March 13, 2010
Slot Allocation at Congested Airports
For blog readers fluent in Portugese, Alessandro V.M. Oliveira of the Latin American Center for Transportation Economics has a new article on airport slots available online. See Slot Allocation at Congested Airports and Its Impacts on Airline Market Power, 4 Revista de Literatura dos Transportes 5 (2010) (available from SSRN here). From the abstract:
This study aims to analyze the impact of the dominance of essential facilities on market power, and thus on the generation of competitive advantage for the firms holding them. By using a conduct parameter framework, I model the behavior of oligopolistic firms under conditions of product differentiation - on the demand side - and a range of patterns of strategic interaction - on the supply side. Through structural estimation it was empirically investigated the emergence of market power due to the dominance or concentration of departure and landing slots at two major airports of Brazil.
March 11, 2010
FAA Reauthorization Poised to Move Forward
After spending months in limbo, the 2009 FAA Reauthorization Act is set to move forward for consideration after Tennessee Senator Bob Corker stated he would no longer stand in the way of the bill. See Bill Theobald, Sen. Corker Releases Hold on Bill Affecting FedEx Labor, Tennessean, Mar. 10, 2010 (available here); see also Elise Foley, FedEx Warns Congress Not to Pass UPS Bill, Politico, Mar. 11, 2010 (available here). Corker, along with fellow Tennessee Senator Lamar Alexander, had opposed to the bill due to a controversial provision which would move FedEx from its current coverage under the Railway Labor Act to the union-friendly National Labor Relations Act. Though it's unclear at this point what sort of deal may have been struck in the Senate, according to Corker's office, the FAA Act will no longer carry the FedEx labor provision.
While today's news is undoubtedly good for FedEx, it may put a dark cloud over other parts of the air transport industry. As discussed last year on the blog, see here, here, and here, the FAA Reauthorization Act, H.R. 915, 111th Cong., contains provisions which would would sunset all antitrust immunity for international airline alliances three years after enactment (sec. 426(e)); tighten the statutory requirement that domestic airlines be under the "actual control" of U.S. citizens by excluding foreigners from "control[ing] all matters pertaining to the business and structure of the air carrier" (sec. 801); and mandating twice-yearly inspections of foreign repair stations by FAA personnel (sec. 303).
All three provisions have been heavily criticized by officials from the European Union and its Member States. In particular, the changes to the antitrust immunity law, which could compromise the operations of global airline alliances, and the tightening of the "actual control" requirement for U.S. airline ownership is seen as an affront to the ongoing negotiations between the U.S. and EU for a second stage accord to build on their 2007 air services agreement. The FAA Act's inspection requirements concerning foreign repair stations has also come under fire as a needless expenditure of time and monetary resources.
March 10, 2010
Next Round of U.S./EU Talks
After failing to finalize a new agreement in Madrid last month, negotiators from the United States and the European Union will meet in Brussels on the 22nd of this month to try and forge a second stage agreement which builds on their landmark 2007 aviation treaty. See Doug Cameron, New EU-US Aviation Talks Planned for March 22, Dow Jones Newswires, Mar. 10, 2010 (available here).
At this point in the negotiating process, it is becoming clear that there will be no substantive progress made on relaxing U.S. foreign ownership and cabotage restrictions. There is, to put it mildly, no political will in the U.S. to undertake such radical action. This leaves the EU in a tight spot since ownership and traffic rights were supposed to be central to the second stage negotiations. See [U.S./EU] Air Transport Agreement, 2007 art. 21, O.J. (L 134) 4. In 2007, Douglas Alexander, the United Kingdom's former Transport Secretary, declared that his country would withdraw traffic rights granted under the 2007 agreement if "the Americans [fail] to act in relation to stage two." See Michael Harrison & Stephen Castle, Heathrow Scramble Starts as EU Agrees to Historic "Open Skies" Deal, Independent (London), Mar. 23, 2007, at 54. (That is, if the U.S. failed to finalize a fully liberalized air services agreement with the EU.) Of course, the U.K. may be singing a different tune now that its flag carrier, British Airways, has managed to secure (tentative) antitrust immunity from the Department of Transportation to deepen its cooperation with American Airlines and Iberia as part of the oneworld Alliance. Any act of suspension from the U.K. would likely be met with termination of the alliance's immunization.
This leaves open the question about what can be achieved as part of the second stage. The U.S. has stated that it remains dissatisfied with night flight restrictions at certain Member State airports and the EU's plan to bring U.S. airlines under its emissions trading scheme starting in 2012. To make progress on those issues, the U.S. will have to bring something to the negotiating table. But what does the U.S. have left to give?
Perhaps now is not the time for either party to expect substantive concessions. That doesn't mean the negotiations have to end in failure, however. It has been suggested that one area where the two sides could lay the groundwork for future progress is by abolishing the 2007 agreement's provision for unilateral suspension of traffic rights. See Air Transport Agreement, supra, art. 21(3). Under this provision, the U.S. or any EU Member State is entitled to give notice after November of this year that it will suspend some (or all) of the traffic rights contained in the 2007 agreement. For example, the U.K. could reinstate its pre-2008 restrictions on U.S. carrier access to London Heathrow and allow only American Airlines and United access rights while the other 26 Member States continue to honor the U.S./EC air services agreement. (This is distinct from the 2007 agreement's termination provision which can only be triggered by the Member States acting in tandem. See id. art. 23.)
Though some believe that neither party would be so foolish as to actually suspend concessions and thus instigate an aviation trade war, the very possibility of suspension creates an unnecessary air of commercial uncertainty--and even a little bit of latent hostility. Air carriers on both sides of the Atlantic have been hit hard by the global economic crisis. Many of them have made provisions for the future in order to survive, including forming cooperative joint ventures and reducing capacity in relation to expected demand in the transatlantic market. Such measures will only be effective if neither side's airlines lose traffic rights or are compelled by regulators to cease cooperating through their respective alliances. Removing the 2007 agreement's suspension clause helps ensure that the airlines' strategic planning will not be compromised by impulsiveness from either party. The agreement's aforementioned termination provision supplies both sides a way out in the remote chance their relations suffer a severe setback.
Additionally, the U.S. and EU can look to ways to strengthening the Joint Committee formed by the 2007 agreement. See Air Transport Agreement, supra, art. 18. If the world's two largest aviation powers have any hope of one day creating a truly open aviation area, they will need to be prepared to deal with a plethora of regulatory harmonization issues in areas such as antitrust, safety, security, and the environment. The U.S. and EU could begin the process of making provisions for this deep level of cooperation now so that when the liberal winds of change start blowing, they will be prepared to capitalize on an authentically open market.
These modest advances will not mark the end of U.S./EU negotiations, of course. If the suspension threat is removed, both parties can continue to strengthen their aviation ties and push for more substantive advances in the years to come. It's important to bear in mind that it took near two decades from the time when the U.S. launched its open skies aviation policy to the time it finalized a deal with the EU. Many political, legal, and economic changes had to occur first. While the airline industry may be growing impatient with the pace of liberalization, none would likely disagree that the present state of global aviation relations represents an exponential improvement over the days of managed trade and unbridled protectionism which were the hallmarks of international aeropolitics for most of the twentieth century.
Commission on the Verge of Approving oneworld
According to a number of stories out today, the oneworld Alliance is on the verge of winning an antitrust exemption from the European Commission to cooperate closer on marketing, pricing, routes, and revenue sharing following the alliance's agreement to surrender slots at some of the world's busiest airports. See, e.g., James Kanter, E.U. Signals Approval for Larger Alliance, N.Y. Times, Mar. 10, 2010 (available here); Terry Maxon, European Regulators Say American Airlines, Partners Have Offered to Give Up London Flights, Dallas Morning News, Mar. 10, 2010 (available here).
The Commission, which opened an investigation into the alliance last year, recently issued a series of objections to the link-up. In response, the alliance offered a series of concessions. According to the Commission:
The commitments proposed by the parties are primarily aimed at enabling competing airlines to start operating on the affected routes by lowering barriers to entry. Concretely, they offer to make available landing and take-off slots at London Heathrow or London Gatwick airports on routes to Boston, New York, Dallas and Miami. On the London-New York city pair, the parties also propose to provide the competitor with operating authorisations at New York JFK airport.
In addition, British Airways, American Airlines and Iberia undertake to provide access to their frequent flyer programmes on the relevant routes, allowing passengers of the qualified new entrants to accrue and redeem miles on the parties' frequent flyer programmes.
The parties also propose to allow fare combinability and offer special prorate agreements in relation to the routes of concern, which would enable competitors to offer tickets on the parties' flights and facilitate access to connecting traffic.
See Press Release, European Commission, Antitrust: Commission Market Tests Commitments Proposed by BA, AA and Iberia Concerning Transatlantic Operation, IP/10/256 (Mar. 10, 2010) (available here).
With the oneworld Alliance receiving tentative antitrust immunity last month from the Department of Transportation, the European Commission's investigation remained the last regulatory hurdle for the joint venture to clear.
The timing of the decision should not be ignored. U.S. and EU negotiators are scheduled to meet later this month in Brussels to continue their second stage air transport negotiations. A positive decision on oneworld from the Commission complements the DOT's approval which, as discussed previously on the blog, see "The Aeropolitics of the oneworld Order," was apparently timed to lead into the two sides' mid-February talks in Madrid.
March 8, 2010
Eastern Airlines Moving Closer to Alliance Membership
According to a story out yesterday, China Eastern--one of China's three largest carriers--will soon announce its decision to join one of the three major worldwide alliances. See Patricia Jiayi Ho, China Eastern to Join Alliance, Wall St. J., Mar. 7, 2010 (available here). China's other two major airlines, Air China and China Southern, are already members of the Star Alliance and SkyTeam, respectively. That would seem to make the oneworld Alliance the obvious choice, though China Eastern is remaining tight-lipped pending its final decision.
Regardless of its decision, for the time being China Eastern's alliance membership will be limited to a codeshare relationship. China has yet to finalize an open skies agreement with the United States, thus leaving its carriers ineligible to deepen their alliance relationships with U.S. partners to include close coordination on routes, pricing, and revenue sharing under a grant of antitrust immunity from the Department of Transportation. Under longstanding DOT practice, such grants are only given to carriers from States which have signed a liberal bilateral with the U.S. While the most recent amendment to the U.S./China air services agreement requires the parties "to [begin] negotiat[ing] an agreement and timetable for the full liberalization of their bilateral air transport market" by March 25 of this year. See Protocol to Amend the Agreement Between the Government of the United States of America and the People’s Republic of China Relating to Air Transport, art. 5 (July 9, 2007) (available here).
At this point it remains too early to tell what (if any) progress will be made in future U.S./China aviation talks. Undoubtedly, China will be paying close attention to both ANA and JAL's ongoing antitrust immunity proceedings before the DOT. If both airlines are able to win immunity for their joint ventures with U.S. partners, it may help spur the Chinese Government to negotiate a new bilateral that provides its own carriers the opportunity to forge comprehensive alliance relationships. That assumes, of course, that China is willing to place the commercial interests of its carriers before any nationalistic desire to protect its market from additional foreign competition.