Thursday, May 27, 2010
The U.S. Government Accountability Office issued a new report today, Airline Mergers: Issues Raised by the Proposed Merger of United and Continental Airlines, GAO-10-778T (May 27, 2010) (available here). From the summary:
Earlier this month, United Air Lines (United) and Continental Airlines (Continental) announced plans to merge the two airlines and signed a merger agreement. This follows the acquisition of Northwest Airlines by Delta Air Lines (Delta) in 2008, which propelled Delta to become the largest airline in the United States. This latest merger, if not challenged by the Department of Justice (DOJ), would surpass Delta's merger in scope to create the largest passenger airline in terms of capacity in the United States. The passenger airline industry has struggled financially over the last decade, and these two airlines believe a merger will strengthen them. However, as with any proposed merger of this magnitude, this one will be carefully examined by DOJ to determine if its potential benefits for consumers outweigh the potential negative effects. At the Committee's request, GAO is providing a statement for the record that describes (1) an overview of the factors that are driving mergers in the industry, (2) the role of federal authorities in reviewing merger proposals, and (3) key issues associated with the proposed merger of United and Continental. To address these objectives, GAO drew from previous reports on the potential effects of the proposed merger between Delta and Northwest and the financial condition of the airline industry, and analyzed Department of Transportation (DOT) airline operating and financial data.
As GAO has previously reported, airlines seek to merge with or acquire other airlines to increase their profitability and financial sustainability, but must weigh these potential benefits against operational costs and challenges. The principal benefits airlines consider are cost reductions--by combining complementary assets, eliminating duplicate activities, and reducing capacity--and increased revenues from higher fares in existing markets and increased demand for more seamless travel to more destinations. Balanced against these potential benefits are operational costs of integrating workforces, aircraft fleets, and systems. DOJ's antitrust review is a critical step in the airline merger and acquisition process. DOJ uses an integrated analytical framework set forth in the Horizontal Merger Guidelines to determine whether the merger poses any antitrust concerns. Under that process, DOJ assesses the extent of likely anticompetitive effects of reducing competition in the relevant markets--in this case, between cities or airports. DOJ further considers the likelihood that airlines entering these markets would counteract any anticompetitive effects. It also considers any efficiencies that a merger or acquisition could bring--for example, consumer benefits from an expanded route network. Finally, it examines whether one of the airlines proposing to merge would fail and its assets exit the market in the absence of a merger. One of the most important issues in this merger will be its effect on competition in the airline industry. For example, GAO's analysis of 2009 ticket data showed that combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total traffic between airports) in 1,135 markets (called airport pairs) affecting almost 35 million passengers while creating a new effective competitor in 173 airport pairs affecting almost 9.5 million passengers. However, in all but 10 of these airports pairs there is at least one other competitor.
Wednesday, May 26, 2010
United Airlines CEO Glenn Tilton has said that he is "very optimistic" that the pending Continental/United merger will receive clearance from the Justice Department before the close of 2010. See John Crawley, UAL CEO Optimistic Can Address CAL Merger Concerns, Reuters, May 25, 2010 (available here). From the story:
Tilton said the companies have already had "initial conversations" with Justice Department staff and he expects a "full and robust review" of the transaction.
Antitrust officials focus on how the proposal would impact competition, if at all. Antitrust experts, analysts and industry consultants see few if any regulatory problems and widely anticipate government approval. However, they say United and Continental may be required to divest some assets at one or more airports, possibly in the New York area where Continental is strong at Newark, to enhance competition.
Tilton would not discuss specific antitrust matters. He and Continental CEO Jeff Smisek are scheduled to appear before U.S. Senate lawmakers at two hearings on Thursday to answer questions about the merger.
Tilton and Smisek's appearance will be part of the Senate Committee on Commerce, Science, & Transportation's "The Financial State of the Airline Industry and the Implications of Consolidation in the Industry" hearings. See here for further information.
Tuesday, May 25, 2010
Blog readers may be interested to read Adam Warren et al.'s Airports, Localities and Disease: Representations of Global Traveling During the H1N1 Pandemic, 16 Health & Place 727 (2010) (available from SSRN here). From the abstract:
During summer 2009, the UK experienced one of the highest incidences of H1N1 infection outside of the Americas and Australia. Building on existing research into biosecurity and the spread of infectious disease via the global airline network, this paper explores the biopolitics of public health in the UK through an in-depth empirical analysis of the representation of H1N1 in UK national and regional newspapers. We uncover new discourses relating to the significance of the airport as a site for control and the ethics of the treatment of the traveller as a potential transmitter of disease. We conclude by highlighting how the global spread of infectious diseases is grounded in particular localities associated with distinctive notions of biosecurity and the traveller.
Friday, May 21, 2010
With the Delta/Northwest merger in 2008 and the pending merger of Continental/United awaiting clearance from the Justice Department, does American Airlines need a partner to survive? No, says former American Chairman and CEO Robert Crandall. See Andrea Ahles, Former AMR CEO Crandall Says American Doesn't Need Merger Partner, Star-Telegram, May 19, 2010 (available here). In remarks given to the American Association of Airport Executives Conference in Dallas, Crandall stated that American would be better served focusing on its alliance relationships with British Airways/Iberia and Japanese Air Lines than seeking out a domestic merger partner. He also took time out to decry airline deregulation as unhelpful to the air transport industry while noting that he "favor[s] a mix of competition and regulation rather than the consolidation of every airline under the sun."
While the story does not indicate whether or not Crandall opted to elaborate on his vision for a mixed regime of regulation and competition at the conference, it's likely his vision remains along the same lines that he drew during a 2008 address to the Wings Club in 2008. See Robert L. Crandall, Remarks at the Wings Club Luncheon (June 1, 2008) (available here). In that talk, Crandall was prepared to saddle airline deregulation with responsibility for the cumulative failure of the industry over the past 30 years. He also offered a mix of new regulatory interventions including a mandated "sum-of-segments" pricing policy to encourage nonstop flights (and discourage airline connecting complexes) by charging the full price for each segment of a connecting itinerary; binding arbitration for labor disputes; tougher bankruptcy laws that would oust managements more quickly; and "a more accommodating stance toward industry collaboration" on capacity sharing.
Blog readers interested in learning more about Crandall's take on deregulation and his suggestions for improving the industry should watch the International Aviation Law Institute's A Conversation with Bob Crandall (Sept. 14, 2009) (available in streaming video here), part of the Institute's ongoing Conversations with Aviation Leaders Oral History Project.
Thursday, May 20, 2010
Blog readers interested in the intersection of health crises and aviation may wish to read Lucy Budd et al.'s Value, Cost and Ethics: UK Airports and the Governance of Pandemic H1N1 Risk (May 13, 2010) (available from SSRN here). From the abstract:
The outbreak and subsequent worldwide spread of pandemic influenza H1N1, popularly known as ‘swine flu’, from the spring of 2009 has illustrated our continued microbial vulnerability in a highly interconnected aeromobile world. The UK has been particularly affected by the first ‘wave’ of infection, with some commentators suggesting this was an inevitable consequence of the country’s status as a hub of global air communications. Given that the virus was almost certainly brought to the UK by holidaymakers returning from Mexico, the role of the UK airport as the ‘first line’ of defence against the importation of infectious disease has been subject to particular scrutiny. An important debate has subsequently emerged surrounding the ‘rights’ of airline passengers to move unimpeded through the world’s airports (without being subjected to medical screening) against the ‘rights’ of individual nations to be protected from the spread of infection through the employment of ‘strict’ screening practices. Focusing on concepts of ‘value’ and ‘cost’, as applied to individual ‘forms of life’, we consider how the governance of H1N1 risk at UK airports has generated a set of complex and interlocking biopolitical and ethical concerns associated with the safeguarding of the national border. We conclude by indicating how this tension, between securing and ethically valuing life, may inform future UK policy responses to infectious disease control at its international airports. One means is through a process of policy transfer.
Wednesday, May 19, 2010
Blog readers may be interested to read Professor Alberto Alemanno's new paper, The European Regulatory Response to the Volcanic Ash Crisis: Between Fragmentation and Integration, 2 Euro. J. Risk Reg. __ (forthcoming 2010) (available from SSRN here). From the abstract:
More than twenty years after the EU eliminated its internal land borders, the Union still lacks an integrated airspace. This seems to be the most immediate regulatory lesson of the recent volcanic ash crisis. In this brief report, I will provide a first-hand analysis of the regulatory answer developed across Europe in the aftermath of the eruption of the Icelandic volcano Eyjafjallajökull. While reconstructing the unfolding of the events and the procedures followed by the regulators, I will attempt to address some of the questions that I have repeatedly asked myself when stranded in Washington DC between 16 and 25 April 2010. Who did the assessment of the hazard posed by volcanic ash to jetliners? Who was competent to take risk management decisions, such as the controversial flight bans? Is it true that the safe level of volcanic ash was zero? How to explain the shift to a new safety threshold (of 2,000 mg/m3) only five days after the event? Did regulators overact? To what extent did they manage the perceived risk rather than the actual one? At a time when the impact of the volcanic ash cloud crisis is being closely scrutinised by both public authorities and the affected industries, it seems particularly timely to establish what happened during the worst aviation crisis in European history. This report was written one week after the event and relied on a limited number of sources available by 30 April 2010.
Tuesday, May 18, 2010
Following the May 3 announcement that Continental and United Airlines would consummate a $3 billion merger to form the world's largest air carrier, there has been a torrent of news stories, op-eds, and public statements from lawmakers and government officials on the pros and cons of the tie-up for the U.S. air transport market. Opponents of the merger argue that it will lead to higher prices and fewer route options for consumers. There is some plausibility to these two charges. Any merger between competitors leads to some reduction in competition and, assuming the deal has a significant effect on the number of participants in a given market (in this scenario, reducing the number of major network carriers from five to four), perhaps increases the risk of oligopolistic pricing. Assuming competent management is placed in charge of the enterprise, rational business decisions such as reducing or eliminating unprofitable service offerings is likely to follow.
On the other hand, it is far from an inevitability that fewer actors in a given market means higher prices. There is always a temptation for one or more participants to "cheat" by shading their prices. Additionally, the possibility of additional revenues in a given market will invite new entrants which eventually compete down the price of service. To counter these basic observations, some argue that an admixture of unstable capital markets and a general unease with respect to investment in the often volatile aviation industry creates a barrier to entry. Perhaps, though such claims have yet to be substantiated with hard evidence. Paying too much mind to these claims also distracts from the most significant barriers to entry, namely the Government laws and policies which bar foreign airlines and capital from penetrating the U.S. air transport market.
Like most countries worldwide, the U.S. reserves cabotage, i.e., the right to operate air service between two points within its territory, for its national carriers. So, for example, British Airways (BA), on a flight departing London, cannot put down passengers (or cargo) in New York; take on new passengers (or cargo); and then continue on to its final destination in, say, Los Angeles. Though extending cabotage privileges to foreign airlines would probably only affect the competitive makeup on the most heavily trafficked U.S. domestic routes, it would at least help assuage fears that a drop in domestic carriers in these lucrative markets automatically means higher prices.
A more onerous entry barrier than the cabotage restriction is the federal statutory requirement that an airline must be 75% owned and actually controlled by U.S. citizens before receiving operating authority from the Department of Transportation. This investment restriction means that foreign airlines such as BA are barred from establishing a subsidiary for the purposes of competing in the U.S. domestic market. It also means that existing U.S. air carriers do not have access to sources of foreign capital which could allow them to sustain (or expand) their operations without necessarily resorting to consolidation or complete exit from the marketplace.
If the pending Continental/United merger raises legislator concerns about the competitive makeup of the U.S. air transport market, then lawmakers in Washington need to rethink these protectionist artifices. In the meantime, the U.S. industry should be given the freedom to organize itself in response to shifts in consumer demand and the rising costs of doing business.
Monday, May 17, 2010
The Wall Street Journal just released a story discussing the antitrust scrutiny the proposed Continental/United Airlines merger is likely to receive from both the Justice Department's Antitrust Division and the House Judiciary Committee. See Susan Carey, Airline Deal Faces Tough Review, Wall St. J., May 17, 2010 (available here). While the story largely repeats observations made on the blog two weeks ago, see here and here, it does provide an interesting comparison to the 2008 Delta/Northwest merger. Specifically, on the question over whether or not Continental and United would be required to divest gates or slots at airports where the two carriers have a significant presence, the story notes:
United and Continental say their planned union would have no overlapping international flights and only 14 nonstop domestic-route overlaps, mostly between the carriers' hubs.
A person close to the airlines' planning said the pair have 114 overlapping connecting flights and serve four small endpoint airports, or spoke airports that aren't hubs, where each has more than 10% of the passenger share. In the Delta-Northwest case, this person said, the two had 12 overlapping nonstop routes, 597 overlapping connecting routes and 44 endpoint airports where both sides had more than 10% of the passengers. No divestitures were required in that merger.
Whether this existential facts will sway the United/Continental review is not easy to prophesy. After all, with a new set of flexible horizontal merger guidelines in hand, see FTC & DOJ, Horizontal Merger Guidelines For Public Comment: Released on April 20, 2010 (2010) (available here), the Department of Justice is free to try and strongarm concessions from the carriers in the name 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). Indeed, before approving a merger between concert promoter Live Nation Inc. and entertainment giant Ticketmaster earlier this year, the DOJ mandated Ticketmaster share its ticketing software with competitors and sell its college sports ticketing division to a major rival. See Ethan Smith & Thomas Catan, Concert Deal Wins Antitrust Approval, Wall St. J., Jan. 26, 2010 (available here). Apparently "vigorous antitrust enforcement" means administrative illuminati, not consumer choice and potential efficiency gains, will determine the contours of the market.
Of course, this footnote in antitrust history has yet to be written and so outright despair remains uncalled for. As Steven Horwitz, Professor of Economics at St. Lawrence University, observed earlier this month, "Whether the United-Continental merger is a good thing or not remains to be seen. We can only hope that regulators will use forbearance and let consumers decide through the market whether what would be the new world's largest airline better meets their demands." See Steven Horwitz, Mergers Are Not Monopolies, PBS Nightly Business Report Blog, May 4, 2010 (available here).
Thursday, May 13, 2010
It appears that in addition to scrapping plans to build a third runway at London Heathrow, the United Kingdom's newly formed Conservative/Liberal Democrat coalition plans to introduce a new "eco" tax on the airline industry. See Pilita Clark & Brian Groom, Air Tax Angst Mars Business Delight, Fin. Times, May 13, 2010 (available here). Not surprisingly, the airlines are less than enthused. From the story:
Virgin Atlantic branded the tax "unworkable" while British Airways said there was no guarantee it would be used to benefit the environment. FlyBe, one of the largest regional carriers, branded it "illogical" and unfair.
Business jet and air freight operators were critical of the government's adoption of the Lib Dems' pre-election pledge to replace air passenger duty with a "per-plane duty", which the party said would ensure "pollution is properly taxed". Aircraft flown by these groups do not pay the existing air passenger duty.
"It's colossal from our perspective," said Anne de Courcy, secretary-general of the Association of International Courier and Express Services, which represents air freight operators in the UK such as Fedex and DHL.
Wednesday, May 12, 2010
On Wednesday, May 26, 2010, DePaul University College of Law and BeiHang University (Beijing University of Aeronautics and Astronautics) will conduct their second annual Key Issues in International Aviation Law conference in Beijing, China. The theme for this year’s conference is Aviation Law Under Open Skies: Commercial and Regulatory Developments in the Asia-Pacific Region.
Confirmed speakers (listed below this note) include key civil aviation officials from the U.S. and Chinese governments, directors of major international aviation law institutes, and prominent aviation executives, attorneys, and academics. An agenda describing all speakers, topics, and times will be forthcoming soon.
If you would like additional information, please contact Professor Jerold Friedland at firstname.lastname@example.org.
Key Issues in International Aviation Law
Aviation Under Open Skies: Commercial and Regulatory Developments in the Asia-Pacific Region
May 26, 2010
(Beijing University of Aeronautics and Astronautics)
Confirmed speakers include:
• John R. Byerly Deputy Assistant Secretary of State for Transportation Affairs
• Ms. MENG Qingfen Director, Law & Regulation Division, Civil Aviation Administration of China • Peter Harbison Executive Chairman, Centre for Asia Pacific Aviation
• Prof. WANG Han Vice President, Northwest University of Politics & Law
• G. Bailey Leopard, Jr. Senior Counsel, FedEx Express • Michael F. O’Laughlin Senior Partner, O’Laughlin & Company, Hong Kong
• Prof. XUAN Zengyi Director, Institute of Air and Space Law, Faculty of International Law China University of Political Science and Law
• Sandra Chiu Principal, Center for Aviation Policy & Economics; Former Director, International Affairs, United Airlines
• Prof. Long Weiqiu Dean, School of Law, BeiHang University Honorary Director, Institute of Aviation Law, School of Law, BeiHang University
• Nathan Bush Partner, O’Melveny & Myers, Beijing
• Prof. LI Bin Associate Director, Institute of Aviation Law Beihang University School of Law
The newly formed Conservative-Liberal Democrat coalition, with David Cameron at the helm as Prime Minister, has pledged to scrap plans to build a third runway at London Heathrow Airport. See Dan Coombs, Conservative Lib-Dem Coalition: No Third Runway, Uxbridge Gazette, May 12, 2010 (available here). From the story:
A landmark coalition agreement between the Conservatives and the Liberal Democrats has included a pledge to scrap the third runway at Heathrow.
The confirmation came in the form of a seven page A4 document, outlining the key policies, agreements, and concessions made by both parties in the wake of a hung parliament following last Thursday's General Election.
. . . .
One of the Conservatives pre-election pledges was to deliver on their campaign against the runway and sixth terminal at Heathrow, which would have lead to the destruction of 700 homes in Sipson and Harmondsworth, and an increase in flight activity around West Drayton.
The coalition agreement confirms, in bullet point format: "The cancellation of the third runway at Heathrow", and "the refusal of additional runways at Gatwick and Stansted."
While this is no doubt good news for environmentalists and other critics who were skeptical that an increase in Heathrow's capacity would bring concrete economic benefits to the United Kingdom, it will no doubt strike a sour note with international air transport industry. According to Airports Council International's 2009 statistics, Heathrow was the busiest airport in Europe and the second busiest in the world (behind Atlanta's Hartsfield-Jackson International Airport). Moreover, competition for takeoff and landing slots at Heathrow has markedly increased since the 2007 U.S./EU Air Transport Agreement removed access restrictions to the airport for U.S. carriers.
Monday, May 10, 2010
Professor Steve Horwitz, the Charles A. Dana Professor of Economics at St. Lawrenece University and a theorist in the "Austrian School" tradition of economics, posted his take on the Continental/United merger at the PBS Nightly Business Report blog. See here. It's well worth reading.
Friday, May 7, 2010
Professor Brian Havel was featured in a story from ABC News on the Department of Transportation and Federal Aviation Administration's tough regulatory enforcement policies against the airlines. See Scott Mayerowitz, Obama Administration Gets Tough on Airlines, ABC News (May 6, 2010) (available here).
Wednesday, May 5, 2010
The following papers will appear in the Spring 2010 edition of the International Aviation Law Institute's journal, Issues in Aviation Law and Policy:
- Peter Harbison, The Importance of the Japan Airlines Bankruptcy and Restructuring in Modernizing the Asia Pacific Airline Industry
- Kenneth P. Quinn et al., Improving Global Aviation Safety by Protecting Information Sources
- Matt Anderson, Getting at the Core of Airline Economics
- Moses George, Public Monopoly and Private Monopoly--A Case Study of Greenfield Airport Privatization in India--Part II
- Russell E. Tanguay, Jr., The Future of the U.S.-EU Agreement: A World of Open Skies?
- Stuart A. Hindman, The Air Carrier Access Act: It Is Time for an Overhaul
- Bin Li, Open China's Skies or Not?--From the Perspective of a Chinese Scholar
- Graeme B. Dinwoodie, Efficiently Reaching Airline Customers: Key Word Advertising and Trademark Law
- Bruce L. Ottley, Airport Full-Body Scanners: Improved Security or Cause for Concern?
Blog readers seeking more information on the journal can find it here.
Tuesday, May 4, 2010
Monday, May 3, 2010
As expected, Continental Airlines and United Airlines announced this morning that they will be merging into the world's largest air carrier, known simply as "United." See Julie Johnsson, It's Official: United, Continental Announce Merger, Chi. Tribune, May 3, 2010 (available here). From the story:
United Airlines and Continental Airlines announced early Monday morning that they are combining operations to form the world's largest airline in a $3 billion merger.
The deal is the culmination of a lengthy search by United CEO Glenn Tilton for a partner that would bolster his carrier's global network and that would promote consolidation in a badly fragmented industry plagued by chronic losses. Continental CEO Jeff Smisek will be named CEO of the new carrier, while Tilton will move to its board as non-executive chairman for a two-year term.
. . .
Unlike the earlier merger that United had contemplated with US Airways, this deal isn't expected to involve large-scale cuts since United's and Continental's networks have little overlap. The carriers expect to continue serving the 370 cities where United or Continental currently fly, and will operate 10 hubs, including bases in the four largest cities in the U.S.
As discussed on the blog last week, see here, the merger will likely test the Department of Justice's current antitrust enforcement policy. Last month, the DOJ and Federal Trade Commission released their new Horizontal Merger Guidelines for public comment. See FTC & DOJ, Horizontal Merger Guidelines For Public Comment: Released on April 20, 2010 (2010) (available here). Perhaps the most startling feature of the new guidelines is the agencies' position that "merger analysis does not consist of uniform application of a single methodology" but rather a "fact-specific process" whereby a "range of analytical tools" are applied. See id. at 1-2. This turn by the agencies from methodological formalism to what might appear to be an ad hoc approach to merger analysis introduces a confounding element into what otherwise is being perceived as a structurally sensible deal for the airline industry.