Wednesday, July 29, 2009

Oberstar's Specious Assertions

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.

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