June 19, 2009
Economic Analysis of Hub Dominance
University of Virginia Economics Professors Federico Ciliberto and Jonathan W. Williams's working paper, Limited Access to Airport Facilities and Market Power in the Airline Industry (SSRN Working Paper Series, Feb. 12, 2009), may be of interest to blog readers. The abstract reads as follows:
We investigate the role of limited access to airport facilities as a determinant of the hub premium in the US airline industry. We use original data from competition plans that airports are required to submit to the Department of Transportation in compliance with the Aviation Investment and Reform Act for the 21st Century. We collect information on the availability and control of airport gates, on leasing and sub-leasing arrangements, and on restrictions that airport face to expand their facilities.
We find that the hub premium is increasing in the ticket fare. We show that control of gates leased on an exclusive basis is a crucial determinant of the hub premium. Limits on the fees that airlines can charge for subleasing their gates lower the prices charged by airlines. Finally, control of gates and restrictions on sublease fees explain high fares only when there is a scarcity of gates relative to the number of departures out of an airport.
The paper may be downloaded from SSRN here.
June 18, 2009
DOJ to Offer Input on Star Alliance
According to several news outlets, see, e.g., CNN Money here; Chicago Daily Herald here; & Business Week here, U.S. Attorney General Eric Holder has "reached out to the Department of Transportation" to request that the Department of Justice's Antitrust Division "have some input" into the pending final order for Continental Airlines to join the Star Alliance. As discussed on the blog last week, the Senate Judiciary Committee issued a letter to Transportation Secretary Ray LaHood requesting the DOT suspend delivering a final order approving and granting antitrust immunity to the alliance until the DOJ could assess the venture. While both Continental and United Airlines have publicly proclaimed confidence that they will receive final approval, a report which first appeared in the Financial Times stated that the DOJ is looking to "carve out" certain routes from immunization, specifically Newark/Frankfurt. Under the tentative approval order issued in April, the DOT had planned to remove its preexisting carve outs for the Chicago/Frankfurt and Washington/Frankfurt city pairs. Now that the DOJ is getting involved, that may no longer be the case.
Despite Holder's assurance that any DOJ inquiry will be over in a matter of weeks, it's important to bear in mind that Star is receiving disproportionate scrutiny from U.S. officials. SkyTeam, which includes the recently formed Delta/Northwest entity, received a comparative free pass from the DOT on its alliance application. Depending on the scope of conditions imposed by the DOJ (done under the auspices of "protecting consumers"), regulators may be establishing an inequitable playing field for the transatlantic market and thus undermining the full consumer benefits robust competition between multiple alliances could bring. No doubt the ongoing oneworld application, which includes American Airlines, British Airways, and Iberia, will also be subject to a DOJ investigation and potential conditions. With lawmakers and competing airlines (most notably Virgin Atlantic) loudly protesting BA and AA's potential to dominate the U.S./London Heathrow market within an immunized alliance, oneworld may be forced to accept an impaired approval.
June 17, 2009
Remembering the CAB
With the publication of the U.S. Treasury Department's white paper, Financial Regulatory Reform: A New Foundation (July 17, 2009) (available online here), there should be little doubt that the Government is in a "reregulatory mood" at the moment. The chances of this interventionist mentalité extending in-full to civil aviation remain, hopefully, slim. That doesn't mean there hasn't been cause for concern. As chronicled on the blog, the U.S. House of Representatives have already passed a version of the 2009 FAA Reauthorization Act which could bring down the international airline alliance system within three years and place serious roadblocks to an enhanced second stage air transport agreement between the U.S. and European Community. Even so, this is a far cry from the four plus decades when the Civil Aeronautics Board held monopoly oversight power on airlines' rates, routes, and services and waved a wand of antitrust immunity far more potent than any in U.S. regulatory history.
For those readers of the blog interested in refreshing their memories on the CAB and its demise or, due to time of birth, too young to recall when the CAB roamed the regulatory landscape, the following articles from the archives may be of interest:
- Comments, Civil Aeronautics Board Policy: An Evaluation, 57 Yale L.J. 1053 (1948);
- Richard D. Cudahy, The Coming Demise of Deregulation, 10 Yale J. on Reg. 1 (1993);
- Paul S. Dempsey, Rate Regulation and Antitrust Immunity in Transportation: The Genesis and Evolution of This Endangered Species, 32 Am. U. L. Rev. 335 (1982);
- Paul S. Dempsey, The Rise and Fall of the Civil Aeronautics Board, 11 Transp. L.J. 91 (1979);
- Robert M. Hardaway, Transportation Deregulation (1976-1984): Turning the Tide, 14 Transp. L.J. 101 (1986);
- Edward M. Kennedy, Airline Regulation by the Civil Aeronautics Board, 41 J. Air L. & Com. 607 (1975);
- John J. Farrell, Comment, The Civil Aeronautics Board as Trustees of the Public Interest, 5 U.S.F. L. Rev. 392 (1971);
- Christopher L. Manos, Note, Airline Deregulation and Service to Small Communities, 57 N.D. L. Rev. 607 (1981);
- John T. McGoldrick, Jr., Note, The Impact of the Civil Aeronautics Board's Regulation of Price Structure on the Airline Industry, 10 Ga. L. Rev. 619 (1976);
- John G. Murphy, Jr., Comment, C.A.B. Regulation of Fares of Foreign Airlines, 11 Colum. J. Transnat'l L. 276 (1972);
- William A. Paterson, Stewardship of the Airlines by the Civil Aeronautics Board, 15 J. Air L. & Com. 390 (1948); and
Jerrold Scoutt, Jr. & Coates Lear, Regulation by the Civil Aeronautics Board of the Ownership and Control of Air Carriers, 27 J. Air L. & Com. 247 (1960).