August 21, 2009
Liberalization of Air Transport Services and Passenger Traffic
Economists Roberta Piermartini and Linda Rousova's working paper on behalf of the World Trade Organization's Economic Research and Statistics Division offers empirical confirmation of what most of us already know: liberalization increases traffic volume. See Liberalization of Air Transport Services and Passenger Traffic (Staff Working Paper ERSD-2008-06, Dec. 2008) (available here). From the abstract:
Using a gravity-type model to explain bilateral passenger traffic, this paper estimates the impact of liberalizing air transport services on air passenger flows for a sample of 184 countries. We find robust evidence of a positive and significant relationship between the volumes of traffic and the degree of liberalization of the aviation market. An increase in the degree of liberalization from the 25th percentile to the 75th percentile increases traffic volumes between countries linked by a direct air service by approximately 30 per cent. In particular, the removal of restrictions on the determination of prices and capacity, cabotage rights and the possibility for airlines other than the flag carrier of the foreign country to operate a service are found to be the most traffic-enhancing provisions of air services agreements. The results are robust to the use of different measures of the degree of liberalization as well as the use of different estimation techniques.
August 20, 2009
How Bad Is Antitrust Immunity for Aviation?
In the closing pages of his entertaining and informative polemic, The Antitrust Religion (Cato Inst. 2007), former Chairman of the ABA's Antitrust Law Section Edwin S. Rockefeller writes:
The antitrust laws provide a vehicle for the antitrust community to carry on a useless, mischievous activity portrayed as law enforcement. Antitrust has been called "a subcategory of ideology," "a religion without a cause," and a "hoax." Whatever antitrust may be, it is not law enforcement. Justice Abe Fortas wrote: "Antitrust in the United States is not...a set of laws by which men may guide their conduct. it is rather a general sometimes conflicting statement of articles of faith and economic philosophy.
Id. at 99.
There should be little doubt that Rockefeller's iconoclasm has not won any apostates from the Antitrust Division at the Department of Justice, nor from the "antitrust community" at large. Cf. Christine A. Varney, Assistant Attorney General, U.S. DOJ Antitrust Division, Vigorous Antitrust Enforcement in This Challenging Era, Remarks to the U.S. Chamber of Commerce (May 12, 2009) (available here). Still, that hasn't stopped some who are faithful to the "antitrust religion" from recommending the book. See Required Reading for the New Antitrust Administration, Antitrust Source, Aug. 2008, at 2 & 4 (available here). While Rockefeller's indictment of antitrust may seem extreme, it is in fact part of a significant line of criticism which has agitated for repeal of all U.S. antitrust statutes. See, e.g., D.T. Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure (Independent Inst. 2d ed. 1996); D.T. Armentano, Antitrust: The Case for Repeal (Ludwig von Mises Inst. rev. 2d ed. 2007); The Abolition of Antitrust (Gary Hull ed., Transaction Pub. 2005); Cato Inst., Cato Handbook for Policymakers 411-17 (Cato Inst. 7th ed. 2009) (available here). So, on the assumption that Rockefeller et al. are on to something with regard to antitrust, how uncomfortable should we be with the Department of Transportation's vestigial authority to immunize international intercarrier agreements from "judges and other government officials mak[ing] arbitrary decisions using antitrust doctrines based on faith not easily overcome by reason, logic, and empirical data"? Rockefeller, supra, at 8.
For over six decades the air transport industry has had to labor under regulatory scheme drawn up on the basis of its supposed "exceptionalism." While the U.S. Government eventually came around to dismissing much (though not all) of that "exceptionalism" as good grounds for comprehensive regulation in 1978, international aviation remains in the grip of bilateral trade agreements and protectionism. Perhaps this is why lawmakers implicitly left the old Civil Aeronautics Board's immunization powers for agreements involving foreign air transport untouched when they transferred to the DOT. See CAB Sunset Act of 1984, sec. 3, Pub. L. No. 98-443, 98 Stat. 1703; see also id. sec. 3(c) (sunsetting the CAB/DOT immunization powers for domestic air transportation on Jan. 1, 1989). Both the DOT and the DOJ opposed the former retaining the old CAB immunization powers on the grounds it could lead to "reregulation," see Legislative History of the [CAB] Sunset Act of 1984, 1984 U.S.C.C.A.N., at 2864, though it seems that such fear is only justified if the DOT were to wield its powers in a non-transparent, discriminatory fashion. Interestingly, with respect to international agreements, it has been the DOT's generally positive and, one might say, non-discriminatory approval and immunization of airline alliances which has drawn the most ire from policymakers and industry observers. In approving theseventures, however, the DOT has allowed a struggling industry which must contend with outmoded nationality and cabotage restrictions to provide comprehensive network benefits to consumers without the specter of arbitrary antitrust enforcement haunting their every move.
Three decades after deregulation, lawmakers are now regressing from the more enlightened thinking about civil aviation of the 1970s back to the myth of "exceptionalism" and the attendant (but specious) "need" for robust regulation. Rep. James Oberstar has been particularly vocal about reharnassing the industry by strengthening the nationality rule and sunsetting antitrust immunity for alliances. See FAA Reauthorization Act of 2009, secs. 426 & 801, H.R. 915, 111th Cong. But as Prof. Brian Havel recently opined:
If the government is in a regulatory frame of mind, however, why should we go Oberstar's way [and sunset antitrust immunity for alliances]? Why would it be so outlandish to rebuff Oberstar and for Congress to expand antitrust immunity in these challenging times, not restrict it? For example, we could allow temporary immunity for domestic intercarrier agreements as we did in the days of the [CAB]. Lufthansa and Austrian have this privilege (in the context of the EU internal market), so why not in the United States? It seems extraordinary to me that United can have antitrust immunity with Air Canada that covers the Chicago and Toronto hubs which are only 300 miles apart, but is prohibited from a similar arrangement with Continental even though Chicago and Continental's Houston hub are three times that distance apart.
If there is a tension between the industry's need for consolidation and Congress's understandable fear of reducing the number of domestic airlines, then why not call Congress's bluff, sideline Oberstar, and lobby for domestic antitrust immunity? Given the connections that U.S. network carriers have with international alliances, and the proven economic success of those connections, why would this be such a dangerous or commercially illogical move? . . . It is time to recognize that, when Adam Smith meets the airline industry, sometimes classic competition and network competition are not in perfect alignment.
See Brian F. Havel, In Praise of Law's Cosmos: Reflections on the Entrepreneurial Spirit in Aviation Law and Policy, Keynote Address to the IATA Legal Symposium, Bangkok, Thailand (Feb. 9, 2009), reprinted in 8 Issues Aviation L. & Pol'y 127, 131-32 (2009).
The thought that civil aviation--domestic and international--should be shielded from antitrust enforcement may appear revolutionary, but the U.S. statutory archives already provide ready-made standards which could be reanimated. See 49 U.S.C. § 1378(b)(1)(B) (1979) (repealed). Perhaps the airlines could prove to be a useful test case for further rethinking of U.S. antitrust law and enforcement. Maybe it will become clear that the old hobgoblins of antitrust--"market power," "barrier to entry," and "predatory pricing"--will be revealed as the stuff of fantasy in the context of the aviation industry. At the very least, immunization certainly couldn't hurt this already beleaguered sector of the economy.
Moving Brazilian Aviation Forward
The International Air Transport Association recently set out an agenda to help move Brazil's aviation sector forward "to improve [its] competitiveness and deliver broad economic benefits." See Press Release, IATA, Strengthening the Foundations of Brazilian Aviation, No. 23 (Aug. 20, 2009) (available here); see also Giovanni Bisignani, General Director & CEO, IATA, Remarks to the British Chamber of Commerce, Sao Paulo, Brazil (Aug. 20, 2009) (available here). On the topic of air transport liberalization, IATA's CEO had the following to say:
I would like to spend some time on liberalization. Brazil is the 10th largest economy in the world but has only 13 million international air passengers. That is only a third of what markets like Thailand and Singapore have annually with much smaller economies and populations. As a result you are not maximizing the economic benefits of air transport. Part of the problem is the very traditional protectionist policy approach of the bilateral system.
Unlike any other industry, airlines need a government treaty to sell its product and airline mergers are limited by archaic foreign ownership restrictions. Late last year, Brazil took two historic leadership steps. First, it accepted our invitation to join IATA’s Agenda for Freedom meeting in Istanbul. The 15 invited governments focused on finding a way to give airlines the commercial freedoms that every other industry takes for granted. We are now working on a multi-lateral statement of policy principles to promote a more normal approach for aviation. CONAC’s recent proposal to increase foreign ownership possibilities to 49% would be a step in the right direction and I hope that Brazil will be one of the first signatories when the group plans to meet again in November.
The second action was almost immediately after the summit when Brazil signed a very liberal agreement with Chile. The sky has not fallen but opportunities for travel between Chile and Brazil have expanded.
IATA recently studied the potential impact of further liberalization. Liberalization of ownership and market access could generate 400,000 jobs in Brazil and add 24 billion Reais to Brazil’s economy. The stakes are high! I hope that Brazil, as the region’s largest economy, can take leadership to promote liberalization in Latin America and globally.
Currently, Brazil does not have an open skies agreement with the United States. Cf. Agreement Between the Government of the United States of America and the Government of the Federative Republic of Brazil on Air Transport, 3 Av. L. Rep. ¶26,231 et seq. This is also true of Brazil's aviation relationship with the European Community, though both sides have publicly committed to working toward a horizontal Brazil/EC Air Transport Agreement. See European Commission, Brazil-European Union Strategic Partnership Joint Action Plan, at 7 (Dec. 22, 2008) (available here).
August 19, 2009
The Durability of EAS
With the Department of Transportation's Essential Air Service Program receiving more public attention in the last week, blog readers may be interested in another story questioning the efficacy of the program. See Halimah Abdullah, Half-Empty Flights Have Some Questioning Federal Subsidies, Macon Telegraph, June, 2, 2009 (available here).
While there are numerous community-by-community stories out there offering both justifications for and criticisms of the program, it is key to keep in mind that the Government Accountability Office--the "investigative arm of Congress" and "congressional watchdog"--has clearly determined that the program is not cost effective. See GAO, Commercial Aviation: Programs and Options for the Federal Approach to Providing and Improving Air Service to Small Communities, at 17, GAO-06-398T (Sept. 14, 2006). More unsettling is the fact the EAS program was intended to sunset after a decade. Instead, the Government renewed the program for an additional 10 years in 1988, see 49 U.S.C. § 1389(1) (1987), and, in 1998, eliminated the sunset provision altogether, see 49 U.S.C.A. § 41742 (West 2008). What should have been a transitional program to ease some of the burdens accompanying the U.S.'s "big bag" deregulation of the air transport sector has turned into one of the most conspicuous regulatory artifices for domestic aviation. That alone should be enough to raise eyebrows the next time Congress wants to step-in and "temporarily correct" the market.
No Air France-KLM Takeover of Czech Airlines
In what shouldn't be terribly surprising news given present economic conditions, Air France-KLM announced that it would withdraw its bid for the State-owned Czech Airlines. See Sean Carney & Steve McGrath, Air France Withdraws From Czech Airlines Bidding, Wall St. J., Aug. 19, 2009 (available here); Robert Wall, Air France Withdraws From Czech Privatization, Aviation Wk., Aug. 19, 2009 (available here). From the Wall Street Journal story:
The privatization of CSA Czech Airlines was thrown into doubt Wednesday after Air France-KLM withdrew from the tender because of the downturn in the industry and after examining the Czech carrier's books, leaving just one bidder left in the process.
The Czech Ministry of Finance said the tender would continue, and the remaining bidder, a consortium of Czech and Icelandic investors, said it remains interested despite Air France-KLM's withdrawal.
In addition to the tough business environment and worsening financial positions for both airlines, Air France-KLM decided that the expected synergies from a tie-up wouldn't be enough to justify the investment, said a person close to the matter. An Air France-KLM spokeswoman declined to comment beyond the company's statement.
Following the recent recomposition of Italy's Alitalia and Greece's Olympic Airways, Czech Airlines remains one of the last State-controlled carriers in the European Union. The Czech Government, however, appears committed to its privatization efforts despite this obvious setback. Despite the airline's unprofitability, the Czech Government has not sought to inject with State aid--either legitimately through European Commission channels or by the backdoor (i.e., the Greek and Italian way). If no takers can be found for the ailing airline, however, it will be interesting to see what the State will do in response.
August 18, 2009
More on the EAS
The New York Times ran a new story on the Department of Transportation's longstanding (and controversial) Essential Air Service (EAS) Program. See Joe Sharkey, Subsidies at Work in a Remote Airport, N.Y. Times, Aug. 17, 2009 (available here). The crux of the piece is the same story which has been told in support of the program for the last three decades: there's a small community; small community does not generate enough traffic to support a profitable airline route; ergo the Government should subsidize it.
Those looking for more information on the program can find a nice overview at the DOT's website here. An earlier post on the blog, see "The EAS Program," contains a brief reading list on the program's history and the disputes which continue to surround it. For a recent popular piece surveying the controversy, see Dean Foust, Do Small Cities Deserve Taxpayer Subsidies to Sustain Air Service?, Bus. Wk., Aug. 18, 2009 (available here).
Two Stories on the Slot Swap
There are two stories up online which attempt to assess the landmark slot swap proposal between US Airways and Delta. The first, Ben Mutzabaugh's Impact of Delta-US Airways Slot Swap Will Be Far-Reaching, Today in the Sky Blog (Aug. 14, 2009) (available here), draws some general conclusions from a number of news sites to essentially conclude that "the pact--if approved by regulators--will result in a major shakeup in the competitive landscape in both" the Washington, D.C. and New York area markets. That's not a bad thing by any stretch. According to the same post, US Airways--which has been no stranger to bankruptcy--will receive an estimated $75 million boost to its profits from the deal.
A second assessment of the arrangement, Adrian Schofield et al.'s Northeast U.S. Airline Market Reshaped by Large Slot Deals, Aviation Wk., Aug. 16, 2009 (available here), also assesses the smaller, but noteworthy, Continental/AirTran Airways deal.
August 17, 2009
It Doesn't Get Any Better
Civil aviation can't get a break it seems. According to a story out today discusses the possibility that major U.S. carriers will have to continue cutting size and capacity even after the present economic downturn abates. See Susan Carey, Airline Industry Sees Pain Extending Beyond the Recession, Wall St. J., Aug. 17, 2009 (available here). From the story:
Growing smaller means parking planes, laying off workers and dropping destinations, meaning potential customers have fewer reasons to book. Earlier this month, Delta Air Lines Inc. cited a gloomy revenue outlook for the rest of the year in its plans to cut more management jobs. If passengers don't return to the skies and fares don't rise, some airlines could run low on cash, raising the specter of additional bankruptcies.
Airlines are suffering huge revenue declines as customers put off purchases, trade down to cheaper fares and bank more personal income. Airlines fear that this behavior will stick, exacerbating the "new normal" the industry has been grappling with for the past eight years.
Sigh of Relief?
Air Transport World has a new editorial online concerning the Department of Transportation's steadfast refusal to cave to the Justice Department's objections to the expanded Star Alliance. See Perry Flint, Editorial, Sigh of Relief, Air Transp. World, Aug. 17, 2009 (available here). The piece concludes by noting:
[The DOT] acknowledged something too quickly dismissed by DOJ (and some members of Congress): "Were [DOT] to suddenly change our antitrust immunity and public interest approach, as DOJ suggests, the credibility of the US government with its international aviation partners would be significantly compromised and our ability not only to reach new Open-Skies agreements but also to maintain those agreements that we have already achieved would be undermined." Still, it appears that the industry may be reaching a saturation point where regulators on both sides of the Atlantic begin to limit the future growth of alliances. DOJ may have lost this battle but it is unlikely to give up the field. Meanwhile, across the pond the European Commission is taking a very close look at Atlantic Plus Plus and the proposed joint venture among American Airlines, British Airways and Iberia. Those unaligned airlines that are sitting on the fence may find the alliance gate is swinging closed to them just as the economic storm drives them to seek shelter.
Even though the author recognizes the challenges ahead for alliances, the situation appears more dire than he lets on. First, the DOJ is definitely not giving up its quest for vigorous antitrust enforcement and is fully expected to attack the pending oneworld Alliance application. Second, the Senate Judiciary Committee remains steadfast in its criticisms of airline alliances and will be holding hearings on them in the near future. And last, but not least, the 2009 FAA Reauthorization Act could sunset all of the alliances' antitrust immunity and potentially lead to the DOT losing its immunization powers altogether. While it is true that the European Commission has kept its eye on the expanding alliance networks, there no evidence that they have departed from their generally positive view of the ventures. In an operating environment where the nationality rule still dominates, alliances remain the "second best" option available.