May 21, 2010
Crandall on Mergers and Deregulation
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.
May 20, 2010
Value, Cost, and Ethics
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.
May 19, 2010
European Regulatory Response to the Volcanic Ash Crisis
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.
May 18, 2010
Barriers to Entry
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.
May 17, 2010
Continental/United's Pending Antitrust Battle
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).