Friday, February 6, 2009
A lead article in this week's edition of The Economist is entitled, "The Return of Economic Nationalism." As it states:
Managing a[n] [economic] crisis as complex as this one has so far called for nuance and pragmatism rather than stridency and principle. . . . But the re-emergence of a spectre from the darkest period of modern history argues for a different, indeed strident, response. Economic nationalism—the urge to keep jobs and capital at home—is both turning the economic crisis into a political one and threatening the world with depression. If it is not buried again forthwith, the consequences will be dire.
This is as true for the international trade in goods as it is in services, including air transport services. Nationalism is not new to international civil aviation. In fact, for over six decades it has been coeval with it. As Prof. Brian Havel notes in his forthcoming book, Beyond Open Skies:
Launched by a restrictive global convention in Chicago in 1944, [international civil aviation's] existing regulatory regime has largely stood firm against the neoliberal free trade winds of the post-war era, straitjacketing the world's airline industry within a system of bilateral, point-to-point air treaties that explicitly reserves to governments the power to parcel out (and to deny) access to national airspace by foreign airlines, to exclude foreign airlines from domestic air service ('cabotage'), and to prohibit foreign citizens (and their airlines) from owning and controlling national air carriers (the 'nationality rule').
While a great deal of attention is currently (and understandably) being paid to an $800 billion-plus stimulus bill being debated on Capitol Hill which, some fear, could contain a provision shutting out foreign suppliers from the vast public works programs the legislation envisages, that should not distract from Rep. James Oberstar's bill targeting international airline alliances. It, no less than a "Buy American" clause, could have a chilling effect on international trade relations. It is important to remember that Rep. Oberstar's bill is being introduced at a time when the United States and European Union are engaged in second stage negotiations to expand the historic 2007 U.S./EC Air Transport Agreement. Article 21 of the Agreement propounds a second stage agenda which implicitly contemplates cabotage ("further liberalization of traffic rights") and easing of inward investment restrictions ("additional foreign investment opportunities") as issues of "priority interest." Given the Air Line Pilots Association's steadfast opposition to relaxing either restriction and President Barack Obama's apparent willingness to adhere to ALPA's policy positions (discussed on the blog here), chances are slim for progress in these areas during the second stage. What, then, does the U.S. have to offer? Some analysts have held out the possibility of both sides integrating their regulatory oversight of airline alliances, but that, of course, assumes the present alliance system remains. Rep. Oberstar's bill hangs like a dark cloud over that assumption.
It is also important to consider what sort of message legislation which could lead to an unraveling of deregulation for air transport sends. Could it be that the country which so boldly deregulated its domestic market 30 years ago and pursued such liberalizing external aviation policies as "Open Skies" is setting the stage for an aviation trade war? Remember that the EU (and possibly its individual Member States) has the option to suspend any or all of the rights granted under the 2007 Agreement if a satisfactory second stage agreement is not secured by November 2010. The United Kingdom has been particularly outspoken about its dissatisfaction with the first stage and its willingness to dismantle U.S. carriers' newly acquired route privileges. With the pending approval and antitrust immunization application of the proposed British Airways/American Airlines/Iberia alliance potentially compromised by the threat of Rep. Oberstar's bill, the U.K.'s dissatisfaction will only deepen. Should the bill come into effect and the present immunization for both the SkyTeam and Star alliances sunset, the U.K.'s antipathy will spread quickly. With the alliances gone, traffic rights suspended, and the hopes of furthering air transport liberalization dashed, the transatlantic aviation marketplace will quickly find itself haunted by the spectre of economic nationalism.
Thursday, February 5, 2009
Prof. Paul Stephen Dempsey, Director of the Institute of Air and Space Law at McGill University, recently published an extensive new aviation law treatise, Public International Air Law. With nearly 900 pages of primary and secondary material, Prof. Dempsey's work should be applauded for its scope. A full press release along with ordering information is available from McGill University here.
A new posting from The Middle Seat Terminal, the travel blog of The Wall Street Journal, discusses Rep. James Oberstar's proposed legislation which could spell the end of antitrust immunity for alliances such as Star, SkyTeam, and oneworld. As Matt Phillips--WSJ writer and the blog's lead poster--points out, the proposal alone "[n]o doubt . . . makes carriers with pending requests for antitrust immunity fairly jittery that their petitions will be turned down or delayed." It's possible (though far from certain) that the U.S. Department of Transportation may tread lightly from here on out in the hopes of assuaging fears that it is has failed to be judicious with its immunization powers.
Continental Airlines, which has an application pending before the DOT to join the Star Alliance, issued the following press statement yesterday:
Continental would be pleased to participate in Chairman Oberstar's proposed study. However, any further delay in the review of the current ATI applications perpetuates the competitive imbalance that now exists, and we caution against prolonging the current anticompetitive environment. We are confident DOT will approve our applications to participate in
Star Alliance. It is important for this review to be completed expeditiously so we can provide effective competition to airlines globally, including the world's largest airline, which already operates in an antitrust immunized global alliance with Europe's largest airline. We agree with Chairman Oberstar that all global alliances need to be treated equally. This is essential not only to Continental, but to our customers, communities and employees, which is why our ATI application is supported by dozens of members of Congress, mayors, governors and business groups around the country.
The SkyTeam Alliance, which includes Air France-KLM and the recently merged U.S. carriers Delta and Northwest, already enjoys transatlantic antitrust immunity from the DOT. Until the expanded Star Alliance and oneworld applications are approved, a competitive imbalance exists. Regardless of the legislative fate of Rep. Oberstar's new bill, the DOT should move forward on approving these applications. Doing so will enhance competition and allow consumers to reap the benefits while Congress debates the purported merits of turning back the clock on air transport regulation.
Wednesday, February 4, 2009
Rep. James Oberstar, Chairman of the House Transportation and Infrastructure Committee, is behind the newly introduced bill, H.R. 831 which bears the title "A Bill to Ensure Adequate Airline Competition between United States and Europe." Rep. Oberstar's speech in support of the bill may be read here. Needless to say, this will raise more than a few eyebrows across the Atlantic. Further discussion on this blog of the bill and its implications is forthcoming.
Tuesday, February 3, 2009
Readers interested in the regulatory ramifications of airline alliances will want to peruse Prof. Philip G. Gayle's recently published study, An Empirical Analysis of the Competitive Effects of the Delta/Continental/Northwest Code-Share Alliance, 51 J.L. & Econ. 743 (2008). Gayle, an Associate Professor in the Department of Economics at Kansas State University, has found that the three-way alliance--which received approval from the U.S. Department of Transportation in 2003--did not appear to facilitate collusion on price or traffic levels in the carriers' overlapping markets. This conclusion, the result of an aggregated analysis of both traditional and virtual code-sharing, goes some distance in vindicating the DOT's decision to approve the alliance despite the fact it involved an unprecedented number of overlapping routes. (The DOT's Termination of Review Notice is available at 68 Fed. Reg. 16,854.) Prof. Gayle's previous work in this area, Airline Code-Share Alliances and Their Competitive Effects, 50 J.L. & Econ. 781 (2007), suggested a structural econometric model to quantify the competitive effects of proposed code-share alliances which, if applied by the DOT, could allow the agency to make a more informed decision when weighing potential consumer benefits against the possibility of price increases.
Monday, February 2, 2009
Airport Coordination Limited (ACL), which is charged with coordinating slots at London’s Heathrow Airport, submitted answers last week to the U.S. Department of Transportation as part of the latter’s ongoing investigation into the pending alliance approval and antitrust immunity application for American Airlines, British Airways, and Iberia (all members of the oneworld alliance). At issue is the availability of slots at Europe’s busiest airport for new entrants in the transatlantic market. In its submission (Doc. ID: DOT-OST-2008-0252-3068), ACL reaffirmed that the secondary market remains the only viable avenue for determined new entrants to begin offering services on the transatlantic market, though "it is ACL's experience that new entrant airlines still need to be flexible about the timing of slots and accept commercially suboptimal timings." ACL also stated that "[t]he ability of potential competitors [to the proposed alliance] to secure slots on the secondary market assumes that the competitors value slots more highly than the existing holders and any other potential user of the slots . . . such that redistribution of slots to new transatlantic services would be an economically efficient outcome." Though the private nature of slot transactions did not allow ACL to provide exact figures on the going rate for slots in the transatlantic scheduling time windows, it did speculate "that slot values have [probably] fallen back from the high levels reportedly paid during the exuberant market of 2008" following the U.S./EC Air Transport Agreement.
The scarcity of slots at London Heathrow will no doubt factor heavily into the forthcoming DOT decision for the proposed alliance. Two previous applications for an immunized BA/AA "oneworld" alliance were denied by the agency, in part due to the absence of an "Open Skies" agreement with the United Kingdom as well as the unwillingness of the carriers to surrender some of their Heathrow slots to competitors. BA CEO Willie Walsh, while reportedly "confident" that the DOT will give the green light, is still not interested in relinquishing slots. Unlike the last time around, the existence of an "Open Skies" agreement is not an issue and opposition from rivals (with the notable exceptions of Virgin Atlantic and Air France) has not played a role in this regulatory drama. Industry analysts have pointed out that if the alliance is not approved, oneworld may collapse should its smaller Pacific partners choose to defect to the rival SkyTeam and Star alliances--both of which already enjoy varying degrees of approval and immunization. If that happens, the DOT may have narrowed the competitive skyways in the name of protecting them.
While a final order from the DOT may still be months away, it is likely to impact the mood of the ongoing negotiations for a second stage U.S./EC agreement. The UK, which publicly expressed dissatisfaction over the terms of the first agreement and has threatened to suspend traffic rights if the second stage fails to yield more favorable results, will not look kindly on its native carrier's transnational venture being once again snubbed by the DOT. With the U.S. having very little to offer its European partners with respect to easing foreign ownership and control restrictions, any further jolt to the spirit of cooperation could have dire consequences.