Friday, July 31, 2009
Hubert Horan is an independant aviation analyst with 25 years of experience. He has published extensively on airline competition issues and has first-hand experience working with over a dozen major airline mergers, alliances, and restructuring. Further information on Mr. Horan, including articles and public statements, may be found on his website, Hubert Horan Aviation.
Thanks to Prof. Brian Havel for the invitation to post an introduction to the “anti-airline consolidation” viewpoint. The issues here are immediately relevant to the current antitrust immunity applications (CO/Star, AA/BA), the next phase of US-EU Open Skies negotiations, and the dispute between the DOT and DOJ that emerged in the CO/Star case. I am not a lawyer, but have been an airline manager/consultant for a quarter century. At Northwest, I was responsible for the original development of the NW-KL alliance network that served as the template for all of the subsequent North Atlantic alliances, and later managed one from the other side of the Atlantic (Swissair-Delta). I’ve also helped shut down major alliances that didn’t make any economic sense (CO-America West, the intra-European Qualifyer group) and have been involved in a wide variety of merger cases. I have published a number of articles on international airline competition, and testified before Congress on the Delta-Northwest merger. One can obviously not prove or refute major claims in a blog setting, but I’ll try to throw out a number of points that I think would need to be fleshed out in a more serious analysis, and addressed by advocates of increased consolidation.
A couple critical background points:
The Aviation Law Prof Blog welcomes guest posts from academics, attorneys, analysts, industry participants, and interested students of aviation law and policy on any topic related to the subjects considered on this blog. Guest posts may respond to content featured on the blog or explore entirely new issues. Those interested in contributing a guest post should submit the proposed text to either Brian Havel or Gabriel Sanchez. All submissions are subject to (light) editing and should not have appeared on another web-log or in print.
Thursday, July 30, 2009
Professors Volodymyr Bilotkach & Vivek Pai of UC Irvine's Department of Economics have an informative working paper on airport dominance up on SSRN. See Hubs Versus Airport Dominance (Working Paper, Feb. 25, 2009) (available here). From the abstract:
This study separates what is known in the literature as the airport dominance effect (dominant airline's ability to charge higher fares for trips to/from the airport at which it has the dominant position) into what can be interpreted as quality and market power based components, using price data for trips to/from/through five US airports, each serving as a hub for two US carriers. We find market power based component of the dominance premium is smaller than the quality based one. We also determine that dominant carriers exercise their market power on an average customer rather than a price insensitive business traveler. This is in contrast to what previous studies suggested.
Readers of the blog interested in the economic analysis of immunized airline alliances and their impact on the aviation market would do well to read W. Tom Whalen's A Panel Data Analysis of Code-Sharing, Antitrust Immunity, and Open Skies Treaties in International Aviation Markets, 30 Rev. Indus. Org. 39 (2007). As the abstract reads:
This paper estimates the effects of code-sharing, antitrust immunity, and Open Skies treaties on prices, output, and capacity using an eleven-year panel of U.S.-Europe data. Code-sharing and immunized alliances are found to have significantly lower prices than does traditional interline (multi-carrier) service, but the effects are smaller in magnitude than those found in previous results that rely on cross-sectional data. Statistical tests that prices for immunized alliance service are equal to online (single carrier) service often cannot be rejected, providing additional evidence that immunity grants allow immunized carriers to internalize a double marginalization problem. Estimated output effects, consistent with the price effects, show that alliances are associated with large increases in passenger volumes. Lastly, estimates suggest that capacity expansions associated with “Open Skies” treaties are due entirely to expansion by immunized carriers on routes between their hubs.
A list of further readings on alliances and antitrust immunity is available in an earlier post here.
Wednesday, July 29, 2009
Though there is a great deal of anti-airline alliance invective coming out of the Halls of Congress at the moment, it should not be taken as a sign the U.S.'s legislators are of one mind on the nation's air transport policy. According to a news report issued by the National Industrial Transportation League--a longstanding representative body for the freight transportation sector--members of the U.S. Senate Commerce, Science and Transportation Committee
urged Transportation Secretary Ray LaHood in a letter to have his department “exercise its long-held statutory authority and expertise to determine if applications for airline antitrust immunity are in the public interest.”
The letter, released by the senators, said: “We are writing regarding the long-standing authority of the Department of Transportation (DOT) to approve or disapprove applications for antitrust immunity between U.S. and foreign air carriers. This fundamental component of the department’s jurisdiction has helped to promote competition in the airline industry by opening up restricted markets and encouraging healthy competition among international alliances.”
A full copy of the piece is available online here.
As mentioned in one of yesterday's blog posts, see post here, Rep. James Oberstar, Chairman of the House Transportation Committee, is back pressing his case against antitrust immunity for international airline alliances. The crux of his argument, which he made clear in a letter earlier this month to, see Letter from Rep. James Oberstar to Christine A. Varney, Asst. Attorney General (July 8, 2009) (available here), is that
[i]f the [Star and oneworld alliance] applications are approved [by the Department of Transportation], the United States-European market will essentially be locked down by the top three alliances [including SkyTeam], which will have a market share of over 95 percent. There will be no incentives for these alliances to compete with each other, and major entry barriers at the most important airports would make it extremely difficult for non-alliance carriers to seriously challenge the alliances.
Taking the second point first, no one seriously doubts that there is a capacity crunch at a select number of airports in the U.S. and many more within the European Union. There is also reason to believe that measures taken on both sides of the Atlantic to alleviate these constraints are in need of some (perhaps serious) overhaul. What Rep. Oberstar appears to ignore in his statement is where a "serious challenge" could or should come from. As has been well documented in the literature, airline consumers value the network benefits that major airlines provide (whether through their own hub-n-spoke networks or the combined networks with their alliance partners). See, e.g., Michael E. Levine, Commentary, Airline Alliances and Systems Competition, 45 Hous. L. Rev. 333 (2008). New entrants may not be able to provide comparable networks, but they may, for example, be able to provide low-cost service on certain high-volume routes to customers uninterested in taking advantage of an incumbent's network. To do so efficiently oftentimes means using secondary airports, similar to Southwest's operations in the U.S. domestic market or Ryanair's for its intra-European services. Available slots at major airports, particularly in the EU, do not come cheap. For transatlantic service, this model may never capture more than a small share of the overall traffic volume; the network benefits are too enticing (as are the combined customer loyalty programs that accompany them). But they do provide an alternative for those consumers looking for point-to-point service between major city pairs at the lowest price available.
As for Rep. Oberstar's second point, it is almost counterintuitive to hold that the three major alliances "will have no incentives" to compete with each other. As a recent paper by Yale Law Professor George L. Priest discusses, see Rethinking Antitrust Law in an Age of Network Industries (Yale Law & Economics Research Paper No. 352, 2007) (available here), an "airline will attempt to define its network so that it generates enough aggregate travel over the long term to support the entire system," id.at 13. "Thus," according to Priest, "it must determine to which cities to extend spokes and the number and size of flights along those spokes that will support traffic" along with "determin[ing] how to allocate general network costs in the pricing of specific routes in a way that maintains the most effective network." Id. This is true of alliances as well. In order to sustain and expand their networks, airline alliances must coordinate services and establish prices which will keep as much traffic as possible coming in. The more traffic an alliance has, the more services to in-demand destinations it can provide consumers and hence the greater share of revenues its members can capture. There is no logical basis for Oberstar's assertion that the three alliances will calcify their services or refuse to vie for new customers from each other's networks.
Tuesday, July 28, 2009
Thanks goes out to the Antitrust & Competition Law Blog, a fellow member of the Law Professors Blog Network, for calling attention to Xavier Fageda & German Bel's Privatization, Regulation and Airport Pricing: An Empirical Analysis for Europe (EUI Working Paper RSCAS 2009/27, June 2009) (available here). From the abstract:
This paper examines factors determining prices that airports charge to airlines. Using data for 100 large airports in Europe, we find that they charge higher prices when they move more passengers. Additionally, competition from other transport modes and other nearby airports imposes some discipline on the pricing behavior of airports. Low-cost carriers and airlines with a high market share seem to have a stronger countervailing power. Finally, we find that private airports not regulated charge higher prices than public or regulated airports. From our analysis, we can infer that market power of each airport is dependent upon its specific characteristics.
The Wall Street Journal's Law Blog has a new commentary up on the New York Times article referenced earlier this week, see previous post here, concerning the Department of Justice's new stance on robust antitrust enforcement and the political resistance it is receiving. See Ashby Jones's Post to the WSJ Law Blog, Varney Getting Pushback on Aggressive Antitrust Agenda (July 27, 2009) (available here). The Journal is also reporting that House Transportation Committee Chairman James Oberstar is "stepp[ing] up efforts to limit airlines' ability to join alliances that cooperate on schedulingand revenue sharing, urging the White House to review antitrust policies." Josh Mitchell, Lawmaker Seeks Air-Alliance Curbs, Wall St. J., July 28, 2009 (available here). As the articles goes on to state:
Rep. James Oberstar (D., Minn.) sent a letter Monday to Lawrence Summers, director of the National Economic Council, expressing "deep concern over the decline of airline competition in international markets." He said three global alliances -- Star, Sky Team and oneworld -- now control more than 87% of traffic between the U.S. and Europe, hurting consumers.
Mr. Oberstar urged a "sunset" on exemptions to antitrust laws that have allowed U.S. airlines to join the alliances.
Rep. Oberstar's sunset proposal has been discussed previously on the blog. See earlier posts here, here, and here. It's not surprising that following the recent decision of the Department of Transportation to grant (almost full) antitrust immunity to Continental's application to join the Star Alliance he would choose to again raise his concerns with the Administration. He has not been shy about characterizing the alliances as examples of collusive arrangements which harm consumers. See, e.g., Letter from Rep. James Oberstar to Christine A. Varney, Asst. Attorney General (July 8, 2009) (available here). Yet for all his high-octane numbers intended to demonstrate unprecedented and anticompetitive market dominance by Star, oneworld, and SkyTeam (e.g., that they account for 80% of the world's airline capacity, 78% of world revenue passenger kilometers, and 87% control of U.S./European air traffic), see id. at 2, he has not provided empirical data demonstrating actual consumer harm from these arrangements. Oberstar is also committed to maintaining the U.S.'s outmoded foreign ownership and control rules for airlines, thus preventing the consummation of transnational mergers. What alternative, then, is left to the airlines as they seek to remain viable in a tough operating environment by offering transnational network benefits and enhanced loyalty programs to consumers? That, too, appears absent from the Congressman's assessment of the current international aviation marketplace.
Monday, July 27, 2009
Over the weekend, a link was produced to a new study by the U.S. Government Accountability Office on the Department of Transportation's Essential Air Services (EAS) Program. See earlier post here. For those interested in the history of this program, including criticisms and defenses, the following law journal articles may be of interest:
- Christopher L. Manos, Note, Airline Deregulation and Service to Small Communities, 57 N.D. L. Rev. 607 (1981);
Arnold I. Havens & David A. Heymsfeld, Small Community Air Services Under the Airline Deregulation Act of 1978, 46 J. Air. L. & Com. 641 (1981);
- James S. Meyer, Comment, Section 419 of the Airline Deregulation Act: What Has Been the Effect on Air Service to Small Communities, 47 J. Air L. & Com. 151 (1982);
- Alfed E. Kahn, Airline Deregulation--A Mixed Bag, But a Clear Success Nevertheless, 16 Transp. L.J. 229 (1987);
- Melvin A. Brenner, Rejoinder to Comments by Alfred Kahn, 16 Transp. L.J. 253 (1987);
- Paul Stephen Dempsey, Airline Deregulation and Laissez-Faire Mythology: Economic Theory in Turbulence, 56 J. Air L. & Com. 305 (1990); &
- Amy K. Bock, Comment, How to Restore the Airline Industry to Its Full Upright Position, 59 J. Air L. & Com. 663 (1994).
A new article up online today discusses the role of airline customer loyalty programs in generate revenues during the current worldwide economic downturn. See Ian Wylie, Flying Far and Wide on the Back of Airline Loyalty, Fin. Times, July 27, 2009 (available here). As the piece notes:
[I]n this recession, the real value to airlines of loyalty programmes lies in their ability to generate cash rather than loyalty. "Frequent flyer programmes no longer serve to drive brand loyalty alone, but rather to deliver extra cash, mostly through the sale of miles to card-issuing banks," says Jay Sorensen, a former Midwest Airlines executive and now president of IdeaWorks, a consulting company.
At Delta alone, Mr Robertson says the SkyMiles and WorldPerks programmes are expected to generate more than $2bn (€1.4bn, £1.2bn) in revenue in 2009. United and Continental each raised cash last year from the advance sales of miles to their card partner, JPMorgan Chase.
"Tough economic times have encouraged airlines to rely upon this kind of short-term gratification," says Mr Sorensen, who reckons that when investor confidence returns some of the biggest airlines will try selling off their programmes.
A new opinion piece from Business Travel News discusses the recently completed proceeding for Continental Airlines to join the Star Alliance and what it has to tell about the apparent shift in antitrust views which has taken place within the Department of Justice recently. See Jay Boehmer, Star Approval Illustrates Shift in D.C. Antitrust Views, Bus. Travel News, July 27, 2009 (available here).
Sunday, July 26, 2009
There is a fascinating story on the front page of today's New York Times discussing the new enforcement aims of the Department of Justice's Antitrust Division and the resistance it is meeting from within the Obama Administration. See Stephen Labaton, Antitrust Chief Hits Resistance in Crackdown, N.Y. Times, July 26, 2009 (available here). Both railroad giants and airlines have signaled out by the DOJ as part of its desired crackdown.
The story contains a succinct briefing on the recent controversy caused by the DOJ's involvement in Continental's application to the Department of Transportation for antitrust immunity to join the Star Alliance and notes that the interagency strife caused by the proceeding prompted Obama's economic advisor, Lawrence Summers, to mediate the dispute. Also intriguing is the article's mention that the House Judiciary Committee is preparing to hold a hearing on the application in the near future. The outcome of that hearing could indicate the extent to which the DOJ will continue its involvement in airline alliance applications.
Saturday, July 25, 2009
The U.S. Government Accountability Office recently issued a report on one of the regulatory byproducts of the 1978 Airline Deregulation Act, the Essential Air Services (EAS) Program. See Govt. Accountability Office, National Transportation System: Options and Analytical Tools to Strengthen DOT's Approach to Support Communities' Access to the System, GAO-09-753 (July 17, 2009) (available here). From the summary:
Since 1978, the Essential Air Service (EAS) program has subsidized air service to eligible communities that would otherwise not have scheduled service. The cost of this program has risen as the number of communities being served and subsidies to air carriers have increased. At the same time, the number of carriers providing EAS service has declined. Given continuing concerns over the EAS program's long-term prospects, GAO was asked to review the program. GAO reviewed (1) the characteristics and current status of the EAS program, (2) factors affecting the program's ability to provide air service, (3) options for revising the program, and (4) tools for assessing the program, the options for its revision, and the program's performance. GAO interviewed stakeholders and reviewed the results of an expert panel convened by GAO, Department of Transportation (DOT) data and program documentation, and potential methodologies for assessing federal programs.
Friday, July 24, 2009
Amidst the the ballyhoo surrounding Continental Airlines's (mostly) successful bid to win approval and antitrust immunity for its participation in the Star Alliance, see previous blog post here, little notice has been paid to the approval and immunity application filed by the U.S.'s Delta Airlines and Australia's Virgin Blue, V Australia, and Pacific Blue (which also has operations in New Zealand). See Dkt. No. OST-2009-0155, Application for Approval of and Antitrust Immunity for Alliance Agreements (July 9, 2009) [hereinafter Joint Application]. The application avails itself of the 2008 U.S./Australia Air Transport Agreement, 3 Av. L. Rep. (CCH) ¶ 26,207g, at 21,850 (Feb. 14, 2008), which--according to the application--"fundamentally changes the competitive market structure between the U.S. and Australia, establishing a solid framework for expanded transpacific competition by Australian and U.S. airlines," Joint Application, supra, at 9.
While no major party on the U.S. end (including the Department of Justice) has come forward to oppose the venture before the Department of Transportation, there is a report out that Air New Zealand "will fight what it has described as [the airlines' proposed] collusion on fares and capacity." Matt O'Sullivan, Virgin Delta Tie-Up Opposed, Dominion Post, July 25, 2009 (available here). Also joining the clamor against the proposed alliance is Singapore's Tiger Airways. See id. The airlines are hoping that the precedent set by the Australian Competition and Consumer Commission's 2008 rejection of an Air New Zealand/Air Canada cooperative arrangement will spell defeat for the new transpacific link-up. Id. No indication was given by the report when a decision on the matter is expected.
The Centre for Asia Pacific Aviation has a new reflection up on the dysfunctionality of the U.S. airline system. See Ron Kuhlmann, Why is the U.S. Airline System Dysfunctional?, Centre for Asia Pacific Aviation (July 24, 2009) (available here). The lead-in to the piece states:
This past week has revealed continuing poor results for the majors and the American carriers are announcing still more cuts and dire predictions. This current crisis, with its plummeting demand, overlapped the previous crisis, fuel cost, creating an environment in which the airlines were set upon from all directions. In response to high fuel, the US carriers were the most aggressive in reducing capacity and there was some hope that they would be rewarded for that effort. So far? Not so much.
Thursday, July 23, 2009
The issue of alleged above-cost predatory pricing has gained considerable attention in the scholarly literature over the least several years, particularly after the publication of Professor Aaron S. Edlin's essay Stopping Above-Cost Predatory Pricing, 111 Yale L.J. 941 (2002). A recent article by law and economics scholar Gustavo Mathias Alves Pinto, Competition and Predation in the Airline Industry, 74 J. Air L. & Com. 3 (2009), "analyz[es] the merits of the application of above-cost predatory pricing theory to the airline industry," id. at 5, and suggests that both the problem is overstated with respect to aviation and that any rule intended to "cure" the "problem" which would limit the capacity of incumbent airlines to reduce prices or increase services would amount to "nothing but a disguised proposal for complex regulation, going against the rationale of the 1970s reforms, which had the objective of deregulating [the airline industry]," id. at 23. Readers of the blog interested in antitrust and aviation should make a point to read it.
For more on above-cost predatory pricing theory and its application, see Einer Elhauge, Why Above-Cost Price Cuts to Drive Out Entrants Are Not Predatory--and the Implications for Defining Costs and Market Power, 112 Yale L.J. 681 (2003); Daniel A. Crane, The Paradox of Predatory Pricing, 91 Cornell L. Rev. 1 (2005).
Blog readers should take note that the ABA Forum on Air & Space Law's 2009 Annual Meeting will be held September 24-25, 2009 at the InterContinental Hotel in Chicago, Illinois. Full information on the event, including a program brochure and registration details, are available at the ABA's website here.
Wednesday, July 22, 2009
For those interested in the liberalized groundhandling services market in the European Union, Stephan Schmidberger et al.'s Ground Handling Services at European Hub Airports: Development of a Performance Measurment System for Benchmarking, 117 Int'l J. Production Econ. 104 (2008), may be of interest. The abstract reads:
The liberalization of ground handling in Europe forces airports to assess their performance relative to their competitors in order to remain competitive and sustain long-term competitive advantage. Together with main EU hub airports, action research was conducted for one year to develop a holistic performance measurement system (PMS) for ramp services. The resulting PMS entails a process-based perspective and reflects the supply chain of airport logistics. As the findings of an ex-post validation suggest, the system represents a suitable basis for competitive benchmarking activities.
Reuters ran a story last week on the latest rumors concerning a possible merger between Continental and United Airlines following the news that Continental's CEO Larry Kellner will step down at year's end. See Continental's CEO Shift Stirs Merger Talk, Reuters, July 17, 2009 (available here). According to USA Today's aviation travel blog, however, "most industry observers seem [to] think that the airlines will not transform their current alliance plans into another attempt at a full-fledged merger." Today in the Sky, Continental-United Merger Talk Renewed by CEO Shakeup? (July 20, 2009) (available here).
Regardless of whether or not the merger speculations are mere water cooler gossip, it is worth noting that any merger attempt by the two would likely meet much stiffer regulatory scrutiny than last year's Delta/Northwest link-up. With the Department of Justice's Antitrust Division promising "vigorous antitrust enforcement," Continental and United won't be the recipients of a "free pass." Given the degree to which the DOJ chose to involve itself in Continental's recently approved application to join the Star Alliance with full antitrust immunity, it's clear the Justice Department is taking seriously the impact the airlines' business ventures could have on consumers and competition. While healthy competition oversight is a worthy end, the DOJ should remain mindful of the changing air transport market and the reality that the classic competition models for air transport are outmoded. With consumer demand down and operating costs on the rise, both the domestic and international markets can no longer sustain the same level of multicarrier competition from a decade ago. Though neither Continental nor United may be in a position to consummate a merger at this point in time, an aviation marketplace with fewer participants is already taking shape; the DOJ should not stand in the way.