August 27, 2010
DOJ Antitrust Division Clears Continental/United Merger
The Department of Justice's Antitrust Division has cleared Continental and United's plans to form the world's largest airline after the carriers agreed to relinquish takeoff and landing slots and other assets at Newark Liberty Airport to Southwest Airlines. See Press Release, DOJ, United Airlines and Continental Airlines Transfer Assets to Southwest Airlines in Response to Department of Justice's Antitrust Concerns (Aug. 27, 2010) (available here). From the press release:
The department conducted a thorough investigation. The proposed merger would combine the airlines’ largely complementary networks, which would result in overlap on a limited number of routes where United and Continental offer competing nonstop service. The largest such routes are between United’s hub airports and Continental’s hub at Newark airport, where Continental has a high share of service and where there is limited availability of slots, making entry by other airlines particularly difficult. The transfer of slots and other assets at Newark to Southwest, a low cost carrier that currently has only limited service in the New York metropolitan area and no Newark service, resolves the department’s principal competition concerns and will likely significantly benefit consumers on overlap routes as well as on many other routes. The slot transfer is through a lease that permanently conveys to Southwest all of Continental’s rights in the assets, in compliance with FAA rules.
FAA Hits AA With Record Penalty
The Federal Aviation Administration announced yesterday that it has proposed a record $24.2 million fine against American Airlines "for failing to correctly follow an Airworthiness Directive involving the maintenance of its McDonnell Douglas MD-80 aircraft." The press release went on to state:
“We put rules and regulations in place to keep the flying public safe,” said U.S. Transportation Secretary Ray LaHood. “We expect operators to perform inspections and conduct regular and required maintenance in order to prevent safety issues. There can be no compromises when it comes to safety.”
The FAA alleges American did not follow steps outlined in a 2006 Airworthiness Directive requiring operators to inspect wire bundles located in the wheel wells of MD-80 aircraft. The Airworthiness Directive, AD 2006-15-15, required a one-time general visual inspection by March 5, 2008 for chafing or signs of arcing of the wire bundle for the auxiliary hydraulic pump. It also required operators to perform corrective actions in accordance with the instructions of the applicable manufacturer’s Service Bulletin.
. . .
The FAA subsequently determined that 286 of the airline’s MD-80s were operated on a combined 14,278 passenger flights while the aircraft were not in compliance with Federal Regulations. American ultimately completed the work required by the 2006 Airworthiness Directive.
See Press Release, FAA, FAA Proposes Civil Penalty Against American Airlines (Aug. 26, 2010) (available here).
According to the Dallas Morning News, American intends to appeal the fine. See Eric Torbenson & Terry Maxon, American to Fight $24.2M FAA Fine, Dallas Morning News, Aug. 27, 2010 (available here).
August 25, 2010
IATA Calls on Australia to Liberalize Air Transport
Giovanni Bisignani, Director General and CEO of the International Air Transport Association, has called on the Australian Government to remove its remaining restrictions on airline ownership. From the press release:
Bisignani encouraged Australia to remove outdated ownership restrictions for international aviation. “Historically, airlines have profit margins of less than 1%, that is not sustainable. To fix this, we need to run this business like a normal business. Australia is a leader in aviation liberalization. The open aviation area with New Zealand has achieved what the US and Europe could not in their open skies discussions. And the removal ownership restrictions for domestic Australian operations benefited consumers with greater choice and lower prices. These results make the 49% foreign ownership cap for international operators very difficult to understand,” said Bisignani.
See Press Release, IATA, Agenda to Strengthen Australian Aviation (Aug. 25, 2010) (available here).
As important as crossborder consolidation is to the airline industry, Australia's reticence over removing its foreign ownership caps is not as difficult to understand as Bisignani opines. According to the World Trade Organization, over 90% of all air services agreements (ASAs) contain nationality clauses, i.e., requirements that a State's airline be "substantially owned and effectively controlled" by its citizens before being eligible to provide international service. So, for example, if Australia's flagship air carrier, Qantas, was acquired by British Airways, Qantas could lose market access privileges to any State which has a nationality clause in its ASA with Australia. Until these clauses are removed or neutralized, they will continue to exert a powerfully dissuasive influence on State-level airline ownership rules.
August 23, 2010
Profit Margin Presistence
Blog readers may be interested in reading Denton Collins et al.'s An Empirical Investigation of the Relationship Between Profit Margin Presistence and Firms' Choice of Business Model: Evidence From the US Airline Industry (Working Paper Aug. 19, 2010) (available from SSRN here). From the abstract:
This paper examines the influence of a firm’s business model on the relative persistence of profit margins in the U.S. airline industry. A firm’s business model reflects how that firm chooses to compete in the marketplace. Prior research conjectures that profit margin persistence is influenced by, among other things, competitive forces in the marketplace. We test this conjecture by (1) partitioning our sample firms according to business model (network carriers versus low-cost carriers), and (2) decomposing sample firms’ profit margins into components relating to pricing policy, input cost control, and productivity. While low-cost carriers are, on average, more profitable than their network carrier counterparts, we find that the margins of network carriers tend to be more persistent than those of low-cost carriers. This supports our hypothesis that business model influences the relative persistence of margins. Additional analyses suggest that, after controlling for innovations in growth, these differences arise because of both favorable and unfavorable pricing and productivity innovations.
Back to Normal
With law schools across the United States resuming classes today, the Aviation Law Prof Blog will resume daily postings.