March 26, 2009
On Protectionism and Alliances
A recent inquiry to the blog took note of our recent postings on protectionism and the aviation industry and asked if international airline alliances are not also "very dangerous mechanisms for allowing market-dominating behavior, which is detrimental to the consumer, free competition and open access for new entrants." That is a fair question, but one which would require far more than a single blog post to answer comprehensively. Nevertheless, it is possible to address some general points concerning international alliances and why their potential anticompetitive effects ought to be distinguished from the more pervasive problem of protectionism.
When we refer to "protectionism" on the blog, we are referring to State policies which inhibit free trade in goods and services. In the context of civil aviation, we are typically talking about such practices as States limiting foreign ownership and control of their carriers (either through national laws or in their bilateral air services agreements with other countries), restricting foreign carriers' domestic traffic rights (cabotage), or injecting public subsidies (State aid) into their flag carrier(s). This list is by no means exhaustive. Bilateral agreements which fall outside the "open skies" framework can have all sorts of additional protectionist provisions, from demanding 50/50 capacity sharing on routes to complex, highly-politicized route exchanges. (Article 11 & Annex I of the now-defunct 1977 U.S./UK Air Transport Agreement, commonly known as Bermuda II, serve as the locus classicus for these restrictions.) The U.S.'s Fly America program has been derided as protectionist by EU Member States; so, too, has the recent European Commission proposal to suspend its "use or lose" slot rule at Community airports. It is the position of the International Aviation Law Institute (and thus this blog) that these and other forms of protectionism impede the safe and orderly development of international civil aviation and the offering of air services on the basis of equality of opportunity, operated soundly and economically. Cf. Chicago Convention on International Civil Aviation, pmbl., 61 Stat. 1180, 15 U.N.T.S. 295.
Airline alliances, by their very nature as agreements between private entities, do not engage in protectionism. That does not mean they or their individual members refrain from engaging in anticompetitive behavior. An exhaustive treatment of the merits of this general charge is beyond the scope of this post. However, when examining airline alliances--specifically the three major global alliances--it is important to look at each of their respective networks as a whole and how it does (or does not) compete with the networks of the other alliances. It is easy to narrow the analysis down to specific city pairs and find that a particular alliance, acting through one or more of its member airlines, dominates the route. That's inevitable for the simple fact that not every city pair demands, or can support,multicarrier competition. But in the aggregate, how important are those city pairs? If a consumer is looking to fly from Grand Rapids, Michigan, to Frankfurt, one can do so through SkyTeam or the Star Alliance. SkyTeam will take them from Grand Rapids to Detroit, Michigan, on Northwest Airlines, before placing the consumer on a KLM plane bound for Frankfurt. On the other hand, Star will take the consumer from Grand Rapids to United's hub at Chicago O'Hare and on to Frankfurt on a flight operated by Lufthansa. For the consumer, the question is likely to come down to which alliance will get them from Point A (Grand Rapids) to Point B (Frankfurt) in the cheapest, most time convenient manner possible. If this consumer is a frequent air traveler, they may take into account what additional "perks" are offered by one alliance or the other. For example, if the consumer is going to Frankfurt on vacation but normally makes frequent trips between, say, Grand Rapids and St. Paul, Minnesota, on Northwest to visit immediate family, the consumer may be inclined to pick SkyTeam to maximize frequent flyer miles.
Now, as the example loosely illustrates, despite the large networks that Star, SkyTeam, and oneworld have developed, there is not complete overlap. Parts of each alliance's network will be dominated by one of its members. The competition for these international alliances, however, is for the large body of consumers who want to get from their city to a distant destination and that is what produces choices for consumers and keeps overall costs down. It is also important to bear in mind that alliance members operating between major city pairs will still face competition from airlines offering point-to-point service, including low-cost carriers. The barriers to entry that alliances are oftentimes accused of erecting, such as slot hoarding, can be and ought to be dealt with through robust competition rules. Alliances are not, by nature, compelled to engage in such practices and can readily be dissuaded from doing so without impeding their ability to expand their respective networks and continue to offer consumers substantial benefits.
As a final note, in most instances airline alliances are "second best" options in the face of legal hurdles which prohibit or minimize the benefits of transnational mergers. While some analysts have argued that alliances are preferable to mergers in that they do not demand the same levels of capital investment and thus carry less risk, they have exhibited signs of instability in their relatively short history and remain the subject of political discontent (particularly in the United States).
March 24, 2009
Airline Alliances? "Hell no," Says Oberstar
Rep. James Oberstar, Chairman of the House Transportation Committee and main proponent of a provision in the 2009 FAA Reauthorization Act which would sunset antitrust immunity for global airline alliances, defended his position before the International Aviation Club (IAC) in Washington, D.C. yesterday. According to a story from Reuters, Rep. Oberstar derided the immunized alliances as "de facto merger[s]" before asking rhetorically, "Is that what I voted for when I voted for [U.S. airline] deregulation in 1978? Hell no."
The full prepared text of Rep. Oberstar's speech is available on the IAC's website here. An independent review of the speech supplied to the blog noted that some of Rep. Oberstar's more provacative remarks are not included in the IAC text, including the aforementioned mild expletive. However, the speech is well worth reading for those wishing to gain insight on the protectionist motivations of one of Capital Hill's most influential lawmakers.
March 23, 2009
Safety Transparency in the EU
Aviation lawyers Guido de Vos and Frans Vreede (whose earlier guest post on the blog is available here) of the Dutch firm AKD Prinsen Van Wijmen have written a fresh commentary on opening the European Commission's database on airline safety performance to the public. Noting that the EU's current airline blacklist "is no panacea for aircraft accidents," their piece begins:
A serious accident involving a Turkish Airlines aircraft took place in the Netherlands last Wednesday. The drastic impact of such a disaster on victims and relatives cannot be stressed enough. Fortunately aid workers were on hand quickly, and the fact that no fire broke out prevented more serious consequences. Speculation began immediately as to the cause of the crash. The history of air disasters has shown that there is seldom one single cause; the disaster is usually the result of a chain of interrelated events. It is the task of the Safety Investigation Board to carefully ascertain the cause. Anyone is free to state their opinion, since statements before the Council cannot, in principle, be used in criminal proceedings.
In the meantime, it has been suggested in various media that Turkish Airlines has the reputation of being an unsafe airline because it has been involved in other serious accidents. However, the European Commission quickly issued a statement that the company is not, and never has been, on the European blacklist of unsafe airlines.
The rest of the article is available online here.
The ATA on Antitrust Immunity
The Air Transport Association (ATA) released a public statement today urging the Obama Administration to resist the recent amendment to the 2009 FAA Reauthorization Act which would sunset the antitrust immunity for existing airline alliances. See previous discussion on the blog here, here, and here. According to the ATA, the legislation could result in the loss of 15,000 U.S. airline jobs and have a ripple effect across the travel and tourism industry. The statement also observed:
International alliances are a vital element of a global economy and produce enormous benefits for travelers, businesses, shippers and others. The U.S. Department of Transportation (DOT) has historically approved international airline alliances because of the substantial benefits that they provide both to passengers, and to European and U.S. airlines. [The legislative proposal] could destroy important service and public benefits such as competitive fares and new routes by withdrawing previously granted rights for carriers to participate in alliances.
In addition to the ATA's comments, it is important to take cognizance of the fact that the extension of antitrust immunity for airline alliances has been crucial to persuading countries to sign open skies agreements with the U.S. For example, the full implementation of the 1996 U.S./Germany Air Transport Agreement was preconditioned on U.S. antitrust immunity for an expanded Lufthansa/United Airlines alliance. Likewise, the DOT's 1996 refusal to extend antitrust immunity to the proposed British Airways/American Airlines alliance was due to a breakdown in negotiations for a liberal U.S./UK agreement to replace the highly restrictive Bermuda II treaty. This practice was explicitly referenced in Paragraph 48 of the Memorandum of Consultations to the 2007 U.S./EC Air Transport Agreement where the U.S. assured EU Member States that that the Agreement "will satisfy the DOT requirement that, to consider . . . an application from foreign airlines for antitrust immunity or to continue such immunity, an Open Skies agreement must exist between the United States and the homeland(s) of the applicant foreign airline(s)."
The proposal to sunset current antitrust immunity for airline alliances comes with the risk that the DOT will lose the authority to grant it altogether. If that happens, the U.S. will be deprived of an important bargaining chip for future air transport negotiations, particularly with crucial markets such as Japan, China, Mexico, and Brazil. More problematic is the possibility that the U.S. will lose the confidence of EU Member States during the ongoing negotiations for a second stage air transport agreement, leading to a possible suspension of some (if not all) of the traffic rights acquired for U.S. carriers in 2007. The result could be not just a loss of 15,000 U.S. jobs, but the forfeiture of two decades' worth of aerodiplomacy which has helped rid the transatlantic market of inefficient protectionism.
A Suggestion for Congestion
Readers of the blog may be interested to read Michael E. Levine's recently published analysis of alleviating airport congestion through slot auctions, Airport Congestion: When Theory Meets Reality, 8 Yale J. on Reg. 37 (2009). In the article, Levine critiques the Federal Aviation Administration's slot auction proposal and suggests a new way forward through the use of blind auctions.