Aviation Law Prof Blog

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. 

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.

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. 

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.

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).

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.

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). 

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.

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.

For the fifth day in a row most of European air space as been closed to instrument flights in controlled air space, which brought air travel to a virtual standstill - an unprecedented situation since World War II. Thousands of travellers, including many Bank staff, are stranded in many parts of Europe and even the world, as many key hubs cannot transit passengers. Every single day expectations were high that "tomorrow things will gradually return to normal", but so far only limited air travel has resumed.

Here are some aspects on the complexity of the matter, and an update on the European situation.

The cause of the problem:

• A volcano in Island, under a glacier known as Eyjafjallajokull, began erupting several weeks ago for the first time since the 1820s. It exploded more violently early Wednesday, spewing ash 30,000 feet into the air. The major difference with the eruption of other volcanos for aviation with this event is the fact that the volcano was covered with a massif cap of ice, which melted in an explosive manner. This resulted that the lava and its ashes were transformed into an aerosol type, which stays airborne for days, and which is transported over long distances.

The aviation world has very limited experience with volcanic ashes. Even though there have been over 80 ash related incidents in aviation over the past decades, only two major incidents involving commercial airliners and volcanic ashes were examined in detail:

• British Airways Flight 9, sometimes referred to as the Speedbird 9 or Jakarta incident, was a scheduled British Airways flight from London Heathrow to Auckland, with stops in Bombay, Madras, Kuala Lumpur, Perth, and Melbourne. On 24 June 1982, the route was flown by the City of Edinburgh, a 747-236B. The aircraft flew into a cloud of volcanic ash thrown up by the eruption of Mount Galunggung (circa 180 kilometres (110 mi) south-east of Jakarta, Indonesia), resulting in the failure of all four engines. The reason for the failure was not immediately apparent to the crew or ground control. The aircraft was diverted to Jakarta in the hope that enough engines could be restarted to allow it to land there. The aircraft was able to glide far enough to exit the ash cloud, and all engines were restarted (although one failed again soon after), allowing the aircraft to land safely.
• A nearly identical incident occurred on 15 December 1989 when KLM Flight 867, a B747-400 from Amsterdam to Anchorage, Alaska, flew into the plume of the erupting Mount Redoubt, causing all four engines to fail due to compressor stall. Once the flight cleared the ash cloud, the crew was able to restart each engine and then make a safe landing at Anchorage.

The risk for aircraft operations in the presence of volcanic ashes:

• Ash clouds from volcanoes pose a threat to aircraft safety because the plumes are filled with abrasive silica-based materials that risk clogging up the engines and sandblasting windscreens. Traversing a high-altitude volcanic ash clouds with a plane may also spark an electrical discharge known as St. Elmo’s fire, block speed sensors or disrupt the airstream as pulverized rock strips away paint.
• According to Toulouse-based Airbus SAS, volcanic particles have a melting point that is below an engine’s internal temperature, causing them to melt when they pass through an engine in midflight. This may clog turbine vanes and disturb the flow of high-pressure combustion gases, risking an engine stall, according to an Airbus flight operations briefing note.
• Many other aircraft systems may be affected immediately, or over time which are causing expensive repairs and may pose an immediate or delayed operational risk. These include for example clogged airspeed indicators, angle of attack sensors, pressurization systems, static ports, or various other external sensors of an aircraft.

The regulatory challenge for aviation authorities:

• Civil Aviation Authorities (CAA) around the world are responsible for regulatory oversight of aviation. In terms of safety, they need to intervene when a dangerous situation threatens safe operations in air transport. Given the experiences in 1982 and 1989, the presence of volcanic ashes in the atmosphere represents such a risk. However, it primarily seems to affect flights in higher altitudes performed with modern turbine driven aircraft. The sanction is to order that air traffic services cannot accept any controlled flight in their air space, which virtually cancels all air travel on jet driven commercial aircraft. It does, however, not necessarily cancel or prohibit flights in uncontrolled airspace and in lower altitudes (usually, all flights above flight-level 180 (18,000 ft) are in controlled airspace) -> e.g. several test flights were conducted by various carriers in uncontrolled airspace, and many small private aircraft enjoyed training e.g. at Zürich International Airport this weekend, not being disturbed by airlines and when even the landing taxes have been cancelled (see picture below)!
• Aircraft need to be operated by manufactures specification, which requires e.g. clean air for engine operations. Despite growing pressure from air travel groups such as the International Air Transport Association (IATA), the CAA said that all current jet engine manufacturers specify zero levels of atmospheric ash for safe flying. The CAA said that unless jet engine manufacturers changed their operating specifications, something it added was highly unlikely in the short-to-medium term, the restrictions will continue to apply. Addressing calls from some quarters of the European travel industry to lift or ease flight restrictions, a CAA spokesman said: "We need evidence to prove that it is safe to fly... we have evidence that ash adversely affects aircraft and at the moment the manufacturers' guidelines are zero rating with respect to ash." The spokesman said that it would be very unlikely that NATS, the British air traffic control provider, would lift restrictions in the current circumstances.

The economic impact of the flight cancellations:

• The disruption is costing airlines at least $200 million a day in lost revenues, said Giovanni Bisignani, director general and CEO of the International Air Transport Association. an industry trade group. Airports have lost close to 136 million euros ($184 million U.S.) so far, said Olivier Jankovec, director general of Airports Council International Europe, a group that represents airports. More than 6.8 million passengers have been affected, he said. Many other services, such as catering or handling are affected, and will lose million of euros from this even
• Next to direct losses on airlines and airports there are indirect and implied losses. Indirect losses are losses from related economic activities, such as tourism, and implied losses are created be secondary effects of the indirect losses (e.g. services to the tourism industry). No assessment can currently be done on these sort of losses, but should the crisis continue, their effects will certainly become an issue.
• Finally, there are already some supply disruptions in manufacturing and services around Europe as cargo flights are also not possible. All together, the closing of European airspace starts to provide dramatic evidence on how important air transportation has become for modern society and its economic activities.

The current situation in Europe today:

• Most of Northern Europe's airspace remains closed for instrument flights (controlled and guided flights). As a result, only about 8,000 to 9,000 flights are expected to take off today Monday in European airspace, according to traffic authority Eurocontrol. About 28,000 flights take place on most Mondays.

        on a country basis, this is the situation:

• Austria: Austrian airspace, including all Austrian airports, reopened at 05:00 local time (LT) Monday. The Austrian aviation agency Austro Control will continue to monitor the situation and has not ruled out another closure in the coming hours.
• Canada: Flights into and out of St. John's, Gander and Deer Lake, Newfoundland, may be affected by volcanic activity, AirCanada said.
• Denmark:  There will be no flights in Danish airspace before 14:00 LT Monday.
• Finland: There will be no flights in or out of Finnish airports before 18:00 LT on Monday.
• France: Paris' Charles de Gaulle and Orly airports will remain closed until 08:00 LT Tuesday by order of the French Civil Aviation Authority, Air France said on its Web site late Saturday. France reopened airports in Toulouse, Montpellier, Pau, Tarbes, Biarritz, Bordeaux, Nice, and Marseilles until 15:00  Monday, when the situation will be reassessed. Air France is busing passengers from de Gaulle to airports in the south of the country. It plans to have seven flights leave France on Monday: six from Toulouse airport, and one from Pau. It also hopes to have nine nine flights fly into France on Monday, into airports in Toulouse, Bordeaux, Nice and Marseilles. The French national rail company SNCF is adding 80,000 extra places on the Eurostar high-speed trains running from Paris to London this week. Tickets will cost a special fare of 96 euros (about $130) round trip, less than half the normal last-minute price.
• Germany: The flight ban over Germany has been extended to 20:00 local time Monday and applies to all airports in the country, the German aviation safety authority said.
• Ireland: Ireland extended its airspace closure through 13:00 LT Monday and said restrictions past then were "likely" in light of current weather forecasts.
• Italy: The airspace in northern Italy is closed until 20:00 local time Tuesday, the country's civil aviation authority said. Airspace throughout the rest of the country opened at 07:00 Monday, but the situation remains fluid with officials checking how long it can remain open, the civil aviation authority said.
• Norway: The airspace over Oslo airport (Gardermoen), and Kjevik, Torp and Rygge airports opened Monday.
• Poland: About half the airspace in Poland is open, but that over Krakow remains closed, an airport official in the historic city said Monday.
• Russia: Flights have been delayed and canceled at 10 Russian international airports, mostly in the European part of the country, the transport ministry said. Moscow's international Sheremetyevo airport has been affected by far more than others: 277 cancelled flights and 59 delayed, with more than 28,000 people stranded. Throughout Russia, 411 flights were canceled and 77 delayed, affecting more than 34,000 passengers, the Russian transport ministry said.
• Spain: All 16 airports in Spain were scheduled to reopen at 15:30 LT Sunday -- several hours earlier than previously expected, the government announced.
• Sweden: The airspace north and west of the flight corridor from Stockholm to Gothenburg opened Monday morning. The airspace around Bromma Airport has also opened.
• Switzerland: Switzerland is not permitting flights before 14:00 LT Monday, the Swiss Federal Office of Civil Aviation (FOCA) said.
• Thailand: Thai Airways, based in Bangkok, estimates the cloud is costing the airline $3 million a day and has stranded 6,000 of its passengers.
• The Netherlands: A spokeswoman for KLM, one of the airlines that conducted test flights, told CNN the flights show European airspace is safe, with the exception of Iceland.
• United Arab Emirates: Emirates airline says the disruption has already cost it $50 million.
• United Kingdom: The British Royal Navy is deploying two ships, HMS Ocean and HMS Ark Royal, to rescue travelers stranded by the ash, Prime Minister Gordon Brown announced. It's not clear where the ships are now or how long it would take them to get to their destinations, the Ministry of Defense said. Restrictions across British airspace will remain in effect until at least 01:00 LT Tuesday. British Airways canceled all flights in and out of London on Sunday and Monday, the airline announced.
• Other countries There are restrictions on civil flights across most of northern and central Europe. This swath includes Austria, Belgium, Croatia, the Czech Republic, Estonia, Romania, Serbia, Slovenia, Slovakia and Ukraine.

The outlook as of Monday morning:

• The good news is that most of the ice cap (the glacier known as Eyjafjallajokull) has melted, which indicates that less ashes my transported as aerosol over long-distances. However, the effect is not immediate, and the current winds still carry more ashes over Europe. Nevertheless, airlines are pressuring authorities to allow flights under close operational supervision (e.g. visual engine inspection after each flight), and some carriers have begun limited service. I expect that with decreasing level of ashes in the atmosphere, air travel will continue to gradually resume over the coming days. It will, however, require about ten days of full operations of all networks until air travel comes back to normality.
• The bad news is that researchers are also worried about the Katla volcano which is situated almost 16 kms away from Eyjafjallajokull. It has been observed that both the volcanoes erupted together in 1612 and again from 1821 to 1823. According to the data that has been gathered over the years, it is believed that Katla can release far more material during an eruption than Eyjafjallajokull. If Katla errupts, the possibility of a far greater creation of volcanic ashes is quite likely, which may disrupt air travel for weeks, maybe even months. Such an event will have catastrophic effects, as it may even change the climate for a short or medium term (e.g. cool summers, change in rain patters).

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.

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.

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).

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? 

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.

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.

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.