Monday, August 31, 2009

The Perils of Europe's Airlines

A new report from late last week reveals that Europe's carriers are struggling right alongside their transatlantic brethren.  See Steve McGrath, European Airlines Rack Up Huge Losses, Dow Jones Newswire, Aug. 28, 2009 (available here).  From the report:

The global airline industry is suffering one of its worst ever downturns as the credit crunch and economic downturn have caused steep falls in passenger numbers and cargo volumes. The International Air Transport Association, or IATA, last month said it expected the industry to record accumulated losses of $9 billion in 2009, almost double its previous forecast, reflecting a rapidly deteriorating revenue environment.

European scheduled carriers have racked up huge losses in the first half of the year as a result of the downturn, and have responded by grounding planes and cutting costs and jobs. Low-cost carriers have fared slightly better, but still have seen profits fall sharply.

August 31, 2009 | Permalink | Comments (0) | TrackBack (0)

Friday, August 28, 2009

Aviation Alliances & the Coming Global Antitrust Enforcement

Is a new wave of transnational competition enforcement coming?  That's what the American Antitrust Institute is agitating for.  See Think Tank Urges White House to Hike Diligence in Promoting Market Economies, 97 Antitrust & Trade Reg. Rep. (BNA) 216 (Aug. 21, 2009) (available here); see also Letter to Pres. Barack Obama from Albert A. Foer, Pres., AAI (Aug. 12, 2009) (available here).  According to the report:

In addition to the joint pronouncement, the U.S. government should take the lead in establishing an “International Competition Day,” when officials from the Federal Trade Commission and Justice Department's Antitrust Division would educate the public about “the benefits to consumers, world economic growth, and democratic values of competitive markets maintained through vigorous enforcement of the competition laws.”

. . .

An “International Competition Day,” the AAI indicated, should stem the current trend of “suspend[ing] antitrust enforcement as a hindrance to economic stability” in favor of putting antitrust policy at the forefront of the United States' response to the current economic crisis. In making an international statement in favor of market economies, the U.S. government would elevate the “underappreciated ‘American' institution” to gain public support on a global scale and prevent governments from losing focus on antitrust enforcement as a crucial tool in preserving economic growth and stability.
What the letter does not make clear is how more vigorous antitrust enforcement will help spur economic recovery.  Even if one is sympathetic with the AAI's endorsement of limited government involvement in the market, that hardly warrants sympathy for overexuberant antitrust enforcement which could stifle innovation.  In particular, as we have noted many times on this blog, international alliances for airlines.  The alliance system, as industry analysts and this blog have continually observed, are a "second best" option in an international operating environment which severely curtails (if not outright prevents) transnational airline mergers.  Though some have argued that the alliance system would likely persist even if the old nationality restrictions were dismantled, there would certainly be a far less compelling argument for why regulators should tolerate (if not outright immunize) their putative anticompetitive behavior.  Right now, however, the Department of Justice and lawmakers in the U.S. Senate are advocating a Schopenhauerian "worst of all possible worlds," namely no possibility for transnational mergers and severely circumscribed alliances.  This is in keeping with Assistant U.S. Attorney General Christine Varney's call for Vigorous Antitrust Enforcement in This Challenging Era, Remarks to the U.S. Chamber of Commerce (May 12, 2009) (available here).  The AAI entirely supports this view.  Cf. Letter, supra, at 2.
 
What about other substantial aviation markets?  The European Commission has emphasized its "broadly positive approach" to airline alliances in order to allow European carriers to compete effectively on a global level.  See Competition: Commission Confirms Sending Statement of Objections to Members of SkyTeam Global Airline Alliance, Memo/06/243 (Jun. 19, 2006).  Neelie Kroes, Commissioner for Competition Policy, has stressed that EC policy encourages European airlines to become "global winners" even as it enforces its competition rules.  See Competition in the Aviation Sector: The European Commission's Approach, Address to the Conference Celebrating the 20th Anniv. of the Int'l Inst. of Air & Space L., Speech/06/247 (Apr. 24, 2006) (available here).  This doesn't mean ignoring the alliances.  See, e.g., Antitrust: Commission Opens Formal Proceedings Against Certain Members of the Star and Oneworld Alliances, Memo/09/168 (Apr. 20, 2009).  It does appear, however, to indicate that EC regulators are more sensitive to aviation's market realities and adjusting their enforcement policy accordingly.  The tolerance for alliances in the Asia-Pacific market remains uncertain, though pressure is being placed on Austalian regulators to block the recently proposed Delta/Virgin Blue/V Australia/Pacific Blue alliance.  See Matt O'Sullivan, Virgin Delta Tie-Up Opposed, Dominion Post, July 25, 2009 (available here).
 
A movement for stronger international competition law enforcement is not necessarily a bad thing.  If it is put in the service of supporting open aviation markets, then it could be a very good thing.  With respect to international civil aviation, however, such enforcement needs to be cognizant of the outmoded regulatory strictures placed on airlines.  The alliance system has and continues to provide important network and loyalty benefits for consumers.  These should not be so quickly obliterated in the fervor to halt allegedly anticompetitive practices.  By all indications, the global marketplace is crowded with air carriers; yet natural transborder consolidation is largely an impossibility.  Alliances, though perhaps economically, strategically, and commercially suboptimal, provide a needed degree of rationality to the sector.  The system of alliances cannot be suppressed until the airlines--the most visible global service providers in the world--are given to freedom to behave and thrive as globalized competitors.

August 28, 2009 | Permalink | Comments (0) | TrackBack (0)

Thursday, August 27, 2009

Alliances Not Mergers?

Graham Dunn's Consolidation: Painful Progress, Flightglobal, Aug. 19, 2009 (available here), offers a critical account of the outmoded regulatory scheme international air carriers are forced to operate under and the limits placed on true consolidation in the market.  The story also highlights the importance of alliances in a tough operating environment and suggests that they remain more enticing for the industry than true consolidation.  Indeed, as the story points out, alliances allow carriers to cut back their capacity without abandoning markets wholesale. 

August 27, 2009 | Permalink | Comments (0) | TrackBack (0)

The New Airline Competition

There's a new story out about the changing face international airline competition which is well-worth reading.  See Richard Newman, Airline Competition Has Become an International Team Game, Star-Ledger, Aug. 26, 2009 (available here).  Those interested in a synoptic view of the present alliance system should make a point to read it.

August 27, 2009 | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 26, 2009

More on Kennedy and Airline Deregulation

The Wall Street Journal's Middle Seat Terminal blog has a nice summary of the late Sen. Edward Kennedy's contribution to airline deregulation and the U.S. air transport industry as a whole.  See Scott McCarthy, Kennedy Pushed Airline Deregulation, Changed U.S. Air Travel, Middle Seat Terminal Blog (Aug. 26, 2009) (available here).  From the blog post:

Deregulating the airline industry was a major legislative achievement for Sen. Edward M. Kennedy, who pushed the issue even though he didn’t have jurisdiction over aviation and used his substantial charm and persuasiveness to change the way America travels.

In the early 1970s, Sen. Kennedy held extensive hearings as chairman of the Subcommittee on Administrative Practice and Procedure, pushing deregulation as a way to increase competition and bring affordable air travel to millions of Americans. At the time, the Civil Aeronautics Board, a government agency, set airline fares and routes, limiting competition and guaranteeing airlines’ profits. The hearings drew media attention and raised the profile of what had been a largely academic issue to major pro-consumer status.

August 26, 2009 | Permalink | Comments (1) | TrackBack (0)

Kennedy and Airline Deregulation

With the news of Sen. Edward Kennedy's passing, it seems appropriate for the Aviation Law Blog to make mention of his considerable contribution to U.S. airline deregulation.  As head of the Subcommittee on Administrative Practice and Procedure of the Senate Committee on the Judiciary, he held widely publicized hearings in 1976 to consider arguments on airline deregulation.  See Report of the Subcomm. on Administrative Practices and Procedure of the Senate Committee on the Judiciary, 94th Cong., 1st Sess. (1975).  The so-called "Kennedy Report" concluded:

The airline industry is potentially highly competitive, but the Civil Aeronautic Board's system of regulation discourages the airlines from competing in price and virtually forecloses new firms from entering the industry.  The result is high fares and security for existing firms.  But the result does not mean high profits.  Instead the airlines--prevented from competing in price--simply channeled their competitive energies toward costlier service: more flights, more planes, more frills. . . .  The remedy is for the [CAB] to allow both new and existing firms greater freedom to lower fares and . . . to obtain new routes.

Id. at 3.

A summary of the report can be found in the archives of the Journal of Air Law and CommerceSee Edward M. Kennedy, Airline Regulation by the Civil Aeronautics Board, 41 J. Air L. & Com. 607 (1975).

August 26, 2009 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 25, 2009

United Fined $75k for Advertising Violation

As mentioned previously on the blog, see "DOT Pro-Consumer Crackdown," the Department of Transportation has been vigorous as of late in enforcing its consumer protection regulations.  The latest target of the DOT's efforts is United Airlines:

This consent order concerns Internet advertisements by United Air Lines, Inc. that violate the full fare advertisement requirements specified in 14 CPR Part 399 and are considered to violate 49 U.S.C. § 41712, which prohibits unfair and deceptive practices. This order directs United to cease and desist from future violations, and assesses the carrier a compromise civil penalty of $75,000.

. . .

For a period of time, United advertised a number of fares on the "Special Deals" section of its website that did not contain appropriate notice of the amount or nature of additional taxes and fees that were excluded from the advertised fare at the first point in which the fares were displayed. Nor did United provide clear and conspicuous notice that the fares advertised required a roundtrip purchase. Instead, these fares were followed by a double asterisk that referred the reader to fine print below the group of advertised fares that stated "Each way fares based on required roundtrip purchase, plus taxes/fees." By failing to provide appropriate notice of the taxes and fees applicable to these fares and the roundtrip purchase requirement associated with the fares, United violated 14 CFR Part 399.84 and engaged in an unfair or deceptive practice and unfair method of competition.

See United Airlines, Inc., Violations of 49 U.S.C 41712 and 13 CFR 299.84, Dkt. No. OST-2009-0001, Consent Order (Aug. 25, 2009), at 1 & 2.

 

August 25, 2009 | Permalink | Comments (0) | TrackBack (0)

Airlines Need Money to Operate

While anyone who has operated a Fortune 500 company or a lemonade stand can well attest to the need for their endeavors to take in more money than they spend in order to survive and thrive, apparently this trivial fact of business life is lost on some journalists.  Ellen Creager's Airlines Becoming a Free-For-All, Chi. Tribune, Aug. 25, 2009 (available here), is a good case in point.  According to Creager, "Like an unkind project in social engineering, fees are being especially jacked up for unaccompanied children, pets and sporting equipment -- all hassles for the airlines -- to create a major disincentive to fly."  Really?  Could it not be that the airlines are attempting to offset the costs associated with special accommodations and recover enough revenue to keep their operations afloat in tough economic times? 

Creager goes on to provide a list of "egregious" airline fees for everything from pets to surfboards, failing to note next to each example why an airline might charge a premium to handle and store them.  No one is forced to fly with their guitar or their bike.  In fact, no one is forced to fly at all.  It's a service consumers choose to use--and one which they have to pay for if they want it made available.  With a worldwide economic depression and volatile operating costs pummeling the airlines, consumers have to realize that the "good old days" are, if not gone forever, at least on hold for the indefinite future.  Instead of putting in perspective what the airlines realistically need to do to stay in business, Creager takes the easy route of simply ridiculing them for trying.  Such righteous indignation may draw some reader's eyes to the page, but it does nothing to inform them of the tough operating environment the airlines are in.

August 25, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, August 24, 2009

Alaska Airlines Turns Up the Heat on Virgin America

In its dogged pursuit of grounding a rival carrier, Alaska Airlines has refiled its petition before the Department of Transportation for a full inquiry into Virgin America's citizenship profile.  See Renewed Motion of Alaska Airlines, Inc. for a Public Proceeding, Dkt. No. OST-2009-0037 (Aug. 21, 2009).  From the filing:

Almost six months have passed since Cyrus Capital Partners L.P. and Black Canyon Capital LLC, the two U.S. hedge funds holding 75 percent of Virgin America’s voting stock, exercised puts that surrendered back to the British Virgin Group all of the economic rights traditionally associated with being a shareholder. Alaska Airlines is of the view that Virgin America has lost its status as a U.S. carrier and has therefore been operating illegally ever since these rights were exercised. It also appears, based on the limited publicly available information and the absence of any statement to the contrary, that the Department now considers voting rights stripped of any economic interests to satisfy U.S. citizenship requirements or has provided Virgin America a “grace period” in which to find replacement U.S. investors. Either scenario raises difficult statutory and policy issues. Alaska therefore renews its request for a public review of Virgin America’s current and prospective citizenship status.

Id. at 2-3.

A brief summary of the "story so far" can be found in Kathy Swiff's Alaska Air Wants DOT to Open Virgin America Review, Dow Jones Newswire, Aug. 21, 2009 (available here).

August 24, 2009 | Permalink | Comments (0) | TrackBack (0)

Sunday, August 23, 2009

New Airline Consumer Group

The Washington Post has a brief story on the so-called "Consumer Travel Alliance," a reportedly "new nonprofit, nonpartisan organization [which has] install[ed] itself on the Hill, within earshot of the congressmen who shape the laws that affect every aspect of travel."  See Andrea Sachs, Coming and Going, Wash. Post, Aug. 23, 2009 (available here). 

According to the group's website, it's taking aim at everything from passenger rights to antitrust immunity for airline alliances.  In other words, it appears to support the current crusade to enforce more regulatory restrictions on the airline industry which will likely result in fewer flights and higher fares. 

August 23, 2009 | Permalink | Comments (0) | TrackBack (0)

Friday, August 21, 2009

Liberalization of Air Transport Services and Passenger Traffic

Economists Roberta Piermartini and Linda Rousova's working paper on behalf of the World Trade Organization's Economic Research and Statistics Division offers empirical confirmation of what most of us already know: liberalization increases traffic volume.  See Liberalization of Air Transport Services and Passenger Traffic (Staff Working Paper ERSD-2008-06, Dec. 2008) (available here).  From the abstract:

Using a gravity-type model to explain bilateral passenger traffic, this paper estimates the impact of liberalizing air transport services on air passenger flows for a sample of 184 countries.  We find robust evidence of a positive and significant relationship between the volumes of traffic and the degree of liberalization of the aviation market.  An increase in the degree of liberalization from the 25th percentile to the 75th percentile increases traffic volumes between countries linked by a direct air service by approximately 30 per cent.  In particular, the removal of restrictions on the determination of prices and capacity, cabotage rights and the possibility for airlines other than the flag carrier of the foreign country to operate a service are found to be the most traffic-enhancing provisions of air services agreements.  The results are robust to the use of different measures of the degree of liberalization as well as the use of different estimation techniques.

August 21, 2009 | Permalink | Comments (0) | TrackBack (0)

Thursday, August 20, 2009

How Bad Is Antitrust Immunity for Aviation?

In the closing pages of his entertaining and informative polemic, The Antitrust Religion (Cato Inst. 2007), former Chairman of the ABA's Antitrust Law Section Edwin S. Rockefeller writes:

The antitrust laws provide a vehicle for the antitrust community to carry on a useless, mischievous activity portrayed as law enforcement.  Antitrust has been called "a subcategory of ideology," "a religion without a cause," and a "hoax."  Whatever antitrust may be, it is not law enforcement.  Justice Abe Fortas wrote: "Antitrust in the United States is not...a set of laws by which men may guide their conduct.  it is rather a general sometimes conflicting statement of articles of faith and economic philosophy.

Id. at 99.

There should be little doubt that Rockefeller's iconoclasm has not won any apostates from the Antitrust Division at the Department of Justice, nor from the "antitrust community" at large.  Cf. 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).  Still, that hasn't stopped some who are faithful to the "antitrust religion" from recommending the book.  See Required Reading for the New Antitrust Administration, Antitrust Source, Aug. 2008, at 2 & 4 (available here).  While Rockefeller's indictment of antitrust may seem extreme, it is in fact part of a significant line of criticism which has agitated for repeal of all U.S. antitrust statutes.  See, e.g., D.T. Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure (Independent Inst. 2d ed. 1996); D.T. Armentano, Antitrust: The Case for Repeal (Ludwig von Mises Inst. rev. 2d ed. 2007); The Abolition of Antitrust (Gary Hull ed., Transaction Pub. 2005); Cato Inst., Cato Handbook for Policymakers 411-17 (Cato Inst. 7th ed. 2009) (available here).  So, on the assumption that Rockefeller et al. are on to something with regard to antitrust, how uncomfortable should we be with the Department of Transportation's vestigial authority to immunize international intercarrier agreements from "judges and other government officials mak[ing] arbitrary decisions using antitrust doctrines based on faith not easily overcome by reason, logic, and empirical data"?  Rockefeller, supra, at 8.

For over six decades the air transport industry has had to labor under regulatory scheme drawn up on the basis of its supposed "exceptionalism."  While the U.S. Government eventually came around to dismissing much (though not all) of that "exceptionalism" as good grounds for comprehensive regulation in 1978,  international aviation remains in the grip of bilateral trade agreements and protectionism.  Perhaps this is why lawmakers implicitly left the old Civil Aeronautics Board's immunization powers for agreements involving foreign air transport untouched when they transferred to the DOT.  See CAB Sunset Act of 1984, sec. 3, Pub. L. No. 98-443, 98 Stat. 1703; see also id. sec. 3(c) (sunsetting the CAB/DOT immunization powers for domestic air transportation on Jan. 1, 1989).  Both the DOT and the DOJ opposed the former retaining the old CAB immunization powers on the grounds it could lead to "reregulation," see Legislative History of the [CAB] Sunset Act of 1984, 1984 U.S.C.C.A.N., at 2864, though it seems that such fear is only justified if the DOT were to wield its powers in a non-transparent, discriminatory fashion.  Interestingly, with respect to international agreements, it has been the DOT's generally positive and, one might say, non-discriminatory approval and immunization of airline alliances which has drawn the most ire from policymakers and industry observers.  In approving theseventures, however, the DOT has allowed a struggling industry which must contend with outmoded nationality and cabotage restrictions to provide comprehensive network benefits to consumers without the specter of arbitrary antitrust enforcement haunting their every move. 

Three decades after deregulation, lawmakers are now regressing from the more enlightened thinking about civil aviation of the 1970s back to the myth of "exceptionalism" and the attendant (but specious) "need" for robust regulation.  Rep. James Oberstar has been particularly vocal about reharnassing the industry by strengthening the nationality rule and sunsetting antitrust immunity for alliances.  See FAA Reauthorization Act of 2009, secs. 426 & 801, H.R. 915, 111th Cong.  But as Prof. Brian Havel recently opined:

If the government is in a regulatory frame of mind, however, why should we go Oberstar's way [and sunset antitrust immunity for alliances]?  Why would it be so outlandish to rebuff Oberstar and for Congress to expand antitrust immunity in these challenging times, not restrict it?  For example, we could allow temporary immunity for domestic intercarrier agreements as we did in the days of the [CAB].  Lufthansa and Austrian have this privilege (in the context of the EU internal market), so why not in the United States?  It seems extraordinary to me that United can have antitrust immunity with Air Canada that covers the Chicago and Toronto hubs which are only 300 miles apart, but is prohibited from a similar arrangement with Continental even though Chicago and Continental's Houston hub are three times that distance apart.

If there is a tension between the industry's need for consolidation and Congress's understandable fear of reducing the number of domestic airlines, then why not call Congress's bluff, sideline Oberstar, and lobby for domestic antitrust immunity?  Given the connections that U.S. network carriers have with international alliances, and the proven economic success of those connections, why would this be such a dangerous or commercially illogical move? . . .  It is time to recognize that, when Adam Smith meets the airline industry, sometimes classic competition and network competition are not in perfect alignment.

See Brian F. Havel, In Praise of Law's Cosmos: Reflections on the Entrepreneurial Spirit in Aviation Law and Policy, Keynote Address to the IATA Legal Symposium, Bangkok, Thailand (Feb. 9, 2009), reprinted in 8 Issues Aviation L. & Pol'y 127, 131-32 (2009).

The thought that civil aviation--domestic and international--should be shielded from antitrust enforcement may appear revolutionary, but the U.S. statutory archives already provide ready-made standards which could be reanimated.  See 49 U.S.C. § 1378(b)(1)(B) (1979) (repealed).  Perhaps the airlines could prove to be a useful test case for further rethinking of U.S. antitrust law and enforcement.  Maybe it will become clear that the old hobgoblins of antitrust--"market power," "barrier to entry," and "predatory pricing"--will be revealed as the stuff of fantasy in the context of the aviation industry.  At the very least, immunization certainly couldn't hurt this already beleaguered sector of the economy.

August 20, 2009 | Permalink | Comments (0) | TrackBack (0)

Moving Brazilian Aviation Forward

The International Air Transport Association recently set out an agenda to help move Brazil's aviation sector forward "to improve [its] competitiveness and deliver broad economic benefits."  See Press Release, IATA, Strengthening the Foundations of Brazilian Aviation, No. 23 (Aug. 20, 2009) (available here); see also Giovanni Bisignani, General Director & CEO, IATA, Remarks to the British Chamber of Commerce, Sao Paulo, Brazil (Aug. 20, 2009) (available here).  On the topic of air transport liberalization, IATA's CEO had the following to say:

I would like to spend some time on liberalization. Brazil is the 10th largest economy in the world but has only 13 million international air passengers. That is only a third of what markets like Thailand and Singapore have annually with much smaller economies and populations. As a result you are not maximizing the economic benefits of air transport. Part of the problem is the very traditional protectionist policy approach of the bilateral system.

Unlike any other industry, airlines need a government treaty to sell its product and airline mergers are limited by archaic foreign ownership restrictions. Late last year, Brazil took two historic leadership steps. First, it accepted our invitation to join IATA’s Agenda for Freedom meeting in Istanbul. The 15 invited governments focused on finding a way to give airlines the commercial freedoms that every other industry takes for granted. We are now working on a multi-lateral statement of policy principles to promote a more normal approach for aviation. CONAC’s recent proposal to increase foreign ownership possibilities to 49% would be a step in the right direction and I hope that Brazil will be one of the first signatories when the group plans to meet again in November.

The second action was almost immediately after the summit when Brazil signed a very liberal agreement with Chile. The sky has not fallen but opportunities for travel between Chile and Brazil have expanded.

IATA recently studied the potential impact of further liberalization. Liberalization of ownership and market access could generate 400,000 jobs in Brazil and add 24 billion Reais to Brazil’s economy. The stakes are high! I hope that Brazil, as the region’s largest economy, can take leadership to promote liberalization in Latin America and globally.

Currently, Brazil does not have an open skies agreement with the United States.  Cf. Agreement Between the Government of the United States of America and the Government of the Federative Republic of Brazil on Air Transport, 3 Av. L. Rep. ¶26,231 et seq.  This is also true of Brazil's aviation relationship with the European Community, though both sides have publicly committed to working toward a horizontal Brazil/EC Air Transport Agreement.  See European Commission, Brazil-European Union Strategic Partnership Joint Action Plan, at 7 (Dec. 22, 2008) (available here). 

August 20, 2009 | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 19, 2009

The Durability of EAS

With the Department of Transportation's Essential Air Service Program receiving more public attention in the last week, blog readers may be interested in another story questioning the efficacy of the program.  See Halimah Abdullah, Half-Empty Flights Have Some Questioning Federal Subsidies, Macon Telegraph, June, 2, 2009 (available here). 

While there are numerous community-by-community stories out there offering both justifications for and criticisms of the program, it is key to keep in mind that the Government Accountability Office--the "investigative arm of Congress" and "congressional watchdog"--has clearly determined that the program is not cost effective.  See GAO, Commercial Aviation: Programs and Options for the Federal Approach to Providing and Improving Air Service to Small Communities, at 17, GAO-06-398T (Sept. 14, 2006).  More unsettling is the fact the EAS program was intended to sunset after a decade.  Instead, the Government renewed the program for an additional 10 years in 1988, see 49 U.S.C. § 1389(1) (1987), and, in 1998, eliminated the sunset provision altogether, see 49 U.S.C.A. § 41742 (West 2008).  What should have been a transitional program to ease some of the burdens accompanying the U.S.'s "big bag" deregulation of the air transport sector has turned into one of the most conspicuous regulatory artifices for domestic aviation.  That alone should be enough to raise eyebrows the next time Congress wants to step-in and "temporarily correct" the market.

August 19, 2009 | Permalink | Comments (0) | TrackBack (0)

No Air France-KLM Takeover of Czech Airlines

In what shouldn't be terribly surprising news given present economic conditions, Air France-KLM announced that it would withdraw its bid for the State-owned Czech Airlines.  See Sean Carney & Steve McGrath, Air France Withdraws From Czech Airlines Bidding, Wall St. J., Aug. 19, 2009 (available here); Robert Wall, Air France Withdraws From Czech Privatization, Aviation Wk., Aug. 19, 2009 (available here).  From the Wall Street Journal story:

The privatization of CSA Czech Airlines was thrown into doubt Wednesday after Air France-KLM withdrew from the tender because of the downturn in the industry and after examining the Czech carrier's books, leaving just one bidder left in the process.

The Czech Ministry of Finance said the tender would continue, and the remaining bidder, a consortium of Czech and Icelandic investors, said it remains interested despite Air France-KLM's withdrawal.

...

In addition to the tough business environment and worsening financial positions for both airlines, Air France-KLM decided that the expected synergies from a tie-up wouldn't be enough to justify the investment, said a person close to the matter. An Air France-KLM spokeswoman declined to comment beyond the company's statement.

Following the recent recomposition of Italy's Alitalia and Greece's Olympic Airways, Czech Airlines remains one of the last State-controlled carriers in the European Union.  The Czech Government, however, appears committed to its privatization efforts despite this obvious setback.  Despite the airline's unprofitability, the Czech Government has not sought to inject with State aid--either legitimately through European Commission channels or by the backdoor (i.e., the Greek and Italian way).  If no takers can be found for the ailing airline, however, it will be interesting to see what the State will do in response.

August 19, 2009 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 18, 2009

More on the EAS

The New York Times ran a new story on the Department of Transportation's longstanding (and controversial) Essential Air Service (EAS) Program.  See Joe Sharkey, Subsidies at Work in a Remote Airport, N.Y. Times, Aug. 17, 2009 (available here).  The crux of the piece is the same story which has been told in support of the program for the last three decades: there's a small community; small community does not generate enough traffic to support a profitable airline route; ergo the Government should subsidize it. 

Those looking for more information on the program can find a nice overview at the DOT's website here.  An earlier post on the blog, see "The EAS Program," contains a brief reading list on the program's history and the disputes which continue to surround it.  For a recent popular piece surveying the controversy, see Dean Foust, Do Small Cities Deserve Taxpayer Subsidies to Sustain Air Service?, Bus. Wk., Aug. 18, 2009 (available here).

August 18, 2009 | Permalink | Comments (0) | TrackBack (0)

Two Stories on the Slot Swap

There are two stories up online which attempt to assess the landmark slot swap proposal between US Airways and Delta.  The first, Ben Mutzabaugh's Impact of Delta-US Airways Slot Swap Will Be Far-Reaching, Today in the Sky Blog (Aug. 14, 2009) (available here), draws some general conclusions from a number of news sites to essentially conclude that "the pact--if approved by regulators--will result in a major shakeup in the competitive landscape in both" the Washington, D.C. and New York area markets.  That's not a bad thing by any stretch.  According to the same post, US Airways--which has been no stranger to bankruptcy--will receive an estimated $75 million boost to its profits from the deal. 

A second assessment of the arrangement, Adrian Schofield et al.'s Northeast U.S. Airline Market Reshaped by Large Slot Deals, Aviation Wk., Aug. 16, 2009 (available here), also assesses the smaller, but noteworthy, Continental/AirTran Airways deal.

August 18, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, August 17, 2009

It Doesn't Get Any Better

Civil aviation can't get a break it seems.  According to a story out today discusses the possibility that major U.S. carriers will have to continue cutting size and capacity even after the present economic downturn abates.  See Susan Carey, Airline Industry Sees Pain Extending Beyond the Recession, Wall St. J., Aug. 17, 2009 (available here).  From the story:

Growing smaller means parking planes, laying off workers and dropping destinations, meaning potential customers have fewer reasons to book. Earlier this month, Delta Air Lines Inc. cited a gloomy revenue outlook for the rest of the year in its plans to cut more management jobs. If passengers don't return to the skies and fares don't rise, some airlines could run low on cash, raising the specter of additional bankruptcies.

Airlines are suffering huge revenue declines as customers put off purchases, trade down to cheaper fares and bank more personal income. Airlines fear that this behavior will stick, exacerbating the "new normal" the industry has been grappling with for the past eight years.

August 17, 2009 | Permalink | Comments (0) | TrackBack (0)

Sigh of Relief?

Air Transport World has a new editorial online concerning the Department of Transportation's steadfast refusal to cave to the Justice Department's objections to the expanded Star Alliance.  See Perry Flint, Editorial, Sigh of Relief, Air Transp. World, Aug. 17, 2009 (available here).  The piece concludes by noting:

[The DOT] acknowledged something too quickly dismissed by DOJ (and some members of Congress): "Were [DOT] to suddenly change our antitrust immunity and public interest approach, as DOJ suggests, the credibility of the US government with its international aviation partners would be significantly compromised and our ability not only to reach new Open-Skies agreements but also to maintain those agreements that we have already achieved would be undermined." Still, it appears that the industry may be reaching a saturation point where regulators on both sides of the Atlantic begin to limit the future growth of alliances. DOJ may have lost this battle but it is unlikely to give up the field. Meanwhile, across the pond the European Commission is taking a very close look at Atlantic Plus Plus and the proposed joint venture among American Airlines, British Airways and Iberia. Those unaligned airlines that are sitting on the fence may find the alliance gate is swinging closed to them just as the economic storm drives them to seek shelter.

Even though the author recognizes the challenges ahead for alliances, the situation appears more dire than he lets on.  First, the DOJ is definitely not giving up its quest for vigorous antitrust enforcement and is fully expected to attack the pending oneworld Alliance application.  Second, the Senate Judiciary Committee remains steadfast in its criticisms of airline alliances and will be holding hearings on them in the near future.  And last, but not least, the 2009 FAA Reauthorization Act could sunset all of the alliances' antitrust immunity and potentially lead to the DOT losing its immunization powers altogether.  While it is true that the European Commission has kept its eye on the expanding alliance networks, there no evidence that they have departed from their generally positive view of the ventures.  In an operating environment where the nationality rule still dominates, alliances remain the "second best" option available.

August 17, 2009 | Permalink | Comments (0) | TrackBack (0)

Friday, August 14, 2009

Continental to Join Star in October

After clearing a needless protracted approval process, Continental Airlines announced that it will officially join the Star Alliance on October 27.  See Doug Cameron, Continental to Join Star Alliance, Wall St. J., Aug. 13, 2009 (available here).  According to the report:

The quick move into Star will allow Continental to leverage its new partners' route networks and frequent flyers at a time when airlines face a slump in demand, notably among high-margin business passengers.

The carrier was invited to join Star by UAL Corp., after it rejected a merger in favor of a commercial pact with the parent of United Airlines, a founder member of the alliance alongside Deutsche Lufthansa AG.

It was also wooed by the third airline group, Oneworld, led by American Airlines' parent AMR Corp. and British Airways PLC, which is seeking to match the antitrust approval for cooperation secured by Star and SkyTeam.

What the link-up also means is that SkyTeam will have an authentic competitor in the transatlantic market, a definite boon for consumers looking for cheaper, more convenient, travel options in tough economic times.  This competitive situation would no doubt be improved by a third grant of approval and immunity to oneworld despite the protestations of competing carriers like Virgin Atlantic.  Until that approval comes down, there will remain lack of parity in the market.

August 14, 2009 | Permalink | Comments (0) | TrackBack (0)