June 7, 2011
Canada Clarifies "Control"
The Canadian Transportation Agency has issued an official Interpretation Note on the criteria it will apply when determining whether or not an airline is "controlled in fact" by Canadian citizens for the purposes of acquiring operating authorization. The full note is available online here.
Not surprisingly, the criteria is open-ended, vague, and highly impressionistic. For instance, the note states that "[c]ontrol in fact depends upon the facts of each situation and so can only be evaluated on a case-by-case basis. As each case is unique, all managerial, financial and operational air carrier relationships, or proposed relationships, must be considered before making a determination." Further, despite providing a "list of factors" the CTA will consider in its control analysis, the note adds an important caveat that the list provided "is not exhaustive." As such, almost any foreign involvement in a Canadian carrier remains subject to government fiat.
June 6, 2011
Short-Term Liquidity and Capacity Constraints
Blog readers may be interested in Matthew Gustafson et al.'s working paper, The Effect of Short-Term Liquidity and Capacity Constraints on Industry Cooperation (Mar. 16, 2011) (available from SSRN here). From the abstract:
A recent $1.7 billion anti-trust settlement makes the airline industry a natural setting to analyze how short-term liquidity and capacity considerations affect a firm's decision to cooperate. To this end, we employ a unique dataset of aggregate airfare rate increases and provide novel empirical evidence on how firms in the airline industry appear to cooperate. Specifically, we use the peculiar mechanism by which airlines perform aggregate price increases to argue that these rate hikes represent attempted cooperation. This allows us to investigate how liquidity considerations and capacity constraints affect the cooperation decision. In line with anecdotal evidence, we find that financially constrained airlines are more likely to hike rates. This indicates that as short-term financial health deteriorates firms are more willing to sacrifice long-term reputation and take on increased future litigation risk for cooperation today. In addition, our results support the idea that airlines with low idle capacity levels stand to gain more from cooperation. Finally, we analyze the cooperation decision from the competitor's perspective. We find that competitors with lower idle capacity and worse financial health are more likely to cooperate with the hike leader.