Aviation Law Prof Blog

Virgin America Looks for New Investors

The Financial Times reported last week that Virgin America is seeking regulator approval to receive capital from a new group of U.S. investors.  See Justin Baer, Virgin America Moves to Head Off Challenge, Fin. Times, July 10, 2009 (available here).  The move comes in response to a petition filed earlier this year by Alaska Airlines, Virgin's chief rival, for the Department of Transportation to conduct a fresh review of whether the carrier still meets U.S. citizenship purity rules after its chief American investors reportedly sold their shares back to the U.K.-based Virgin Group.  See previous discussion on the blog here, here, and here.  No word yet as to when the DOT will render a decision on the matter.

Havel on DOT/DOJ Tensions

Prof. Brian Havel, Director of the International Aviation Law Institute, was quoted in Saturday's edition of the Chicago Tribune concerning the recent decision of the Department of Transportation to grant approval and broad (though not absolute) antitrust immunity for Continental Airlines to join the Star Alliance.  See Julie Johnson, Continental OKd to Fly With United; Transportation Officials Prevail on Antitrust Issue, Chi. Tribune, July 11, 2009, at C12 (available here).  On the matter of the Department of Justice's strong opposition to any broad grant of antitrust immunity to the venture, Havel stated that it amounts to "a great interagency battle."  "The power that DOT has here is unprecedented.  It definitely aggravates people at DOJ."  No official word has yet come down from the Justice Department concerning the DOT's ruling.

DOT Approves the Expanded Star Alliance

Despite strong protests from the Senate Judiciary Committee and the Department of Justice's Antitrust Division, the Department of Transportation issued a final order today granting Continental Airlines approval and antitrust immunity to join the Star Alliance.  Here are some of the relevant portions from the DOT's official press release:

In the final order issued today, the Department granted immunity to new alliance member Continental and allowed Air Canada, Deutsche Lufthansa Airlines, United Air Lines, and Continental Airlines to place a portion of their international air services within a new joint venture, to be called Atlantic Plus-Plus. Under the venture, the carriers will jointly arrange capacity, sales and marketing, as well as share revenues in international markets.

The Department concluded that granting antitrust immunity to Continental to join the alliance and approving the joint venture was in the public interest because it would support increased levels of service in international markets served by the carriers, give consumers more travel options and shorter travel times, and reduce fares. The United States has open-skies aviation agreements with all of the home countries of the carriers involved in today’s decision. Open-skies agreements provide for international market access to all home-country airlines.

Following comments from the Department of Justice and other parties on DOT’s April 7 tentative decision, the Department placed new limitations on the immunity in several markets to preserve competition. These limitations, also called “carve outs,” affect four transatlantic markets, four markets between the United States and Canada, and all markets between the United States and Beijing, China. The Star carriers may continue to serve these routes, but they will not be covered by the grant of immunity at this time.

Press Release, U.S. Dept. of Transp., DOT Approves Star Alliance Plan to Add Continental, Establish Joint Venture, DOT 100-09 (July 10, 2009) (available here).

On the matter of carve outs, the DOT chose to retain the four existing Star Alliance carve outs identified in its tentative order--Washington/Frankfurt, Chicago/Frankfurt, San Francisco/Toronto, and Chicago/Toronto--until the joint venture between the Star Alliance members is fully implemented; at that point the two standing transatlantic carve outs will be eliminated.  See Dkt. No. OST-2008-0234, Final Order (July 10, 2009), at 19.  However, at the behest of the Justice Department, the DOT added four additional transatlantic carve outs between New York and Copenhagen, Lisbon, Geneva, and Stockholm.  See id.  But, according to the DOT, these carve outs are not etched in stone: "[S]hould a new entrant enter a 'carved-out' market with nonstop service, with at least five roundtrips per week for nine consecutive months . . . the carve-out provision for that market will cease to apply."  Id.  This provision of the DOT's order also applies to the additional carve outs it established--again in accordance with concerns expressed by the DOJ--on four U.S./Canadian markets, along with the U.S./Bejing market.  See id. at 20-21.

Even with the partial capitulation to the DOJ's call for carve outs to Star's antitrust immunity, the final order has to be seen as a victory for the airlines.  In the face of strong administrative and political pressure, the DOT has chosen to "stay the course" with respect to its international aviation policy and immunize alliances with partners from States which have signed open skies agreements.  The steadfastness of the DOT on this policy point certainly bodes well for the pending oneworld alliance application and for the Delta/Virgin Blue/Pacific Blue joint venture filed yesterday.  See Dkt. No. OST-2009-0155, Application for Approval of and Antitrust Immunity for Alliance Agreements (July 9, 2009).  It may not bode well, however, for the longterm future of the DOT's immunization authority.  With the Senate still reviewing the protectionist 2009 FAA Reauthorization Act and its proposal to sunset all antitrust immunity for alliances, it is surely not out of the question that the legislation could be "beefed-up" to include new restraints on what has become the DOT's most controversial air transport regulatory power.

Flying to Ithaca: The Olympic Epic Continues

Another chapter was written Monday in the legal odyssey involving the European Commission and the Government of Greece concerning State aid the latter provided to Olympic Airways, its longsuffering national carrier whose corporate structure has been twice transmogrified over the last six years to keep it (barely) flying.  See previous discussions of Olympic on the blog here and here.  The European Court of Justice fined the Greek Government euro 2 million for its failure to comply with an earlier ruling ordering the scofflaw State to adhere to a 2003 decision from the Commission demanding recovery of all illegal aid granted to Olympic.  See Case C-369/07, Comm'n v. Hellenic Republic, 2009 E.C.R. 00 (publication pending) (available here).  See also Commission Decision 2003/372, 2003 O.J. (L 132) 1; Case-415/03, Comm'n v. Hellenic Republic, 2005 E.C.R. I-3875.  The latest ECJ decision also imposes a daily euro 16,000 fine which is set to begin in one month should Greece again fail to adhere to the Court's earlier ruling.

While the dispute is not the stuff Homeric hymns are made of, it is a reminder that the State aid phenomenon for airlines has not completely dissipated.  Greece's steadfast refusal to follow the European Community's State aid rules with respect to its inefficient national carrier and its apparent willingness to take on substantial penalties for doing so demonstrates the extent to which national pride remains an animating force in air transport policy. 

Air Canada to Bankruptcy Court?

There are reports circulating that Air Canada may file for bankruptcy protection if three of its five unions are unwilling to ratify agreements which include wage freezes and a 21 month moratorium on payments to the airline's pension plans.  See Chris Sorensen, Analyst Predicts Full-Year Loss for Air Canada, Toronto Star (July 8, 2009) (available here); Francois Shalom, Air Canada in Disarray with Union, Montreal Gazette (July 6, 2009) (available here).  If Canada's largest airline does file for protection, it would be the second time it has had to do so in six years.  It would also give Air Canada the dubious distinction of being the first North American legacy carrier to seek protection in the courts since the global economic crisis hit.

Measuring the Airlines

Yesterday's Financial Times had an illuminating story on the way airlines, particularly low-cost carrier Ryanair, plays with its traffic numbers to support such boasting slogans as "[t]he world's favourite airline."  See Kevin Done, Airline Publicity Dogfight Hides the Real Numbers, Fin. Times (July 7, 2009) (available here).  In the end, despite the time-honored tradition of European airlines using their inflated carriage of international traffic on the Continent to bolster their global standing, U.S. carriers Delta (which now includes Northwest) and American Airlines still lead on the basis of total passenger traffic as measured by RPKs.

American's Riposte to the DOJ

On Monday, both Continental Airlines and its fellow joint applicants from the Star Alliance along with American Airlines filed separate responses to the Department of Justice's recent comments on the pending Star application.  See previous discussion on the blog here and here.  While Star's response is certainly worth reading, the American filing is particularly noteworthy for calling attention to the DOJ's dubious assertion that curtailing antitrust immunity for airline alliances won't jeopardize current and future open skies agreements.  See OST-2008-0234, Response of American Airlines, Inc. to Comments of the Department of Justice (July 6, 2009).

As American's filing states, the Department of Transportation's use of antitrust immunity as a means of enticing States to sign-on to open skies agreements "has gone a long way toward creating global competition by liberalizing markets and facilitating the emergence of broad networks capable of carrying passengers around the world."  Id.at 3.  As laudable as that is, it's an unfinished project as "[m]ajor markets remain closed--such as Japan, China, Russia and Brazil.  Alliances will help open those markets to new competition--unless, of course, the [DOT] succumbs to pressure to turn back the clock."  Id.

As for the DOJ's rather troubling claim that restricting antitrust immunity for alliances would not harm existing open skies agreements, American offered a stern reminder that

the crown jewel of the [DOT's] [international aviation] policy--the [2007 U.S./EC Air Transport Agreement]--is not etched in stone.  Several EU Member States have expressed concerns that Phase I of the deal was too one-sided in favor of U.S. carriers (which gained access to Heathrow), while EU carriers gained little.  The UK and Spanish governments (which were instrumental to the success of the U.S.-EU negotiations) may well decide to exercise their right to unwind the agreement if their consumers are denied the benefits of networks at Heathrow and Madrid [i.e., the hubs of oneworld alliance partners British Airways and Iberia] that can compete with those in Paris, Frankfurt and Amsterdam.  Such "international comity and foreign policy considerations" are directly relevant in adjudicating antitrust immunity cases.

Id.at 4 (citation omitted).

In addition to its deft analysis of the adverse impact the DOJ's suggestions would have on U.S. international air transport policy, American also offered a detailed discussion of the competitive imbalances which would be created by curtailing immunity for the Star and oneworld alliances while SkyTeam operates with global immunity.  See id.at 4-7.  The filing also contains a critique of the DOJ's carve-out proposals for the Star Alliance and contends that they rest on a number of flawed assumptions about the aviation market.  See id.at 7-14.  It will be interesting to see if American's criticisms resonate with the DOT when the final order is handed down and whether they will prompt the DOJ to revise its attack on antitrust immunity when it inevitably files objections to the oneworld alliance's pending application.

A Global Blacklist for Unsafe Airlines?

A number of news sources, including the Financial Times and The Daily Telegraph, are reporting that European Commisioner for Transport Antonio Tajani is calling for a global blacklist of unsafe airlines following the crash of a Yemeni passenger jet which is responsible for the deaths of up to 152 persons.  According to the FT story, Dominique Bussereau, France's Transport Minister, told her country's parliament that "the government would 'fight' for a worldwide blacklist system to ensure passengers did not fly in 'rubbish planes.'" 

As most of the stories concerning the call point out, the European Community established its own blacklist regulation in late 2005 following a series of high-profile crashes involving carriers from Egypt, Columbia, and Cyprus.  See Council Regulation 2111/05, 2005 O.J. (L 344) 15.  Under the Regulation, the EC may impose an operating ban on foreign aircraft which fail to meet "relevant safety standards," i.e., "international safety standards contained in the Chicago Convention [on International Civil Aviation] and its Annexes as well as, where applicable, those in relevant Community law."  Id. art. 2(j).  As some critics have opined, however, this proviso, which accords "relevant Community law" equal footing with the Chicago Convention's "international safety standards," appears incongruous with the latter's mandate for reciprocal recognition of its State parties' airworthiness certificates so long as they adhere to the Convention's safety standards.  See [Chicago] Convention on International Civil Aviation, Dec. 7, 1944, art. 33, 15 U.N.T.S. 295; cf. id. arts. 12 & 37. 

It's unclear at the moment how the EC plans--if there indeed are concrete plans--to pursue its call for a global blacklist.  International initiatives, such as the International Civil Aviation Organization's Universal Safety Audit and the International Air Transport Association's Operational Safety Audit, already exist to monitor and support safety transparency.  A global blacklist forged outside of the context of the Chicago Convention and without ICAO will likely draw criticism similar to what has already been levied against the EC.  Whether that would translate into an actual legal challenge to the blacklist is also uncertain.  Assuming the U.S., Canada, and Australia would join the EC's call, the pressure for the rest of the world to fall-in and comply will be immense.  But blacklists are not panaceas for slack airline safety.  Airlines denied meaningful market access will lose substantial revenues and may continue to fail to properly invest in maintaining and updating their fleets.  What, then, becomes of those consumers who must continue to rely on these unfit carriers for domestic transport? 

WSJ on the DOJ's Opposition to Star

The July 2 edition of the Wall Street Journal has a brief, but acute, commentary on the Department of Justice's recent filing opposing any grant of broad antitrust immunity by the Department of Transportation for Continental Airlines to join the Star Alliance.  Aptly titled "Airline Case Shows U.S. Antitrust Stance," writers Susan Carey and Elizabeth Williamson link DOJ Antitrust Division Chief Christine Varney's tough stance on corporate mergers and cooperative arrangements with Justice's call for the DOT to only grant Star limited immunity. 

Alliances and Antitrust Immunity: A Brief Reading List

In light of the recent news concerning the Justice Department's strong opposition to the expanded Star Alliance receiving broad approval and antitrust immunity, blog readers may be interested in consulting the following articles on airline alliances and the Department of Transportation's immunization powers:

• Patricia M. Barlow, Aviation Antitrust--International Considerations After Sunset, 12 Air L. 68 (1987);
• Jerry L. Beane, The Antitrust Implications of Airline Deregulation, 45 J. Air L. & Com. 1001 (1980);
• Jan K. Brueckner, International Airfares in the Age of Alliances: The Effects of Codesharing and Antitrust Immunity, 85 Rev. Econ. & Stat. 105 (2003);
• Darren Bush, Mission Creep: Antitrust Exemptions and Immunitied as Applied to Deregulated Industries, 3 Utah L. Rev. 761 (2006);

• James L. Devall, American Airlines/British Airways: An Alliance That Was Not Meant to Be?, [2001-04 Transfer Binder] Issues Aviation L. & Pol'y ¶ 10,101, at 4151 (2002);

• Brian F. Havel & Andrew C. Eastmond, The Path to Open Skies: Transcending Global Alliances, [2001-04 Transfer Binder] Issues Aviation L. & Pol'y ¶ 25,051, at 13,101 (2002);

• Rutger Jan toe Laer, Kick-Starting Cross-Border Alliances: Approval and Clearance; The Past, Present, and the Future, 32 Air & Space L. 287 (2007);
• Michael E. Levine, Commentary, Airline Alliances and Systems Competition: Antitrust Policy Toward Airlines and the Department of Justice Guidelines, 45 Houston L. Rev. 333 (2008);
• James Reitzes & Diana Moss, Airline Alliances and Systems Competition, 45 Houston L. Rev. 293 (2008); and
• W. Tom Whalen, A Panel Data Analysis of Code-Sharing, Antitrust Immunity, and Open Skies Treaties in International Aviation Markets, 30 Rev. Indus. Org. 39 (2007).

Emissions Trading and U.S. Aviation

Late last week the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong., by a narrow margin of 219 to 212.  The Act mandates a 17% reduction in carbon dioxide, methane, and other greenhouse gas emissions from their 2005 levels by 2020.  What will be the potential impact on aviation?  According to a story from Air Transport World (available here), the Air Transport Association estimates a $5 billion rise in airline fuel costs in 2012, reaching $10 billion by 2020.  In a statement to House Speaker Nancy Pelosi, the ATA stressed the importance of modernizing the U.S.'s outmoded air traffic management system as the surest means to reduce aviation emissions.  See Letter from James C. May, President and CEO, Air Transp. Assoc., to Nancy Pelosi, Speaker of the House of Rep. (June 25, 2009) (available here).  The ATA also reminded Speaker Pelosi that under the terms of the Kyoto Protocol, the International Civil Aviation Organization has been charged with "com[ing] up with a unifrom global [green house gas] emissions scheme for aviation."  Id.  Therefore, Congress should structure its emissions reduction measures "in a manner that places the regulation of [green house gas] emissions from U.S. aircraft under the global framework ICAO is developing."  Id.

Interestingly, Section 276 of H.R. 2454 contains express language that the U.S. should continue to only work with ICAO, but foreign governments in general, to establish a coherent international framework to address aviation emissions.  The section reads:

It is the sense of Congress that the United States should--

(1) continue to actively promote, within the International Civil Aviation Organization, the development of a global framework for the regulation of greenhouse gas emissions from civil aircraft that recognizes the uniquely international nature of the industry and treats commercial aviation industries in all countries fairly; and

(2) work with foreign governments towards a global agreement that reconciles foreign carbon emissions reduction programs to minimize duplicative requirements and avoids unnecessary complication for the aviation industry, while still achieving the environmental goals.

This is not surprising.  The U.S. in particular was highly critical of the European Community when it absconded from its international commitments in 2007 by entering a reservation to the latest ICAO resolution calling upon "States to refrain from environmental measures that would adversely affect the orderly and sustainable development of civil aviation" and "to continue to cooperate closely with international organizations."  See ICAO, Consolidated Statement of Continuing ICAO Policies and Practices Related to Environmental Protection, app. A, Assemb. Res. A36-22 (2007), compiled in Assembly Resolutions in Force, at I-54, ICAO Doc. 9902 (Sept. 28, 2007).  See also id., app. L; but see app. A, at A-1 (noting Portugal's reservation, on behalf of the EC, to the quoted part of the resolution).  Despite continuing protest, the EC is still committed to unilaterally bringing all civil aviation into its emissions trading scheme in 2012.  See Council Directive 2008/101, 2009 O.J. (L 8) 3.  While EC officials have stated that they would exempt American carriers from the scheme should the U.S. implement comparable measures to reduce aviation emissions, it remains unclear whether H.R. 2454 will satisfy.

The Economic Impact of Regulation

According to the business news website StreetInsider, airline stocks have been adversely impacted by the recent filing from the Department of Justice on the pending application for Continental Airlines to join the Star Alliance with full antitrust immunity.  This comes after all major U.S. carriers save Southwest Airlines experienced double-digit falls last month in their stock value.  It will be interesting (and perhaps disconcerting) to examine the numbers once the Department of Transportation issues its final order on Star's application.  Undoubtedly the decision will signal investors as to the likelihood of American Airlines receiving final approve and immunity for its pending hook-up with British Airways and Iberia as part of the oneworld alliance.  A final decision from the DOT on that application is expected by the end of October.

More on the DOJ/Star Alliance Fallout

Today's Wall Street Journal has a good story on the Department of Justice's opposition to Continental Airlines joining a Star Alliance fully immunized from U.S. antitrust law.  A few points from the story worth considering:

• "The Justice Department . . . technically has no authority over international aviation agreements, but it typically weighs in on such DOT rulings. In this case, however, it waited nearly two months after the comment period closed before registering its opinion with the DOT on Friday."

• "The Justice Department's objections also could signal problems for a separate application for antitrust immunity by members of the oneworld group of carriers[.]"

• "Unions representing United pilots and flight attendants also have signaled their opposition, contending the antitrust immunity would lead to the outsourcing of U.S. jobs."

The story which is beginning to unfold is that of interagency meddling and labor, which is currently enjoying the inflation of its political clout under the Democrats' regime, attempting to hold the alliance proceedings hostage out of malcontent.  A recent letter from United's flight attendants to the DOT "call[s] on the Administration to enact durable and meaningful provisions designed to insure an equitable measure of protections for workers" as part of the Star application.  See Press Release, Association of Flight Attendants-CWA, Flight Attendants Press DOT for Job Protections in UAL/CAL Alliance (June 30, 2009) (available here).  What these "durable and meaningful provisions" should look like is left unsaid.  What also seems to be left out of labor's concerns is any genuine reflection on what a highly restricted alliance could mean for United and Continental's market share.  If potential job losses are their real concern, they would do well to stay out of the way and let the airlines freely compete on a global level.

As for the interagency issue, there is no question that the DOJ's Antitrust Division is looking to take a hard line on enforcement and consumer protection.  See, e.g., Christine A. Varney, Assistant Attorney General, U.S. DOJ Antitrust Division, Vigorous Antitrust Enforcement in This Challenging Era, Remarks to the U.S. Chamber of Commerce (May 12, 2009) (available here).  But even so, as the WSJ story correctly highlights, they are not the agency apportioned by statute to approve and, potentially, immunize intercarrier agreements involving foreign air transportation; the DOT is.  It's no secret the DOJ has been less-than-thrilled with the DOT's immunization powers.  In the words of former Assistant Attorney General Anne K. Bingaman: "It is not necessary for code share partners to receive antitrust immunity for any agreement that would not violate antitrust laws; and conduct that would violate antitrust laws should not be permitted, much less immunized."  Consolidation and Code Sharing: Antitrust Enforcement in the Airline Industry, Address to the ABA Forum on Air and Space Law, Washington, D.C. (Jan. 25, 1996) (available here).  In the 13 years since this protest was made, Congress has not seen fit to divest the DOT of its broad immunization powers, nor has it made the move to allow airlines to consummate crossborder mergers.  This latter fact is telling about why airlines have sought the "pseudo-merger" benefits of alliances, especially in a commercial environment where consumers have come to expect and rely upon the route networks alliances provide.  See Michael E. Levine, Commentary, Airline Alliances and Systems Competition: Antitrust Policy Toward Airlines and the Department of Justice Guidelines, 45 Houston L. Rev. 333 (2008).  If the U.S. has finally reached that "absolute moment" in the history of airline regulation where antitrust immunity appears as nothing other than a dark artifice whose purpose and logic have been extinguished by the light of authentic liberalization, then let the citizenship purity rules for airline ownership be vanquished and the noble knights of competition protection at the DOJ stand guard.  If not, then these knights serve as nothing more than Praetorians of protectionism with the DOT's antitrust immunity power the only shield between them and the freedom of the airlines to operate international services efficiently and effectively in a globalized world.

DOJ Contra Star Alliance

When it was first discussed on the blog that the Department of Justice's Antitrust Division would, in the words of U.S. Attorney General Eric Holder, "have some input" into the pending final order for Continental Airlines to join the Star Alliance with antitrust immunity, some concern was raised that the DOJ would suggest "carving out" certain routes covered by the alliance's carriers from immunization.  This seemed problematic, especially since the Department of Transportation, the administrative agency exclusively endowed by statute with the power to approve and immunize intercarrier agreements involving foreign air transportation, see 49 U.S.C. §§ 41308-09, had found that standing carve outs for the Star Alliance (specifically the Chicago/Frankfurt and Washington/Frankfurt markets) were no longer necessary.  See Dkt. No. OST-2008-0234, Order 2009-4-5 (Apr. 7, 2009), at 10-11.  It now appears that the DOJ disagrees with that line of thinking and disagrees vehemently. 

According to a 55-page submission filed last Friday, the DOJ is requesting the Transportation Department "deny the broad requested immunity [for the expanded Star Alliance] and instead grant a more limited immunity."  See Dkt. No. OST-2008-0234, Comments of the Department of Justice on the Show Cause Order (June 26, 2009), at 2 (available here).  This "more limited immunity" should, according to the DOJ, "carve out the transatlantic and transborder markets where competitive harm is most likely to occur, maintain existing carve outs, and limit immunity to transatlantic markets."  Id.at 36.  Thus, in addition to retaining the carve outs the DOT had indicated it was willing to eliminate, the DOJ is urging that ten additional routes be added and that the carve outs not be restricted to only certain fare classes on these routes.  See id. at 39-40.  The DOJ's submission also recommends that any antitrust immunity offered to Star be strictly limited to the transatlantic market on fear that global immunity "would eliminate competition" and "increase the risk of spillover effects" in the U.S. domestic market with respect to Continental and United's operations.  See id. at 42.

While further analysis on the blog of the DOJ's submission is forthcoming, it should be noted that the DOT is under no statutory obligation to adhere to the Justice Department's suggestions.  On the other hand, with the Senate Judiciary Committee clearly standing behind DOJ's involvement (see earlier discussion on the blog here) and the House having already passed a version of the 2009 FAA Reauthorization Act which would sunset all antitrust immunity for international alliances, the DOT may find the political pressure too strong to resist.  Indeed, resistance may quickly lead to Congressional action rescinding or, at the very least, tightly conditioning the agency's longstanding approval and immunization powers altogether.