Tuesday, April 14, 2009

On the DOT's Tentative Approval for Continental to Join Star

Last week the U.S. Department of Transportation issued a Show Cause Order for the Star Alliance's Joint Application for a grant of authority and antitrust immunity for Continental to be added to the alliance.  See Dkt. No. OST-2008-0234, Order 2009-4-5 (Apr. 7, 2009) [hereinafter Continental Order].  The order, which was issued against the backdrop of Rep. James Oberstar's proposal to sunset all antitrust immunity for international alliances, defies the predictions of some industry analysts that the legislative proposal itself would have a chilling effect on any further grants of immunity.  Not surprisingly, the DOT opted not to address any political concerns with its order and instead focused on applying its standard alliance approval and immunization jurisprudence to the proposal.

The statutory basis of this jurisprudence is found in the 1979 International Air Transportation Competition Act which allows crossborder intercarrier agreements such as alliances to be filed before the DOT for approval and antitrust immunity.  See 49 U.S.C. §§ 41308-09.  Under the statute, the DOT shall approve such agreements so long as they are "not adverse to the public interest."  § 41309(b).  Applying the standard Clayton Act test, however, the DOT "shall disapprove . . . an agreement . . . that substantially reduces or eliminates competition," § 41309(b)(1), unless "the agreement . . . is necessary to meet a serious transportation need or to achieve important public benefits (including international comity and foreign policy considerations)," § 41309(b)(1)(A).  The DOT must also apply the so-called Bank Merger Act escape clause to find that "the transportation need cannot be met or those benefits cannot be achieved by reasonably available alternatives that are materially less anticompetitive."  § 41309(b)(1)(B).  Only after winning DOT approval can an agreement receive antitrust immunity "to the extent necessary to allow [the applicants] to proceed with the transaction specifically approved . . . and with any transaction necessarily contemplated by the [approval] order" if the DOT "decides it is required by the public interest."  See § 41308(b).  While there are two "public interest" tests bundled in the DOT's alliance approval and immunization jurisprudence, the DOT "has always recognized that the public interest standard [for antitrust immunity] is a much more stringent standard than [the alliance approval] public interest standard."  See Continental Order, supra, at 18 (internal quotation marks ommitted).

With respect to its tentative order authorizing Continental to join the Star Alliance with full antitrust immunity, the DOT found that the addition of Continental to the alliance was not likely to substantially reduce competition "provided that transatlantic markets remain governed by a regional open-skies agreement that promotes new entry regardless of national borders. See id. at 17.  With the Clayton Act test satisfied, the DOT did not have to go through the process of rehabilitating the proposal by examining whether approval would "achieve important public benefits."  Arguably, the DOT could forego granting antitrust immunity upon approval since, in its own words, "[i]t is not our policy . . . to confer antitrust immunity simply on the grounds that agreements do not violate the antitrust laws."  Id.  Rather, such grants are only given "if the parties [to the agreement] would not otherwise go forward without it" and "the public interest requires" it.  Id.  However, given that the proposed expansion of the Star Alliance "involves multiple large carriers, including two U.S. carriers, combining their international operations on a scale not previously attempted," id. at 18, there remains a risk of antitrust litigation sufficient to satisfy the DOT of the need for immunization, see id. 

As for the immunization "public interest" test, the DOT was persuaded by the host of public benefits an expanded and fully operational Star Alliance could confer, including an expanded network, new online services, enhanced service options, enhanced competition, cost efficiencies, and the strengthened financial position of the carriers involved.  See Continental Order, supra, at 19.  However, the DOT did express concerns that the fully array of benefits the alliance could offer hinged on the carriers fully implementing their "Atlantic Plus-Plus" (A++) plan which would bring the transatlantic routes served by Air Canada, Continental, Lufthansa, and United within the venture, allowing the participants to "jointly manage capacity scheduling, pricing, revenue management, sales, marketing, and financial settlement."  Id. at 3-4.  Since the plan has yet to be fully executed, the DOT conditioned its approval and immunization on complete implementation within 18 months of an issuance of a final order for the alliance application.  See id. at 21-22.

Two additional outcomes from the DOT's order bear mentioning.  First, despite having the discretion to "carve out" city pairs from an alliance approval and immunization application where there are concerns that consumers may be harmed from reduced competition, the DOT not only declined to do so on markets affected by Continental's entry into Star, but instead tentatively removed earlier carve outs for the Chicago/Frankfurt and Washington/Frankfurt markets pending full implementation of A++.  See id. at 10-11.  Second, the DOT was relieved of any competition fears it might have concerning two major U.S. carriers as part of the single alliance through a Department of Justice-reviewed submission by the airlines that they remain subject to U.S. antitrust laws for conduct in any air transportation market solely within the United States and will adhere to strict confidentiality guidelines with respect to "competitively sensitive information concerning air transportation in domestic markets."  See id. at 22.  On this matter, the DOT also issued a potential signal for future alliance expansion by stating its unwillingness "to arbitrarily limit the number of U.S. carriers that may join an immunized alliance," instead opting to "assess the risk of harm [to competition] on a case-by-case basis and weigh it against the potential public benefits."  See id. at 14.

With two key U.S. carriers tentatively cleared to be part of a single immunized international alliance, it will be interesting to see whether the DOT's liberality toward these ventures carries over to the still pending American Airlines/British Airways/Iberia (oneworld) application.  As it stands, Star and SkyTeam remain the only two fully immunized alliances competing in the transatlantic market.  Given the DOT's explicit confidence that the 2007 U.S./EC Air Transport Agreement has established the proper environment for free and open competition, handicapping oneworld appears neither prudent nor wise.  At the very least, it would mean one less major actor which could bring competitive discipline to the other two.  More troubling, it could sour the ongoing negotiations between the U.S. and EC for a second stage agreement and unravel the conditions altogether for enhanced transatlantic competition.

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