Friday, April 30, 2010

Continental/United Merger to be Announced

The Wall Street Journal is reporting that Continental and United Airlines will announce their decision to merge on Monday.  See Gina Chon & Susan Carey, Airlines Approach Final Deal to Merge, Wall St. J., Apr. 30, 2010 (available here).  The merger is expected to create the world's largest air carrier.

The merger will likely prove to be a major test for the Department of Justice Antitrust Division's promise of "vigorous antitrust enforcement."   See generally 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).  Does this mean the DOJ will stand in the way of a Continental/United merger solely on the ground it increases market concentration?  Or will the Justice Department continue to abide by the propositions that "[m]ere size . . . is not illegal," Baileys Bakery v. Cont'l Baking Co., 235 F. Supp. 705, 718 (D. Haw. 1964), aff'd, 401 F.2d 182 (9th Cir. 1968), and "[b]igness is no crime,"  U.S. v. N.Y. Great Atl. & Pac. Tea Co., 173 F.2d 79, 87 (7th Cir. 1949)?  The tenor of antitrust law and policy in the United States for the past three decades has been to promote economic welfare by maximizing allocative efficiency.  See generally Richard A. Posner, Antitrust Law (2d ed. Univ. Chi. Press, 2001).  It is not the duty of the Justice Department nor, since the 1978 Airline Deregulation Act, any administrative agency to "plan" the U.S. air transport market.   

Given the weakened state of the industry over the past decade, many air carriers are in desperate need of the operating efficiencies and cost rationalizations mergers can facilitate.  Now is surely not the time for the DOJ to make "an example" out of these carriers in order to deter would-be oligopolists. 

April 30, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 29, 2010

U.S./Israel Open Skies

With the fallout of the Icelandic volcano ash crisis capturing most of the aviation law and policy news over the past two weeks, few noticed the finalization of the United States/Israel open skies agreement.  From the press release:

“This agreement is good news for both countries,” Secretary LaHood said. “Consumers, airlines and economies of both the United States and Israel will enjoy the benefits of competitive pricing and more convenient service.”

Under the new agreement, airlines from both countries will be allowed to select routes and destinations based on consumer demand for both passenger and cargo services, without limitations on the number of U.S. or Israeli carriers that can fly between the two countries or the number of flights they can operate. It will also provide unlimited opportunities for U.S. and Israeli carriers to serve the market through cooperative marketing arrangements, including code-sharing.

The previous U.S.-Israel agreement, while liberal in many respects, contained restrictions on code-sharing opportunities and limits on the cities that could be served. Open Skies will remove these restrictions and provide important new third-country code-share opportunities for the carriers of both sides.

See Press Release, Department of Transportation, U.S. Transportation Secretary LaHood Announces U.S.-Israel Agreement on Open Skies, DOT 80-10 (Apr. 23, 2010) (available here).

Readers interested in reading the full agreement can do so here.

April 29, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 27, 2010

State Aid on the Way?

European Commission Vice President Siim Kallas, who is responsible for transport, has issued a menu of short and medium-term policy options for the European Commission to pursue in order to assuage the social and economic damage wrought during the so-called "volcanic ash crisis."  See Press Release, Europa, Commission Outlines Response to Tackle Impact on Air Transport, MEMO/10/152 (Apr. 27, 2010) (available here).  In addition to revising international procedures to deal with the fallout of volcanic activity and accelerating the implementation of the Single European Sky, Kallas's recommendations included affording latitude to Member States to provide air carriers with loans and other financial guarantees at market rates.  Kallas noted, however, that any State aid from EU Members "must be granted on the basis of uniform criteria" and "cannot be used to allow unfair assistance to companies which is not direcly related to the crisis."

Even with a green light for limited aid, it's unclear how far EU Member States are willing to go to compensate their airlines for costs related to the crisis when other industrial sectors in the EU were adversely affected as well.  Last week, Peter Ramsauer, Germany's Transport Minister, said he "would resist any appeal to the State" for aid. See Tony Barber, German Minister Opposes Airline State Aid, Fin. Times, Apr. 19, 2010 (available here).  Of course, with EU airlines now saying that their total losses will be in excess of $2 billion while laying a majority of the blame for the disordered nature of the airspace closures on Member State Governments, the pressure for State aid grants is increasing.

Regardless of the form any Commission approved aid guidelines take, there will certainly be room for abuse.  Given the record losses the EU air transport industry has suffered in the last year, some Member States may use any flexibility afforded by the Commission to "prop up" their failing carriers.  At the very least, the infusions of aid will raise monitoring costs for the European Commission and could result in protracted investigations if indeed the Member States decide to test the plasticity of the forthcoming aid guidelines. 

Finally, even if there is a credible chance that some EU air carriers will go bankrupt from the crisis unless they receive the benefit of State aid, it is unclear that it constitutes a problematic development.  The EU market remains saturated with airlines; further consolidation may be what the sector needs before it can begin operating in the black again. 

April 27, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, April 26, 2010

Customer Friendly Agency

Blog readers may be interested to read Prof. Russell Mill's paper to the Western Political Science Association's 2010 Meeting entitled, The Customer Friendly Agency: A Historical Institutionalist Investigation of the Federal Aviation Administration (Apr. 10, 2010) (available from SSRN here).

In March and April of 2008, the Federal Aviation Administration grounded several hundred aircraft for a mandatory safety audit after news reports surfaced that several Southwest Airlines aircraft had been operating without inspection certifications for over thirty months. Some charged that FAA oversight of the airlines had become lax because of a モcozy relationshipヤ between regulator and industry in which the FAA モcoddled the airlinesヤ). Using the historical institutionalism work of Pierson (2004), this paper explores what role has past policy decisions had in shaping the FAAメs culture, mission and current policies in the area of maintenance oversight. Using interviews, committee testimony, and agency memos, this paper will investigate this conflicting mission by analyzing two of the FAAメs main flight standards programs responsible for ensuring the compliance of airlines in safely maintaining aircraft: The Aviation Safety Action Program (ASAP) and the Voluntary Disclosure Reporting Program (VDRP). The main argument advanced in this paper is that the mission of the FAA has a built-in conflict of interest to モencourage and foster the development of civil aeronautics and air commerceヤ (Poole 1982) while acting as the main regulator for aviation safety that has resulted in a lack of coordination and regulatory oversight within the agency.

April 26, 2010 | Permalink | Comments (0) | TrackBack (0)

Friday, April 23, 2010

Pushing Toward a Single European Sky

The volcanic ash which has caused chaos in the European Union for the past week has put pressure on Member State Governments to complete the Single European Sky initiative.  See Joshua Chaffin & Pilita Clark, Renewed Call for Unified Air Traffic Control System, Fin. Times, Apr. 23, 2010 (available here).  Under the SES, the navigational airspaces of the EU Member States and members of the European Common Aviation Area (e.g., Norway, Iceland, and Macedonia) would be regulated by a single central authority.  EU Member States in particular have been resistant to the change despite agreeing to enabling legislation for the program.  See generally European Commission, Single European Sky II: Towards a More Sustainable and Better Performing Aviation, COM (2008) 389 final (June 25, 2008).

An extraordinary meeting to discuss fast tracking the SES initiative is scheduled for May 4.  See Press Release, Europa, Spain Calls an Extraordinary Meeting of Transport Ministers to Give Impetus to a "Single European Sky" (Apr. 23, 2010) (available here).  In addition to the SES, a review of emergency response procedures for EU airspace will be part of the meeting.  However, no revised timetable has been given for final implementation of the SES. 

Blog readers interested in the legal and policy challenges of the SES initiative should refer to Niels van Antwerpen's seminal work on the topic,Cross-Border Provision of Air Navigational Services with Specific Reference to Europe (Kluwer Law Int'l, 2008).

April 23, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 22, 2010

Taxing for Takeoff

Blog readers may be interested to read Edward Haung & Adib Kanafani's working paper, Taxing for Takeoff: Estimating Airport Tax Incidence Through Natural Experiments (Apr. 17, 2010) (available at SSRN here).  From the abstract:

We view the different start dates of U.S. airport taxes as replicated natural experiments. In each, a portion of plane tickets are subject to a new tax of $3. We show that airlines, in response, raise nonstop fares by $6.5 and overshift the tax onto their nonstop passengers; however, they keep connecting fares little changed and appear burdened by the tax. The results suggest that airport taxes and other similar taxes encourage airlines to provide more nonstop services, and we argue that these taxes can be redesigned to promote both efficiency and equity.

April 22, 2010 | Permalink | Comments (0) | TrackBack (0)

United/US Airways End Merger Negotiations

In a potential sign that Continental Airlines' merger negotiations with United Airlines may succeed, US Airways announced that it has ended its own merger talks with the Chicago-based air carrier.  See Jad Mouawad, US Airways Ends Talks With United, N.Y. Times, Apr. 22, 2010 (available here). 

April 22, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 20, 2010

State Aid for EU Airlines?

In response to the volcanic ash which shut down the European Union's air transport sector last week, the European Commission has convened a special working group to discuss the possibility of relaxing EU State aid rules to allow Member States to provide financial assistance to airlines impacted by the disruption.  See Peppi Kiviniemi, EU Group to Mull Updating State Aid Rules for Airlines, Dow Jones Newswires, Apr. 19, 2010 (available here).  Not everyone is pleased with this possibility.  Peter Ramsauer, German's Transport Minister, said on Monday that he would "resist any [aid] appeal to the State.  Ramsauer noted that while some industrial sectors had been harmed by the ash crisis, others had profited from it.  See Tony Barber, German Minister Opposes Airline State Aid, Fin. Times, Apr. 19, 2010 (available here). 

While EU carriers are drawing comparisons between the economic impact of European airspace closure and the hardships air carriers on both sides of the Atlantic felt after the 9/11 terrorist attacks to bolster their aid request, analysts have been quick to point out that this most recent disruption is unlikely to result in the same longterm drop in demand for air services that the terrorist attacks engendered.  The cross-sectoral impact of the crisis also lessens the airlines' pleas for a special exception to EU State aid rules.  However, some EU airlines have countered by flatly declaring that they face bankruptcy unless aid is given.  See Steve McGrant & David Pearson, European Airlines Seek Help With Cost of Ash Crisis, Dow Jones Newswires, Apr. 20, 2010 (available here). 

The European Commission has not been shy about acting on behalf of its airline industry as of late.  Last year, in the midst of falling demand for air services, the Commission opted to suspend its "use-or-lose" rule for airport takeoff and landing slots so that airlines could cut flights without the risk of forfeiting their rights to scarce capacity at EU airports.  And while it's difficult to tell how credible the threat of airline bankruptcy is following the flight disruption, the Commission is unlikely to wait around for carriers to start failing before it intervenes.  The political costs of inaction would be too high.

April 20, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, April 19, 2010

Guest Post: Air Travel and Volcanic Ashes

The following guest post, entitled "Air Travel and Volcanic Ashes: Update on the European Situation," comes from Charles Schlumberger, Principal Air Transport Specialist at the World Bank.

Continue reading

April 19, 2010 | Permalink | Comments (2) | TrackBack (0)

Thursday, April 15, 2010

Continental Joins Merger Talks

Just a week after it was reported that US Airways and United Airlines are in the midst of merger talks comes today’s news that Continental has entered into its own negotiations with United. SeeAndrew Ross Sorkin, Continental Reopens Talks with United, N.Y. Times, Apr. 15, 2010 (available here).

Continental and United, which had been in merger talks in 2008, have since entered into a codeshare partnership on domestic routes while enjoying antitrust immunity to cooperate on international scheduling, pricing, and revenue sharing as part of the Star Alliance. With less overlap between their respective hubs and route networks than United/US Airways, a Continental/United link-up would arguably be more beneficial to consumers. It may raise less competition concerns with the Justice Department’s Antitrust Division. United and US Airways were blocked from merging by the DOJ in 1995 and 2000, though some analysts have pointed out that changes in the air transport commercial environment since 9/11--including a decrease in both carriers’ market share--might lead regulators to take a more lenient approach to the deal.

Despite the complementary nature of their networks, Continental and United could still face tough resistance from the DOJ. A merger would make them one of the largest airlines in the world. As discussed previously on the blog, see here, the DOJ has promised “vigorous antitrust enforcement,” a statement which has been taken by some to mean that the Department intends to target any market concentration without regard to the efficiencies consolidation could lead to. If that’s true, the two airlines could be in for a long fight before their deal is consummated.

April 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 13, 2010

IATA on Japan

The International Air Transport Association released a statement yesterday on challenges facing the Japanese air transport industry and how they relate to the international aviation market as a whole.  See Press Release, IATA, Japan Must Address Cost Issues to Build Competitiveness (Apr. 12, 2010) (available here).  In addition to calling on Japan's Minister for Land, Infrastructure, Transport and Tourism to establish a more equitable taxing scheme for civil aviation coupled with substantial air transport infrastructure investments, IATA also urged Japan "to continue to push for liberalization" and to join IATA in its efforts to "free up antiquated restrictions on market access and ownership."

On the matter of market access and ownership, Japan remains beholden to protectionism through managed trade.  The open skies memorandum Japan signed with the United States last year still allows the Japanese Government to tightly manage slot distributions at Tokyo's two major international airports.  Instead of relying upon market-based measures such as slot trading or auctions, Japan has instead swapped a handful of takeoff and landing rights at Haneda--a premium airport for business travelers--in apparent exchange for the Department of Transportation granting antitrust immunity to ANA and JAL for their respective alliance partnerships with U.S. carriers.  Japan's airlines still remain out of reach to potential foreign investors (including a crossborder merger with another air carrier) and the most lucrative parts of its market are still under the control of regulators.  Even though the U.S./Japan airline alliances are likely to produce some benefits for consumers on both sides of the Pacific, the fact remains that immunized alliances are "second best" alternatives to a truly open market where unhampered consolidation can occur.

Of course, what incentive would Japan have to open their airlines up to substantial foreign investment (or acquisition)?  Over 90% of all bilateral air services agreements contain nationality clauses which require a carrier to be "substantially owned" and "effectively controlled" by nationals of its home State before it can be designated to operate international service.  So, for example, if British Airways took a majority stake in JAL, JAL could be blocked from taking advantage of the traffic rights Japan has secured with, say, the United States or China.  While it's possible that the Japanese Government could try and amend its bilaterals to allow foreign ownership of its airlines, it is far from clear that it would unilaterally be able to exert enough aeropolitical power to make that a reality in all relevant markets.  Securing a waiver of the nationality clause with China, for example, would be unhelpful for securing foreign investment if another substantial market like the U.S. refused to grant one.

While there is little doubt that Japan has more work to do in modernizing its air transport policies, it cannot hope to transform the international aviation regime on its own.  Crossborder airline consolidation will only occur when a critical mass of States representing an overwhelming amount of the global air transport market come together to abolish the nationality clauses in their respective bilaterals and, from there, take the necessary internal steps to strike all of the foreign ownership restrictions from their internal legislation.  It would be laudable if Japan took a leadership role in this area, but given its continuing commitment to managing market access, the chances of Japan upsetting the status quo are remote.

April 13, 2010 | Permalink | Comments (0) | TrackBack (0)

Friday, April 9, 2010

Airline Deals Won't Stem Capital Flight

Today's edition of the Financial Times contains an excellent op-ed piece on the financial woes of the global airline industry and the need for governments to allow carriers to consummate crossborder mergers.  See Opinion, Airline Deals Won't Stem Capital Flight, Fin. Times, Apr. 9, 2010 (available here).

April 9, 2010 | Permalink | Comments (0) | TrackBack (0)

Consolidation Continues

Consolidation continues in the airline industry as British Airways and Iberia announced the finalization of their merger agreement today.  See Nicola Clark et al., British Airways and Iberia Sign Merger Deal, N.Y. Times, Apr. 8, 2010 (available here).  If the deal is approved by the European Commission, BA-Iberia will become one of the largest airlines in the world.  Meanwhile, news agencies are still buzzing about yesterday's revelation that American carriers United Airlines and US Airways are in the midst of their own merger negotiations.

From a legal perspective, the possibility of a United/US Airways merger raises more interesting issues.  As discussed yesterday on the blog, see here, the two U.S. airlines have twice failed to win merger approval from the Justice Department.  Despite the fact both airlines have lost significant market share since their last attempted link-up in 2000, their merger plans may run up against Assistant Attorney General Christine Varney's plans for "vigorous antitrust enforcement," including limiting further market concentration in presumably all industrial sectors.  See generally 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).  The DOJ has already proved to be a thorn in United's side during its (ultimately successful) bid to win antitrust immunity for its partnerships with carriers such as Continental and Lufthansa as part of the Star Alliance.  In that instance, however, the DOJ had no statutory authority to block the Department of Transportation from making the immunity grant.  If United and US Airways decide to proceed with a full-on merger, the DOJ will have full powers to review and potentially challenge the consolidation.

The second interesting legal issue a possible United/US Airways merger raises is what, if any, effect it will have on United and Continental's pending antitrust immunity application for their alliance with Japan's ANA.  Will the DOT put its immunization analysis on hold until the merger is consummated?  If the immunity is granted before a merger is finished, will a new proceeding have to be initiated afterward?  And, regardless of the timetable, will the potential merger have any impact on the DOT's decision over whether or not to grant the immunity at all? 

April 9, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 7, 2010

United/US Airways Merger Talks

The New York Times is reporting that United Airlines and US Airways "are deep in . . . merger discussions" to form one of the world's largest airlines.  See Andrew Ross Sorkin et al., United and US Airways Said to Be in Merger Talks, N.Y. Times, Apr. 7, 2010 (available here).  According to the story, a formal announcement concerning the discussions is not expected for several weeks and that both carriers' unions may oppose the deal.

The two airlines may also face stiff resistance from the Department of Justice's Antitrust Division.  In 1995 and 2000, the DOJ 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 lenient view of a domestic link-up between the two.

This assumes, of course, that antitrust enforcers in Washington won't be spooked by the size of a combined United/US Airways air carrier.  Recent statements by both the DOJ and the Federal Trade Commission seem to indicate limited tolerance for further market concentration regardless of whether or not the transaction will result in efficiency gains.  See Alan Devlin, Antitrust in an Era of Market Failure, 33 Harv. J. L. & Pub. Pol'y 31-38 (forthcoming 2010) (available from SSRN here).  As ill-advised as this policy position may be, it could prove an insurmountable obstacle to any significant consolidation in the U.S. airline industry.

April 7, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, April 5, 2010

Revenue Management with Opaque Products

Blog readers interested in the business side of aviation may want to read Jochen Goensch & Claudius Steinhardt's new paper, Revenue Management with Opaque Products (Working Paper, Mar. 29, 2010) (available from SSRN here).  From the abstract:

In recent years, opaque selling has evolved into a popular instrument of price discrimination used in many service industries. Opaque products are designed in such a way that some of their characteristics are hidden from the customer until after purchase. Prominent examples include Internet-based intermediaries like Hotwire and Priceline, which sell, for example, airline tickets by disguising details of the service provision like the departure time or the operating airline until the booking has been made. The main benefit of opaque products is the induction of additional low-value demand; however, due to the inherent supplier-driven substitution, the traditional revenue management process changes. In this paper, we therefore propose a capacity control approach that allows opaque products to be incorporated. Our approach is based on the well-known dynamic programming decompositionthat is widely used for traditional revenue management – in theory as well as in commercial software implementations. Analytically, we show that the obtained upper bound on the original dynamic program’s value is tighter than the one obtained by constructing a deterministic linear approximation. Furthermore, we perform computational experiments, using typical airline revenue management scenarios, which show that the developed approach significantly outperforms other well-known capacity control approaches adapted to the opaque product setting.

April 5, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 1, 2010

Unmanned Aerial Exposure

Blog readers may be interested in reading Geoffrey Christopher Rapp's Unmanned Aerial Exposure: Civil Liability Concerns Arising from Domestic Law Enforcement Employment of Unmanned Aerial Systems, 85 N. Dakota L. Rev. 623 (2010) (available from SSRN here).  From the abstract:

Unmanned Aerial Vehicles (UAVs) have proven their worth on the battlefields of Iraq, Afghanistan and Lebanon. UAVs offer a relatively low-cost, low-risk alternative to manned aircraft in the military setting.

The same advantages have led many to see natural applications for UAVs in a domestic setting. Technological advances in communications, control, and optics in recent decades will no doubt increase pressure to introduce UAV systems for a host of domestic applications. In the coming years, law enforcement agencies will seek to use UAVs to police borders, control crowds, track criminals, detect illegal narcotics activities, and spot crime. Other potential civilian uses include mineral and energy exploration, agricultural surveys, communications relay, and wildfire monitoring. The revolution is coming.

Significant administrative and regulatory hurdles will confront policymakers as they seek to integrate UAVs into the domestic airspace system.This Article, a contribution to a symposium on UAVs sponsored by the North Dakota Law Review, explores the narrower issue of civil liability arising from the operation of UAVs by law enforcement authorities. Tort law has a well established body of rules and doctrines dealing with civil liability surrounding traditional aviation. This Article assumes that the legal hurdles to operating UAVs in the national airspace system are surmounted, and then speculates about potential civil liability concerns should things, as they always do, go wrong.

April 1, 2010 | Permalink | Comments (0) | TrackBack (0)