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Anti-trust: A game of two sides

(Amends paragraph 15 to make clear it refers to EC position of 2001)

With alliances seeking anti-trust immunity on their Atlantic and Pacific networks, regulators and airline lawyers have their hands full. But what is the framework for these complex investigations and how do you please every jurisdiction?

The quest continues. The US Department of Transportation's tentative grant of anti-trust immunity for oneworld's North Atlantic alliance is by no means the end of this process. Even if the DoT gives its final go-ahead, oneworld still must secure approval from the European Commission. And, likewise, if the DoT grants the requests by All Nippon Airways and Japan Airlines for immunity with their US partners across the North Pacific, they too must secure approval from Japan. Exemption from competition laws is like any other route authority - you need it on both ends.

 

445 (c) Rex Features

 ©Rex Features
Nor is this exemption a foregone conclusion. Just as Open Skies does not guarantee US anti-trust immunity, a grant of US immunity does not guarantee approval from other countries. Each jurisdiction is sovereign. This has been settled for at least nine years, since the EC rejected the General Electric/Honeywell merger after the USA, Canada, and 10 other nations had approved it. As Connie Robinson, partner in the Washington law firm of Kilpatrick Stockton, wrote: "This was the first proposed merger that was stopped by one international enforcement authority, after it was approved by others."

In the latest round of anti-trust immunity requests, the EC has again demonstrated its independence. It launched its own investigations into the Star and oneworld alliances before the US DoT had issued draft decisions, and has followed these up with a statement of objections against oneworld.

Oneworld members have downplayed the EC's moves, describing them as "anticipated", "routine", or pro forma steps to assert jurisdiction. But the EC is far from casual about this. "We don't routinely open formal anti-trust investigations," it says. "We aren't US authorities. We apply European rules, and these investigations are serious...On the basis of what we has seen so far, we think there may be breaches of anti-trust rules."

The EC's objections serve notice on anyone who still doubted it was serious. Its statement is not a criminal indictment, but the first draft of a complaint with supporting evidence against the alliance. This is a key step in a process that could spell trouble.

The EC's objections are confidential, except to the named parties, sparking much speculation about its specific concerns. Most observers suspect that the EC's target is certain city pairs, and British Airways has publicly intimated as much, but no-one outside the airlines or their counsel really knows.

Oneworld has responded with a number of proposed concessions, including slot divestitures on four routes. The EC says it will seek public comments on these, which usually but does not necessarily mean it is satisfied. The EC has the power to levy fines or block a deal, but its usual practice is to accept a proposal once it is satisfied that the conditions or remedies will mitigate anti-competitive effects. So far, oneworld is the only alliance to reach this stage, but the EC stresses that Star alliance's "Atlantic ++" pact and SkyTeam's North Atlantic pact remain under scrutiny.

Europe differs from the USA because the EC does not grant anti-trust immunity. The EC may approve an alliance, usually with conditions, but this does not bestow immunity. US immunity is like a shield; the immunised airline can raise it as an absolute defence against a third party's anti-trust lawsuit. The EC does not confer any shield.

Does this mean that a disgruntled Virgin Atlantic, for instance, could still challenge oneworld's alliance in court, even if the EC approves it?

Law professor Brian Havel, who is director of Chicago, Illinois-based DePaul University's International Aviation Law Institute and a visiting scholar at University College Dublin, recalls no challenge to any airline alliance approved by the EC, but he points to easyJet's challenge to the Air France-KLM merger after the EC cleared it.

Europe's Court of First Instance ruled against easyJet, holding that the decision could be reversed only by showing that the EC had committed "manifest error". According to the court, easyJet failed to show this. "The decision is important," Havel stresses, "since it shows that the [court] is willing to give a lot of deference to the Commission's competition analysis." Because of this, Havel predicts "it would likely be very difficult for a private airline to seek to annul a Commission decision approving an airline alliance."

RELEVANT MARKETS

When the EC decides to review a proposed alliance, one of its first and most important analytical steps is to define the relevant market. In other words, where is the competition that this alliance could affect?

How this is answered can almost decide the case. If the market is network-to-network, as oneworld argues, then the EC would compare oneworld's entire North Atlantic network with the rival networks of Star and SkyTeam. As rivals such as Virgin Atlantic suggest, this is a far cry from assessing the competitive effect of oneworld's alliance on, for example, London Heathrow-Chicago.

The DoT may impose city-pair remedies, but it has a reputation for assessing overall competitive effects of an alliance on a network-to-network basis. Conversely, the EC's reputation is to focus instead on city pairs. Brussels lawyers debate how far the EC has moved toward recognition of networks. In airline mergers, it has been willing to consider competition from high-speed trains or secondary airports, but these generally have involved cities close to each other.

The furthest the EC had previously shown a willingness to go in acknowledging network issues was back in 2001 with bmi/Lufthansa/SAS, where the EC allowed bmi to reorganise routes so that it enhanced network competition with oneworld, and particularly BA.

More recently, when it came to the Lufthansa/Brussels Airlines merger, Sven Volcker from law firm WilmerHale points out that the EC found that competing service from Antwerp was too far from Brussels to count, and Antwerp was only 50km (31 miles) away.

Most lawyers conclude that the EC still does not embrace the DoT's enthusiasm for relevant markets based on networks. The EC's focus is still closer to the city-pair end of the scale. Hence, oneworld's claim that it only controls 51% of London Heathrow-US capacity, compared with Star's 80% from Frankfurt, SkyTeam's 73% at Paris Charles de Gaulle, or SkyTeam's 85% from Amsterdam, may make little difference.

Once the EC has defined the relevant market and estimated how an alliance might hurt competition in that market, it seeks ways to mitigate those effects. From the conditions imposed so far on airline mergers or alliances, it seems willing to use several approaches. The most common is divestiture, requiring alliance members to relinquish slots at a concentrated hub. Another is creating conditions to encourage new entry, such as ordering alliance members to accept new carriers into their frequent flyer programme.

A closely related third approach is direct regulation, such as when it requires alliance members to interline at special prorates with other airlines as a way to open up fortress hubs. How many of these conditions the EC will impose depends on what it sees as the competitive threat of an alliance.

JAPAN-US OPEN SKIES

Japan is about to join Europe in confronting these issues. As Susan Kurland, assistant secretary for aviation and international affairs at the DoT recently told the Air and Space Law 2010 Update Conference in Washington DC: "Our new Open Skies agreement with Japan has the potential to be truly transformative." But this will happen, according to Japan, only if its carriers gain anti-trust clearance for alliances with their US partners.

United's chief executive Glenn Tilton says Japan has hinted it might implement Open Skies even if only All Nippon Airways is immunised, but this could mean that United is merely talking up the result it wants.

At least on paper, Japan's aviation and competition laws parallel those of the USA. According to law professor and legal author Hiroshi Oda, Japan's law was heavily influenced by the USA during the post-war occupation. Indeed, Japan's Fair Trade Commission, which enforces Japan's anti-monopoly law, is modelled after US regulatory agencies.

Economist Peter Morici, who is a professor at the University of Maryland Business School, also notes in his comparison of US, European, and Japanese anti-trust laws: "Once the Americans left, law was quickly transformed to reflect traditional Japanese values - order, stability, and co-operation - and to serve Japanese industrial policy objectives."

Before 1997, Japan's anti-monopoly law was riddled with so many exemptions that it drew foreign criticism. An omnibus law enacted that year erased many of those exemptions, including one that allowed the transport ministry to exempt domestic airline cartels from anti-trust scrutiny. But the same ministry retained authority to exempt foreign airline cartels.

MIRROR IMAGE

This prompts one US lawyer to describe Japan's current procedure as "a mirror image" of the US approach. The former transport ministry, now called the Ministry of Land, Infrastructure, Transport and Tourism, which is the counterpart to the US DoT, is still authorised by the civil aeronautics law to exempt international airline practices from anti-trust enforcement. The JFTC, which is the counterpart to the US Department of Justice, enforces the anti-monopoly law, but has no power to veto MLIT's exemptions.

So a transport agency can exempt airlines from competition laws, and the agency that enforces those laws is powerless to stop it. These are the same dynamics at play in the USA. One difference is Japan has no statutory equivalent to the US process that gives the DoJ an advisory role. Only after MLIT's decision can the JFTC publicly express it views.

Perhaps the prospect of a unseemly public dispute between the two agencies is enough for the MLIT to seek the JFTC's counsel, but it is unknown how much influence the JFTC exercises with the MLIT behind the scenes.

The aversion to public confrontation is also evident in the practice among all Japanese applicants, whether before MLIT or any other government agency, to inquire and consult informally for what, in effect, is pre-approval before filing a formal application. Then, the approval process can go fairly quickly.

To date, the MLIT has only used its authority to exempt IATA-type agreements during the era when IATA set international fares. The JFTC did not publicly object to any of those. Now, the MLIT will be breaking new ground as it has never been asked to consider an exemption for an alliance between international airlines. The closest Japanese regulators have ever come to considering a case like the current alliances was when the JFTC ruled on the 2001 merger of Japan Airlines and Japan Air System. As the European experience shows, the reasoning applied in reviewing mergers and alliances may overlap. The JFTC was primarily concerned with the effects of the JAL/JAS merger on domestic competition, where the merged carriers would enjoy a monopoly or duopoly with All Nippon on 32 routes. As Professor Havel recalls, there was already a history of concerted fare setting, so "the JFTC was understandably concerned that moving from three to two major domestic carriers would only increase this activity". Also, since new entrants ranged from rare to non-existent, Havel says "the threat of contestability would not discipline ANA or JAL/JAS" from further fare-fixing.

The JFTC raised these concerns about concerted fare setting and the inability of new entrants to discipline prices. In response, JAL and JAS offered to divest slots at Tokyo Haneda, relinquish gates, check-in counters, and boarding bridges, and assist new entrants with ground handling and maintenance. JAL and JAS also promised a 10% fare cut for three years on all major domestic routes. Satisfied with these remedies, in April 2002 the JFTC approved the merger.

HISTORIC PRECEDENT

Thus, in the closest parallel to the alliances proposed now, the JFTC followed an approach similar to the EC - defining the relevant market, focusing on competitive effects, fashioning remedies to address those effects, and then approving the merger.

Will the MLIT follow a similar approach with the present alliances? Its track record is too sparse to say, but the parallels and contrasts between Europe and the USA offer some hints. The EC has applied similar reasoning and remedies in both airline merger and alliance cases. Hence, the EC has developed a consistent approach. Conversely, in the USA, the DoT handles anti-trust immunity while the DoJ reviews mergers - different agencies with different standards. As Charles Stark, former chief of the DoJ's Antitrust Division, has said: "The Justice Department has a single mandate in relation to airline mergers: enforcing the anti-trust laws."

On airline alliances, the views of the two US agencies sharply contrast. As Havel notes: "If you compare the orders handed down by the DoT with the requests made by the DoJ - requests the DoT can freely ignore - you will see how wide the gulf is between the two administrative 'cultures' when it comes to the airlines and anti-trust."

Japan's regulatory system is structured much more like the US system than the European. Hence, one might expect a similar "gulf between administrative cultures", with the JFTC favouring strict enforcement of the anti-monopoly law, while the MLIT places more emphasis on aviation policy. This could be good news for any transpacific alliances.

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