Wednesday, February 25, 2009
A troubling (though underreported) development in the proposed British Airways/American Airlines alliance approval and immunization drama is a new push by labor to make approval contingent on AA extending recall rights for nearly 2,000 furloughed flight attendants. (The full story is available from the Joplin Independent here.) Roger Graham, who was behind the extension of such rights to AA flight attendants following 9/11 and is currently running to head AA's flight attendants' union, wrote to Transportation Secretary Ray LaHood that "[i]f American Airlines is being truthful about additional flying they believe the anti-trust immunity would bring then they should not be unwilling to provide an additional extension to the recall rights of those workers currently laid off.”
What Graham's "observation" fails to appreciate is that AA's potential new flying opportunities will largely hinge on its capacity to keep overhead costs to a minimum and, perhaps, shed more unnecessary labor. Even in a best case scenario for the BA/AA alliance, both carriers--like all of civil aviation--are being forced to take a hard look at their business models in order to survive during the worst worldwide economic crisis in decades. Though fuel costs currently remain at a manageable level, the airlines well know that it is only a matter of time before they escalate again. The shedding of capacity U.S. carriers undertook in 2008 should allow them to turn a minor profit in 2009. However, if oil prices begin to spike again, then more cuts will be required. This is the time for governments worldwide to do everything in their power to unshackle international civil aviation, not threaten to withhold the capacity for key players to compete in order to ease the discontent of those displaced by the market. With the SkyTeam Alliance already enjoying approval and immunization from the DOT, the BA/AA alliance requires it more than ever if there is to be a level playing field in the transatlantic market. Further, given the shockwave a denial of immunization will likely send through the ongoing U.S./EU negotiations for a second stage air transport agreement, catering to labor could lead to a recall of the rights granted under the 2007 agreement and a lot more furloughed flight attendants.
Monday, February 23, 2009
Irish low-cost carrier Ryanair had some cause to celebrate last week. The European Commission announced that it would not appeal last year's judgment by the Court of First Instance (CFI) which nullified the Commission's decision that Ryanair had been the recipient of illegal State aid on account of advantages authorized to the carrier by Belgium's Walloon Region and Brussels South Charleroi Airport (BCSA). In an official press release, Ryanair CEO Michael O'Leary stated, "We are happy but not surprised at the Commission's decision not to appeal what was a thorough vindication of the low cost airport model and Ryanair's agreement with Charleroi Airport. The Commission simply got it wrong, as has been subsequently proven by the huge success of Charleroi Airport."
What ought to be kept in mind is where the Commission "got it wrong." As discussed previously on the blog, the CFI held that the Commission had incorrectly applied European Community State aid rules to the Ryanair/BSCA arrangement. The CFI by no means provided a "thorough vindication of the low cost airport model" in its decision. In fact, it made no comment on whether the deal could have survived under the State aid rules had the Commission applied them properly. With eight other investigations into its arrangements with secondary airports in Alghero, Aarhus, Bratislava, Frankfurt Hahn, Hamburg Lubeck, Pau, Berlin Schonefeld, and Tampere, Ryanair's tangle with the Commission is far from over. The CFI decision provides an ample roadmap for the Commission to avoid future legal pitfalls when applying State aid rules to comparable arrangements between Ryanair and the aforementioned airports. It seems that Europe's largest low-cost carrier will have to be ever more dogged in the fight to vindicate its business model.
Giovanni Bisignani, the International Air Transport Association's Director General and CEO, delivered a strong speech on the importance of civil aviation to worldwide economic recovery to the Wings Club in New York City. (A full text of the speech is available from IATA here.) While Bisignani centered his comments on the need for an initial $4 billion investment to improve the U.S.'s air traffic management system, he also encouraged the Obama Administration to make serious policy adjustments with respect to security, the environment, and commercial freedoms. On the last point, Bisignani stated:
Thirty years after the US started deregulation under President Carter, the job is still incomplete. International markets are closed until governments negotiate them open and foreign ownership restrictions limit access to global capital and prevent cross-border consolidation. . . .
[I]t’s time for the bilateral system, fathered by the US and the UK 62 years ago, to go the way of the paper ticket - framed and in a museum. What worked in the 1940s is killing the industry today.
Bisignani's observation is not new, but its importance has been dramatically heightened by the worldwide economic crisis. With the financial sector still in turmoil and global manufacturing experiencing a rapid decline, service industries are being affected. In December 2008, IATA reported a 22.6% plummet in air cargo compared to a year before and an overall $2.5 billion loss for the industry in 2009. The prudent response to the drop in demand for a market overcrowded with players is consolidation. Opportunities within the U.S. are dwindling. Last year's Northwest/Delta merger was a critical move for both carriers, but one which may not be available to other major U.S. airlines such as Continental, United, and American.
For all of its exhortation on opening up U.S. carriers to foreign investment, Bisignani's speech failed to address a number of pending issues which could have a substantial (and detrimental) impact on the future of air transport liberalization. Specifically, Bisignani did not discuss Rep. James Oberstar's legislative proposal which would sunset antitrust immunity for transnational airline alliances and perhaps lead to divesting the U.S. Department of Transportation of its immunization powers altogether. He also refrained from mentioning the petition brought to the DOT by Alaska Airlines which calls for an investigation into the ownership structure of Virgin America. The outcomes to both the legislative proposal and the petition are important because they will provide clear indication of the U.S.'s aeropolitical mentalité. A willingness to take protectionist action will likely signal intransigence on the foreign investment issue. Unless these challenges to authentic liberalization are dealt with quickly, there may be little hope for the macro-level change Bisignani and his constituents believe is vital for the stability of international civil aviation.
Thursday, February 19, 2009
In light of the recent slowdown in web-log postings over the last week due to pending commitments, readers may wish to spend some time perusing some recent scholarly contributions to the debate surrounding foreign ownership of U.S. airlines and the future of air transport liberalization:
Josh Cavinato, Note, Turbulence in the Airline Industry: Rethinking America's Foreign Ownership Restrictions, 81 S. Cal. L. Rev. 311 (2008)
Lawrence J. Kelly, Is That "Whoosh" You Hear a New Whisper-Jet Whisking Across U.S. Skies, or the Perotvian "Sucking-Sound" of Jobs Leaving the Country?, 14 L. & Bus. Rev. Am. 699 (2008)
Jason Finan, Comment, A New Flight in the International Aviation Industry: The Implications of the United States-European Union Open Skies Agreement, 17 Tul. J. Int'l & Comp. L. 225 (2008)
Bimel Patel, A Flight Plan Towards Financial Stability--The History and Future of Foreign Ownership Restrictions in the United States Aviation Industry, 73 J. Air L. & Com. 487 (2008)
Christian Westra, Comment, The April 2007 U.S.-EU "Open Skies" Agreement: A Dream of Liberalization Deferred, 32 B.C. Int'l & Comp. L. Rev. 161 (2009)
Thursday, February 12, 2009
The last time negotiators from the United States and European Union were busy trying to finalize a far-reaching aviation agreement, Sir Richard Branson's brainchild Virgin America was looking down the barrel of intense scrutiny concerning its ownership structure. Now, with second-stage talks underway between the U.S. and EU, Virgin America could find itself back before the U.S. Department of Transportation to show that it remains owned and controlled by U.S. citizens. Rival carrier Alaska Airlines is asking the DOT to conduct "a careful and ongoing review" of Virgin America, stating that "[s]ince the issuance of their certificate, Virgin America's structure and operations have clearly changed; however, there is a lack of public information about those changes or how they may impact its citizenship status." Alaska Airlines further pointed to "[r]ecent questions about Virgin's ownership status establish[ing] a compelling need for a transparent review of its continuing compliance with [U.S. law]." In its petition to the DOT (Docket No. OST-2009-23307), Alaska Airlines cites substantial cash infusions (allegedly including the British Virgin Group), the possibility of two major U.S. investors pulling out, and a possible plan to create a "time share" ownership structure to satisfy U.S. citizenship rules as "important and potentially disturbing changes" to Virgin America which warrant reinvestigation.
The aeropolitical backdrop to this pending investigation should not be discounted. After failing to win DOT approval to begin operating services in December 2006, Virgin America's fortunes changed in March 2007 following a number of alterations to its ownership structure and its willingness to comply with further DOT demands. This aboutface by the DOT came just days before the EU Council of Transport Ministers was scheduled to finalize the terms of the U.S./EC Air Transport Agreement, though the DOT's decision forewent any explicit mention of that fact. Arguably, the DOT's approval stands on its own merits. Even a cursory reading of the proceedings reveals a careful analysis of Virgin America's ownership structure, and the subsequent conditions imposed on the carrier (including the removal of CEO Fred Reid) were substantive. What Alaska Airlines appears to be questioning (albeit indirectly) is the DOT's commitment to do more than simply rubberstamp contentious applications as a means of advancing U.S. international aviation policy.
A new investigation could go either way at this point. But surely the DOT realizes that an unfavorable result for Virgin America won't sit well across the Atlantic. Between the Obama Administration's apparent unwillingness to yield on foreign ownership restrictions and the recently proposed federal legislation which could threaten international airline alliances, the U.S. has done nothing to show its EU partners that it is willing to move forward on air transport liberalization. From the EU's perspective, there should be no issue with Virgin America's citizenship; the ownership and control rules are dinosaurs which have no place in a deregulated industry. So long as they remain and the right of Virgin America to fly hangs in the balance, the EU (and especially the UK) will be well-entitled to its discontent with U.S. aviation policy. Will this antipathy finally culminate in the EU (or its individual Member States) suspending rights under the 2007 Agreement? A decision in Virgin America's favor will only maintain the status quo; a finding against it could further tip the scales towards suspension and set international air transport liberalization back a decade.
Tuesday, February 10, 2009
Reuters is reporting that the Canadian Government is again contemplating easing restrictions on foreign investment in domestic airlines. The proposed change, which was entered into a budget implementation bill introduced last Friday, would authorize raising the investment cap from 25% to 49%. While the move has drawn the ire of both the separatist Bloc Quebecois and the New Democratic Party, liberal M.P. John McCallum has defended the proposal for allowing a carrier such as Air Canada to access needed foreign capital during the economic downturn.
If Canada's investment cap is raised, it certainly will be welcome with open arms across the Atlantic. The Canada/EC Air Transport Agreement, initialled last December, envisages a phased (although highly contingent) removal of investment and cabotage restrictions between the two sides. The first phase, which is expected to begin after the Agreement is signed this May during the annual Canada/EU Summit, will largely mirror the rights contained in the 2007 U.S./EC Air Transport Agreement. Once Canada raises its foreign investment cap to 49%, it will receive seventh-freedom rights for cargo carriage. While the Agreement's terminus ad quem is full ownership and control of each side's carriers by the other's nationals, there is no definite timetable for this to occur.
It will be interesting to see what (if any) pressure the pending Canadian legislation puts on the United States to follow suit. Publicly, the U.S. position has remained steadfast that it will not lift its airline investment cap (set at 25%). This should change. U.S. carriers no less than Canadian ones could benefit from access to foreign capital. In fact, the transatlantic aviation market could benefit from full transnational mergers. With airline alliances under scrutiny for their alleged anticompetitive practices and their antitrust immunity potentially at risk, now would be the time to let them operate as normal actors in the global market, subject to robust but fair competition rules. Alliances remain a "second best" option in the face of highly restrictive foreign investment limits--one that requires immunization to operate successfully. If that is politically unpalatable, then the airlines must be allowed to exercise the best one: transnational mergers. With consolidation opportunities dwindling in the domestic sphere and access to funding tight, the U.S. should join its neighbor to the north and move to eliminate this needlessly draconian and outmoded rule.
Friday, February 6, 2009
A lead article in this week's edition of The Economist is entitled, "The Return of Economic Nationalism." As it states:
Managing a[n] [economic] crisis as complex as this one has so far called for nuance and pragmatism rather than stridency and principle. . . . But the re-emergence of a spectre from the darkest period of modern history argues for a different, indeed strident, response. Economic nationalism—the urge to keep jobs and capital at home—is both turning the economic crisis into a political one and threatening the world with depression. If it is not buried again forthwith, the consequences will be dire.
This is as true for the international trade in goods as it is in services, including air transport services. Nationalism is not new to international civil aviation. In fact, for over six decades it has been coeval with it. As Prof. Brian Havel notes in his forthcoming book, Beyond Open Skies:
Launched by a restrictive global convention in Chicago in 1944, [international civil aviation's] existing regulatory regime has largely stood firm against the neoliberal free trade winds of the post-war era, straitjacketing the world's airline industry within a system of bilateral, point-to-point air treaties that explicitly reserves to governments the power to parcel out (and to deny) access to national airspace by foreign airlines, to exclude foreign airlines from domestic air service ('cabotage'), and to prohibit foreign citizens (and their airlines) from owning and controlling national air carriers (the 'nationality rule').
While a great deal of attention is currently (and understandably) being paid to an $800 billion-plus stimulus bill being debated on Capitol Hill which, some fear, could contain a provision shutting out foreign suppliers from the vast public works programs the legislation envisages, that should not distract from Rep. James Oberstar's bill targeting international airline alliances. It, no less than a "Buy American" clause, could have a chilling effect on international trade relations. It is important to remember that Rep. Oberstar's bill is being introduced at a time when the United States and European Union are engaged in second stage negotiations to expand the historic 2007 U.S./EC Air Transport Agreement. Article 21 of the Agreement propounds a second stage agenda which implicitly contemplates cabotage ("further liberalization of traffic rights") and easing of inward investment restrictions ("additional foreign investment opportunities") as issues of "priority interest." Given the Air Line Pilots Association's steadfast opposition to relaxing either restriction and President Barack Obama's apparent willingness to adhere to ALPA's policy positions (discussed on the blog here), chances are slim for progress in these areas during the second stage. What, then, does the U.S. have to offer? Some analysts have held out the possibility of both sides integrating their regulatory oversight of airline alliances, but that, of course, assumes the present alliance system remains. Rep. Oberstar's bill hangs like a dark cloud over that assumption.
It is also important to consider what sort of message legislation which could lead to an unraveling of deregulation for air transport sends. Could it be that the country which so boldly deregulated its domestic market 30 years ago and pursued such liberalizing external aviation policies as "Open Skies" is setting the stage for an aviation trade war? Remember that the EU (and possibly its individual Member States) has the option to suspend any or all of the rights granted under the 2007 Agreement if a satisfactory second stage agreement is not secured by November 2010. The United Kingdom has been particularly outspoken about its dissatisfaction with the first stage and its willingness to dismantle U.S. carriers' newly acquired route privileges. With the pending approval and antitrust immunization application of the proposed British Airways/American Airlines/Iberia alliance potentially compromised by the threat of Rep. Oberstar's bill, the U.K.'s dissatisfaction will only deepen. Should the bill come into effect and the present immunization for both the SkyTeam and Star alliances sunset, the U.K.'s antipathy will spread quickly. With the alliances gone, traffic rights suspended, and the hopes of furthering air transport liberalization dashed, the transatlantic aviation marketplace will quickly find itself haunted by the spectre of economic nationalism.
Thursday, February 5, 2009
Prof. Paul Stephen Dempsey, Director of the Institute of Air and Space Law at McGill University, recently published an extensive new aviation law treatise, Public International Air Law. With nearly 900 pages of primary and secondary material, Prof. Dempsey's work should be applauded for its scope. A full press release along with ordering information is available from McGill University here.
A new posting from The Middle Seat Terminal, the travel blog of The Wall Street Journal, discusses Rep. James Oberstar's proposed legislation which could spell the end of antitrust immunity for alliances such as Star, SkyTeam, and oneworld. As Matt Phillips--WSJ writer and the blog's lead poster--points out, the proposal alone "[n]o doubt . . . makes carriers with pending requests for antitrust immunity fairly jittery that their petitions will be turned down or delayed." It's possible (though far from certain) that the U.S. Department of Transportation may tread lightly from here on out in the hopes of assuaging fears that it is has failed to be judicious with its immunization powers.
Continental Airlines, which has an application pending before the DOT to join the Star Alliance, issued the following press statement yesterday:
Continental would be pleased to participate in Chairman Oberstar's proposed study. However, any further delay in the review of the current ATI applications perpetuates the competitive imbalance that now exists, and we caution against prolonging the current anticompetitive environment. We are confident DOT will approve our applications to participate in
Star Alliance. It is important for this review to be completed expeditiously so we can provide effective competition to airlines globally, including the world's largest airline, which already operates in an antitrust immunized global alliance with Europe's largest airline. We agree with Chairman Oberstar that all global alliances need to be treated equally. This is essential not only to Continental, but to our customers, communities and employees, which is why our ATI application is supported by dozens of members of Congress, mayors, governors and business groups around the country.
The SkyTeam Alliance, which includes Air France-KLM and the recently merged U.S. carriers Delta and Northwest, already enjoys transatlantic antitrust immunity from the DOT. Until the expanded Star Alliance and oneworld applications are approved, a competitive imbalance exists. Regardless of the legislative fate of Rep. Oberstar's new bill, the DOT should move forward on approving these applications. Doing so will enhance competition and allow consumers to reap the benefits while Congress debates the purported merits of turning back the clock on air transport regulation.
Wednesday, February 4, 2009
Rep. James Oberstar, Chairman of the House Transportation and Infrastructure Committee, is behind the newly introduced bill, H.R. 831 which bears the title "A Bill to Ensure Adequate Airline Competition between United States and Europe." Rep. Oberstar's speech in support of the bill may be read here. Needless to say, this will raise more than a few eyebrows across the Atlantic. Further discussion on this blog of the bill and its implications is forthcoming.
Tuesday, February 3, 2009
Readers interested in the regulatory ramifications of airline alliances will want to peruse Prof. Philip G. Gayle's recently published study, An Empirical Analysis of the Competitive Effects of the Delta/Continental/Northwest Code-Share Alliance, 51 J.L. & Econ. 743 (2008). Gayle, an Associate Professor in the Department of Economics at Kansas State University, has found that the three-way alliance--which received approval from the U.S. Department of Transportation in 2003--did not appear to facilitate collusion on price or traffic levels in the carriers' overlapping markets. This conclusion, the result of an aggregated analysis of both traditional and virtual code-sharing, goes some distance in vindicating the DOT's decision to approve the alliance despite the fact it involved an unprecedented number of overlapping routes. (The DOT's Termination of Review Notice is available at 68 Fed. Reg. 16,854.) Prof. Gayle's previous work in this area, Airline Code-Share Alliances and Their Competitive Effects, 50 J.L. & Econ. 781 (2007), suggested a structural econometric model to quantify the competitive effects of proposed code-share alliances which, if applied by the DOT, could allow the agency to make a more informed decision when weighing potential consumer benefits against the possibility of price increases.
Monday, February 2, 2009
Airport Coordination Limited (ACL), which is charged with coordinating slots at London’s Heathrow Airport, submitted answers last week to the U.S. Department of Transportation as part of the latter’s ongoing investigation into the pending alliance approval and antitrust immunity application for American Airlines, British Airways, and Iberia (all members of the oneworld alliance). At issue is the availability of slots at Europe’s busiest airport for new entrants in the transatlantic market. In its submission (Doc. ID: DOT-OST-2008-0252-3068), ACL reaffirmed that the secondary market remains the only viable avenue for determined new entrants to begin offering services on the transatlantic market, though "it is ACL's experience that new entrant airlines still need to be flexible about the timing of slots and accept commercially suboptimal timings." ACL also stated that "[t]he ability of potential competitors [to the proposed alliance] to secure slots on the secondary market assumes that the competitors value slots more highly than the existing holders and any other potential user of the slots . . . such that redistribution of slots to new transatlantic services would be an economically efficient outcome." Though the private nature of slot transactions did not allow ACL to provide exact figures on the going rate for slots in the transatlantic scheduling time windows, it did speculate "that slot values have [probably] fallen back from the high levels reportedly paid during the exuberant market of 2008" following the U.S./EC Air Transport Agreement.
The scarcity of slots at London Heathrow will no doubt factor heavily into the forthcoming DOT decision for the proposed alliance. Two previous applications for an immunized BA/AA "oneworld" alliance were denied by the agency, in part due to the absence of an "Open Skies" agreement with the United Kingdom as well as the unwillingness of the carriers to surrender some of their Heathrow slots to competitors. BA CEO Willie Walsh, while reportedly "confident" that the DOT will give the green light, is still not interested in relinquishing slots. Unlike the last time around, the existence of an "Open Skies" agreement is not an issue and opposition from rivals (with the notable exceptions of Virgin Atlantic and Air France) has not played a role in this regulatory drama. Industry analysts have pointed out that if the alliance is not approved, oneworld may collapse should its smaller Pacific partners choose to defect to the rival SkyTeam and Star alliances--both of which already enjoy varying degrees of approval and immunization. If that happens, the DOT may have narrowed the competitive skyways in the name of protecting them.
While a final order from the DOT may still be months away, it is likely to impact the mood of the ongoing negotiations for a second stage U.S./EC agreement. The UK, which publicly expressed dissatisfaction over the terms of the first agreement and has threatened to suspend traffic rights if the second stage fails to yield more favorable results, will not look kindly on its native carrier's transnational venture being once again snubbed by the DOT. With the U.S. having very little to offer its European partners with respect to easing foreign ownership and control restrictions, any further jolt to the spirit of cooperation could have dire consequences.