April 30, 2010
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.
April 29, 2010
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.
April 27, 2010
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.
April 26, 2010
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.