Tuesday, July 27, 2010
The European Commission announced today that it will clear the pending merger between Continental and United. See Press Release, Europa, Mergers: Commission Approves Merger Between United Air Lines and Continental Airlines, IP/10/1010 (July 27, 2010) (available here). The Commission's analysis of the tie-up concluded:
The activities of the parties overlap in the provision of scheduled air passenger and cargo transport between the EEA [European Economic Area] and the US. The proposed merger only has a limited impact on air cargo transport because of the parties' limited presence in this market.
As regards air passenger transport, United and Continental's networks are complementary as they have hubs in different US cities. The proposed merger therefore only leads to small, incremental increases in the market shares of the parties, where one airline markets seats on flights operated by another carrier or offers an indirect service in competition with a nonstop service operated by the other airline from its US hub.
The Commission's investigation confirmed the complementary nature of United's and Continental's respective networks as regards transatlantic EEA-US routes and the fact that their combination will not give rise to concerns on any specific route.
The Commission noted that its investigation focused only on Continental/United and in no way impacts its ongoing inquiry of the carriers' involvement in the Star Alliance. Meanwhile, on the other side of the Atlantic, U.S. antitrust officials at the Justice Department are still scrutinizing the merger.
Friday, July 23, 2010
Blog readers interested in international aviation's impact on the environment should be interested in reading Andrew Macintosh & Lailey Wallace's International Aviation Emissions to 2025: Can Emissions Be Stabilised Without Restricting Demand? (ANU College of Law Research Paper No. 10-44, 2008) (available from SSRN here). From the abstract:
International aviation is growing rapidly, resulting in rising aviation greenhouse gas emissions. Concerns about the growth trajectory of the industry and emissions have led to calls for market measures such as emissions trading and carbon levies to be introduced to restrict demand and prompt innovation. This paper provides an overview of the science on aviation's contribution to climate change, analyses the emission intensity improvements that are necessary to offset rising international demand. The findings suggest international aviation carbon dioxide emissions will increase by more than 110 per cent between 2005 and 2025 (from 416 Mt to between 876 and 1013 Mt) and that it is unlikely emissions could be stabilised at levels consistent with risk averse climate targets without restricting demand.
Blog readers may be interested to read U.S. International Trade Analyst Peder A. Andersen's testimony before the U.S.-China Economic and Security Commission, China's Emergent Military Aerospace and Commercial Aviation Capabilities (May 2010) (available from SSRN here).
Tuesday, July 20, 2010
Less than a week after the European Commission announced that it was closing its investigation of the oneworld Alliance, see "Commission Clears oneworld," the Department of Transportation has issued its final order for the alliance's bid to win approval and antitrust immunity. From the press release:
The U.S. Department of Transportation today granted antitrust immunity to American Airlines and four international partners in “oneworld” to form an integrated global alliance, but also imposed several conditions that will protect consumers and preserve competition. Today’s action makes final the Department’s tentative decision of Feb. 13.
As a result of the Department’s action, American and its oneworld alliance partners British Airways, Iberia Airlines, Finnair and Royal Jordanian Airlines will be able to more closely coordinate international services.
The Department found that granting antitrust immunity to the oneworld alliance will provide travelers and shippers with a variety of benefits, including lower fares in some markets, new nonstop routes, improved services and better schedules. The Department also said that the alliance will enhance competition around the world by enabling the oneworld alliance to compete more vigorously with Star Alliance and SkyTeam, which operate similar immunized alliances.
While the Department found that the alliance, on balance, was pro-competitive, it noted that the alliance could harm competition on select routes between the United States and London’s Heathrow Airport, a major hub for oneworld, where the availability of landing and takeoff slots is limited. To remedy this potential problem, the Department required the applicants to make four pairs of slots at Heathrow available to competitors for new U.S.-London service, with two pairs to be used for Boston-London service and the other two for service from any other U.S. cities.
See Press Release, U.S. DOT, DOT Approves oneworld Antitrust Immunity Application, DOT 140-10 (July 20, 2010) (available here).
A full copy of the final order is available here.
Monday, July 19, 2010
Last week, the D.C. Circuit Court of Appeals upheld the Department of Transportation's 2008 Policy Regarding Airport Rates and Charges, 78 Fed. Reg. 3310. See Air Transport Association v. U.S. Department of Transportation, Case No. 08-1293 (D.C. Cir. 2010) (available here). Writing for a unanimous court, Judge Douglas Ginsburg denied the ATA's petition for review on the grounds, commenting that the DOT's "effort to relieve congestion pricing [through the new pricing policy] . . . should be welcome on its merits, not spurned for its novelty." Id. at 27.
Without commenting on Judge Ginsburg's legal analysis, it is worth taking note of his curious discussion of slots as an alternative means to pricing for reducing airport congestion. See id. 5-6. Judge Ginsburg writes:
There are two ways in which an airport might increase its landing fee to the market-clearing level — that is, to the price just high enough to eliminate the excess demand and hence the queue at peak times. The first is to sell at auction the right to land an aircraft at a particular airport at a particular time; that right is called a “landing slot.” In an auction an airport would first determine the number of landings it can accommodate during a given period of time, such as an hour, and then allow airlines to bid for each slot in an auction; the winning bid would determine the price of the landing slot. The alternative is “congestion pricing,” which entails the airport itself increasing the price (landing fee) until it elicits demand for only as many landings as it can accommodate, thereby eliminating queuing and delay. Both a slot auction and congestion pricing will converge upon the same price and the same quantity.
He then goes on to state that while neither system "is preferable to the other," commentators "have advocated slot auctions rather than congestion pricing because an airport operator knows how many landings the airport can safely accommodate per hour but can only learn by trial and error what fee will yield that many landings." Id. at 5 (citation omitted). This is correct. However, Judge Ginsburg's next step is puzzling. At the end of a string cite in support of the latter proposition, he adds: "But see Michael E. Levine, Landing Fees and the Airport Congestion Problem, 12 J.L. & Econ. 79 (1969) (proposing a system of congestion pricing)."
While there is no doubt that Professor Levine wrote such an article in 1969, it is also true that Levine published a piece in support of slot auctions which was highly critical of congestion pricing in 2009. See Airport Congestion: When Theory Meets Reality, 26 Yale J. on Reg. 37 (2009). All of the articles Judge Ginsburg cites in his discussion of slots are 30-40 years old. Why pass silently over this and other recent scholarly treatments of the airport congestion problem? See, e.g., Jan K. Brueckner, Price vs. Quantity-Based Approaches to Airport Congestion Management, 93 J. Pub. Econ. 681 (2009). Why not take account of the fact airports operate as monopolies and have strong incentives to extract as much rent from airlines (and thus consumers) as possible?
Admittedly, even if the D.C. Circuit's opinion contained a more thorough and accurate discussion of slots, it would not have changed the holding. Perhaps, however, it would have forced the court to deal with the reality that congestion pricing is a suboptimal mechanism for reducing airport congestion while taking account of the latitude for abuse (i.e., rent extraction) the pricing option offers.
Thursday, July 15, 2010
Yesterday, the European Commission closed its investigation of the oneworld Alliance after accepting its commitments to release 49 weekly slots at London Heathrow and enter limited cooperation agreements with competitors on ticket sales and frequent flyer programs for select U.S./London routes. See European Commission, Antitrust: British Airways, American Airlines and Iberia Commitments to Ensure Competition . . ., MEMO/10/330 (July 14, 2010) (available here). The full list of commitments can be found in Commitments to the European Commission, Case COMP/F-1/39.596 (June 25, 2010) (available here).
The Commission's decision in this matter is not surprising. Over the past decade, the Commission's stance toward alliances involving European carriers has been generally positive. Where competition concerns are raised, commitments such as those offered by oneworld or by SkyTeam in 2007. SeePress Release, Antitrust: Commission Market Tests Commitments from Eight Members of SkyTeam Concerning Their Alliance Cooperation, IP/07/1558 (Oct. 19, 2007) (available here). While this approach may upset "antitrust purists" who would prefer to see the Commission curtail alliance behavior such as coordinating prices and scheduling, it has allowed EU airlines to provide consumers with global route networks and other perquisites without crowding-out new market entrants.
The U.S. Government Accountability Office has issued a new report on consumers and airline fees, see Commercial Aviation: Consumers Could Benefit From Better Information About Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees, GAO-10-785 (July 14, 2010) (available here). From the summary:
Airlines have imposed a variety of fees on a range of optional services, such as checked and carry-on bags; meals; blankets; early boarding; and seat selection. According to airline officials, the fees are based on a combination of factors, including the cost of providing the service, competition, and consumer demand. The fees have supplemented airline revenues, providing at least $3 billion in 2009--a small but growing amount of total revenues. However, information about the fees is not fully disclosed through all ticket distribution channels used by consumers, making it difficult for them to compare the total cost of flights offered by different carriers. The Department of Transportation (DOT) does not currently require disclosure of airline-imposed optional fees, apart from those for checked bags, but recently issued a Notice of Proposed Rulemaking (NPRM) considering different forms of disclosure of such fees. Meanwhile, a system is being tested to fully disclose all of the fees to consumers searching for fares, but airlines are not likely to disclose them unless compelled to do so. Airlines' increasing reliance on fees reduces the proportion of their total revenue that is taxed to fund FAA. The Internal Revenue Service (IRS) has determined that many of these fees, including checked baggage fees, are not related to the "transportation of a person"--the basis for imposing the 7.5 percent excise tax. According to GAO's calculations, the checked baggage fee (the largest and only measurable untaxed fee) if taxed in fiscal year 2009 would have accounted for about 2 percent of total Trust Fund revenues but is likely to grow in future years given recent trends. Since DOT guidance requires airlines to report separately only revenues from baggage fees and reservation change and cancellation fees, GAO was unable to estimate potential collections from other untaxed fees. Since airlines first imposed checked baggage fees, the number of checked bags per passenger has declined, contributing to a decline in the rate of mishandled bags. Despite the introduction of fees, airlines have not substantially changed their baggage service or compensation methods. Checked baggage fees have also led to greater amounts of carry-on baggage, resulting in greater competition for limited overhead storage space. According to IRS, aviation excise taxes on unused nonrefundable tickets are not refundable, but if an airline refunds the ticket, a proportionate amount of tax may be refunded. In contrast, consumers with unused nonrefundable tickets with expired or lost value are entitled to a full refund of the September 11th Security Fee, but few consumers request a refund because airlines are not required to inform consumers of this. According to the Department of Homeland Security (DHS), applicable statutes and regulations authorize the refund of its customs and immigration inspection fees if services aren't rendered, but DHS has not issued any policy or guidance that makes this clear. The Department of Agriculture's (USDA) statutes and regulations are unclear as to whether its fee is refundableon unused nonrefundable tickets. If Congress wants to tax currently untaxed airline fees, it would need to amend the Internal Revenue Code. GAO recommends that DOT require airlines to consistently disclose optional fees and notify passengers of any refundable government fees; USDA determine whether its fee is refundable on unused nonrefundable tickets; and DHS issue guidance on the refundability of its fees. USDA and DHS agreed with the recommendations and DOT did not comment on them.
Tuesday, July 13, 2010
As discussed previously on the blog, the "second stage" Protocol amending the 2007 U.S./EU Air Transport Agreement, 2007 O.J. (L 134) 4, was signed at the end of June. See also Protocol to Amend the Air Transport Agreement . . . (June 24, 2010) (available here). The Protocol strengthens aeropolitical relations between the two parties through the Joint Committee established under the first agreement. Specifically, the Protocol contemplates cooperation on issues such as the environment, social protection, competition, and security. The Protocol also eliminates the first agreement's suspension clause which allowed the parties to suspend some or all of the treaty's concessions if they were dissatisfied with the outcome of second stage negotiations. (For more on the suspension clause, see earlier discussion here).
Conspicuously absent from the Protocol, however, are concrete concessions on investment rights. Despite EU urging to the contrary, the U.S. refused to modify its current 25% cap on foreign ownership in U.S. air carriers. Instead, the two sides reached a limited compromise whereby U.S. airlines would be afforded limited seventh freedom (stand alone) rights for passenger or combination passenger/cargo services from points within the EU provided each party "permit[s] majority ownership and effective control of its airlines by the other Party or its nationals[.]" See Protocol, supra, art. 6 (replacing Article 21 of the 2007 Agreement).
It is far from clear that the offer of limited seventh freedom rights will be enough to entice the U.S. to reform its airline ownership laws. Perhaps with that in mind, the European Parliament motioned for a resolution last month calling on the European Commission "to start the process of third stage negotiations with a view to include . . . additional foreign investment opportunities." See Euro. Parliament, Motion for a Resolution to Wind Up the Debate . . . on the EU-US Air Transport Agreement, Session Doc. No. B7-0374/2010 (June 14, 2010 (available here). Whether these negotiations occur or not remains to be seen. Until there is a change in Washington's protectionist stance on airline ownership, however, it's difficult to imagine any further progress being made.
Friday, July 9, 2010
US Airways and Delta Air Lines have filed a petition for review before the D.C. Circuit concerning their proposal to trade slots at New York LaGuardia and Washington Reagan airports. While the Federal Aviation Administration approved the transaction earlier this year, it did so on the condition that both carriers surrender a portion of the slots to be traded. The following summary of the case is taken from the carriers' Form 8-K filing from the Securities and Exchange Commission (available here):
In August 2009, US Airways Group, Inc. and US Airways, Inc. (“US Airways”) entered into a mutual asset purchase and sale agreement with Delta Air Lines, Inc. (“Delta”). Pursuant to the agreement, US Airways would transfer to Delta certain assets related to flight operations at LaGuardia Airport in New York, including 125 pairs of slots currently used to provide US Airways Express service at LaGuardia. Delta would transfer to US Airways certain assets related to flight operations at Ronald Reagan Washington National Airport (“Washington National”), including 42 pairs of slots, and the authority to serve Sao Paulo, Brazil and Tokyo, Japan. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies, including the U.S. Department of Justice, the U.S. Department of Transportation (“DOT”), the Federal Aviation Administration (“FAA”) and The Port Authority of New York and New Jersey.
In February 2010, the FAA issued a proposed order conditionally approving the transaction. However, the proposed order contemplated the divestiture of 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. In March 2010, Delta and US Airways announced a proposed alternative transaction which contemplated fewer divestitures than required by the FAA’s February 2010 proposed order. In a final decision dated May 4, 2010, the FAA rejected the alternative transaction proposed by Delta and US Airways, and affirmed its proposed order. In connection with this action by the FAA, Delta and US Airways were obligated to advise the FAA no later than July 2, 2010 whether they intended to proceed with the transaction as described in the FAA’s May 4, 2010 action. On July 2, 2010, Delta and US Airways jointly advised the FAA that they did not intend to proceed with the transaction under the conditions imposed by the FAA, and that Delta and US Airways are prepared to complete the transaction without those conditions. Also on July 2, 2010, Delta and US Airways jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the FAA’s order seeking to set the FAA’s order aside. We cannot predict the outcome of this judicial proceeding.
Blog readers with access to the Daily Airline Filings website can read the airlines' petition for review here.
Thursday, July 8, 2010
Blog readers may be interested to read Alessandro V.M. Oliveira's Does the Market Power of a Dominanet Airlne Spill Over to its Rivals? (Latin American Center for Transportation Ecomomics Working Paper, June 16, 2010) (available from SSRN here). From the abstract:
Some of the main sources of market power in the airline industry are related to route and airport dominance. What is more, Borenstein (1989) found evidence that the market power of a dominant airline does not spill over to its rivals on the same route. Here I investigate this lack of “umbrella” effect by examining an air shuttle market with recent liberalization in which the major carrier has more than 50 % of the market share of both route and endpoint airports. Dominance in air shuttle markets is crucial since most passengers are usually very time-sensitive and a firm with a broader portfolio of departures is more likely to conquer their loyalty. The main contribution of the paper is the use of a competition model rather than a non-structural pricing equation. By employing a demand system with stages of budgeting and a conduct parameter to capture rivalry among heterogeneous players, I estimate the extent of deviation from Bertrand-Nash equilibrium after deregulation measures and two episodes of cost shock. As route-level marginal costs are unobservable, I then use observed shifters at the aircraft level to control for costs and economies of density. The model also permits an evaluation of the impact of the regulatory reform on the behavior of firms. The main finding is that the dominant carrier managed to persistently sustain higher-than-average markups whereas the smaller rivals had marginal-cost or below-marginal-cost pricing. Additionally, the higher estimated markups of the dominant firm were not due to anticompetitive behavior but solely to product differentiation - a higher perceived product quality by very time-sensitive consumers. This is indicative not only that the regulatory reform was successful in enhancing competition but also, from an antitrust perspective, it induced a situation in which the potential effects of market dominance on margins were offset.
Saturday, July 3, 2010
The American Spectator has a brief, but informative, article on current Congressional rumblings to reregulate the airline industry. See Iain Murray & Roger Abbott, Regulatory Flights of Fancy, Am. Spectator, July 2, 2010 (available here). From the lead paragraph:
In Washington, D.C., everything old is new again. Keynes is back as the defunct economist our politicians are in thrall to, wind and solar are the power sources of the future, just as they were in the seventies, and, after two decades in which entrepreneurs and industry were freed from the crippling hand of regulation, re-regulation is now the order of the day. The latest target is the domestic airline industry, and if Congress wanted to kill it off, they couldn’t be picking a better way.
Friday, July 2, 2010
Blog readers interested in reading the 1,076-page WTO Panel Report, European Communities and Certain Member States--Measures Affecting Trade in Large Civil Aircraft, WT/DS316/R (June 30, 2010), can do so by following this link.
Media attention on the ruling has focused on its U.S. domestic implications, specifically the House and Senate measures which would force the Pentagon to take account of illegal subsidies when choosing to award lucrative defense contracts to aircraft manufacturers. See, e.g., Christopher Drew, In Ruling, W.T.O. Faults Europe Over Aid to Airbus, N.Y. Times, June 30, 2010 (available here). Some have expressed concerns that the legislation could hurt U.S. manufacturer Boeing. The WTO is expected to issue its report on possible illegal subsidies to Boeing later this year. However, it is important to keep in mind that the total amount of subsidies Boeing is accused of receiving--approximately $20 billion--is a fraction of the $200 billion Airbus was alleged to have received from EU Member States. In the end, the WTO Panel reduced the amount to $20 billion and may push the amount down even further after it rules on the EU's forthcoming appeal. There's every reason to expect that should the WTO Panel rule against Boeing, it too will reduce the amount of accused subsidization. Even if the Pentagon is forced to take account of illegal subsidies for its contract awards, Boeing is likely to retain an advantage over Airbus in that respect.
The more interesting question is where do things go from here? The U.S. and EU had a treaty governing trade in large civil aircraft until the U.S. denounced it in 2004. Arguably, the best case scenario would be for the two sides to return to the negotiating table to hammer out a new agreement. Under a fresh bilateral, both sides could set new rules for State subsidies to their respective "national champions" which accounts for the current nature of the aircraft manufacturing sector and allows innovation to proceed without hampering competition. Neither company is going away. What must be decided is whether their operations from here on out will confer real benefits to the world community in the form of cutting-edge products or if they will become the basis for a needless, counterproductive, and potentially destructive trade war between two of the world's economic giants.
Thursday, July 1, 2010
Professor Brian Havel was quoted in yesterday's edition of the Chicago Tribune on the implications of the World Trade Organization's recently published ruling against European aircraft manufacturer Airbus. See Julie Johnsson, Illegal Aid Enabled Airbus to Overtake Boeing, Panel Rules, Chi. Tribune, June 30, 2010 (available here).