Wednesday, August 28, 2013
CAPA Centre for Aviation posted a very helpful article yesterday describing the extent to which New Zealand has worked to implement its new air transportation policy emphasizing an expansion of open skies agreements, even in cases where the liberalization of traffic rights has not been reciprocal.
Tuesday, August 27, 2013
Friday, August 23, 2013
Welcome to the redesigned blog! I hope everyone likes the new look.
The top end-of-week story is that American Airlines and US Airways have filed a motion requesting a November 12 start date for their antitrust trial. This is three months earlier than the February start date the DOJ would prefer. The disagreement isn't trivial, as American cannot resolve its bankruptcy proceedings without first settling the merger question. The DOJ, by contrast, wants more time to prepare its arguments.
Thursday, August 22, 2013
For those still struggling to understand the DOJ's surprising decision last week to challenge the proposed American/US Airways merger, I'd recommend two white papers from Diana Moss of the American Antitrust Institute. The arguments therein appear to be largely in line with the DOJ's thinking. The titles (with links to ssrn pages) and abstracts are below:
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.
Should US Airways make a bid for American Airlines, currently in bankruptcy proceedings, the deal could present a conundrum for antitrust authorities. The transaction would create the largest domestic airline, reducing the number of legacy mega-carriers to three – Delta Air Lines (Delta), United Continental, and US Airways-American Airlines (US Airways-American). This consolidation would occur against an industry backdrop marked by a dwindling fringe of low-cost carriers (LCCs) and growing questions as to whether legacy look-alike Southwest Airlines-AirTran Airways (Southwest) exerts any significant competitive discipline in the industry. The merger could therefore hasten a troubling metamorphosis of the domestic airline industry from one in which hub airports were designed to accommodate multiple, competing airlines to a few large, closed systems that are virtually impermeable to competition and create a hostile environment in which LCCs and regional airlines have difficulty thriving and expanding.
This White Paper, produced jointly by the American Antitrust Institute (AAI) and Business Travel Coalition (BTC), asks: What competitive issues should be the focus of antitrust investigators in reviewing the proposed merger of US Airways and American?
The paper takes the position that a U.S. Department of Justice (DOJ) investigation into the proposed merger of US Airways and American should be informed by mounting evidence on the effects of previous airline mergers, namely Delta-Northwest and United- Continental. The White Paper presents a brief analysis of these combinations and highlights a number of preliminary observations that deserve a more in-depth look. These range from the effects of previous mergers on creating costly post-merger integration problems, substantially reducing rivalry on important routes, producing above-average fare increases, and driving traffic to major hubs and away from smaller communities.
The White Paper continues on to evaluate key competitive issues raised by the proposed merger of US Airways and American that deserve some attention in an antitrust investigation. One is the expected outcome – similar to previous legacy mergers – that the proposed combination could eliminate competition on a number of important overlap routes, creating very high levels of concentration and potential harm to consumers. The risk that the proposed merger could adversely affect small communities through reduced levels of, or lower quality, air service is also worth a close look. Another observation is that the merger is unlikely to be one of complementary networks (as might be argued) and could instead create regional strongholds and solidify US Airways-American’s control over key airports. Any arguments that the merger is necessary to create another “equal-size” competitor to the existing Big 3 systems are also not compelling. The analysis concludes by examining the potential effect of the merger on buyer market power and disclosure of information regarding ancillary service fees.
The joint AAI/BTC White Paper offers a number of concluding observations and recommendations. Among them is that our analysis of the US Airways-American merger– coupled with potential warning signs from previous legacy mergers – indicates that there may be enough smoke surrounding the proposed combination to indicate a potential fire. The merging parties therefore bear a heavy burden is demonstrating that their merger would not be harmful to competition and consumers.
Wednesday, August 21, 2013
Tuesday, August 20, 2013
A blog post yesterday from the Huffington Post characterizes the international debate over aviation emissions, fairly I think, as being "under the radar." The subject certainly has not received anywhere close to the amount of attention in the United States that has been devoted to construction of the Keystone pipeline. This is somewhat understandable, as a pipeline offers not only a much more visceral symbol but also a more tangible objective for advocates on both sides of the issue to rally around. Additionally, evidence to date suggests that both the U.S. media and public are only willing to devote a limited amount of bandwidth to the subject of climate change, and that coverage is easily taken up with stories on Keystone and natural disasters. Still, the lack of discussion of the subject in the U.S. has occurred despite the contentious international disagreement over the European Union's emissions trading scheme and the potentially momentous unveiling of ICAO's global emissions reduction proposal next month. This can't entirely be explained by the absence of aviation emissions from the political agenda as both legislative chambers passed a bill barring U.S. carriers from complying with the EU emissions regulation, which the President signed into law.
With much of his legislative agenda stalled in a divided congress, international aviation is one area, like the Keystone pipeline, where President Obama can support measures to combat climate change primarily through executive action. It is true that the current U.S. Senate will not ratify a Kyoto-like agreement on aviation emissions, but the executive branch should be able to assert a large influence on international policy on aviation emissions through more subtle diplomatic channels such as U.S. representation within ICAO and bilateral negotiations with EU officials over the ETS issue. By the end of the year we'll hopefully know a lot more about the administration's actions on both fronts. I'm skeptical, however, that anyone will take notice given how muted the responses from both sides of the political aisle were to the European Union Emissions Trading Scheme Prohibition Act. Regardless of what U.S. policy should be with regard to carbon emissions from international aviation, the issue undoubtedly warrants greater public attention.
Monday, August 19, 2013
Friday, August 16, 2013
To close the week, here is a compilation of various commentary and news updates on the DOJ's surprising decision to challenge the American Airlines/US Airways merger:
- A highly critical take on the DOJ's decision.
- And a more positive view.
- Former American Airlines CEO Robert Crandall isn't a fan of the move
- Loose lips sink planes? The DOJ complaint makes extensive use of quotes from US Airways executives.
- A good recap of negotiations leading up to the DOJ announcement.
- Texas Attorney General Greg Abbott explains why Texas joined the DOJ suit.
- Some are skeptical about the prospects for a settlement.
- Lawyers from the two carriers discuss plans to fight the suit.
- Meanwhile, the judge overseeing American's bankruptcy process postponed his decision on the carrier's reorganization plan with the merger up in the air.
- A judge has been assigned to the antitrust case.
- Staffing decisions related to the merger are being put on hold, at least temporarily.
- Airline stocks prices fell.
- Finally, this story suggests that American and US are largely the victims of bad timing. I think there's some truth to that. The industry is more consolidated now than when earlier mergers were approved. It is also more profitable. On the government side, the DOJ has had time to witness the consequences and feel some regret over the approval of earlier mergers and to gain comfort with enforcing the new Horizontal Merger Guidelines. Related, though unmentioned in the article, the DOJ's argument about coordination of baggage fees wasn't available for some of the earlier mergers.
It's been a busy news week, so I thought it best to break up the end-of-week aviation link omnibus into two posts. Here's a collection of aviation pieces that may have been missed amidst the merger madness. We'll have a collection of reactions to the DOJ decision posted later this afternoon.
- Matt Yglesias takes on cabotage restrictions. For a longer analysis, we recommend Robert Hardaway's Of Cabbages and Cabotage.
- Justin Fox questions the success of U.S. airline deregulation.
- Is high speed rail hurting Chinese airlines? A good companion piece to last week's story on Chinese flight delays.
- Ryanair has dismissed the pilot who publicly criticized the carrier's safety practices.
- More Dreamliner technical glitches.
- Investigation ongoing into cause of UPS cargo plane crash that killed both pilots earlier this week.
Thursday, August 15, 2013
As I have observed in multiple posts the past two days, the potential elimination of US Airways' Advantage Fares program appears to be an important component of the DOJ's opposition to the American Airlines/US Airways merger. Although the complaint doesn't use the actual term "maverick," it is clear from the analysis that the DOJ views US Airways operations under that program as playing the role of a "maverick" firm.
Under the 2010 Guidelines, one piece of evidence that the DOJ can use to determine that a merger will have anti-competitive effects is if the merger eliminates a maverick firm:
The Agencies consider whether a merger may lessen competition by eliminating a “maverick” firm, i.e., a firm that plays a disruptive role in the market to the benefit of customers. For example, if one of the merging firms has a strong incumbency position and the other merging firm threatens to disrupt market conditions with a new technology or business model, their merger can involve the loss of actual or potential competition. Likewise, one of the merging firms may have the incentive to take the lead in price cutting or other competitive conduct or to resist increases in industry prices. A firm that may discipline prices based on its ability and incentive to expand production rapidly using available capacity also can be a maverick, as can a firm that has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition.(2010 Horizontal Merger Guidelines 2.1.5).
The maverick firm concept has been a part of antitrust law for a while (see this 2002 article by Jonathan Baker for a great discussion of the concept and application to scenarios involving the airline industry). But it has received increased attention under the Obama administration, appearing in DOJ complaints against recent high profile merger attempts such as AT&T/T-Mobile and H&R Block/TaxACT (this 2013 note from Taylor Owings provides a good overview of recent cases).
So what makes US Airways a maverick firm? As I wrote Tuesday, and as the section V.C.1. of the complaint explains, under the Advantage Fares program US Airways offers one-stop flights on certain routes that significantly undercut the fares offered by dominant non-stop carrier on those routes. According to the complaint, the other major network carriers don't use connecting flights to undercut prices on their competitors' non-stop monopolies out of fear of retaliation on their own non-stop routes. It is only the less profitable structure of US Airways' own non-stop routes that gives US Airways the incentive to compete in this way. This lines up with two of the potential maverick firm characteristics described above: US "[has] the incentive to take the lead in price cutting or other competitive conduct or to resist increases in industry prices," and "has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition."
So will the court buy this maverick firm argument? An examination of the court's opinion in H&R Block suggest that it might. That court was highly dismissive of the importance of labeling one of the firms involved as a "maverick," at one point accusing the government of playing "semantic gotcha." This may be one reason why the DOJ declined to use the term in this complaint, instead describing the Advantage Fares program as "highly disruptive to the industry's overall coordinated pricing dynamic." However, the court in H&R Block was persuaded by the underlying theory -- that TaxACT played a special market role that constrained prices and its elimination would therefore be anti-competitive. So there is no reason to assume the court will reject the theory outright. Additionally, the DOJ presents fairly persuasive evidence that the Advantage Fares program will be discontinued should the merger go forward, addressing the frequent counterargument from merging firms that the competitive "maverick" behavior will continue post-merger. To defeat the DOJ's argument, attorneys for American Airlines and US Airways are likely to contest whether US Airways, through its Advantage Fares program, actually plays a price-constraining role within the domestic air service market, a claim some have already disputed.
Wednesday, August 14, 2013
While I laid out the DOJ's rationale for opposing the proposed AA-US merger in mostly layman's terms in yesterday's post, I thought it appropriate to come back and explain the legal theory underpinning the DOJ's argument. The place to look to better understand the basis for this move is section 7 of the 2010 Horizontal Merger Guidelines, under the heading "coordinated effects." According to the Guidelines:
A merger may diminish competition by enabling or encouraging post-merger coordinated interaction among firms in the relevant market that harms customers. Coordinated interaction involves conduct by multiple firms that is profitable for each of them only as a result of the accommodating reactions of the others. (Horizontal Merger Guidelines 7)
The bulk of the DOJ complaint is dedicated to a discussion of coordinated interaction between U.S. legacy airlines. The possibilities for increased post-merger coordination are laid out in section V subsection C of the complaint, which represents approximately 15 pages of the 34-page complaint and is the heart of the complaint's analysis of potential anti-competitive effects. The arguments about industry-wide capacity discipline leading to higher fares, increased baggage fees and abandoned hubs are all addressed as potential coordinated effects. It is the DOJ's contention that each of these actions would be unprofitable if undertaken by an airline individually, but that all of the major carriers will profit if they adopt these measures simultaneously. The DOJ's concern for the future of US Airways' Advantage Fares program is also related to this coordinated effects analysis, something I'll examine further in a future post. It may seem that the DOJ has assigned itself the daunting task of proving each of those consequences are likelier to take place post-merger, and as a result of coordinated as opposed to distinct business strategies, but the Guidelines are fairly lax with regard to the need to justify coordinated effects arguments:
There are, however, numerous forms of coordination, and the risk that a merger will induce adverse coordinated effects may not be susceptible to quantification or detailed proof. Therefore, the Agencies evaluate the risk of coordinated effects using measures of market concentration (see Section 5) in conjunction with an assessment of whether a market is vulnerable to coordinated conduct....Pursuant to the Clayton Act’s incipiency standard, the Agencies may challenge mergers that in their judgment pose a real danger of harm through coordinated effects, even without specific evidence showing precisely how the coordination likely would take place. (Horizontal Merger Guidelines 7.1)
This permissive evidentiary standard will likely prove important if the DOJ lawsuit proceeds to trial and is successful in blocking the merger (note that the Guidelines aren't binding on courts, although courts often rely on them). The DOJ appears on sound footing in describing the airline industry as structurally vulnerable to coordination, describing it as dominated by a few large players, consisting of small transactions with transparent pricing. The DOJ also provides evidence (especially from US Airways) of previous examples of coordination, and attempted coordination as well as business planning around the anticipated reactions of competitors.
Demonstrating that a market is vulnerable to coordination is only one of three criteria the Guidelines consider necessary for making a coordinated effects case, DOJ also needs to show that the merger would significantly increase concentration and lead to a moderately or highly concentrated market. The DOJ attempts to do this through its annex of city-pairs that will experience a significant increase in concentration as well as its reference to consolidation in the U.S. airline industry overall. The DOJ must also have "a credible basis on which to conclude that the merger may enhance that vulnerability." Again, note the low threshold required under that phrasing. As I quoted yesterday, the DOJ believes removing one more major airline, regardless of the routes involved, is enough to make coordination easier and thus the merger worth blocking.
This is not to say that a court will be persuaded by the DOJ's coordinated effects argument, or that it won't demand greater empirical justification for the DOJ's claims than the Horizontal Merger Guidelines require. But for anyone who is surprised by the lack of rigorous city-pair analysis in the DOJ's suit, the arguments the DOJ makes are in keeping with an emphasis on structural factors and coordinated effects arguments in prior cases brought by the DOJ under the Obama administration.
Tuesday, August 13, 2013
DOJ Complaint Focuses on Broader Effects of Industry Consolidation as Opposed to Head-to-Head Competition
Terry Maxon and Airline Biz Blog reports that on a conference call with reporters this morning, Assistant Attorney General Bill Baer made clear that this morning's suit wasn't just a tough negotiating tactic by the DOJ in the hopes of extracting concessions out of American Airlines and US Airways. Many observers predicted the merger plan would be approved because of limited overlap between the two carriers' networks on nonstop routes. The merged entity's dominant position at Reagan National Airport in Washington D.C. was a widely anticipated obstacle, but one easy enough to overcome by surrendering slots to other airlines. However, in a key quote, Baer says, “We have many concerns, and they’re not limited to Reagan National.” This is also evident from reading the DOJ complaint.
While the DOJ notes the increased concentration that would result from the merger both at Reagan National and on 1,665 city pairs listed in an annex at the end of the complaint, much of the complaint focuses its attention on the anti-competitive effects of industry-wide consolidation. For example, as noted in an earlier post, the complaint devotes extended discussion to US Airways' Advantage Fares program which uses connecting service to undercut the fares offered by American, United and Delta on certain non-stop routes. US Airways is the only carrier to do this, as the other three legacy carriers don't want to provoke each other into retaliating on their own nonstop routes. Because US Airways' hub configuration gives it the least profitable nonstop routes, it is the only carrier economically positioned to pursue this strategy, something it would no longer be inclined to do after the merger. There are no possible concessions that could satisfy the DOJ's concerns on this front. Instead, the DOJ appears to be arguing that US Airways plays a unique and important role in the market, and any conceivable merger with American would eliminate that role and therefore have anti-competitive effects.
Beyond the Advantage Fares program, the DOJ appears to be unhappy with how the aviation industry operates in general, accusing the major carriers of coordination on everything from fares to services and ancillary fees. The DOJ views industry consolidation as a major driver of this coordination. I thought the following was a key paragraph from the complaint:
Coordination becomes easier as the number of major airlines dwindles and their business models converge. If not stopped, the merger would likely substantially enhance the ability of the industry to coordinate on fares, ancillary fees, and service reductions by creating, in the words of US Airways executives, a “Level Big 3”of network carriers, each with similar sizes, costs, and structures.
Similarly, the DOJ seems to take the position that capacity reduction has gone far enough, and further reduction will harm passengers:
Legacy airlines have taken advantage of increasing consolidation to exercise “capacity discipline.” “Capacity discipline” has meant restraining growth or reducing established service. The planned merger would be a further step in that industry-wide effort. In theory, reducing unused capacity can be an efficient decision that allows a firm to reduce its costs, ultimately leading to lower consumer prices. In the airline industry, however, recent experience has shown that capacity discipline has resulted in fewer flights and higher fares.
Therein lies the DOJ's answer to critics who contend that the route-overlap and overall anti-competitive effects of an American-US Airways merger are much smaller than in prior combinations the DOJ has approved over the past decade, such as United-Continental and Delta-Northwest. The DOJ would appear to agree and to conclude that the anti-competitive consequences of prior mergers are evidence for why it should not approve this one. While some would argue that it is unfair to keep American Airlines and US Airways smaller and less stable than their recently merged competitors, to the DOJ this is a feature not a bug. The DOJ has high praise for American's expansionary stand-alone post-bankruptcy plans and believes consumers would benefit from a marketplace where American and US are forced to pursue growth strategies and increase, rather than reduce, overall capacity in the U.S. market.
Whether the DOJ's broad industry overview approach as opposed to a more city-pair focused analysis will hold up in court is yet to be determined. The DOJ fails to present much in the way of empirical evidence to show that the coordination among legacy carriers about which it is so worried will be made significantly worse as a result of this merger. Regardless, it can be safely assumed that this is not merely a negotiating ploy. The DOJ appears to be genuinely determined to halt an almost decade-long trend toward consolidation in the U.S. airline industry.
The U.S. Department of Justice announced this morning that it will attempt to prohibit the US Airways-American Airlines merger because it believes the deal violates U.S. antitrust law. The move comes as a surprise, if not shock, to many industry observers who believed the proposed merger was on solid footing. We'll have more commentary on the decision later in the day. The DOJ's press release is available here. Key excerpts are below:
According to the department’s complaint, the vast majority of domestic airline routes are already highly concentrated. The merger would create the largest airline in the world and result in four airlines controlling more than 80 percent of the United States commercial air travel market.
The merger would also entrench the merged airline as the dominant carrier at Washington Reagan National Airport, with control of 69 percent of the take-off and landing slots. The merged airline would have a monopoly on 63 percent of the nonstop routes served out of Reagan National airport. As a result, Washington, D.C., area passengers would likely see higher prices and fewer choices if the merger is allowed, the department said in its complaint. Blocking the merger will preserve current competition and service, including flights that US Airways currently offers from Washington’s Reagan National Airport.
The DOJ appears particularly concerned about the probable elimination of US Airways' Advantage Fares program as a constraint on the fares offered by other legacy carriers:
Today, US Airways competes vigorously for price-conscious travelers by offering discounts of up to 40 percent for connecting flights on other airlines’ nonstop routes under its Advantage Fares program. The other legacy airlines – American, Delta and United – routinely match the nonstop fares where they offer connecting service in order to avoid inciting costly fare wars. The Advantage Fares strategy has been successful for US Airways because its network is different from the networks of the larger carriers. If the proposed merger is completed, the combined airline’s network will look more like the existing American, Delta and United networks, and as a result, the Advantage Fares program will likely be eliminated, resulting in higher prices and less services for consumers.
Monday, August 12, 2013
Friday, August 9, 2013
Readers might be interested in a new paper from George Mason's Eric Claeys on property rights and overflights. From the abstract:
Many scholars writing on property or intellectual property policy assume that, when commercial aviation
became feasible, the ad coelum maxim applied so literally that any
airplane automatically trespassed on the air columns above lots of land
beneath its flight path. The ad coelum maxim alienated property doctrine
from sensible policies, these assumptions continue, and this
disjunction was not fixed until courts reinvigorated property doctrine
with new policies in the 1930s and 1940s.
This Article has two goals. The first is to show that this portrait of overflight litigation is misleading. In the watershed overflight cases, jurists took for granted that legal “property” has a built-in normative commitment to one fundamental policy goal — that property rights be structured to facilitate all stakeholders being allowed to use those resources concurrently and beneficially, each for his own individual goals. So in overflight cases, jurists revised the scope of the ad coelum maxim to make sure that the maxim cohered with sound policies already fundamental to property law. The maxim confirmed landowners’ control over the low-altitude air space reasonably necessary to their beneficial uses of their lots. But the maxim was found not to apply to high-altitude airspace, because it seemed likely to impede all citizens’ concurrent interests in using airspace as a commons for air travel and transport.
The second goal is to shed light on why contemporary scholarship portrays the ad coelum maxim and the transition in aerial trespass law so inaccurately. The conventional portrait of the overflight transition provides a tempting narrative helping to make traditional rights of exclusive control seem overbroad. By process of elimination, the “ad coelum fable” helps make seem more attractive alternate property strategies, especially commons approaches and “liability rule” forced transfers of use rights. Although such approaches may be desirable in some situations, they should be judged on their normative merits — not by setting up and then ridiculing straw-man portraits of alternatives. This Article illustrates with contemporary scholarship on eminent domain and urban redevelopment, and on the Google Books dispute.
Thursday, August 8, 2013
A few of this week's most important aviation law stories:
- The latest edition of The Economist has an article on the primary causes of airline delays in China.
- A claim has been filed in U.S. Bankruptcy Court alleging that the proposed U.S. Airways-American Airlines merger will violate federal antitrust law. (via the Dallas Morning News' Airline Biz Blog)
- The European Commission formally announced its approval of the U.S.-American merger.
Tuesday, August 6, 2013
Thursday, August 1, 2013
Monday, July 29, 2013