Monday, October 5, 2009

NYT on Alliances

Blog readers may be interested in Micheline Maynard's Airlines Seek Global Allies to Expand, N.Y. Times, Oct. 5, 2009 (available here).  As the story starts:

The sharp falloff in passenger traffic in the months after the 2001 terrorist attacks forced many airlines to file for bankruptcy or cut deeply into operations. When oil prices soared in recent years, carriers piled on new fees for baggage and fuel, and shut down unprofitable flights.

Now airlines are thinking of ways to grow again—this time, by teaming up with global partners to expand their international reach.

All of this is true, but it passes over in silence that the alliance system, starting with Northwest/KLM, has been around since 1993 and international codesharing--one of the key components of alliances--has been around since at least the 1980s.  See 59 Fed. Reg. 40,836; see also U.S. General Accountability Office, International Aviation: Airline Alliances Produce Benefits, But Effect on Competition is Uncertain, GAO/RCED-95-999 (Apr. 1995). 

The story also fails to mention the perseverance of the nationality rule in international aviation which prohibits conventional corporate mergers and acquisitions among airlines of different States.  Instead, the piece pays notice to the now-popular view that "alliances are 'superior to mergers, because you don't have to go through the costs and upheaval of a merger.'"  What's not mentioned is that unlike a merger, alliances don't allow airlines to fully rationalize their costs and operations.  Also key is the fact they are unstable entities.  In the last year SkyTeam has lost Continental Airlines to the Star Alliance and, up until a recent suspension of negotiations, the oneworld Alliance was actively trying to keep its Japanese partner JAL from defecting to SkyTeam. 

Exacerbating the instability of the alliance system is the fact regulators on both sides of the Atlantic appear uncertain about how far they are willing to let the system grow.  Late last week the European Commission notified oneworld that it may be in violation of European Community competition law.  Similarly, the U.S. Department of Transportation has continued to drag its feet on granting oneworld the same approval and antitrust immunity that it has already bestowed upon Star and SkyTeam.  Add into that mix the antitrust immunity sunset provision contained in the (currently stalled) 2009 FAA Reauthorization Act and the Justice Department's renewed interest in limiting the scope of immunity for alliances and what you have are longterm, complex business ventures whose existences hang on regulatory and legislative fiat.  In other words, alliances remain--for better or worse--second best options in the face of outmoded and arcane crossborder merger restrictions.

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