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ANALYSIS: Transatlantic venture faces antitrust test

European antitrust officials are about to impose commitments on United Airlines, Air Canada, and Lufthansa because of concerns about the anti-competitive effects of their "Atlantic Plus Plus" joint venture.

The European Commission's case is not against Star alliance as such, as Lufthansa insists, but only against the "A ++" venture. This is one of two probes the Commission launched in 2009 against joint ventures by transatlantic airlines. The other, against members of Oneworld, settled in 2010. In the present case, the Commission has raised concerns that the A++ venture might harm premium passengers (as distinct from economy passengers) on the Frankfurt-New York route in breach of EU antitrust rules.

United, Air Canada, and Lufthansa offered commitments in December to settle the case. The deadline for public comments passed on 21 January and the Commission is now reviewing those comments. Its final decision could vary from what the airlines offered, but the remedies are still likely to fall into the four categories they proposed. These will also closely parallel what the commission secured in 2010 from oneworld members British Airways and American Airlines and to comparable "carve outs" it has obtained in several airline mergers.

Slot give-backs will be the biggest. The three Star carriers have proposed and the Commission will almost certainly require that they offer slots at Frankfurt and New York (either JFK or Newark) to other airlines willing to fly the route.

The second and third remedies will be offers by the incumbent airlines to others that might fly or feed the route. These would be to interline or enter prorate agreements on favorable terms.

Finally, if another carrier interested in launching or expanding service on the route lacks a comparable frequent flyer programme, the incumbents would offer to allow passengers on that rival carrier to earn or burn credits under their loyalty programmes.

In its Oneworld case, the Commission required BA and American to do all these things, with particular emphasis on offering slots at either London Heathrow or Gatwick - at the competitor's choice - for 21 weekly non-stops to New York, 14 to Boston, and 7 each to Dallas and Miami.

In a third transatlantic probe, the Commission also has investigated a SkyTeam joint venture. Its first investigation, launched in 2006, involved nine SkyTeam members - Aeromexico, Air France, Alitalia, Continental, CSA Czech Airlines, Delta, KLM, Korean, and Northwest. Those carriers offered similar commitments in 2007, but the Commission did not make them legally binding. Instead, last January, it dropped proceedings against them, citing "significant changes" in the relevant markets. It did not say what those changes were, but they may have included Northwest's merger with Delta, and Continental's withdrawal from SkyTeam due to its merger with United.

On the same day that it closed its big SkyTeam case, the Commission last January launched a new investigation limited to Air France-KLM, Alitalia, and Delta Air Lines. That case is on-going.

All three of these transatlantic joint ventures enjoy US antitrust immunity, but that does not limit the European Commission's authority. Asked about this, a somewhat indignant EC spokesman replied: "We aren't US authorities. We apply European rules."

The commission's assessments are fact-specific. United Parcel Service, for instance, recently called off plans to take over TNT Express because the Commission was not satisfied with UPS's specific offer to sell certain business units and to grant rivals access to some of its network.

Questions have been raised about how well the EC's remedies against airlines actually work. Brian Havel, law professor and director of DePaul University's International Aviation Law Institute in Chicago, claims historically that they "have failed to generate increased competition or to attract new entrants into the markets in question."

Havel points to the Oneworld case, where divestiture of Heathrow slots was a key requirement. Yet Delta's recent willingness to pay $360 million for a stake in Virgin Atlantic appears largely driven by a desire to boost its NY-London presence at Heathrow. "So there are obviously competitors interested in entering the markets on which the EC remedies focused," Havel observes, "though they aren't necessarily relying on the EC remedies as the means for doing so."

Havel adds, however, that over the past decade "the EC has been market testing its proposed remedies in advance" to ascertain that interested competitors exist and will take advantage of the proposed remedies. "So, at the least", he says, "the EC appears to be working toward ensuring its remedies are effective."

The public comments the EC is soliciting in the A++ case represent this "market testing" - finding out if the concessions offered by the incumbent airlines will attract new competition onto the route.

A lawyer in the Brussels office of WilmerHale argued several years ago that EC remedies designed to assure new entry could make incumbent airlines "hostage to strategic behavior of their fiercest rivals." His criticism came in the context of intra-EU airline mergers, but one wonders how much it could apply to transatlantic alliances if the Commission requires rivals to declare their interest in proposed concessions before it will allow or acquiesce in a venture.

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