K. markets. In 1996, 12 million passengers traveled on scheduled service between the United States and the United Kingdom, which is more than twice that for the U.S.-Germany markets and three times that for the U.S.-France markets. Competition is restricted in the U.S.-U.K. markets because Bermuda II, among other things, sets limits on the amount of service airlines can provide and prevents all U.S. airlines, except American and United, from flying to and from Heathrow. These restrictions on competition result in fewer service options for U.S. and British consumers. In addition, they also likely result in higher airfares. However, the extent to which airfares are higher is uncertain. DOT does not have data on the fares paid by passengers flown by BA or Virgin Atlantic if those passengers’ itineraries did not involve a connection with a U.S. carrier, because it has generally not required foreign airlines to report data from a sample of their tickets, as it requires U.S. airlines to do. Bermuda II’s limits on competition also disproportionately affect U.S. airlines. In contrast to the continuing restrictions placed on U.S. airlines, the United Kingdom was successful in negotiating increased access for British carriers to the U.S. markets in the early 1990s. Partly as a result, between 1992 and 1996, the British carriers’ share of the U.S.-U.K. markets rose from 49 percent to 59 percent. As figure 1 shows, this gain by British Airways and Virgin Atlantic has come primarily at the expense of the U.S. airlines that are not allowed to serve Heathrow. The proposed AA/BA alliance is subject to review by the European Commission, several agencies within the U.K. government, and DOT. The European Commission, the U.K. Department of Trade and Industry, and DOT have decision-making authority over the proposed alliance. The U.K. Office of Fair Trading and the U.S. Department of Justice’s Antitrust Division (Justice) have advisory roles and provide analysis and comments to their respective decisionmakers. According to officials, the process for reviewing the AA/BA alliance is complicated by the fact that it is new and untested and some European laws have not previously been applied to airline alliances. The European regulatory agencies have nearly completed their reviews, and the formal U.S. review has yet to get under way. Both the European and the U.S. reviewers have access to extensive information—including confidential proprietary data—to evaluate the competition issues arising from the AA/BA and other alliances. This information includes data on airline capacity, market shares on specific routes, and passenger travel statistics. In July 1996, because of concerns about the anticompetitive effects of the alliances, the European Commission’s Directorate General for Competition initiated a review of the proposed AA/BA alliance and three other ongoing alliances: United/Lufthansa/SAS; Delta/Swissair/Sabena/Austrian Airlines; and Northwest/KLM. This review is examining a broad range of competition issues on AA/BA, including access to slots and facilities at Heathrow Airport; the frequency of service offered by AA and BA, which would dominate the market at Heathrow; and AA/BA’s sales and marketing practices, such as frequent flier programs, travel agent commission overrides, corporate incentive agreements, and computer reservation system practices. The European Commission’s Directorate General for Competition expects to issue its draft remedies for addressing the anticompetitive effects of AA/BA within the coming weeks. Officials added that their reports on other alliances should be done soon afterwards. Various parties then have the opportunity to provide comments and possibly participate in oral hearings on the draft remedies. After it obtains comments from the interested parties, the Directorate General for Competition prepares a document outlining its recommendations on whether to approve the alliance with conditions or to withhold approval, and submits the document to the European Commission’s Member States Advisory Committee for review. After the Advisory Committee’s review, the Directorate General for Competition incorporates appropriate comments and prepares its draft final ruling, which either lays out the conditions that must be met in order for the alliance to be approved or disapproves the alliance. It becomes the ruling of the Commission when it is adopted by the European Commission’s College of Commissioners. Thus, the European Commission’s final decisions are not expected for several more months. The U.K. Department of Trade and Industry is conducting its own review of the proposed AA/BA alliance. It has asked the U.K. Office of Fair Trading to investigate and provide advice on the proposed alliance. The Office of Fair Trading investigation, which began in June 1996, examined a broad range of issues raised by the proposed alliance, including competitive impacts of the alliance on routes, hubs, and networks within the U.S.-European markets; the frequency of service in the U.S.-U.K. markets; the pooling of frequent flier programs; and access to slots at Heathrow. The Office of Fair Trading issued a draft report in December 1996 that called for AA/BA to, among other things, make available to other airlines up to 168 slots per week at Heathrow for use only on U.S.-U.K. transatlantic services and allow third-party access to their joint frequent flier program in those cases in which that party does not have access to an equivalent program. The report took into account the views of third parties on conditions that should be placed on the alliance to remedy competition concerns. Before they provide their final advice on the proposed AA/BA alliance, the U.K. Office of Fair Trading is awaiting the European Commission’s publication of its draft remedies. The Secretary of State for Trade and Industry will decide on the case after receiving final advice from the Office of Fair Trading. The U.K. agencies reviewing the proposed AA/BA alliance are in contact with the European Commission and have a duty to cooperate with it. If the United Kingdom’s decision on the proposed AA/BA alliance differs from the European Commission’s, the differences will have to be reconciled. According to European Commission officials, this could require a judgement by the European Court of Justice in Luxembourg, which ultimately judges the sound application of the European Union’s treaties by the institutions of the Union or the member states. In the United States, DOT has the authority not only for approving airline alliances, but also for granting those alliances immunity from the antitrust laws. In determining whether to grant approval and antitrust immunity for an airline alliance, DOT must find that the alliance is not adverse to the public interest. DOT cannot approve an agreement that substantially reduces or eliminates competition unless the agreement is necessary to meet a serious transportation need or to achieve important public benefits that cannot be met or that cannot be achieved by reasonably available alternatives that are materially less anticompetitive. Public benefits include considerations of foreign policy concerns. In general, DOT has found code-sharing arrangements to be procompetitive and therefore consistent with the public interest because they create new services, improve existing services, lower costs, and increase efficiency for the benefit of the traveling and shipping public. As with the other international code-sharing alliances that the United States has approved, DOT officials explained that they will not approve AA’s and BA’s proposed code-sharing alliance with antitrust immunity unless the United States has reached an open skies agreement with the United Kingdom. According to U.S. law, DOT is to give the Attorney General and Secretary of State “an opportunity to submit written comments about” the application.