Code Sharing and Airline Alliances1
Deregulation had also produced the practice of code sharing between airlines domestically, in 1983. Code sharing allows an airline to advertise, as its own, a route from an origin to a destination, even though a part of that route is not actually flown by the advertising airline. Usually unknown to the passenger, a part of the route is flown by a different airline using its own aircraft, its own pilots, and its own support infrastructure and staff, all of which entails utilizing its own procedures and rules. For many reasons, this is information that many travelers would like to know, but a primary reason is that major carriers and regional carriers (who code share) may have significantly different safety records, types of aircraft, and pilot hiring qualifications.
Code sharing also involves airlines jointly setting rates and fares, which is traditionally a big no-no since that kind of action fits exactly the definition of antitrust collusion and anticompetitive behavior. The antitrust laws of the United States apply fully to code-share arrangements, which are administered by the Department of Justice. Over the years, code-share arrangements have gone into effect without interference from the Department of Justice for the simple reason that these arrangements are seen by the DOJ as competitive overall and favorable to the consumer.
Code sharing between domestic airlines and foreign airlines is also subject to the antitrust laws of the United States, unless an express grant of statutory immunity is made by the Department of Transportation. The first foreign code-share arrangement was approved by the Department of Transportation in 1993 to allow KLM Royal Dutch Airlines to infuse capital into financially strapped Northwest Airlines. Although code sharing between airlines does not require a swap of assets or other financial investment between them, approval was initially given by the United States government to these arrangements in part due to the fact that additional financial stability was achieved in the domestic carrier. Following the KLM-Northwest code-share arrangement, approval was given for a United Airlines – Lufthansa pairing, and shortly thereafter British Airways bought into USAir for $400 million and began code sharing. Although these arrangements constituted, in many cases, a deception to the flying public, they were actually a first step in the globalization of the world air transportation market.
Airline alliances are an evolutionary development of code sharing. Beginning with codesharing arrangements domestically and then internationally, alliances between domestic and foreign airlines have blossomed since the first group, Star Alliance, was founded in 1997. This alliance was followed by two others, One – World and SkyTeam, in 1999 and 2000, respectively. These antitrust immunized arrangements allow the alliance partners to provide a seamless travel experience as if there were a single carrier involved, to include benefits such as coordinated schedules at hubs to expedite interline transfers, integrated frequent flyer programs, and baggage check throughs. These alliances have been greatly facilitated by “Open Skies” treaties.
International alliances and Open Skies treaties, as part of global deregulation, will be further discussed in Part VI.