Friday, January 28, 2011
The European Commission has launched infringement proceedings against several EU Member States on charges that their bilateral air services agreements are incompatible with EU law. See Press Release, Eur. Comm'n, Air Transport: Infringements Concerning Bilateral Aviation Agreements With Russia (Jan. 27, 2011) (available here). In brief, the Commission claims that a number of Member State ASAs hinder competition, violate EU rules on freedom of establishment, and provide a basis for Siberian overflight charges which may be illegal.
Blog readers who have endured the trials and tribulations of law school will likely appreciate Judge Richard Posner's recent salvo against the unwieldly Bluebook. See Richard A. Posner, Book Review, The Bluebook Blues, 120 Yale L.J. 850 (2011).
Wednesday, January 19, 2011
Hubert Horan, a veteran airline industry analyst and guest commentator on this blog, has just had his new study on antitrust immunity for international alliances, Double Marginalization and the Counter-Revolution Against Liberal Airline Competition, published in 37 Transp. L.J. 251 (2010) (available at SSRN here). From the abstract:
In the last decade, the Department of Transportation has abandoned its previously liberal, market-oriented policies towards international airline competition. While the policies of the 1980s and 90s were designed to maximize industry competitive dynamics so that consumers could benefit from ongoing improvements in price and efficiency levels, recent DOT policies have sought to reduce competition and entrench the position of the largest carriers. These policies have already led to the consolidation of 26 previously independent transatlantic airlines into three collusive alliances that would be virtually immune from future competitive challenges, and in 2009 the DOT has initiated a process that could see 23 previously independent transpacific airlines consolidated into those three same collusive alliances. While the DOT proactively used “Open Skies” treaty negotiations in the 1990s to undermine the ability of governments to reduce consumer welfare through artificial competitive barriers, recent “Open Skies” negotiations with the EU and Japan reestablished that private, bilateral discussions between large legacy airlines and government officials could dramatically restructure international airline competition in favor of those established legacy carriers. While the DOT used antitrust immunity in the 90s as a tool that allowed small competitors such as KLM and Northwest to offer consumers improved schedules and lower prices in previously underserved niche markets, since 2003 the DOT has used antitrust immunity to enhance the market power of the largest incumbents, leading to pricing shifts that appear to have created multi-billion dollar annual consumer welfare losses.
The abandonment of consumer welfare-based airline antitrust policies and the sudden shift to unprecedented levels of international airline concentration was made possible by the DOT’s evisceration of traditional antitrust immunity evidentiary standards. The DOT’s recent immunity grants to members of the Star, Skyteam and Oneworld alliances were based on willful non-enforcement of the Clayton Act market power test and the Horizontal Merger Guidelines’ requirement that applicants present verifiable, case-specific evidence of public benefits in order to meet the section 41308 test that immunity is required by the public interest. The DOT has supplanted the need for verifiable, case-specific evidence with a series of arbitrary “rules” that ensure that almost any antitrust immunity proposal will be found to automatically produce public benefits without any risks of creating market power. The most important of these is “double marginalization”, a rule which asserts that every time an immunity grant reduces international competition, consumer prices in certain connecting markets automatically fall 15-25%, regardless of actual market or competitive conditions.
This paper describes the process by which the DOT has used rules such as “double marginalization” to eviscerate traditional antitrust evidentiary standards, and argues that none of the post-2003 consolidation of international aviation would have been possible if the traditional public benefits or market power tests and the traditional evidentiary standards had been enforced. The dispute over evidentiary standards surfaced in late 2009 when the Department of Justice’s Antitrust Division objected when the DOT rubber-stamped the Star/Continental applicants’ unsubstantiated benefit claims. The DOT emphatically rejected the DOJ’s objections as an inappropriate interference with the DOT’s aviation policy and bilateral negotiation prerogatives, a position that was more fully articulated in a recent Dean and Shane Air and Space Lawyer commentary, which claimed that all recent DOT decisions were fully consistent with longstanding pro-consumer, pro-competitive policies, and attacked the DOJ and Congressional critics of the DOT’s antitrust approach as hostile to the interests of the US airline industry. This paper argues that the policies favoring extreme concentration and the effort to render the public benefits and Clayton Act tests meaningless reflect a major policy shift towards more active governmental management of airline industry structure, and represent a counter-revolution against the liberal airline competition policies of the 90s.
American Airlines and United filed suit yesterday to halt the City of Chicago's plans to proceed with the next phase of the O'Hare International Airport expansion project. The airlines allege that the City breached their airport lease agreements by failing to secure the carriers' approval for the capital-intensive venture.
A copy of the airlines' complaint is available below.
Monday, January 17, 2011
Blog readers may be interested in a recent study which examines the effects of airline competition on prices. See Jan K. Brueckner et al., Airline Competition and Domestic U.S. Airfares: A Comprehensive Reappraisal (Working Paper, June 2010) (available here).
Earlier this month, Delta Air Lines began a new program to solicit volunteers to give up their seats on overbooked flights by asking passengers at check-in time how much money (travel vouchers) they would like to receive in exchange for being rebooked on another flight. See Got Time? Get Rewarded, Delta Air Lines Blog, Jan. 6, 2011 (available here). Professor Steven Horwitz, an economist at St. Lawrence University, has provided brief commentary on the program:
Delta Airlines has recently changed the way they handle overbooked flights. If your flight is overbooked, you are told of the situation when you check-in, either online or at the airport kiosk, and are asked if you are willing to give up your seat and, if so, to enter a dollar amount corresponding to what it would take to get you to give it up. Not only does this provide the gate agents earlier information about likely volunteers so they can start rebooking, it lets Delta bump folks with the lowest opportunity cost of their time, likely saving the airline money and more efficiently allocating airline seats.
See Markets in Everything: Delta Air Lines More Efficienctly Bumps Passengers, Coordination Problem, Jan. 14, 2011 (available here).
Thursday, January 13, 2011
The Boston University International Law Journal has just published Brian F. Havel & Gabriel S. Sanchez's Restoring Global Aviation's "Cosmopolitan Mentalite", 29 B.U. Int'l L.J. 1 (2011), as the lead article for its 29th volume. The study is the first of its kind to assess international aviation's global regulatory environment from the standpoint of philosophical cosmopolitanism. From the abstract:
For over six decades, the central juristic premise of the global regulatory regime for international civil aviation has been that citizenship defines ownership; the mentalite—the determinative category of thought—has been that nationality organizes air commerce. Through this conflation of commercial and national affiliation, there are American carriers, British carriers, Canadian carriers—but not a single authentically transnational carrier. Because nationality supervenes, there is no international airline as such; the concept of a multinational enterprise remains unknown in air transport, even in the 21st century.
In this article, we generate a fresh context within which to reevaluate the issue of airline nationality by first illuminating the implicit cosmopolitanism of the international aviation industry and of its (potential) global regulatory structure by recollecting the origins of the current order and by positioning the industry within the conceptual development of the notion of cosmopolitanism itself. To accomplish this, we use the recently-signed air services agreement between Canada and the European Union to project what we will call a “cosmopolitan mentalite” that can radically transform air transport law and regulation for the future. In particular, we will explore how a doctrine of “citizenship purity” has had a stranglehold on the natural cosmopolitanism of the aviation industry virtually since its establishment, and how the Canada/EU agreement, which contains features (or at least prospective features) excluded from all prior bilateral air services agreements through which countries exchange air route permissions, models a way past the industry’s inheritance of regulatory chauvinism.
Wednesday, January 12, 2011
Though the Second Stage Protocol to Amend the 2007 U.S./EU Air Transport Agreement, 2010 O.J. (L 223) 3, has been in provisional effect since last year, the instrument still has not received final ratification from the European Parliament. In a draft report published by the Parliament's Committee on Transport and Tourism last month, concerns were raised with respect to the agreement's failure to include new market access opportunities for EU airlines, including the right to own and control subsidaries established in the United States. See Eur. Parliament, Draft Report on the Draft Council Decision on the Conclusion of the [Second Stage Protocol], Doc. No. 2010/0112(NLE) (Dec. 16, 2010) (available here). Additionally, the report called on the European Commission to establish a third round of negotiations with the U.S. to address, inter alia, additional market liberalization provisions.
Undoubtedly, one of the biggest challenges facing the Commission is overcoming U.S. inertia. As it stands, the U.S./EU Agreement is essentially "perfect" from the perspective of the U.S. Open Skies policy. See generally 1995 U.S International Air Transport Policy Statement, 60 Fed. Reg. 21,841 (May 3, 1995). The U.S./EU accord establishes open gateways for both parties' carriers, removes archaic restrictions on pricing, capacity, and frequencies, and allows U.S. and EU airlines to pursue joint commercial ventures such as code-sharing and integrated alliances. From a policy standpoint, this is all the U.S. has ever wanted out of the EU and now they have it.
Blog readers may be interested in perusing Darren A. Prum's recent article, Flight Check: Are Air Carriers Any Closer to Providing Gambling on International Flights that Land or Depart from the United States?, 74 J. Air L. & Com. 71 (2009) (available from SSRN here). From the abstract:
This article examines the likelihood that air carriers will provide gambling entertainment on international flights that land or depart from the United States or its territories. Recently, international carriers began offering wagering activities on non-U.S. routes in an effort to tap new sources of revenue for their operations. With such opportunities available to foreign flagged carriers but non-American ones, some commentators believe that Congress will be forced to change the U.S. laws in order to keep U.S. carriers competitive.
The prohibition against in-flight gambling began in 1962 when the federal government disallowed the activity on US-flagged airlines. Northwest Airlines reignited the debate in 1994 when they tried to remove the ban on international routes. Instead, the government widened the prohibition to include the activity or carriage of such devices on any carrier, regardless of the aircraft’s country of registration, that landed or departed from a U.S. territory pending a study by the Department of Transportation (DOT).
As a result, this action by the U.S. government prompted an outcry from other sovereign nations as well as many international airlines. With a blatant disregard for those concerns and a determination that the activity could be conducted safely while flying, the DOT’s study concluded that the most prudent approach for America included a wait and see strategy to allow monitoring of foreign carriers’ progress and experience before changing course in the U.S.
Recently, other attempts by the U.S. government to force its ethic and morals upon sovereign nations resulted in court challenges, diplomatic efforts, international resolution forums, or retaliatory acts. Many treaties call for the International Court of Justice (ICJ) or the World Trade Organization (WTO) to resolve trade disputes involving member nations. One successful country convinced the WTO that the American ban on Internet gaming was hypocritical; while the European Union effectively utilized noise restrictions on aircraft to bring the U.S. government to the negotiating table for another dispute.
Finally, the crash of Swiss Air Flight 111 and the Unlawful Internet Gambling Enforcement Act (UIGEA) presents new challenges to in-flight gaming. While the Swiss Air accident seems like an unfortunate tragedy, one of the underlying causes for its demise led investigators to a faulty in-flight entertainment system that delivered gambling activities to its passengers. Moreover, the UIGEA requires the U. S. banking system to implement safeguards that prevent American citizens from participating in legal foreign gambling sites, which may be accessible while on an international flight.
Hence, the U.S. policy appears to be moving indirectly further away from allowing gambling on international flights because Congress continues to take actions that on the surface do not seem to affect aviation; but should the U.S. government be forced to change course, the layering approach by anti-gaming advocates will need reconciling.
Thus, competitive forces in the airline industry may force Congress to allow carriers to offer gambling on international flights.
Diana Moss, Vice President and Senior Fellow at the American Antitrust Institute, has a new working paper out entitled Airline Mergers at a Crossroads: Southwest Airlines and Airtran Airways (AAI Working Paper, Dec. 10, 2010) (available from SSRN here). From the abstract:
The proposed merger of Southwest/AirTran could meet with relatively little antitrust enforcement resistance based on the Department of Justice’s (DOJ) public statements in recent airline mergers. For example, claimed efficiencies are likely to get significant weight. Moreover, concerns over eliminating competition on Southwest/AirTran overlap routes could be mitigated because the number of routes is relatively small, there is rivalry (from low-cost carriers (LCCs) and legacies) on some of those routes, and entry may be relatively easy at some affected airports.
However, the proposed merger of Southwest and AirTran – the first major merger of LCCs – raises novel issues that may not be captured by analysis that focuses mainly on overlaps between the merging partners in city-pair or airport-pair markets. These novel issues include how the merger could potentially result in: (1) a transition from a point-to- point/hybrid system to a hub-and-spoke network model; (2) changes in the two LCCs’ price discounting strategies; (3) changes in entry or expansion patterns in new and existing markets; and (4) changes in short-term output and/or longer-term capacity decisions. These questions deserve attention in an antitrust review of the proposed merger.
For example, combining the Southwest and AirTran systems may stretch the limits of Southwest’s model, pushing the merged company away from a point-to-point or hybrid system and more toward a hub-and-spoke model. If so, then the combined company may be less able to inject the competitive discipline through lower fares, more choice, and entry and expansion than each LCC alone has brought to the industry. With the ranks of the LCCs reduced through a Southwest/AirTran merger, it is also important to consider how effective the rivalry offered by the remaining LCCs will be.
Eliminating AirTran also means removing from the market the second largest LCC (based on its presence as a low fare carrier on top routes) and the source of some of the most aggressive price discounting and market entry. Combining the maverick-like AirTran with Southwest could change incentives for the merged company to discount. And because Southwest and AirTran, as LCCs, are closer competitors to each other than to the legacy airlines, potential post-merger price increases (or smaller discounts) may not be captured by standard market share and concentration analysis.
Finally, post-merger output restrictions and/or capacity reductions are demonstrated effects of airline mergers that have been largely overlooked in antitrust reviews. Not only do they raise fares, but they reduce choice for consumers. Well-publicized cutbacks at Cincinnati after Delta/Northwest and conditions imposed on United/Continental at Cleveland by the state of Ohio indicate the gravity of these effects. Mergers of LCCs should be no exception to an examination of the potential for post-merger output and capacity reductions. This is particularly true if the merger eliminates competition on routes/airports and the carriers are adept at managing capacity – as is the case in Southwest/AirTran.
This White Paper by the American Antitrust Institute (AAI) is the first of what is intended to be a series by the AAI on competition in the U.S. airline industry. It is based on publicly available information – no confidential information was provided to the AAI in the course of preparing this analysis. While we do not make a recommendation as to the legality of the proposed Southwest/Air Tran merger, the paper raises important questions that deserve investigation before a decision is made.
Monday, January 10, 2011
Last week's edition of the Economist had a good article discussing the recent string of weather-related delays on U.S. airports and whether more regulation is the right answer to the problem. See Air Travel: The Misery of Flying, Economist, Jan. 6, 2011 (available here).
Tuesday, January 4, 2011
Blog readers interested in the market effects of international airline alliances may be interested to read Volodymyr Bilokatch and Kai Huschelrath's new working paper, Airline Allainces, Antitrust Immunity and Market Foreclosure (ZEW Centre for Eur. Econ. Research Discussion Paper No. 10-083, Dec. 2010) (available from SSRN here). From the abstract:
This paper examines the issue of market foreclosure by airline partnerships with antitrust immunity. Overlapping the data on frequency of service and passenger volumes on nonstop routes on the transatlantic airline market with the information on dynamics of airline partnerships, we find evidence consistent with the airlines operating under antitrust immunity refusing to accept connecting passengers from the carriers outside of the partnership at respective hub airports. When an airline partnership is granted antitrust immunity, airlines outside this partnership end up reducing their traffic to the partner airlines’ hub airports by 2.6-8.5 percent (depending on the specification and estimation technique involved). Our results suggest ambiguous welfare effects of antitrust immunity on some markets, where previous studies indicated airline consolidation should benefit consumers.
The Dallas Morning News has posted its Top 10 Airline Stories of 2010. Not surprisingly, the United/Continental merger topped the list. More surprising, however, was that Europe's Volcanic Ash Crisis only made #10. You can read the entire list here.
Sunday, January 2, 2011
Thomas Hazlett, Professor of Law & Economics at George Mason University, wrote a nice tribute to the late Alfred Kahn in Friday's edition of Financial Times. See Thomas Hazlett, Fred Kahn's First-Class Flight, Fin. Times, Dec. 31, 2010 (available here).