April 15, 2010
Continental Joins Merger Talks
Just a week after it was reported that US Airways and United Airlines are in the midst of merger talks comes today’s news that Continental has entered into its own negotiations with United. SeeAndrew Ross Sorkin, Continental Reopens Talks with United, N.Y. Times, Apr. 15, 2010 (available here).
Continental and United, which had been in merger talks in 2008, have since entered into a codeshare partnership on domestic routes while enjoying antitrust immunity to cooperate on international scheduling, pricing, and revenue sharing as part of the Star Alliance. With less overlap between their respective hubs and route networks than United/US Airways, a Continental/United link-up would arguably be more beneficial to consumers. It may raise less competition concerns with the Justice Department’s Antitrust Division. United and US Airways were blocked from merging by the DOJ in 1995 and 2000, though some analysts have pointed out that changes in the air transport commercial environment since 9/11--including a decrease in both carriers’ market share--might lead regulators to take a more lenient approach to the deal.
Despite the complementary nature of their networks, Continental and United could still face tough resistance from the DOJ. A merger would make them one of the largest airlines in the world. As discussed previously on the blog, see here, the DOJ has promised “vigorous antitrust enforcement,” a statement which has been taken by some to mean that the Department intends to target any market concentration without regard to the efficiencies consolidation could lead to. If that’s true, the two airlines could be in for a long fight before their deal is consummated.
April 13, 2010
IATA on Japan
The International Air Transport Association released a statement yesterday on challenges facing the Japanese air transport industry and how they relate to the international aviation market as a whole. See Press Release, IATA, Japan Must Address Cost Issues to Build Competitiveness (Apr. 12, 2010) (available here). In addition to calling on Japan's Minister for Land, Infrastructure, Transport and Tourism to establish a more equitable taxing scheme for civil aviation coupled with substantial air transport infrastructure investments, IATA also urged Japan "to continue to push for liberalization" and to join IATA in its efforts to "free up antiquated restrictions on market access and ownership."
On the matter of market access and ownership, Japan remains beholden to protectionism through managed trade. The open skies memorandum Japan signed with the United States last year still allows the Japanese Government to tightly manage slot distributions at Tokyo's two major international airports. Instead of relying upon market-based measures such as slot trading or auctions, Japan has instead swapped a handful of takeoff and landing rights at Haneda--a premium airport for business travelers--in apparent exchange for the Department of Transportation granting antitrust immunity to ANA and JAL for their respective alliance partnerships with U.S. carriers. Japan's airlines still remain out of reach to potential foreign investors (including a crossborder merger with another air carrier) and the most lucrative parts of its market are still under the control of regulators. Even though the U.S./Japan airline alliances are likely to produce some benefits for consumers on both sides of the Pacific, the fact remains that immunized alliances are "second best" alternatives to a truly open market where unhampered consolidation can occur.
Of course, what incentive would Japan have to open their airlines up to substantial foreign investment (or acquisition)? Over 90% of all bilateral air services agreements contain nationality clauses which require a carrier to be "substantially owned" and "effectively controlled" by nationals of its home State before it can be designated to operate international service. So, for example, if British Airways took a majority stake in JAL, JAL could be blocked from taking advantage of the traffic rights Japan has secured with, say, the United States or China. While it's possible that the Japanese Government could try and amend its bilaterals to allow foreign ownership of its airlines, it is far from clear that it would unilaterally be able to exert enough aeropolitical power to make that a reality in all relevant markets. Securing a waiver of the nationality clause with China, for example, would be unhelpful for securing foreign investment if another substantial market like the U.S. refused to grant one.
While there is little doubt that Japan has more work to do in modernizing its air transport policies, it cannot hope to transform the international aviation regime on its own. Crossborder airline consolidation will only occur when a critical mass of States representing an overwhelming amount of the global air transport market come together to abolish the nationality clauses in their respective bilaterals and, from there, take the necessary internal steps to strike all of the foreign ownership restrictions from their internal legislation. It would be laudable if Japan took a leadership role in this area, but given its continuing commitment to managing market access, the chances of Japan upsetting the status quo are remote.