Thursday, October 15, 2009
Yesterday's edition of the Financial Times had an outstanding piece on airline deregulation and the limits of industry oversight from government regulators. See John Kay, How the Skies Proved the Limits of Regulation, Fin. Times, Oct. 14, 2009 (available here). The piece discusses some of the lessons government officials might today draw from airline deregulation as the debate over future financial sector regulation continues to be waged on both sides of the Atlantic.
British Airways CEO Willie Walsh rightly noted yesterday that the transatlantic aviation market will turn into an "untouchable duoply" if the Department of Transportation fails to approve and grant antitrust immunity to the oneworld Alliance. See Doug Cameron & Josh Mitchell, British Airways' CEO Warns of Transatlantic 'Duoply', Dow Jones Newswire, Oct. 14, 2009 (available here). The remarks came during Walsh's speech to the International Aviation Club in Washington, D.C. See Press Release, British Airways, Give Consumers Choice, Urges BA Chief (Oct. 14, 2009) (available here) (summarizing Walsh's speech).
In the course of his talk, Walsh also stated the following:
If approved, this agreement [to further integrate the oneworld Alliance] will bring substantial benefits to US-EU customers by offering an expanded route network, improved schedules and connectivity, greater access to discounted fares, fully reciprocal frequent flyer programmes and integrated corporate deals.
Above all, it will provide customers with choice. The Star and Skyteam alliances already operate across the Atlantic with the benefit of anti-trust immunity. But surely a market of 800 million potential consumers deserves a choice of more than two network providers. If Star and Skyteam remain the only immunised alliances across the Atlantic, we could end up with an untouchable duopoly. I do not believe that customers would want that.
Walsh is correct. Consumers won't want a duopoly. Thankfully they won't have to endure one if the DOT stays the course with its international aviation policy and immunizes the link-up.
Wednesday, October 14, 2009
As the date for an expected Department of Transportation decision on the oneworld Alliance's application for approval and antitrust immunity draws near, the litany of vague and redundant charges against the link-up is intensifying. Yesterday, Senators Herb Kohl and Orin Hatch dispatched a letter to U.S. Transportation Secretary Ray LaHood expressing concerns that the alliance "raises significant competition issues" and calling on the DOT to "act cautiously." See Josh Mitchell, Kohl, Hatch Raise Concerns on American Air, BA Plan, Dow Jones Newswire, Oct. 13, 2009 (available here).
Arguably, there are "significant competition issues" at hand, but they concern the disparity which still exists between oneworld--an alliance without antitrust immunity--and its two immunized competitors, SkyTeam and Star. As for the DOT "act[ing] cautiously," both AA and BA have been waiting over eight years for a satisfactory resolution to their immunity application. See Dkt No. OST-2001-10387, Joint Application of [AA] and [BA] for Antitrust Immunity (Aug. 10, 2001); see also Dkt. No. OST-2008-0252, Joint Application (Aug. 14, 2009) (renewing their application for antitrust immunity following the 2007 U.S./EC Air Transport Agreement). Rivals such as Virgin Atlantic and naysayers at the Department of Justice have had their opportunity to provide concrete evidence that the alliance will have unduly anticompetitive effects and fail to serve the public interest. Now it's time for the DOT to decide and, hopefully, decide in favor of adding a third robust competitor in the transatlantic aviation market--one that will be able to deliver more network benefits for consumers.
Tuesday, October 13, 2009
Two weeks ago, a federal court in New Mexico ruled that enforcement of the State's liquor laws with respect to airlines is not preempted by the 1978 Airline Deregulation Act (ADA). See US Airways, Inc. v. O'Donnell, Civ. No. 07-1235 (D. N.M. Sept. 30, 2009) (order granting summary judgment). Under the Act, as codified at 49 U.S.C. § 41713(b)(1), "a State . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier that may provide air transportation" under the relevant federal statute. This is not the first "high profile" ADA preemption case to come up recently. Last year, in Air Transp. Assoc. of Am. v. Cuomo, 520 F.3d 218 (2d Cir. 2008), a court struck down a New York State "Passenger Bill of Rights" requiring airlines to provide passengers with basic amenities such as "electric generation service to provide temporary power for fresh air and lights"; "waste removal service in order to service the holding tanks for on-board restrooms"; and "adequate food and drinking water and other refreshments." See id. at 220 (quoting the statute). The court ruled that requiring their provision "to passengers during lengthy ground delays does relate to the service of an air carrier and therefore falls within the express terms of the ADA's preemption provision. As a result, the substantive provisions [of the N.Y. statute] are preempted." Id. at 223.
In the US Airways case, the issue at hand was whether or not New Mexico's liquor licensing regime could be enforced against US Airways. Under the licensing statute, the State has the power to issue, suspend, or revoke a license to sell liquor within--and according to the court--over its territory. The court properly noted that the Second, Fifth, Seventh, and Eleventh Circuits have uniformly "adopted a definition of services [under the ADA] that includes the provision of beverages as a 'service[.]'" US Airways, Inc., at 8. One Circuit, the Ninth, has departed from this recognition. Id. On that basis, the court in the instant case opted to comb the history of the ADA in order to determine whether or not a beverage-inclusive understanding of "service" was warranted. While it rightly noted that the focus of the ADA was on the economic operation of airlines, never once in the opinion did it emphasize the role of airline services--understood broadly--in facilitating economic competition both before and after the ADA was passed. Without much in the way of justification, the court blithely followed the Ninth Circuit that "service" should be understood to "refer to such things as the frequency and scheduling of transportation." Id. at 10; but see Eric E. Murphy, Comment, Federal Preemption of State Laws Relating to an Air Carrier's Services, 71 U. Chi. L. Rev. 1197 (2004) (persuasively arguing for a broader definition of "services" consistent both with the ADA and Supreme Court precedent).
Even if the court in US Airways, Inc. been inclined to adopt a broader definition of "services," it still had recourse to the canon "that 'where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress.'" US Airways, Inc., at 11 (quoting Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575 (1988)). In the court's view, Section 2 of the 21st Amendment of the Constitution prohibits preempting the statute on the grounds that it would violate New Mexico's right to "virtually complete control over whether to permit importation or sale of liquor and how to structure [its] liquor distribution system." Id. at 12 (quoting California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 110 (1980)) (internal quotations omitted).
It will be interesting to see what US Airways chooses to do in response to the ruling. One of US Airways's hubs is in Phoenix, Arizona. Clearly any flight bound in or out of that hub which has to cross New Mexico's airspace will be curtailed from selling liquor, at least temporarily. Will this be enough to dissuade passengers from flying on the carrier? Since deregulation took effect, consumers appear to be overwhelmingly more concerned with access to affordable and frequent flights than any particular service offering. (Exceptions still exist, particularly for business class passengers on long-haul flights.) That doesn't mean they don't care for a drink or two (or three). While the provision of alcoholic beverages is an obvious revenue producer for the airlines, there doesn't appear to be any evidence (yet) that it is in any way tied to significant consumer demand for a particular airline's services. What ought to worry US Airways and, indeed, all carriers operating within the U.S., is if this ruling results in patchwork enforcement of individual State liquor rules with respect to the airlines. If this occurs, it's likely that a more concerted challenge to these individual State licensing and oversight schemes may be in order.
As discussed previously on the blog, see "Iceland and Norway to Join U.S./EC Air Transport Agreement," the European Commission issued a proposal to the Council of Ministers outlining procedures for Iceland and Norway to accede to the 2007 U.S./EC Air Transport Agreement. As noted, the accession is an important first step toward actualizing the Agreement's potential to function as a plurilateral faciliator of global air transport liberalization. Cf. 2007 art. 18(5), U.S./EC Air Transport Agreement, 2007 O.J. (L 134) 4 (extending the Agreement to third parties following the development of conditions, procedures, and necessary amendments); see also Restatement (Third) of Foreign Relations Law of the United States sec. 312 (1987) (discussing the structure and functions of a plurilateral agreement).
Last week, the U.S. and EC, in the context of their ongoing negotiations for a "second stage" agreement to expand on the liberalizing provisions of the 2007 Agreement, approved Norway and Iceland's accession. See Josh Mitchell, Norway, Iceland to Join "Open Skies" Pact with US, Dow Jones Newswire, Oct. 9, 2009 (available here). Though incremental, the decision to expand the Agreement beyond the U.S. and EC appears to indicate that both sides are dedicated, in principle if not in practice, to ensuring that the 2007 Agreement will continue to order their aviation relations. Both parties have also agreed to reconvene next month with a list of concrete proposals for the "second stage."
Monday, October 12, 2009
Though not specifically legal in terms of subject matter, Sylwia Nowak's working paper, How do Public Announcements Affect the Frequency of Trading in U.S. Airline Stocks? (Centre for Applied Macroeconomic Analysis Working Paper No. 38, 2008, Nov. 2008) (available from SSRN here), may be of interest. From the abstract:
This paper examines how news releases, key microstructure features of market activities and crude oil futures returns affect trading frequency in U.S. airline stocks. Using the autoregressive conditional hazard framework of Hamilton and Jorda (2002), we show that on average, trading intensity spikes prior and consequent to macroeconomic announcements, but decreases around firm-specific releases. We find that market microstructure variables have a small yet significant effect on trading frequency, with high trade volume and narrow bid/ask spread inducing higher trading intensity. Strong evidence is provided to indicate that the intraday crude oil futures returns are relevant for model.
The Allied Pilots Association, which represents over 11,000 American Airlines employees, is calling on the U.S. Department of Transportation to withhold approval and antitrust immunity for the oneworld Alliance. See Karl West, Bid to Block British Airways' Alliance with American Airlines, Daily Mail, Oct. 12, 2009 (available here). The APA warns that the alliance could cost U.S. jobs and harm consumers.
The two-part complaint issued by the APA is nothing new. It's also spurious. Taking the latter first, the transatlantic market already has two major alliances operating with antitrust immunity: SkyTeam and Star. Assuming that increased competition confers unqualified benefits on consumers, how is adding one more allinace into the mix going to hurt? The fact is that it won't. If oneworld is granted approval and antitrust immunity, there will be real competitive parity in the transatlantic market. Consumers who value the network benefits alliances provide will have another viable option.
As for the first complaint, the APA conveniently ignores the fact that if American Airlines and its alliance partners are facing a serious disadvantage by having to compete without antitrust immunity. The potential result could be a loss in marketshare which, in turn, means layoffs or worse. The APA should be trying to find ways to help American Airlines strengthen its competitive position, especially given the current tough operating environment. If the APA pushes too hard on this issue, it may end up selling down the river the airline employees whose interests its supposed to represent.