November 20, 2009
An Interesting Read From the oneworld Docket
Despite the Department of Transportation's promise to render a decision by October 30, the oneworld Alliance's antitrust immunity docket continues to swell with new filings. On Monday, Virgin Atlantic let loose another volley of criticism at the proposed link-up, comparing recent statements made by American Airlines CEO Gerard Arpey concerning slot scarcity at Tokyo's Narita Airport to the current situation at London Heathrow. See Motion for Leave to File and Supplemental Comments of Virgin Atlantic Airways, Dkt. No. OST-2008-0252 (Nov. 16, 2009) (available here). Not surprisingly, the oneworld Alliance returned fire:
Virgin attempts to compare Heathrow slots to Narita slots, yet omits the key fact - there is a vibrant secondary market for slots at Heathrow. It is hard to see how Virgin can argue that new entrants lack access to Heathrow when five new carriers launched more than a dozen new flights to the US immediately upon US-EU Open Skies taking effect. Virgin should also explain how it does not have an adequate number of Heathrow slots to operate its desired schedule when it is leasing a number of them to Aer Lingus. In fact, on the same day Virgin filed its motion, The Times reported that "the world’s leading airlines have expressed little to no interest" in bmi’s Heathrow slots, including Virgin Atlantic.
Completely ignored by Virgin is the fundamentally different impact the Proposed Alliance and Delta/JAL would have on interalliance competition. If JAL joined SkyTeam, consumers would be faced with yet another Star/SkyTeam duopoly – controlling 92% of US-Japan bookings. Such an alliance would eliminate the existing US-Asia competition between SkyTeam’s hubs at Narita (Delta) and Seoul (Korean) and JAL. In contrast, the Proposed Alliance would account for just 40% of US-UK bookings, and even together with Star the two hub networks at Heathrow will account for just 54%. And unlike SkyTeam - which already has two integrated Asian hubs, oneworld today has none. There is simply no comparison between the Proposed Alliance (which will add to interalliance competition) and JAL joining SkyTeam (which would reduce such competition).
Joint Applicants' Answer to Virgin Atlantic's Unauthorized Motion and Supplemental Comments, at 1-2, Dkt. No. OST-2008-0252 (Nov. 18, 2009) (available here).
What AA, Delta Have to Gain
Market Place, the syndicated business radio show produced by American Public Media, has a good story up online about American and Delta's efforts to court JAL into their respective alliances. See Market Place, What AA, Delta Gain From a JAL Alliance (Nov. 19, 2009) (available here). You can read the text of the story on their website or listen to the streaming audio version.
November 18, 2009
SkyTeam's Bold Move
A new story in the Wall Street Journal is reporting that Delta Air Lines and the other members of the SkyTeam Alliance are willing to provide over $1 billion in funding to the struggling JAL if it jumps ship from the oneworld Alliance. See Doug Cameron & Yoshio Takahashi, Delta, SkyTeam Offer Funding Deal to JAL, Wall St. J., Nov. 19, 2009 (available here).
The offer is no doubt enticing for the perennially troubled JAL. SkyTeam has a larger route network than oneworld and, with respect to the lucrative transatlantic market, it has already overcome the regulatory hurdle of receiving antitrust immunity from the U.S. Department of Justice. oneworld's future still hangs in the balance of a postponed final order from the DOT. (Like oneworld, however, SkyTeam remains under competition scrutiny from the European Commission.) Japan's other major international carrier, ANA, is already part of Star--the largest of the three alliances. Arguably, if JAL wants to keep pace with its chief rival, it would be in a better position to do so with SkyTeam.
At the same time it is important to bear in mind that neither JAL nor ANA are able to deepen their participation in any alliance since they remain ineligible for antitrust immunity from the DOT. As a matter of policy, the DOT only grants immunity for international intercarrier agreements where the home States of all the parties have an open skies agreement with the U.S. Cf. U.S./EC Air Transport Agreement, Memoranda of Consultations, para. 48, 2007 O.J. (L 134) 4. As discussed previously on the blog, the most recent round of air transport negotiations between the U.S. and Japan failed to finalize such a treaty. See here. Until some sort of deal can be brokered which would satisfy the DOT's longstanding open skies requirement, both Japanese carriers will have to remain content with their more limited alliance roles.
Carve-Outs Under Airline Antitrust Immunity
There is an impressive new paper up online discusing the economic ramifications of the Department of Transportation's carve-outs to its grants of antitrust immunity for airline alliances. See Jan K. Brueckner & Stef Proost, Carve-Outs Under Airline Antitrust Immunity (CESifo Working Paper Series No. 2848, Nov. 2009) (available from SSRN here). From the abstract:
This paper offers the first formal economic analysis of carve-outs under airline antitrust im- munity. Carve-outs are designed to limit the potential anticompetitive effects of cooperation by alliance partners in hub-to-hub markets, where they provide overlapping nonstop service. While the paper shows that carve-outs are beneficial when the alliance does not involve full integration of the partners’ operations on the hub-to-hub route, its key point is that a carve-out may be harmful when imposed on a joint-venture alliance. A JV alliance involves full exploitation of economies of traffic density on the hub-to-hub route, and a carve-out prevents the realization of these benefits. While a carve-out may limit anticompetitive incentives on the hub-to-hub route, welfare may be reduced if the resulting gains are overshadowed by the efficiency loss generated by the carve-out.
November 17, 2009
Canada Refrains from the Agenda for Freedom
Despite the summit being hosted within its territory, Canada opted to refrain from signing the Statement of Policy Principles set forth by the International Air Transport Association as part of its Agenda for Freedom. See Robert Gibbens, Canada Holds Off on Air Carrier Liberalization, Montreal Gazette, Nov. 16, 2009 (available here); see also IATA, Statement of Policy Principles Regarding the Implementation of Bilateral Air Services Agreements (Nov. 16, 2009) (available here). According to the story:
Canada was odd-man-out at Monday's International Air Transport Association "Agenda for Freedom" Summit in Montebello, Que.. Seven countries including the United States, Chile, Malaysia, Panama, Singapore, Switzerland, the Emirates and also the European Commission signed IATA's airline liberalization policy document.
But Canada stood aside, saying it needs more time to evaluate the policy process, IATA sources said. Canada has strict limits on domestic airline ownership.
This is a strange justification from the Canadian Government, particularly since its airline ownership law mirrors U.S. restrictions. Yet the U.S. chose to the sign the Statement. By doing so, however, the U.S. in no way legally bound itself to altering its tight 25% cap on foreign ownership of airline voting equity. The Statement clearly sets forth that it "creates no legal obligations on the signatories or the countries they represent. See Statement, supra, para. 5. The International Law Commission's Guiding Principles Application to Unilateral Declarations of States Capable of Creating Legal Obligations (2006) (available here), notes that determining whether or not a legal obligation has been created requires "tak[ing] account of [a declaration’s] content, [including] all the factual circumstances in which [it was] made" and, more importantly, such declarations must "manifest the will to be bound." But even if the Statement could be construed--in defiance of law and logic--has a binding declaration, it makes no mention of States' internal rules on foreign ownership. Rather, it promotes States waiving the nationality clauses in their air services agreements on a reciprocal basis. Here is the relevant text:
1. Freedom to access capital markets
a. We should generally respect the policies of other countries that to encourage foreign investment in their airlines. Accordingly, on the basis of reciprocity, and in the absence of valid social or public policy concerns, we should waive, where our legal systems permit us to do so, or otherwise refrain from exercising rights under existing bilateral air services agreements to disallow service by an airline of the other party to that agreement on the grounds that it is not owned and controlled by nationals or the Government of that other party.
b. Furthermore, also on the basis of reciprocity, we should eliminate, replace or otherwise reduce the negative effects of traditional nationality clauses when negotiating new or amended air services agreements, including through expedited methods such as joint memoranda of understanding or a public exchange of letters.
c. We should give sympathetic consideration to the possibility of a multilateral agreement to accomplish this goal.
So, following the Statement, State A and B would reciprocally waive the nationality clause in their bilateral, thus allowing State C to purchase State B's airline without jeopardizing the carrier's right to fly to and from A. Of course, State A and B could still waive and retain any internal ownership restriction they deem appropriate.
Is there more to Canada's hesitancy? Unfortunately, it's not clear from the story.
November 16, 2009
Agenda for Freedom Press Release
The International Air Transport Association has posted an extensive press release concerning the recently concluded Agenda for Freedom Summit in Montebello, Quebec, Canada. See Press Release, IATA, Governments Sign Principles for Liberalization (Nov. 16, 2009) (available here). As mentioned on the blog last week, the International Aviation Law Institute's Director, Brian Havel, gave one of the meeting's keynote addresses. More details on this historic gathering will be forthcoming on the blog.