Friday, February 26, 2010
Could the U.S. see open skies with China in the near future? There is news out that China Eastern is in talks with the oneworld, SkyTeam, and Star alliances about a possible transpacific link-up. See China Eastern in Talks with Three Airline Alliances, Trading Mkts., Feb. 26, 2010 (available here). While China Eastern could forge a codesharing relationship with one of the alliances without an open skies deal between the U.S. and China in place, it would be unable to reap the full benefits of alliance integration unless it first received antitrust immunity from the Department of Transportation.
For nearly two decades now, the DOT has insisted that a liberal bilateral air services agreement be in place with a foreign carrier’s home State before granting it antitrust immunity to cooperate on scheduling, pricing, and revenue sharing with any U.S. airlines. Would the Department be willing to soften its stance in exchange for greater (though not unrestricted) traffic rights into China? The recently signed U.S./Japan Memorandum of Understanding is purportedly an open skies accord, though the agreement still allows Japan to keep tight control over slot allocation at its busiest airports. Some critics have charged the deal is “sub-open skies,” yet most expect the DOT will still dispense antitrust immunity to Japanese carriers JAL and ANA as part of airlines’ plans to deepen their alliance arrangements with oneworld and Star, respectively.
Currently the U.S. has a restrictive bilateral in place with China, though the agreement does provide for a steady increase in flight frequencies through 2011. See Protocol to Amend the Agreement Between the Government of the United States of America and the People’s Republic of China Relating to Air Transport, art. 2 (July 9, 2007) (available here). The agreement also states that the two parties will enter into negotiations for a new air services agreement no later than March 25, 2010. See id. art. 5.
Thursday, February 25, 2010
United Airlines and US Airways are in the mood to merge, but will they find any takers? See Jui Chakravorty, Two Big U.S. Airlines Open to Merger, Reuters, Feb. 24, 2010 (available here). Unlike regulators in Washington, both carriers understand that consolidation in a tough operating environment is the only way to survive. The problem, however, is that domestic capital is thin and crossborder megers are an impossibility under the strict U.S. cap limiting foreign ownership to 25%.
US Airways claims that it is not interested in a foreign takeover. Even so, its chances of finding a domestic partner are long. In 1995 and 2000, the Department of Justice threatened lawsuits to block US Airways's acquisition by United. Both threats were predicated on the implications of United taking over US Airways hub operations at high-use East Coast airports. Perhaps, given the financial woes the airline industry has faced since 9/11, including record high fuel prices and the economic downturn, the Justice Department would be willing to take a more favorable view of a domestic link-up between the two. That's assuming, of course, that United would even be interested in pursuing a new deal with US Airways. United's 2008 plans to merge with Continental fell through and it seems the airline is more interested at the moment in pursuing deals to bolster its international market presence through the Star Alliance and its Madrid/Washington Dulles operating agreement with Ireland's Aer Lingus.
Assuming that United is out of the picture, that essentially leaves US Airways with two options: Continental and American Airlines. Delta Air Lines, after its takeover of Northwest in 2008, is no doubt out of the running. American, the nation's second largest airline, may have a tough time convincing the DOJ that a merger with US Airways doesn't raise antitrust concerns. Continental could be a viable option, but like United, it may be content with its international relationships for the time being.
Tuesday, February 23, 2010
The scramble for scarce slots at Tokyo's Haneda airport is on. As discussed previously on the blog, see "DOT to Allocate Scarce Haneda Slots," the Department of Transportation has been authorized under the U.S./Japan open skies Memorandum of Understanding signed last December to allocate four daily takeoff and landing slots at the world's fourth busiest airport. See generally Order Instituting Proceedings, Dkt. No. DOT-OST-2010-0018 (Jan. 26, 2010). Not surprisingly, all four major U.S. carriers--American, Continental, Delta, and United--are vying for one or all of the available slots. Without judging the merits of each applicant's claims, Delta's filing is certainly the most intriguing in light of JAL's recent decision to pursue an immunized alliance with American Airlines rather than join Delta as part of SkyTeam.
According to Delta, JAL, along with fellow Japanese airline and Star Alliance member ANA, "operate 84 percent of scheduled departures and 90 per cent of scheduled seats at Haneda." See Application of Delta Air Lines, Inc., at 2, Dkt. No. DOT-OST-2010-0018 (Feb. 16, 2010). Delta argues in its filing that since it has been effectively locked out of forming an alliance with a major Japanese airline, the only way to establish competitive parity on routes between the U.S. and Haneda is for the DOT to grant Delta all four daily slot offerings. Though Delta does enjoy greater access at Tokyo's other airport, Narita, the carrier believes "that its services at far-distant Narita are not competitive with Haneda for premium business passengers." Id.
It will be interesting to see if the DOT accepts Delta's arguments and awards it all four slots. If it does, the decision could have the effect of bolstering both oneworld and the Star's claims that granting their alliances antitrust immunity won't unduly harm competition in the transpacific market. On the other hand, if the DOT opts not to immunize one or both of the transpacific alliance applications, a decision to hand all four slots over to Delta would be difficult to justify. It's uncertain at this point whether the DOT will render its alliance decisions before making a final determination on how to allocate the Haneda slots. Though that route appears to make sense in light of the arguments advanced in Delta's application, the two antitrust immunity applications will take longer to decide. Meanwhile, scarce slots at Haneda--slots which could benefit airline consumers--will go unused.
Blog reader's interested in China's growing aviation sector may be interested to read Qiang Gong & Xingli Fan's The Neutrality of Fuel Surcharge, 1 Global J. Bus. Res. 1 (2007) (available from SSRN here). From the abstract:
Airline companies usually collect a fuel surcharge rather than increase airfares when fuel prices surge. This paper initiates a theoretical model to analyze the properties of fuel surcharges. We show that the role of fuel surcharges is neutral under the present fee collection scheme, which means that the fuel surcharge policy cannot help the airline industry improve its profits. In addition, the equilibrium results of air fares with fuel surcharge policies are identical to that of the fuel-cost-driven air fares without it. Therefore, the effects on social welfare are the same. We also offer an analysis to clear up the common misunderstanding in which the fuel surcharge policy was in favorable to the airline companies at the expense of the consumer welfare. The empirical facts from Chinese airlines support our theoretical findings.
Friday, February 19, 2010
The latest round of second stage talks between the United States and European Community which began in Madrid on Monday failed to produce concrete results. See Doug Cameron & Carolyn Henson, EU, US Fall Short on New Open-Skies Deal, Dow Jones Newswire, Feb. 18, 2010 (available here). Though both sides cite "progress" being made this week, time may be running out.
By the timeline established by their 2007 Air Tansport Agreement, both parties have the right to suspend some (or all) of the rights granted under it if no second stage accord is struck by this November. See U.S./EC Air Transport Agreement, art. 21(3), 2007 O.J. (L 134) 4. The suspension won't come into effect immediately, however. Any notice of suspension "shall take effect no sooner than the start of the International Air Transport Association (IATA) traffic season that commences no less than 12 months after the date on which the notice of suspension was given." Id. Since the IATA traffic seasons begins in October and March of each year, a November 2010 suspension notice could not take effect until March 2012. That would leave 17 months for negotiations to continue before any traffic rights are impaired. Would that provide enough time for both sides to finalize an agreement before an air services trade war begins?
Thursday, February 18, 2010
Professor Brian Havel, Director of the International Aviation Law Institute, was featured in Main Justice's story on the recent tentative order from the Department of Transportation granting the oneworld Alliance antitrust immunity to cooperate on marketing, scheduling, and revenue sharing for transatlantic air services. See Aruna Viswanatha, DOT Snubs DOJ in Approving Airline Alliance, Main Just., Feb. 15, 2010 (available here). From the story:
This weekend’s ruling is subject to a comment period, and observers expect the Justice Department to weigh in again. Additional comments could pressure the DOT to impose stricter conditions, said Brian Havel, a professor at DePaul College of Law and director of the International Law Aviation Institute, in an e-mail to Main Justice.
. . .
When American Airlines and British Airways previously sought antitrust immunity for a joint venture in 2001, the DOT had asked the airlines to surrender 16 slots per day. “The DOT’s request that oneworld surrender Heathrow slots is little more than a bone they are tossing to the DOJ,” Havel said. “The DOJ brought up slot surrender in its public comments, but was likely envisioning something more comprehensive.”
Monday, February 15, 2010
Negotiators from the United States and the European Commission are meeting in Madrid today to continue work on the "second stage" to the 2007 U.S./EC Air Transport Agreement. See Pilita Clark, Investors Focus on Open Skies Talks in Madrid, Fin. Times, Feb. 15, 2010 (available here). The new round of discussions comes on the heels of the U.S. Transportation Department's Saturday announcement that it had tentatively approved the oneworld Alliance's antitrust immunity application. Sweeping immunity for the alliance, which includes the United Kingdom's British Airways and Spain's Iberia, had been opposed by lawmakers, the Justice Department, and rival carrier Virgin Atlantic before the DOT the tentative order. While interested parties still have 45 days to file additional comments, it's unlikely the DOT will retract the immunity. To do so could spell disaster for the ongoing U.S./EC second stage talks.
When the initial 2007 Agreement was finalized, both the U.K. and Spain protested that the U.S. came out with the better deal. The U.K. in particular was dismayed that access to London Heathrow--one of the world's busiest airports--would be open to all U.S. airlines while BA would remain foreclosed from deeper investment opportunities in American carriers and cabotage rights. In an effort to appease the U.K., the EC demanded a a strict timetable to improve the 2007 Agreement and reserved for itself the right to suspend any or all provisions of the first accord if they are dissatisfied with the progress of negotiations by November of this year. See 2007 U.S./EC Air Transport Agreement, art. 21, 2007 O.J. (L 134) 4. While some, such as chief U.S. negotiator John Byerly, have expressed skepticism that either side would open an aviation trade war by suspending parts of the 2007 Agreement, the U.S. may be taking the threat seriously.
The timing of the DOT's antitrust immunity decision for oneworld cannot be ignored. Since it remains highly unlikely that the U.S. will accede to U.K.-backed demands for investment rights and cabotage, immunizing an alliance which has the potential to substantially benefit both BA and Iberia could be the DOT's way of softening the disappointment. Both Spain and the U.K. have to be aware that any move to suspend parts of the 2007 Agreement will likely be met by a rescission of oneworld's antitrust immunity. Though not mandated by statute, the DOT has long required a liberal air services agreement to be in place before dispensing immunity. Cf. Joint Application to Amend Order 2007-2-16, at 50, Dkt. No. DOT-OST-2008-0234 (July 23, 2008) (citing the DOT "consistently . . . predicat[ing] its willingness to approve and grant antitrust immunity for alliances on the effectiveness of an open skies agreement in the relevant markets").
The DOT is no stranger to playing aeropolitcs with controversial decisions. In March 2007, just two days before the European Council of Ministers was scheduled to vote on whether or not to accept the first U.S./EC Air Transport Agreement, the DOT granted operating authority to Virgin America--the U.K.-based Virgin Group's affiliate carrier--despite a 2006 finding that it had failed to meet U.S. citizenship purity requirements of being 75% owned and actually controlled by Americans. See Jeff Bailey & Nicola Clark, An American Version of Virgin Atlantic is Tenatatively Approved for Service, N.Y. Times, Mar. 21, 2007, at C3; Dan Reed & Ben Mutzabaugh, Virgin America Gets Provisional OK to Operate in USA, USA Today, Mar. 21, 2007, at 2B; see also Order to Show Cause, Dkt. No. OST-2005-23307 (Dec. 27, 2006) (denying Virgin America's first attempt to secure operating authority).
Last Friday, on the eve of the oneworld Alliance receiving tentative approval and antitrust immunity for its transatlantic joint venture, alliance partner American Airlines applied for further antitrust immunity to deepen its cooperative relationship with JAL in the transpacific market. See Joint Application for Antitrust Immunity, Dkt. No. OST-2010-XXXX (Feb. 12, 2010). From the filing:
This proposed alliance will create metal neutrality between two of oneworld’s core transpacific members – American and JAL. These agreements will provide for revenue sharing and closer integration, giving oneworld the ability to offer consumers an effective competitive alternative to Star and SkyTeam in Asia, and will maximize the benefits that the US-Japan Open Skies Agreement will make possible. American and JAL will implement their bilateral alliance agreement immediately upon approval, and will implement the JBA within 18 months of the Department’s final order granting antitrust immunity consistent with the precedent set in [the DOT's immunization order for the SkyTeam Alliance].
Approval of the Joint Application will facilitate the implementation of a new US-Japan Open Skies agreement, will link two complimentary networks and give oneworld its first truly integrated transpacific hub network to compete with Star and SkyTeam, and involves overlaps on just three city-pairs accounting for less than a million bookings per year where there will be no less than two nonstop post-transaction competitors on each route.
Interestingly, AA and JAL are seeking to consolidate their docket with the recently opened United Airlines/Continental/ANA application for a similar immunization grant. Both parties appear to be hoping that their applications will be approved before October when the U.S./Japan open skies deal is supposed to come into effect. That may be wishful thinking, particularly in the case of AA/JAL. With the Japanese carrier in the midst of bankruptcy, it will be difficult for the DOT to undertake a thorough market analysis of its planned arrangement with AA until after JAL's reorganization is complete. That could take years. On the other hand, the DOT may feel pressured to sidestep such an analysis altogether. Failure to bestow antitrust immunity on AA/JAL could sour aeropolitical relations with Japan--an unwelcome prospect given the time and energy expended by U.S. negotiators to establish an open skies agreement in the first place.
Sunday, February 14, 2010
The Department of Transportation's tentative order granting approval and antitrust immunity to oneworld Alliance members American Airlines, British Airways, Iberia, Finnair, and Royal Jordanian "to more closely coordinate international operations and launch an integrated joint venture in transatlantic markets" is now available online. See Show Cause Order, Dkt. No. DOT-OST-2008-0252 (Feb. 13, 2010) (available here). Interested parties have 45 days in which to final answers to the order with 15 additional days reserved for replies.
Though it's unlikely the DOT will substantially modify the immunity order despite the criticisms the decision is sure to draw from Virgin Atlantic and the Department of Justice, the DOT may be persuaded to require additional conditions for the immunity, including further slot divestitures and carve outs. Blog readers may recall that following the DOT's tentative antitrust immunity order for the Star Alliance last April, objection s from the DOJ prompted the Department to impose limited carve outs in the final order. See previous blog posts here and here.
Saturday, February 13, 2010
The Department of Transportation announced today that it has tentatively approved the oneworld Alliance's application for antitrust immunity. From the press release:
In today’s show-cause order, the Department tentatively found that granting antitrust immunity to the oneworld alliance would provide travelers and shippers with a variety of benefits, including lower fares on more routes, increased services, better schedules and reduced travel and connection times. The Department also said the proposed alliance would enhance competition around the world by creating competition with the existing Star Alliance and the SkyTeam alliance, which already have been granted immunity.
However, the Department also noted that the alliance could harm competition on select routes between between the United States and London’s Heathrow Airport, oneworld’s primary hub, where the availability of landing and takeoff slots is limited. As a condition of approval, the Department is proposing in its show-cause order that the applicants make four pairs of slots available to competitors for new U.S.-Heathrow service. The Department also would require changes to the agreement to ensure capacity growth, and require the carriers to submit traffic data and implement the proposed alliance within 18 months of a final decision.
See Press Release, U.S. DOT, DOT Proposes Approval of oneworld Antitrust Immunity Application, DOT 28-10 (Feb. 13, 2010) (available here).
Friday, February 12, 2010
Blog readers interested in the efficacy of so-called "use-or-lose" provisions which can be found in both U.S. and EU airline regulations will be interested to read Ian Gale and Daniel O'Brien's new working paper, The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms (Fed. Trade Com'n Working Paper No. 299, Feb. 1, 2010) (available here). From the abstract:
A use-or-lose provision requires firms to employ a certain minimum fraction of their productive capacity. Variants have been used by regulators in the airline, natural gas transmission, and electric power industries, among others. The primary objective of these provisions is to limit capacity hoarding. We examine the welfare implications of imposing a use-or-lose provision on firms that are able to buy and sell capacity. We find that imposing such a constraint makes it more likely that a dominant firm will purchase capacity from a competitive fringe. Moreover, imposing the constraint makes aggregate output fall if the dominant firm is more efficient than the fringe. If the dominant firm is less efficient than the fringe, aggregate output rises. In both cases, total surplus can rise or fall.
Blog readers interested in regulatory theory should consider reading Edward L. Rubin's new study, The Regulation Process and the Boundaries of New Public Governance (Vanderbilt Public Research Paper No. 10-04, Feb. 10, 2010) (available from SSRN here). From the abstract:
New Public Governance is one of the most significant intellectual movements in the theory of government to have emerged in the past few decades. It suggests that regulators should develop a more modulated, cooperative approach to the task of achieving compliance with regulatory programs, rather than relying on the adversarial stance that characterizes command and control regulation. This speaks directly to the concerns about regulation that have raised by both scholars and elected officials, and that may provide a model for the Obama Administration’s strategy in this important area. The question is when the recommendations of New Public Governance are likely to be most effective, and when they should be treated with caution. This paper advances an answer based on the social theory of Norbert Elias ("The Civilizing Process,” 1939). One feature of Elias’ theory is its suggestion that regulation is not a static process for which one temporally independent approach will be optimal, but a dynamic one that changes and evolves, which means that different approaches will be optimal at different stages of the process. The paper illustrates the applicability of Elias’ theory - and the advantages of a dynamic theory of regulation in general - by using the example of commercial airline regulation. It concludes that the effectiveness of a New Public Governance approach is likely to increase as regulated parties become more accustomed to, and accepting toward, the regulatory framework.
Wednesday, February 10, 2010
Blog readers may be interested in the Tuesday, February 9 edition of PBS's longrunning news show, Frontline. Entitled "Flying Cheap," the episode scrutinizes the tragic crash of Continental Flight 3407 outside of Buffalo, NY last February and what (if any) implications it has for the future of regional carriers. The full episode, along with additional footage and interviews, can be viewed in streaming video online here.
Monday, February 8, 2010
Reports of the demise of the JAL/oneworld Alliance appear greatly exaggerated. The beleaguered and bankrupt Japanese carrier announced today that it will remain part of oneworld and closed its negotiations with Delta Air Lines to jump to SkyTeam. See JAL to Stay With Oneworld, End Delta Talks, Reuters, Feb. 7, 2010 (available here). According to the report, “the burden of upgrading computer systems and other costs” along with the risk that JAL and Delta would not be able to receive regulatory approval for antitrust immunity” influenced the decision.
This is no small victory for oneworld. The alliance partners are still awaiting approval from regulators on both sides of the Atlantic in order to join rivals SkyTeam and Star in being able to deepen their cooperative relationship. Both the European Commission and the U.S. Department of Justice have raised concerns that oneworld would harm transatlantic aviation competition and bar new entrants at heavily trafficked airports such as London Heathrow. Assuming oneworld is able to clear the regulatory hurdles for its transatlantic link-up, its attentions will certainly turn to applying for antitrust immunity for its transpacific services with JAL. Star Alliance members United Airlines and Continental currently have an application pending before the Department of Transportation to cooperate on rates, routes, and services with Japan’s other major airline, ANA.
Friday, February 5, 2010
Susan Kurland, the current Assistant Secretary for Aviation and International Affairs at the Department of Transportation addressed the ABA Forum on Air and Space Law last week in Washington, D.C. (available here) on key points of U.S. international aviation policy. Of particular interest were her remarks on the state of U.S./EC second stage negotiations and the future of antitrust immunity for airline alliances.
On the U.S./EC negotiations, she reaffirmed U.S. commitment to finalizing a second agreement and identified security, regulatory cooperation, and the role of the 2007 Air Transport Agreement's Joint Committee as areas where progress had been made. At the same time she indicated that the U.S. was not prepared to relax its foreign investment restrictions for airlines, noting that Congressional action would have to be taken first. Conspicuously absent from her remarks was the issue of cabotage despite the fact the EU has singled it out as a negotiating point.
As for antitrust immunity, Kurland implicitly rejected the contention that immunity proceedings were policy driven by stating that "the Department has granted antitrust immunity only in cases where it has determined that doing so would enhance competition and provide consumers with a broader choice of options and other benefits not otherwise available." While cognizant of the fact that U.S. open skies partners "have a strong interest in the Department's disposition of immunity cases involving their airlines," Kurland again "emphasize[d] that the review of each application, and its ultimate disposition, is based on the specific merits of each particular application."
Wednesday, February 3, 2010
According to a story out today, Virgin Atlantic CEO Steve Ridgway is calling on the European Union to take retaliatory measures against the United States under the 2007 U.S./EC Air Transport Agreement if the U.S. fails to raise its 25% limit on foreign investment in its airlines and grant EU carriers cabotage rights by the end of the year. See Steven Rothwell, EU Should Scrap U.S. Open Skies Benefits, Virgin Says, Bloomberg, Feb. 3, 2010 (available here). Under the 2007 Agreement, if either party is dissatisfied with the outcome of negotiations for a "second stage" treaty by November 2010, they may suspend some or all of the rights granted in the original agreement. See 2007 U.S./EC Air Transport Agreement, art. 21(3), 2007 O.J. (L 134). 4.
If the EU follows through on Ridgway's advice, it could mean a return to the days when only American Airlines and United had authorization to fly to and from London Heathrow Airport and a concomitant loss of traffic rights for Delta Airlines, Continental, and US Airways. On the other hand, EU carriers such as British Airways could also find their rights to operate services to and from the U.S. curtailed. What a suspension would ultimately amount to is an aviation trade war between the two largest air transport markets in the world. Given the tough economic climate and the massive financial losses incurred by carriers on both sides of the Atlantic, the impact of a war would prove devastating.
Tuesday, February 2, 2010
A recent article which may be of interest to blog reader's is Norberto Ezequiel Luongo's The Fifth Jurisdiction: The "American Dream," 34 Annals Air & Space L. 437 (available from SSRN here). From the abstract:
The article covers the historical process that led to the inclusion in the Montreal Convention of 1999 of the concept of a jurisdiction based on the place where a claimant has his/her regular place of residence. It particularly analyzes the historical scenario in which the idea of a "fifth jurisdiction" made its formal debut, when the efforts undertaken by IATA to create private liability agreements seemed to represent the only way to keep the old Warsaw System alive. It explains in detail how the United States, through successive Orders issued by the Department of Transportation, endeavored to attach its antitrust approval to such conversations to the explicit inclusion of a "lex domicilii" provision in such agreements, and why this concept was of great importance to American interests. In its conclusion, the article describes how the fifth jurisdiction finally became a reality under the new legal regime, despite numerous previous unsuccessful attempts at incorporating it into the law.
The oneworld Alliance appears to have moved significantly closer to gaining regulatory clearance from the European Commission. According to a story in yesterday's Financial Times, EU regulators are consulting with the alliance's rivals (most notably Virgin Atlantic) on commitments oneworld has made to assuage fears that it will harm competition. See Nikki Tait & Pilita Clark, Three-Way Global Alliance Edges Nearer Regulatory Clearance, Fin. Times, Feb. 1, 2010 (available here).
Winning approval in the EU is only half the battle, however. A cloud of uncertainty still rests over the alliance's chances of gaining antitrust immunity from the U.S. Department of Transportation without being asked to surrender lucrative slots at London Heathrow. The DOT could also choose to carve out certain routes from the immunity and thus potentially hinder the full network benefits the alliance is attempting to secure. It's possible, however, that a favorable decision from the European Commission concerning oneworld's commitments could persuade U.S. authorities to approve the alliance's immunity application with few or no additional concessions.
Meanwhile, sitting against the backdrop of both approval processes is the future of oneworld's relationship with bankrupt Japanese airline JAL. While many industry analysts believed that a jump to rival airline alliance SkyTeam was imminent for JAL, a final decision remains on hold. See Tomoko A. Hosaka, JAL Says It Will Decide on Alliance Partner Soon, Assoc. Press, Feb. 1, 2010 (available here). If oneworld is able to clear the regulatory hurdles on both sides of the Atlantic, it could go a long way toward persuading JAL to stay put.