Lois Jones

There's no denying it - from movies to massacres, from hamburgers to heart disease cures, from diets to democracy, the United States leads the way while the rest of the world is inclined to follow.

So what happens now that this 'Land of the free' has suddenly discovered that free airline competition no longer reigns supreme? What happens when this sure-footed father of the world's airline industry is uncertain of the next step forward? The US airline industry is entering a new phase which can only mean another shakeup that is liable to have reverberations worldwide.

Some 20 years after the deregulation of the domestic airline industry - a move that allowed carriers to determine their own routes and prices - the US Department of Transportation is now fine-tuning domestic competition guidelines which are set to mould the business for the next 20 years. Meanwhile, the US is weaving a web of open skies agreements around the globe. Questionmarks are piling up over issues such as the future of antitrust immunity for major alliances. And the proposed British Airways/American Airlines deal, deemed the genesis of future airline alliances, is finally nearing approval.

Of all the issues raging through the ranks of the US airline industry, none is provoking as much controversy as the US Department of Transportation's draft domestic competition guidelines. Love them or hate them, they are guaranteed to provoke a strong reaction if you're in the US airline industry. Opinions on the guidelines vary from delight to depression, and the DOT will not be short of comments from interested parties during the 60-day comment period following their publication on 6 April.

The guidelines aim to shield new entrants and small players from anti-competitive behaviour by the big boys. The competitive markers follow a surge of complaints over alleged unfair exclusionary practices by the majors, which have forced the DOT to intervene. The rules are seen as a way to crack down on anti-competitive practices by US majors, which are said to be stifling competition in their main markets and driving out new entrants by increasing capacity and dumping fares.

According to one US legal source, US transportation secretary Rodney E Slater had 'no alternative but to try something, as he was being hammered by those who think competition is too high'. Michael Korens, vice- president at public affairs and strategic communications consultants Apco Associates, points to the tremendous pressure to act from officials on Capitol Hill. 'This is a good, exciting issue in a political year'.

The majors have kicked up a storm of protest against the new moves. They argue that tremendous competition already exists in the industry, with consumer prices a third lower than 10 years ago. Jon Ash, consultant at Global Aviation Associates, questions why the DOT has drawn the conclusion that antitrust laws are inadequate if 'no predation cases have yet been tried'.

In their defence, US officials argue that they are simply ensuring that the good times continue. Indeed, the main message which the DOT is keen to put across is that these are not efforts to reregulate but forward-looking measures which are designed to ensure that free market principles and competition continue to thrive in the airline industry for the next 20 years. 'We're not changing a good thing - the guidelines are a response to the developments of the industry as they are occurring,' says Charles Hunnicutt, the DOT's assistant secretary for aviation and international affairs.

Senator Mike DeWine, chairman of the Senate antitrust subcommittee, sees the guidelines as preventative measures that will result in lower air fares and better service for consumers. 'Fair and vigorous competition has been a key element in the revival of America's airline industry.I want to ensure any guidelines do not threaten the economic health of the industry or lead us down a path to reregulation. However, it is important to ensure active competition does not cross the line into anti-competitive or predatory behaviour.'

While conceding that competition exists, Hunnicutt points out that this does not mean that 'in any city-pair there isn't unfair competitive practice . . . competitive muscle can be acquired by the majors that can be used in an unfair way'. The DOT maintains that there have been instances in which a new, small carrier has offered low-price service between a major's hub and a spoke city, only to find the major cutting its own fares and increasing capacity on that route. This type of sacrifice of short-term profitability has only one goal: to drive the new entrant out of the market and then raise fares again to their original level or higher, cutting back on the level of service.

Some industry sources question why the majors are protesting so vehemently if they are innocent. 'People aren't making this up and trying to overturn the benefits of regulation - where we previously had genuine nationwide competition in key markets, now the industry is being divided up again', says a legal source. And even if innocent at the moment, the guidelines can serve as an early warning system to ward off future anticompetitive behaviour.

Critics maintain, however, that the guidelines do not make it sufficiently clear what is acceptable behaviour. In the DOT's favour, Ash points out that 'it is a very sticky wicket to try to craft a set of guidelines because there are so many vehicles for competing' and 'if they were too clear-cut they would limit flexibility'.

The major complaint has been that for action to take place, the guidelines require a level of knowledge of a competitor that is difficult to acquire. Although the DOT will examine possible unfair practices on a case by case basis, three identifiable patterns of behaviour will trigger an investigation:

1 If a major adds capacity and sells such a large number of seats at low fares that this results in lower local revenues than would be 'a reasonable alternative response'.

2 If the number of local passengers carried by the major at low fares exceeds the new entrant's total seat capacity.

3 If the major carries more local passengers at the low fares than the new entrant.

The penalty for being found guilty of unfair exclusionary practice is a fine of US$1,100 per day for each violation. If the fines are not effective in stopping the airline's bad behaviour, then the DOT can seek an injunction, says Hunnicutt.

Pro-deregulation economist Clifford Winston claims that the guidelines are unclear because they are premature, and at this stage are liable to cause more problems than they solve. 'Ideally we would need to know a lot more than we do before we make a policy on this. At this point we know that carriers match other carriers' fares, but it is not clear whether this is predatory behaviour'.

One sector at least is giving the guidelines a warm welcome. From the new entrants' point of view, the guidelines provide much-needed protection from the threat of the mega-carriers.

A firm advocate of the proposed moves is Mark Kahan, vice-chairman and chief operating officer of Detroit-based startup Spirit Airlines. Kahan says Spirit is 'one of the few profitable carriers that has been set up in the last 10 years, pointing out that his success has only been achieved by avoiding competition with the majors.

Kahan declares that 'the single most effective competitive discipline arises from entry by a low-fare competitor . . . the real issue is not reregulation versus deregulation, but whether deregulation can ultimately succeed if there is increasing concentration and no new entry into the marketplace . . . we seek only a reasonable opportunity to compete.'

But while startups may wholeheartedly cheer the strong, helping hand provided by the guidelines, some still seem guaranteed to crumble when faced with competitive forces, whether supportive parameters are in place or not.

Indeed, some industry observers maintain that the entire furore surrounding the guidelines may be entirely misplaced and predict that the impact will be minimal. Apco's Korens is surprised at the concern over what he sees ultimately as a small community air services bill. 'Small community drives this debate. Something like this which is narrow and targeted will help improve air service to small communities. The guidelines are pushing airlines to buy regional jets and use those in smaller markets', says Korens.

Korens believes that the majors should be pleased with the modest scale of the DOT's demands. 'If you're a major and used to really scary legislation out there, then you'd say, "Gee-wizz, this is a pretty small price to pay," and feel pretty good about dodging the bullet. If this is just a small community air services bill, then the majors will support it.'

But while the guidelines themselves may be tame, a greater threat may come from the manner in which they are adopted. 'It all depends on if the policy is aggressively implemented - just having this policy doesn't really mean anything. It would go away overnight if excess capacity and fares go down,' says Howard Veal of GKMG consultants. 'What officials are going to do is the great uncertainty - in the past they've jawboned. If they tried to be very aggressive, it could get very messy,' says Veal.

While the US airline industry is absorbed in analysing the possible impact of domestic competition moves, other burning issues urgently need to be addressed, not least domestic alliance strategy. The alliance agreement between Northwest and Continental has prompted a further round of consolidation among US majors, with the United/Delta linkup following hard on the heels of the US Airways/American deal. These three groups will control 80 per cent of the US industry between them.

However, Apco's Korens sees the Northwest and Continental deal as standing apart from other domestic moves, as the pair are a different size to other US majors. 'Northwest and Continental can't compete head to head with the big three and are just keeping up with the other guys. The Northwest/Continental deal just makes market sense,' says Korens.

Some industry attention should be diverted away from the new competition guidelines towards the new wave of domestic airline alliances hitting the US, which can proceed with minimal government interference. As a codeshare alliance, the new agreements do not require formal approval by the US government, although the government is likely to request information about the alliances.

While observers watch domestic competition moves, the process of approving the proposed BA/American alliance continues.

The European Commission is due to make its position known on the alliance by the end of May. Competition commissioner Karel Van Miert warned BA and American in April that they would not be able to sell the slots to be given up in exchange for approval from Brussels for their planned alliance. One US industry source says that a deal was being finalised whereby the carriers would give up 250 weekly slots, 180 of them at London/Heathrow with the remainder at Gatwick, in exchange for US$1-3 million per slot. Both carriers had clearly favoured selling slots for cash and long-awaited alliance approval. 'BA and American have a price and know what price can be paid for their alliance,' says Korens. 'Slots being bought would be a favourable outcome,' admits Thomas Horton, American Airlines' vice-president Europe. Yet a BA source says he has accepted that Van Miert will not budge on allowing slot sales, even though he strongly disagrees with this policy.

Winston warns, however, that the alliance should not overshadow the key issue, which is the conclusion of UK-US open skies, due to be sealed by this September or October after the DOT has decided on BA/AA. 'The focus has to be that we need open skies - the alliances in general are somewhat of a sideshow.'

US officials are frustrated at the time taken to conclude open skies with the UK. The DOT points out that its last negotiations with the UK were held in February 1997. Hunnicutt says: 'We're waiting to hear that they are ready - it becomes very difficult to believe that they are actually very serious'.

Hunnicutt declares that 'for a country as committed to market principles as the UK, with similar viewpoints, it is very hard to believe that it is has the most restrictive, antiquated bilateral in the world'. Hunnicutt is particularly frustrated by the negative competitive element developing on both sides. 'There's a feeling that if one side wins, its carriers win and the others lose, rather than the feeling that we all benefit,' he says.

The signing of a new US-France bilateral on 8 April is prompting speculation that the UK may opt for a similar two-step process to the French, initially giving codesharing approval, followed by phased-in open skies. The US-French bilateral allows full open skies to be phased in over five years, but immediately removes limits on codesharing services between US and French airlines. However the US is extremely unlikely to concede antitrust immunity to BA/AA without a full open skies deal.

Meanwhile there is widespread backing in the US for the EU to negotiate with it as a single entity, as favoured by Van Miert and transport commissioner Neil Kinnock but opposed by the UK and France. Hunnicutt says that the US is prepared to negotiate with the EU as a whole, providing the Commission has the authority. 'The US will negotiate with whomever the legitimate body on the other side is. We want to negotiate with an association that has actual hard rights and authority, and to date that's the member states and not the EU. When Brussels has the authority then we'll negotiate with Brussels,' says Hunnicutt.

Korens agrees. 'We in the US have a common methodological approach, so why not have a high-level dialogue between the US and EU with the aim of having a common transatlantic methodological approach?' he says. 'Surely it would make sense to deal with a comparable body and that partner is Europe,' a US legal source says.

While it debates the future of aviation negotiations with the EU, the US continues with its entrenched policy of seeking open skies with as many like-minded global partners as possible. 'We're willing to talk to anyone,' says Joel Spiro, the department of state's deputy assistant secretary for transportation affairs. Korea initialled an open skies agreement with the US on 24 April and negotiations are currently continuing with Russia, Italy, Portugal, Hungary and Poland as well as Argentina, Peru and Chile.

However, Federico Bloch, chief executive officer of the Taca group, added a note of heavy caution to all the Latin American carriers pushing for open skies at the recent AvMan CEO conference.

A year ago Bloch passionately embraced the concept of open skies, saying: 'We put our money where our mouth is. We believe in open skies and in an open market.' At the time, Bloch was being courted by American Airlines chairman Bob Crandall to forge an alliance between American and the six Central American carriers that make up the Taca Group. Now, however, Bloch feels betrayed by the way the US has conducted itself, saying that after five Central American countries signed open skies agreements last year, the US failed to live up to its side of the deals by approving the American codeshare.

'I really question the true colours of whether the US is truly ready for open skies,' says Bloch. 'Latin America has been much more upfront about it. The worst case is what the US is doing to us now. They said they wanted open skies and we took them at their word. We have been fooled. We have not got access - we have had our hands completely tied.

'My advice to all Latin American carriers is do not sign open skies until you know what the issues really are. We are the guinea pigs. You need to be absolute fools to sign until you know whether they're going to put their money where their mouth is.'

Bloch will certainly not be the last critic of evolving US policy, as the industry adjusts to changes set to emerge from the DOT, Department of Justice and Capitol Hill. From domestic competition policy to domestic and overseas alliance strategies and the conclusion of open skies, the US airline industry is resounding with changes which are set to echo throughout the rest of the airline world.

Source: Airline Business