February 26, 2010
China Eastern Looking for an Alliance
Could the U.S. see open skies with China in the near future? There is news out that China Eastern is in talks with the oneworld, SkyTeam, and Star alliances about a possible transpacific link-up. See China Eastern in Talks with Three Airline Alliances, Trading Mkts., Feb. 26, 2010 (available here). While China Eastern could forge a codesharing relationship with one of the alliances without an open skies deal between the U.S. and China in place, it would be unable to reap the full benefits of alliance integration unless it first received antitrust immunity from the Department of Transportation.
For nearly two decades now, the DOT has insisted that a liberal bilateral air services agreement be in place with a foreign carrier’s home State before granting it antitrust immunity to cooperate on scheduling, pricing, and revenue sharing with any U.S. airlines. Would the Department be willing to soften its stance in exchange for greater (though not unrestricted) traffic rights into China? The recently signed U.S./Japan Memorandum of Understanding is purportedly an open skies accord, though the agreement still allows Japan to keep tight control over slot allocation at its busiest airports. Some critics have charged the deal is “sub-open skies,” yet most expect the DOT will still dispense antitrust immunity to Japanese carriers JAL and ANA as part of airlines’ plans to deepen their alliance arrangements with oneworld and Star, respectively.
Currently the U.S. has a restrictive bilateral in place with China, though the agreement does provide for a steady increase in flight frequencies through 2011. 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. 2 (July 9, 2007) (available here). The agreement also states that the two parties will enter into negotiations for a new air services agreement no later than March 25, 2010. See id. art. 5.
February 25, 2010
In Search of Mergers
United Airlines and US Airways are in the mood to merge, but will they find any takers? See Jui Chakravorty, Two Big U.S. Airlines Open to Merger, Reuters, Feb. 24, 2010 (available here). Unlike regulators in Washington, both carriers understand that consolidation in a tough operating environment is the only way to survive. The problem, however, is that domestic capital is thin and crossborder megers are an impossibility under the strict U.S. cap limiting foreign ownership to 25%.
US Airways claims that it is not interested in a foreign takeover. Even so, its chances of finding a domestic partner are long. In 1995 and 2000, the Department of Justice threatened lawsuits to block US Airways's acquisition by United. Both threats were predicated on the implications of United taking over US Airways hub operations at high-use East Coast airports. Perhaps, given the financial woes the airline industry has faced since 9/11, including record high fuel prices and the economic downturn, the Justice Department would be willing to take a more favorable view of a domestic link-up between the two. That's assuming, of course, that United would even be interested in pursuing a new deal with US Airways. United's 2008 plans to merge with Continental fell through and it seems the airline is more interested at the moment in pursuing deals to bolster its international market presence through the Star Alliance and its Madrid/Washington Dulles operating agreement with Ireland's Aer Lingus.
Assuming that United is out of the picture, that essentially leaves US Airways with two options: Continental and American Airlines. Delta Air Lines, after its takeover of Northwest in 2008, is no doubt out of the running. American, the nation's second largest airline, may have a tough time convincing the DOJ that a merger with US Airways doesn't raise antitrust concerns. Continental could be a viable option, but like United, it may be content with its international relationships for the time being.
February 23, 2010
Allocating Haneda's Slots
The scramble for scarce slots at Tokyo's Haneda airport is on. As discussed previously on the blog, see "DOT to Allocate Scarce Haneda Slots," the Department of Transportation has been authorized under the U.S./Japan open skies Memorandum of Understanding signed last December to allocate four daily takeoff and landing slots at the world's fourth busiest airport. See generally Order Instituting Proceedings, Dkt. No. DOT-OST-2010-0018 (Jan. 26, 2010). Not surprisingly, all four major U.S. carriers--American, Continental, Delta, and United--are vying for one or all of the available slots. Without judging the merits of each applicant's claims, Delta's filing is certainly the most intriguing in light of JAL's recent decision to pursue an immunized alliance with American Airlines rather than join Delta as part of SkyTeam.
According to Delta, JAL, along with fellow Japanese airline and Star Alliance member ANA, "operate 84 percent of scheduled departures and 90 per cent of scheduled seats at Haneda." See Application of Delta Air Lines, Inc., at 2, Dkt. No. DOT-OST-2010-0018 (Feb. 16, 2010). Delta argues in its filing that since it has been effectively locked out of forming an alliance with a major Japanese airline, the only way to establish competitive parity on routes between the U.S. and Haneda is for the DOT to grant Delta all four daily slot offerings. Though Delta does enjoy greater access at Tokyo's other airport, Narita, the carrier believes "that its services at far-distant Narita are not competitive with Haneda for premium business passengers." Id.
It will be interesting to see if the DOT accepts Delta's arguments and awards it all four slots. If it does, the decision could have the effect of bolstering both oneworld and the Star's claims that granting their alliances antitrust immunity won't unduly harm competition in the transpacific market. On the other hand, if the DOT opts not to immunize one or both of the transpacific alliance applications, a decision to hand all four slots over to Delta would be difficult to justify. It's uncertain at this point whether the DOT will render its alliance decisions before making a final determination on how to allocate the Haneda slots. Though that route appears to make sense in light of the arguments advanced in Delta's application, the two antitrust immunity applications will take longer to decide. Meanwhile, scarce slots at Haneda--slots which could benefit airline consumers--will go unused.
Neutrality of Fuel Surcharge
Blog reader's interested in China's growing aviation sector may be interested to read Qiang Gong & Xingli Fan's The Neutrality of Fuel Surcharge, 1 Global J. Bus. Res. 1 (2007) (available from SSRN here). From the abstract:
Airline companies usually collect a fuel surcharge rather than increase airfares when fuel prices surge. This paper initiates a theoretical model to analyze the properties of fuel surcharges. We show that the role of fuel surcharges is neutral under the present fee collection scheme, which means that the fuel surcharge policy cannot help the airline industry improve its profits. In addition, the equilibrium results of air fares with fuel surcharge policies are identical to that of the fuel-cost-driven air fares without it. Therefore, the effects on social welfare are the same. We also offer an analysis to clear up the common misunderstanding in which the fuel surcharge policy was in favorable to the airline companies at the expense of the consumer welfare. The empirical facts from Chinese airlines support our theoretical findings.