Now reaching the level of a plague, the bestowal of antitrust immunity by the US Department of Transportation for alliances between US and non-US airlines is becoming routine enough to be a perfunctory affair. The saving grace for these immunity-seeking carriers is that, so far, most have had at least a couple of years to get to know each other without developing equity ties. But there is plenty to be concerned about, including the predilection for airlines to jump on a bandwagon thinking only about the potential.
Risks do exist: hundreds of millions of dollars later, KLM will tell you that immunity only enticed it to put more money into an already shaky alliance with Northwest four years ago. According to a recent Harvard Business School case study, airline codesharing alliances last an average of five years before control issues begin to break up the partnerships.
In May the US Department of Justice stepped into an increasingly politicised morass of what DOT considers liberalisation of the international aviation marketplace. The DOJ, which has the right only to peruse an immunity applicant's proposal and make a recommendation, tried to slow the forward momentum of the approval process for airline immunity by suggesting limits on the Delta group's proposal.
Specifically, the DOJ suggested 'carve-outs,' or pieces of the alliance that would not be given immunity. Yield management and the pooling of revenues would not be immunised for business travel in seven gateway-to-gateway markets - Atlanta to Brussels and Zürich; Cincinnati to Zürich; and New York to Brussels, Geneva, Vienna and Zürich. Similarly, DOJ had enough concerns about market concentration to suggest United-Lufthansa not be allowed to cooperate without restrictions between Frankfurt and both Chicago and Washington.
United and Lufthansa complied. Delta did not like this idea: it would suck the lifeblood from the quadrilateral alliance. In bowing to this concern, DOT's show-cause order approved the immunity request with carve-outs, but only in the non-New York markets on DOJ's list.
In a 36-page protest letter, Justice argues that competition on the New York sectors will be reduced because of the removal of independent pricing by Delta and its partners, which currently compete to sell seats on the same aircraft. 'As a result, the number of carriers offering nonstop service that is priced independently will drop from three to two in New York-Brussels and New York-Zürich, where American Airlines will be the only remaining nonstop competition. In New York-Geneva and New York-Vienna, the Delta alliance carriers will cease competing and will become monopolists on the nonstop routing.'
Delta's opposition to a carve-out on New York was well known, and, under the circumstances, not unreasonable. More surprising was that DOT broke from the DOJ's recommendation and sided with Delta. DOT maintains that because open skies between the US and Switzerland, Austria and Belgium was a prerequisite for the approval of antitrust immunity, any airline is free to enter these markets and compete.
Though some have given credit to transportation secretary Federico Peña for taking an independent stand, others say that this was a politicised issue and a mark of inconsistent policy making.
If nothing else, there is a problem of perception here. Says Michael Goldman, an aviation lawyer with Bagileo, Silverberg and Goldman: 'The problem with the DOT making this decision is that they are affected by their own policy concerns and domestic politics. [DOJ's] antitrust office is fairly pure - it's hard to bring political influence on an analysis they do. This could come back to haunt the DOT.'
How could it haunt the transportation department? Remember that in the 1980s, DOT under the guidance of Elizabeth Dole was the department 'that never met a merger it didn't like.' These mergers were sometimes successful but usually were a difficult experience highlighted by high levels of debt and a next-to-impossible task of meshing workforce seniority lists. USAir-Piedmont-PSA was so messy that many observers think the airline has not recovered from the ordeal.
Most of the blame for the merger mania a decade ago rests with the airlines. But a regulatory agency at the time inspired with a mission to comply with market demands may have unwittingly promoted the high debt levels and unstable corporate airline structures that later exacerbated a difficult time during the Gulf war period of fuel price spikes and less traffic. DOT might also have avoided the 1989 ceding of authority to regulate airline mergers to the Justice Department.
From DOT's perspective, however, one thing can be said for immunity-protected international airline alliances - collusion does not automatically become an integral part of them. Immunity is only worth as much as the allied carriers want to make of it.
Even beyond the board-level antagonism, Northwest-KLM is not the picture-perfect partnership the pair have led the industry to believe. Sources say that cultural problems exist at the operational level - the Dutch are too rigid for the Americans, the Americans too flexible for the Dutch. The two carriers even sell against each other, even though they maintain a prorate agreement to split revenues. No matter how close airlines are, self-interest lies at the heart of every agreement.
Source: Airline Business