July 25, 2009
GAO Report on EAS
The U.S. Government Accountability Office recently issued a report on one of the regulatory byproducts of the 1978 Airline Deregulation Act, the Essential Air Services (EAS) Program. See Govt. Accountability Office, National Transportation System: Options and Analytical Tools to Strengthen DOT's Approach to Support Communities' Access to the System, GAO-09-753 (July 17, 2009) (available here). From the summary:
Since 1978, the Essential Air Service (EAS) program has subsidized air service to eligible communities that would otherwise not have scheduled service. The cost of this program has risen as the number of communities being served and subsidies to air carriers have increased. At the same time, the number of carriers providing EAS service has declined. Given continuing concerns over the EAS program's long-term prospects, GAO was asked to review the program. GAO reviewed (1) the characteristics and current status of the EAS program, (2) factors affecting the program's ability to provide air service, (3) options for revising the program, and (4) tools for assessing the program, the options for its revision, and the program's performance. GAO interviewed stakeholders and reviewed the results of an expert panel convened by GAO, Department of Transportation (DOT) data and program documentation, and potential methodologies for assessing federal programs.
July 24, 2009
Opposition to Proposed U.S./Australia Joint Venture
Amidst the the ballyhoo surrounding Continental Airlines's (mostly) successful bid to win approval and antitrust immunity for its participation in the Star Alliance, see previous blog post here, little notice has been paid to the approval and immunity application filed by the U.S.'s Delta Airlines and Australia's Virgin Blue, V Australia, and Pacific Blue (which also has operations in New Zealand). See Dkt. No. OST-2009-0155, Application for Approval of and Antitrust Immunity for Alliance Agreements (July 9, 2009) [hereinafter Joint Application]. The application avails itself of the 2008 U.S./Australia Air Transport Agreement, 3 Av. L. Rep. (CCH) ¶ 26,207g, at 21,850 (Feb. 14, 2008), which--according to the application--"fundamentally changes the competitive market structure between the U.S. and Australia, establishing a solid framework for expanded transpacific competition by Australian and U.S. airlines," Joint Application, supra, at 9.
While no major party on the U.S. end (including the Department of Justice) has come forward to oppose the venture before the Department of Transportation, there is a report out that Air New Zealand "will fight what it has described as [the airlines' proposed] collusion on fares and capacity." Matt O'Sullivan, Virgin Delta Tie-Up Opposed, Dominion Post, July 25, 2009 (available here). Also joining the clamor against the proposed alliance is Singapore's Tiger Airways. See id. The airlines are hoping that the precedent set by the Australian Competition and Consumer Commission's 2008 rejection of an Air New Zealand/Air Canada cooperative arrangement will spell defeat for the new transpacific link-up. Id. No indication was given by the report when a decision on the matter is expected.
Why is the U.S. Airline System Dysfunctional?
The Centre for Asia Pacific Aviation has a new reflection up on the dysfunctionality of the U.S. airline system. See Ron Kuhlmann, Why is the U.S. Airline System Dysfunctional?, Centre for Asia Pacific Aviation (July 24, 2009) (available here). The lead-in to the piece states:
This past week has revealed continuing poor results for the majors and the American carriers are announcing still more cuts and dire predictions. This current crisis, with its plummeting demand, overlapped the previous crisis, fuel cost, creating an environment in which the airlines were set upon from all directions. In response to high fuel, the US carriers were the most aggressive in reducing capacity and there was some hope that they would be rewarded for that effort. So far? Not so much.
July 23, 2009
Above-Cost Predatory Pricing in the Airline Industry
The issue of alleged above-cost predatory pricing has gained considerable attention in the scholarly literature over the least several years, particularly after the publication of Professor Aaron S. Edlin's essay Stopping Above-Cost Predatory Pricing, 111 Yale L.J. 941 (2002). A recent article by law and economics scholar Gustavo Mathias Alves Pinto, Competition and Predation in the Airline Industry, 74 J. Air L. & Com. 3 (2009), "analyz[es] the merits of the application of above-cost predatory pricing theory to the airline industry," id. at 5, and suggests that both the problem is overstated with respect to aviation and that any rule intended to "cure" the "problem" which would limit the capacity of incumbent airlines to reduce prices or increase services would amount to "nothing but a disguised proposal for complex regulation, going against the rationale of the 1970s reforms, which had the objective of deregulating [the airline industry]," id. at 23. Readers of the blog interested in antitrust and aviation should make a point to read it.
For more on above-cost predatory pricing theory and its application, see Einer Elhauge, Why Above-Cost Price Cuts to Drive Out Entrants Are Not Predatory--and the Implications for Defining Costs and Market Power, 112 Yale L.J. 681 (2003); Daniel A. Crane, The Paradox of Predatory Pricing, 91 Cornell L. Rev. 1 (2005).
ABA Forum on Air & Space Law 2009 Annual Meeting
Blog readers should take note that the ABA Forum on Air & Space Law's 2009 Annual Meeting will be held September 24-25, 2009 at the InterContinental Hotel in Chicago, Illinois. Full information on the event, including a program brochure and registration details, are available at the ABA's website here.
July 22, 2009
Ground Handling Services at European Hub Airports
For those interested in the liberalized groundhandling services market in the European Union, Stephan Schmidberger et al.'s Ground Handling Services at European Hub Airports: Development of a Performance Measurment System for Benchmarking, 117 Int'l J. Production Econ. 104 (2008), may be of interest. The abstract reads:
The liberalization of ground handling in Europe forces airports to assess their performance relative to their competitors in order to remain competitive and sustain long-term competitive advantage. Together with main EU hub airports, action research was conducted for one year to develop a holistic performance measurement system (PMS) for ramp services. The resulting PMS entails a process-based perspective and reflects the supply chain of airport logistics. As the findings of an ex-post validation suggest, the system represents a suitable basis for competitive benchmarking activities.
Continental/United Merger Rumors and the Future
Reuters ran a story last week on the latest rumors concerning a possible merger between Continental and United Airlines following the news that Continental's CEO Larry Kellner will step down at year's end. See Continental's CEO Shift Stirs Merger Talk, Reuters, July 17, 2009 (available here). According to USA Today's aviation travel blog, however, "most industry observers seem [to] think that the airlines will not transform their current alliance plans into another attempt at a full-fledged merger." Today in the Sky, Continental-United Merger Talk Renewed by CEO Shakeup? (July 20, 2009) (available here).
Regardless of whether or not the merger speculations are mere water cooler gossip, it is worth noting that any merger attempt by the two would likely meet much stiffer regulatory scrutiny than last year's Delta/Northwest link-up. With the Department of Justice's Antitrust Division promising "vigorous antitrust enforcement," Continental and United won't be the recipients of a "free pass." Given the degree to which the DOJ chose to involve itself in Continental's recently approved application to join the Star Alliance with full antitrust immunity, it's clear the Justice Department is taking seriously the impact the airlines' business ventures could have on consumers and competition. While healthy competition oversight is a worthy end, the DOJ should remain mindful of the changing air transport market and the reality that the classic competition models for air transport are outmoded. With consumer demand down and operating costs on the rise, both the domestic and international markets can no longer sustain the same level of multicarrier competition from a decade ago. Though neither Continental nor United may be in a position to consummate a merger at this point in time, an aviation marketplace with fewer participants is already taking shape; the DOJ should not stand in the way.
Full-Time Posting Resumes Today
Though summer has not fully abated, the Aviation Law Prof Blog is returning to a full-time posting schedule starting today. Readers can expect twice-daily postings during the week, along with weekend updates.
July 20, 2009
The Aviation Law Prof Blog has been on a brief summer break, but will be back to a full-time posting schedule starting Wednesday.