Five airline requests for antitrust immunity are pending in different parts of the world and their size and significance are raising concerns from some quarters.
Global economic conditions have helped fuel this demand for joint ventures, but debate is growing over whether antitrust immunity is a good thing. Concern is coming from several directions.
Some US congressmen, led by James Oberstar, chair of the House transportation committee, see immunised airline alliances as a "threat to competition" that should be curtailed, and he has introduced a bill to do this.The US Department of Justice, traditionally hostile to immunity, also argues that antitrust exemptions "should be strongly disfavoured". And the European Commission has opened formal proceedings and raised antitrust objections to at least one proposed venture.
So far, the only immunity request approved by the US Department of Transportation this year is the so-called "Atlantic ++" pact between ten members of Star alliance, including its newest entrant, Continental Airlines. The venture has Asian implications, but its scope is mostly North Atlantic. The US DoT gave its final approval in July.
DoT is also overdue in meeting its own deadline for a draft decision on the application by American, British Airways, Iberia, and two other oneworld members for an immunised North Atlantic joint venture. This comes after their last attempt failed in 2002. DoT's draft decision on this renewed request was due at the end of October.Whenever it decides, interested parties will be able to comment. DoJ is likely to be critical of oneworld's proposal. DoT has the final say on airline antitrust immunity, but DoJ plays a vigorous advisory role.
Meanwhile, the European Commission has opened formal reviews to elements of both the Star and oneworld ventures, raised objections to the oneworld proposal, and continues to review last year's grant of US immunity to the SkyTeam alliance.
Two other immunity requests involve only two carriers each. Delta and the Virgin Blue group gained Australia's approval in November for an immunised trans-Pacific venture; that request now awaits US approval. Finally, Qantas and British Airways have applied to continue immunised joint operations on the "kangaroo route" between the UK and Australia. Their current five-year approval expires in February.
Beyond these, a typhoon is brewing over future alliance plans for Japan Airlines. Delta Airlines is lobbying JAL to switch to SkyTeam and is even offering to cover JAL's costs of defecting from oneworld. American Airlines is resisting with every available means. Any talk of an immunised joint venture with JAL is tied inevitably to the outcome of US-Japan Open Skies talks, which are due to resume in December. Japan hints it may link immunity and Open Skies. Any immunity for a venture that includes JAL has broad implications for the North Pacific.
The claimed advantages of immunised ventures over codeshares are well known. As the DoT said in its final Star decision: "in a 'metal-neutral' sales environment, with revenue- or benefit-sharing, the airlines can balance risks and benefits for the benefit of the consumer and alliance as a whole. The airlines . . . share the same incentive to make the sale and share the revenues."
Delta and Virgin Blue also argued in Australia that such a venture eliminates the disincentives to co-operate typical in a codeshare, where each carrier tries to optimise its own revenue.That, they claim, results in what is often called "double marginalisation" or multiple mark-ups.
Yet differences remain over how to assess immunity requests. All regulators weigh public benefits and competitive harm, but not always with the same result. Disputes often boil down to differences over what is the relevant market. For example BA says the market for its North Atlantic venture is Western Europe and North America, where oneworld's network competes with Star and Skyteam. Willie Walsh, BA's chief executive insists competition will benefit from three immunised alliances rather thantwo.But Virgin Atlantic warns oneworld's US-London Heathrow dominance threatens to create "a monster monopoly".It accuses American of hypocrisy for warning regulators would never approve a Delta-JAL venture because of Delta and JAL's dominance at Tokyo's Narita, while AA-BA dominance at Heathrow is already greater -disputed by American. Virgin chief executive Steve Ridgway, argues: "American cannot have it both ways."
As this exchange illustrates, the underlining question is whether the relevant market is network-to-network, region-to-region, or individual city-pairs.
DoT says it considers all three, but Walsh sees a divergence in European and US perspectives. "There is a slight difference of approach between the Commission and the US DoT," Walsh says. "The DoT very clearly focuses on network benefit while the Commission still sees city-pair competition as the issue to focus on."
To complicate this further, markets may differ for different passengers. Australia's Competition and Consumer Commission ruled in the Delta-Virgin Blue case that the relevant market for leisure and VFR passengers is region-to-region, while for business travellers it is specific city pairs.
Diverse views also carry through to the issue of remedies. An emphasis on city-pairs often leads to a conclusion that city-pairs where venture partners dominate should not be immunised. This tends to be DoJ's view, which convinced the DoT in Star's case to impose eight city-pair carve outs between the US, Canada, and Europe, plus an exclusion from immunity of all US-Beijing routes. Yet, DoT has also expressed a reluctance to carve out key hub-to-hub routes due to its concern that such exclusions could undercut the efficiencies of an alliance so much that it might not proceed.
Other minefields remain, according to antitrust lawyers, over how much passengers are willing to substitute connecting for nonstop flights, or one hub over another, and how much to use slot divestitures as a remedy. American's chief executive Gerard Arpey predicts oneworld will not be forced to relinquish any London Heathrow slots, but DoT and the EC have not yet ruled.
Whether DoT and EC enforcement views are converging is a subject of frequent debate among antitrust specialists. In the US, there is little doubt that DoT and DoJ will continue to hold contrasting views about the standards to apply in granting immunity and the scope of carve outs or other remedies. So long as US laws remain unchanged, this tension will persist.
Oberstar's bill could dramatically change this. It would force a review of immunity grants, tighten rules for granting them, and limit their length. The House of Representatives has included Oberstar's proposal in its FAA reauthorisation bill passed in May. The Senate version omits this language due to a sharp split between judiciary and transportation committee members over the wisdom of Oberstar's approach. Unlike many Capitol Hill disputes, this one is not along party lines. The final decision could be left to House-Senate conferees when they strive to reconcile the conflicting bills.
Antitrust immunity may, as some have suggested, represent the only available form of airline consolidation, but controversy about it seems sure to grow.
Antitrust Immunity Cases: In Brief
- Oneworld: Five oneworld members, American Airlines, British Airways and Iberia, along with Finnair and Royal Jordanian Airlines, filed for antitrust immunity on flights between North America and Europe in August 2008. The US DoT was originally due to issue a decision this October, but is still to rule. The European Commission has also issued a statement of objections relating to the tie-up of American, BA and Iberia on transatlantic routes. "We are very optimistic we can address the concerns the Commission has identified and remain optimistic the DoT will view our application in a positive light," says BA boss Willie Walsh.
- Star Alliance: DoT in July issued antitrust immunity approval to a transatlantic joint venture covering 10 Star Alliance carriers, but widening the number of city pairs excluded from immunity in its final approval. In April the ECdisclosed a probe into Air Canada, Continental Airlines, Lufthansa and United's co-operation on transatlantic routes.
- SkyTeam: Six SkyTeam members, Air France, Delta Air Lines, Northwest Airlines, KLM, Alitalia and CSA Czech Airlines, secured extended antitrust immunity from DoT in May 2008.An earlier antitrust immunity application had been rejected in 2005. The ECin 2006 sent a statement of objections to SkyTeam members amid competition concerns on some routes.
- Delta/Virgin Blue: The airlines in November secured antitrust clearance from the Australian Competition and Consumer Commission for their joint venture pact. They now await a decision from DoT
- Qantas/British Airways: The ACCC last approved the Qantas-BA joint services agreement for Australia-UK operations in 2005 for a five-year period.In Novemberof this year the airlines applied to extend that approval.
For more on the transatlantic market read our earlier report on how capacity has been cut