Six major domestic airlines have proposed alliances in 1998. These alliances are significant in scope but vary in extent, and their details are still emerging. In sum, the three alliances would control about 70 percent of domestic traffic, as measured by the number of passengers that board a plane—enplanements. Table 1 summarizes the size and characteristics of the proposed alliances. A key characteristic of two of the alliances is extensive code-sharing. According to officials at DOJ and DOT, code-sharing agreements are forms of corporate integration that fall between outright mergers, which involve equity ownership, and traditional arm’s length agreements between airlines about such things as how they will handle tickets and baggage. Continental Airlines and Northwest Airlines announced in January 1998 that they were entering into a “strategic global alliance” that would connect the two airlines’ route systems. Under this alliance, the airlines plan to code-share flights and include each of their respective code-share partners, such as America West, Alaska Airlines, and KLM Royal Dutch Airlines. In addition, the airlines will establish reciprocity between their frequent flier programs, which means that travelers who belong to both programs will be able to combine miles from both to claim an award on either airline. The airlines will also undertake other cooperative activities, including coordinating flight schedules and marketing. Certain aspects of the alliance agreement are contingent on the successful conclusion of negotiations with Northwest’s pilots’ union. Northwest plans to buy an equity share in Continental and place it in a voting trust. In April 1998, United Airlines and Delta Air Lines announced a tentative agreement to enter into a global alliance. The United-Delta alliance would be the largest alliance in terms of its market share of passengers, but it would have no exchange of equity. Under the terms of the agreement, the two airlines plan to engage in code-sharing arrangements, reciprocal frequent flier programs, and other areas of marketing cooperation. The alliance will be implemented on the airlines’ domestic routes and expanded internationally only after obtaining the concurrence of the airlines’ alliance partners and approval by governments, where applicable. Code-sharing on flights to Europe is not currently part of the plan for this alliance because of complex governmental and alliance issues, particularly linking two current competitors—Lufthansa and SwissAir—under the same alliance. According to airline officials, the code-sharing planned for the U.S. domestic markets will probably not occur before early 1999 and is contingent on the approval of pilots at both airlines. Also in April 1998, American Airlines and US Airways announced that they had agreed on a marketing relationship that would give the customers of each airline access to the other airline’s frequent flier program. In addition, the two airlines agreed to allow reciprocal access to all domestic and international club facilities and are working to make final arrangements to cooperate in other areas. The airlines expect to implement the linkages between the two frequent flier programs by late summer 1998. The alliance will also include code-sharing by the airlines’ regional partners, American Eagle and US Airways Express, and may seek broader code-sharing, pending pilots’ approval, at a later date. The chief executive officers of both airlines have also announced that if the other two alliances are implemented, they would seek a code-sharing arrangement as a competitive response. DOJ and DOT have somewhat different statutory authorities to review the proposed alliances. In 1989, DOT’s long-standing authority to review domestic mergers and alliances transferred to DOJ. DOJ’s Antitrust Division uses its authority under the Clayton, Sherman, and Hart-Scott-Rodino acts to examine domestic alliances in which a change in ownership or code-sharing occurs. If DOJ believes an alliance is anticompetitive in whole or part, it may seek to block the agreement in federal court. Alternatively, DOJ may negotiate a consent decree that would restructure the transaction to eliminate the competitive harm. DOJ has been reviewing the Northwest-Continental alliance proposal, which was announced in January 1998. In May 1998, DOJ indicated that it also is looking at the other two alliance proposals. DOT has stated that, later this year, it also intends to study the proposed alliances under its broader authority to maintain airline competition and protect against industry concentration and excessive market domination, as well as its specific authority to prohibit unfair methods of competition in the airline industry. It will coordinate with DOJ on the alliance reviews. DOT does not have prior approval authority over an alliance. On the basis of a recommendation from an administrative law judge, DOT could issue a cease-and-desist order. Alliances could benefit consumers by increasing the number of destinations and the frequency of flights available through each partner. The airlines believe that these increases will in turn attract new passengers, allowing them to offer more frequent flights, and, if demand is substantial, more new destinations. In an alliance that includes code-sharing, such as those proposed by United and Delta and Northwest and Continental, airline route networks are effectively joined, expanding possible routings by linking two different hub-and-spoke systems. The service provided through code-sharing replicates the “seamless” travel that would be provided by a single airline, known as “on-line service.” This type of service is generally preferred by airline passengers because it allows the convenience of single ticketing and check-in. Airlines have had interline agreements, which offer many of the same services, for some time. Interline agreements provide for the mutual acceptance by the participating airlines of passenger tickets, baggage checks, and cargo waybills, as well as establish uniform procedures in these areas. However, with on-line service, connecting flights between the two code-sharing airlines are shown in the computer reservation system as occurring on one airline. Officials for the airlines see advantages to on-line service for their customers. For example, with on-line service under the alliance proposed by United and Delta, airline passengers would be able to travel from Sioux Falls, South Dakota, to Bangor, Maine, on one airline’s code, even though neither airline currently serves the entire route between these two cities. In this example, a passenger could purchase a ticket from Delta and fly on a United plane from Sioux Falls to Chicago, then to Boston, and then, on a Delta flight, to Bangor. The passenger would earn Delta frequent flier miles for the entire trip. According to Northwest and Continental executives, their alliance would result in more than 2,000 new destinations that each airline could begin marketing as its own. The American-US Airways alliance plans to initially offer only limited code-sharing on regional airline flights, and not on each partner’s flights. In addition to new destinations, combining airlines’ hub-and-spoke route networks would also result in a substantial increase in the number of flight options that each airline could offer travelers to existing destinations. Airlines contend that these expanded service options may also attract new passengers, which would then allow the airlines to offer even more frequent flights and, if demand is substantial, more new destinations. Airline officials also note that additional routing options can create some better on-line connections by substituting one airline’s connection for its partner’s when the partner has closer connection times for the customer. This could reduce travel time for some travelers. However, this benefit may be limited. For example, through the proposed alliance, Northwest and Continental officials predict shorter travel times for about 250,000 passengers, or 0.3 percent of the 81.3 million passengers potentially affected in 1997. Critics of code-sharing point out that the practice is inherently deceptive because consumers may believe they are flying on one airline only to discover that they are on another airline’s flight and because code-sharing does not necessarily expand consumer choice. These critics charge that airlines take advantage of consumers’ preferences for on-line connections by making an interline code-share connection appear in computer reservation systems to be an on-line connection. Code-share flights also have the advantage of being listed more than once on computer reservation systems. For example, in our examination of flight listings for 17 international city-pairs, we found that 19 percent of the time code-share flights were listed at least three times (once under each airline and another as an interline connection) on the first screen of the display, giving the partners a competitive advantage over other airlines operating on those routes. Even the former chairman of American Airlines and the current chairman of US Airways are reported as calling code-sharing deceptive for consumers, but have said that they will also propose a code-sharing alliance as a competitive response if the other alliances are approved. In addition to the anticipated benefits of code-sharing, all three of the proposed alliances would offer their passengers reciprocal frequent flier benefits—that is, earning and using frequent flier points on either alliance partner—and the reciprocal use of club facilities. Airline officials believe that these reciprocal benefits would increase the value of frequent flier programs by allowing consumers to pool their points and choose from more destinations and frequencies. One critic counters, however, that unless the airlines substantially increase the number of seats available for use by frequent fliers, the additional demand created by combining the programs will reduce the availability of seats and therefore the value of the frequent flier programs. While the proposed domestic alliances may benefit consumers, they also have the potential to decrease competition in dozens of nonstop markets and hundreds more one-and multiple-stop markets because, even though the alliances are not mergers, they may reduce the incentive for alliance partners to compete with each other. Many longer routes that include one or more stops are currently the most competitive because they offer the greatest number of airlines from which consumers can choose. These same routes are likely to see the largest reduction in choices among totally unaffiliated airlines and, correspondingly, the greatest potential loss in competition. Our prior work on mergers in the 1980s showed that when such competition declines, airfares tend to increase.