Wednesday, December 30, 2009
Despite promises of capital infusions and lucrative joint ventures from the oneworld and SkyTeam alliances, JAL may be turning to the Japanese Government again for a bailout. See Yoshio Takahasi & Juro Osawa, Japan Says Talks of More Loans to JAL as Shares Shrink, Dow Jones Newswires, Dec. 30, 2009 (available here).
Tuesday, December 29, 2009
Achim I. Czerny, Code-sharing, Price Discrimination and Welfare Losses, 43 J. Transp. Econ. & Pol'y 193 (2009) (available to subscribers here). From the abstract:
Airlines frequently use code-share agreements allowing each other to market seats on flights operated by partner airlines. Regulation may allow code-share agreements with antitrust immunity (cooperative price setting), or without antitrust immunity, or not at all. I compare the relative welfare effects of these regulation regimes on complementary airline networks. A crucial point is that such agreements are used to identify and price-discriminate interline passengers. I find that interline passengers always benefit from code-share agreements while non-interline passengers are worse off. Furthermore, I show that the latter effect questions the overall usefulness of code-share agreements from a welfare perspective.
Eric Pels, Network Competition in the Open Aviation Area, 15 J. Air Transp. Mgmt. 83 (2009) (available to subscribers here). From the abstract:
In 2008 the ‘joint open aviation area’ between the US and EU will become reality. It is expected that competition will increase. The reaction of the airlines depends on the possibility to make profits in ‘new’ markets (markets that can now be entered). This, in turn, depends on network characteristics. In this paper we find that full liberalization of international markets by means of a bilateral agreement results in higher welfare than the formation of an alliance. Carriers, however, will also in fully deregulated aviation markets most likely opt for an alliance. This is a result of a built-in competitive effect of hub–spoke networks. Only in markets where the reservation price is very high (e.g. to London Heathrow), hub–spoke airlines may enter a competitive game. Low-cost airlines, which do not operate extensive hub–spoke networks, may find it profitable to enter new markets.
Despite the recent delay to the oneworld Alliance antitrust immunity application which will put a final decision off until at least late January, see "DOJ Comes Out Against oneworld," the Star Alliance is gearing up to take full advantage of the recently finalized U.S./Japan open skies agreement. Star partners United Airlines, Continental, and Japan's ANA have filed for approval and antitrust immunity before the Department of Transportation in the hopes of "enter[ing] into a highly-integrated, metal-neutral joint venture agreement for the carriage of transpacific traffic[.]" See Joint Application of All Nippon Airways Co., Ltd., Continental Airlines, Inc., and United Airlines, Inc., Dkt. No. OST-2009-0350 (Dec. 23, 2009).
Up until last year, there was something of an expectation among the airline and industry observers that an open skies agreement meant "automatic" antitrust immunization for international intercarrier agreements. Now, with the Justice Department and lawmakers taking a greater interest in how these applications are approved, matters are less certain. One of the recent complaints against immunizing the three transatlantic alliances is that it places over 80% of the market in their hands. In the transpacific market, specifically between the U.S. and Japan, concerns have already been raised that a duopoly could form around Japan's two international airlines, ANA and JAL. With ANA already part of Star, all eyes remain on JAL to see if it will stick with oneworld or be lured away by the promise of greater rewards from SkyTeam.
Wednesday, December 23, 2009
The Department of Justice filed comments on Monday opposing a broad grant of antitrust immunity for the oneworld Alliance. See Joint Application of American Airlines, Inc. et al., Comments of the Department of Justice, Dkt. No. OST-2008-0252 (Dec. 21, 2009) (available here). From the filing:
Applicants’ proposed agreements would result in competitive harm on certain transatlantic routes serving 2.5 million passengers annually. Fares between six pairs of cities – (1) Boston and London, (2) Chicago and London, (3) Dallas and London, (4) Miami and London, (5) Miami and Madrid, and (6) New York and London – could increase up to 15% under the proposed agreements. The Applicants claim substantial benefits will flow from an expanded alliance, but they have not shown that immunity is necessary to achieve these benefits. Although the proposed alliance agreements may lead to public benefits, Applicants overstate their magnitude and value, particularly in relation to their current unimmunized alliance. We therefore recommend that DOT impose conditions – slot divestitures or carve-outs, as appropriate – on a grant of immunity to protect the public interest in competition.
Id. at 3.
According to a story out today, both American Airlines and British Airways said they would be filing responses shortly. See Airlines Hit Back at US Criticism of Tie-Up Plans, BBC News, Dec. 23, 2009 (available here). While the DOT had said it would render a decision on the application at the end of October, it has extended its deadline for new filings into early next year. Stakeholders now have until January 11, 2010 to comment on the proposal.
Monday, December 21, 2009
Not surprisingly, the Air Transport Association isn't sitting in silence following the Department of Transportation's new tarmac delay rule. From their press statement:
“We will comply with the new rule even though we believe it will lead to unintended consequences – more cancelled flights and greater passenger inconvenience. In particular, the requirement of having planes return to the gates within a three hour window or face significant fines is inconsistent with our goal of completing as many flights as possible. Lengthy tarmac delays benefit no one,” said ATA president and CEO James C. May.
See Press Release, ATA, ATA Comments on DOT Tarmac Delay Rule (Dec. 21, 2009) (available here).
According to the DOT, the new rules won't take effect until 120 days after publication in the Federal Register. See U.S. DOT, Enhancing Airline Passenger Protections, Final Rule, Dkt. No. DOT-OST-2007-0022 (Dec. 21, 2009) (available here).
The Department of Transportation has announced that airlines may not keep passengers out on the tarmac for more than three hours. See Devin Dwyer, Tarmac Delays Get Three Hour Limit in DOT Airline Crackdown, ABC News, Dec. 21, 2009 (available here). The rule is limited to domestic flights only, however. According to the DOT:
The new rule prohibits U.S. airlines operating domestic flights from permitting an aircraft to remain on the tarmac for more than three hours without deplaning passengers, with exceptions allowed only for safety or security or if air traffic control advises the pilot in command that returning to the terminal would disrupt airport operations. U.S. carriers operating international flights departing from or arriving in the United States must specify, in advance, their own time limits for deplaning passengers, with the same exceptions applicable.
Carriers are required to provide adequate food and potable drinking water for passengers within two hours of the aircraft being delayed on the tarmac and to maintain operable lavatories and, if necessary, provide medical attention.
. . .
The rule also:
• Prohibits airlines from scheduling chronically delayed flights, subjecting those who do to DOT enforcement action for unfair and deceptive practices;
• Requires airlines to designate an airline employee to monitor the effects of flight delays and cancellations, respond in a timely and substantive fashion to consumer complaints and provide information to consumers on where to file complaints;
• Requires airlines to display on their website flight delay information for each domestic flight they operate;
• Requires airlines to adopt customer service plans and audit their own compliance with their plans; and
• Prohibits airlines from retroactively applying material changes to their contracts of carriage that could have a negative impact on consumers who already have purchased tickets.
See Dept. of Transp., New DOT Consumer Rule Limits Airline Tarmac Delays, Provides Other Passenger Protections, DOT 199-09 (Dec. 21, 2009) (available here).
Friday, December 18, 2009
Canada and the European Community officially signed their much-heralded air transport agreement today. See Richard J. Brennan, Canada, EU Land Open Skies Deal, Toronto Star, Dec. 18, 2009 (available here). The salient features of the agreement are outlined in the EC's official press release:
As from now all EU airlines are now able to operate direct flights to Canada from anywhere in Europe. The Agreement removes all restrictions on routes, prices, or the number of weekly flights between Canada and the EU. Other traffic rights will be liberalised gradually in parallel with the opening up of investment opportunities. The end product will be that EU undertaking or citizens will be able to freely invest in Canadian airlines and vice versa.
Furthermore, the agreement will help tackle common challenges, such as security or the environment. Both sides agreed to closely cooperate in order to mitigate the effects of aviation on climate change. In the field of safety and security, the agreement envisages mutual recognition of standards and one-stop security. This will facilitate the operations for airlines and airports, and reduce inconvenience for passengers. The text provides for a strong mechanism to ensure that airlines cannot be discriminated against in terms of access to infrastructure or state subsidies. This approach will be a real novelty in international aviation.
See Press Release, Europa, EU and Canada Sign Air Transport Agreement, IP/09/1963 (Dec. 17, 2009) (available here). The full text of the agreement, along with relevant background material, is available from the European Commission's Air Transport Portal here.
As discussed previously on the blog, while the agreement contains the seeds to grow into one of the most liberal aviation pacts in history, they've yet to germinate. Like the U.S., Canada still maintains a tight 25% cap on foreign ownership of its airlines' voting equity and reserves domestic routes (cabotage) for its carriers alone. Until Canada liberalizes its foreign investment and establishment rules for EC airlines, the potential of the agreement will not be actualized. As it stands, while the EC has won Canadian recognition of its "Community carrier" construct whereby any airline licensed by a Member State may operate service between Canada and any point in the Community, they are not afforded fifth freedom rights. Similarly, Canadian carriers do not have intra-Union fifth freedom rights. So, for example, Air Canada could not operate service between, say, Toronto and London, then onward to Frankfurt. Once Canada lifts its foreign investment cap to 49%, its airlines will have access to intra-Union fifths while both parties will have unlimited seventh freedom rights for their all-cargo carriers.
After that, everything hinges on the willingness of both sides to take the radical legislative steps necessary to provide a full right of establishment for each other's airlines. This would allow, for example, British Airways to operate a wholly-owned subsidiary in Canada ("Canadian Airways") with full access to cabotage routes. The final phase of the agreement will be entered once both parties remove all restrictions on traffic and investment rights, thus setting the stage for a true crossborder airline merger (say, Air Canada and Lufthansa). With no timetable established under the Canada/EC Agreement for accomplishing these lofty goals, however, it could be years, even decades, before its full possibilities are realized.
Thursday, December 17, 2009
British Airways appears to be off the hook this holiday season as a High Court issued an injunction today blocking cabin crew from going on strike next Tuesday. More details are available from CNN International here. While the High Court judge denied the crew's union--United--the right to appeal, it's possible that Unite could go straight to the Court of Appeal. However, it's unclear as of yet whether an appeal could be filed and heard before Christmas.
The Australian Government is prepared to lift its 25% ceiling on foreign ownership of Qantas to 49%, thus paving the way for the carrier to participate in the slow process of global airline consolidation. See Qantas Ownership Rules to Change, Reuters, Dec. 16, 2009 (available here). Australia currently allows 100% foreign ownership for airlines which operate domestic service exclusively (cabotage).
The liberalization of its foreign ownership rule for Qantas is only the first step the Australian Government will need to take. Under the current bilateral system, most air services agreements include "nationality clauses" which only allow carriers which are owned and substantially controlled by nationals of their flag State to be designated to fly international routes. Until Australia secures assurances and/or amendments to its existing bilaterals, foreign investment in Qantas could result in the loss of valuable traffic rights.
Wednesday, December 16, 2009
A British High Court is expected to rule tomorrow on whether British Airways's cabin crew can proceed with a 12-day strike starting this Tuesday. See Philip Pank, British Airways Seeks Ban on Staff Christmas Walkout, London Times, Dec. 16, 2009 (available here). From the story:
Lawyers for BA argue that a strike ballot, which was passed with the overwhelming support of cabin crew members, contained “serious and substantial irregularities” because about 800 people voted even though they were due to take voluntary redundancy before the possible start of any strike. Almost a million passengers will have their flights cancelled if the strike goes ahead on Tuesday.
“BA has therefore brought this action to protect its passengers against these wilful, disproportionate and clearly unlawful actions,” Bruce Carr,QC, told the High Court in London.
If the strike proceeds, nearly a million passengers could be stranded during the holiday travel rush. It appears that BA's alliance partners are preparing for the worst. In a statement out today, Australia's Qantas tried to reassure consumers that it is "doing everything [it] can to minimize disruption," see Bill Lindsay, Qantas: Assessing Impact of Planned British Airways Strike, Dow Jones Newswire, Dec. 15, 2009 (available here), while American Airlines "is already allowing [flight] changes without penalty or fee, even though BA has not canceled any flights as of [yet]," see Harriet Baskas, Travelers Scramble to Save Holiday Travel Plans, MSNBC, Dec. 16, 2009 (available here).
Tuesday, December 15, 2009
The U.S. State Department website has a complete scan of the Record of Discussions, Delegation List, and Memorandum of Understanding for the freshly finalized U.S./Japan open skies agreement here. According to the ROD, the two parties "will inform each other at such time as each is prepared to sign the 2009 MOU, expressing their hope and expectation that signature . . . would take place not later than October 2010."
A new working paper which may interest blog readers is Steve L. Puller et al.'s Testing Theories of Scarcity Pricing in the Airline Industry (NBER Working Paper No. w15555, Dec. 2009) (available from SSRN here). From the abstract:
This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports. We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion. We use a unique new dataset to test between two broad classes of theories regarding airline pricing. The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods. The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay. We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors. The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories. We find only mixed support for the scarcity pricing theories. Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low. Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights. However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.
Monday, December 14, 2009
After experiencing a negotiating setback last week, the United States and Japan managed to finalize an open skies treaty to replace the restrictive agreement the two parties had originally made in 1952. See Press Release, Dept. of Transp., U.S. Transportation Secretary LaHood Announces U.S.-Japan Agreement on Open Skies, DOT 196-09 (Dec. 11, 2009).
"Achieving Open Skies with Japan, a major U.S. transportation and trade partner, has been a long-standing U.S. goal and is good news for air travelers and businesses on both sides of the Pacific," said Secretary LaHood. "Once this agreement takes effect, American and Japanese consumers, airlines and economies will enjoy the benefits of competitive pricing and more convenient service."
Under the new agreement, airlines from both countries would be allowed to select routes and destinations based on consumer demand for both passenger and cargo services, without limitations on the number of U.S. or Japanese carriers that can fly between the two countries or the number of flights they can operate. It would remove restrictions on capacity and pricing, and provide unlimited opportunities for cooperative marketing arrangements, including code-sharing, between U.S. and Japanese carriers.
The agreement also would provide opportunities for growth of U.S. carrier operations at Tokyo’s Narita Airport and ensure fair competition regarding the new opportunities at Tokyo’s close-in Haneda Airport.
The agreement also paves the way for Japanese airlines JAL and ANA to apply for approval and antitrust immunity to deepen their alliance relationships with U.S. carriers. As it stands, ANA is a member of the Star Alliance while JAL remains in oneworld, though it is currently being courted by SkyTeam. The open skies treaty may not mean immunization, however. While it has been longstanding DOT practice to require an open skies agreement before granting immunity to international intercarrier agreements, the Justice Department's recent series of objections to Star's and oneworld's applications have placed a cloud of uncertainity over such authorizations.
Friday, December 11, 2009
Though not centered directly on international aviation law, Harvard Law School Professor Rachel Brewster's essay, Shadow Unilateralism: Enforcing International Trade Law at the WTO, 30 U. Pa. J. Int'l L. 1133 (2009), provides an instructive critique of one of international law's most touted judicial mechanisms: the World Trade Organization's dispute settlement system. In Brewer's view, while the current system--embodied in the Understanding on Rules and Procedures Governing the Settlement of Disputes (full text available here)--represents a clear advance over the old General Agreement on Tariffs and Trade dispute settlement regime, it suffers from a flawed institutional design which "creates a need for the unilateral enforcement of trade rules" outside the scope of the WTO while simultaneously "provid[ing] legal protection" for this enforcement. See id. at 1135. Brewster argues that this is due to what she calls the "stall-and-withdrawl" loophole in the WTO's dispute settlement system. States which are alleged to have abrogated WTO trade rules can continue to remain in violation until a dispute settlement decision is rendered--a process which takes, at minimum, 18 months and may, in fact, continue for years. See id. at 1144 (discussing the Bush II Administration's imposition of steel tariffs in 2002 and their subsequent withdrawal over a year later after the WTO declared them illegal). A State (or States) suffering economic harm due to another's unwillingness to adhere to its commitments under the WTO has (have) a strong incentive to undertake unilateral retaliatory measures rather than await a WTO decision. As Brewer notes, such retaliation is afforded the same latitude under the dispute settlement process as the violation which prompted it.
How is this relevant to international civil aviation, particularly since it is largely exempted from coverage under the WTO General Agreement on Trade in Services? See WTO, GATS Annex on Air Transport Services (available here). While trade in air services has traditionally been carried out at the bilateral level, particularly since the 1944 International Civil Aviation Conference which established the Chicago Convention, incremental but important change is underway. The landmark U.S./EC Air Transport Agreement contains provisions allowing it to function as a plurilateral whereby non-parties may accede to the treaty. See 2007 U.S./EC Air Transport Agreement, art. 18(5), 2007 (O.J. L 134) 4; see also Restatement (Third) of Foreign Relations Law of the United States sec. 312 (1987) (discussing plurilateral agreements). This potentiality was actualized earlier this year when the U.S. and EC agreed to terms for Iceland and Norway's accession. See Josh Mitchell, Norway, Iceland to Join "Open Skies" Pact with US, Dow Jones Newswire, Oct. 9, 2009 (available here). It is conceivable that at some stage a "critical mass" of State parties will be reached, requiring a more sophisticated mechanism for settling disputes than the more informal consultation/negotiation/arbitration procedures commonplace in air services agreements. See, e.g., U.S. Dept. of State, Current Model Open Skies Agreement Text, art. 14 (Jan. 10, 2008) (available here); cf. also U.S./EC Air Transport Agreement, supra, art. 18. Even before such a "mass" is reached, enhanced regulatory harmonization between the current parties could demand the eventual establishment of a standing body with the competence and juridical power to settle disputes. Before such efforts are undertaken, however, civil aviation authorities would be well served to scrutinize the WTO model, reflect on the criticisms offered by Brewer, and hopefully develop a system which disciplines global aviation trade through and within the rule of law.
Despite talk that an agreement would be finalized before year's end, the United States and Japan were unable to finalize an open skies treaty in Tokyo yesterday. See Yoshio Takahashi, Japan Transport Min: No Agreement Yet on US-Japan Open Skies, Dec. 10, 2009 (available here). According to news reports, slot allocation at Haneda Airport remains one of the sticking points in the negotiations. While "open gateways" between partners is a central element of the open skies policy template, the Japanese Government has indicated in recent weeks that it will limit slots for U.S. airlines at it Tokyo airports. See "No Japan/U.S. Open Skies?"
Thursday, December 10, 2009
As expected, see "Regulators to Approve U.S./Australia Alliance," the Australian Competition and Consumer Commission officially cleared the Delta Airlines/Virgin Blue alliance proposal. See Harry R. Weber, Australian Regulators OK Delta, Virgin Blue Plan, Assoc. Press, Dec. 10, 2009 (available here). The joint venture is still awaiting final approval and antitrust immunity from the U.S. Department of Transportation. See Dkt. No. OST-2009-0155, Application for Approval of and Antitrust Immunity for Alliance Agreements (July 9, 2009).
As discussed last month on the blog, see "New Passenger Rights Enforcement," the Department of Transportation set something of a precedent by issuing fines to Continental Airlines, Mesaba Airlines, and ExpressJet for their role in the highly publicized stranding of 47 passengers on the tarmac in August of this year. There's a new story out discussing the fines and their possible ramifications that is well worth reading. See Jay Boehmer, Tarmac Delay Triggers DOT Fine Precedent, Bus. Travel News, Dec. 7, 2009 (available here). As the story discusses, the three airlines were fined a total of $175,000 for engaging in "unfair and deceptive practices" due to their failure to follow Continental's "Airlines Customer First Commitments" published on its website. According to 49 U.S.C. § 41712:
On the initiative of the Secretary of Transportation or the complaint of an air carrier, foreign air carrier, or ticket agent, and if the Secretary considers it is in the public interest, the Secretary may investigate and decide whether an air carrier, foreign air carrier, or ticket agent has been or is engaged in an unfair or deceptive practice or an unfair method of competition in air transportation or the sale of air transportation. If the Secretary, after notice and an opportunity for a hearing, finds that an air carrier, foreign air carrier, or ticket agent is engaged in an unfair or deceptive practice or unfair method of competition, the Secretary shall order the air carrier, foreign air carrier, or ticket agent to stop the practice or method.
Notice, however, that this provision only permits the Secretary to order a halt to an air carrier's deceptive or unfair business practices. It says nothing about issuing monetary penalties. As the DOT order makes clear, the fines levied were agreed upon "in the interest of compromise and settlement" in order "to avoid the substantial burdens of litigation." See Continental Airlines, Inc., Consent Order, Dkt. No. OST-2009-0001 (Nov. 24, 2009), at 3. It remains unclear what criteria the DOT may use in the future to determine a "passenger rights" violation through the exercise of its § 41712 authority and what the penalities for such violations would be. It is also not clear to what extent the DOT will pursue future "passenger rights" cases. The discretion lies with the DOT. The result, unfortunately, is more regulatory uncertainty for the airlines.
Wednesday, December 9, 2009
A report from yesterday's Wall Street Journal indicates that the U.S. airline industry may soon recover from its financial woes. See Susan Carey & Mike Esterl, Airline Appear Headed for Recovery, Wall St. J., Dec. 8, 2009 (available here). While the story notes a number of challenges ahead, including consumer concerns over the spread of the H1N1 virus and potential increases in fuel prices sparked by overall economic recovery, the bottom line is that the U.S. aviation sector has taken the right steps to weather the current economic storm and reposition itself for profitability in the near future.
Assuming the airlines' recovery remains steady over the next several years, one has to wonder whether it will be enough to halt recent discussions about reregulating the industry. Transportation Secretary Ray LaHood has committed himself to establishing a new advisory group for aviation, one which could certainly suggest lawmakers take a more proactive role in "stabilizing" or "maintaining" U.S. air transportation. At the same time, it's important to bear in mind that despite numerous upheavals over the past three decades, the airline industry has done remarkably well staving off reregulation. (Ironically, however, this may have been due to the industry's fractured interests where no "one size fits all" regulatory schema would be appropriate rather than an exercise of bald lobbying power.) Cf. Michael E. Levine, Why Weren't the Airline Reregulated?, 23 Yale J. on Reg. 269 (2006).
Tuesday, December 8, 2009
With the privatization of Alitalia and Olympic Airways earlier this year, it appeared the days of the EU Member State flag carrier were coming to a close. Not so, apparently. According to a new report, Hungary is poised to forgo HUF 19 billion in debt of its former State carrier Malév. See Hungary to Forgo Debts of Ailing Airline Malév . . ., Portfolio.HU, Dec. 4, 2009 (available here). As part of the deal, Hungary could convert its claims into a majority ownership stake. According to the report, the Hungarian Government is looking to partner with Malév's Russian parent company, AirBridge, to help the carrier return to profitability.