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
Thursday, July 25, 2013
Wednesday, July 24, 2013
Following the Asiana 214 crash earlier this month, a number of people have asked how these incidents affect airlines financially. For those interested, Thomas John Walker, Marcus Glen Walker, Dolruedee Thiengtham and Kuntara Pukthuanthong have a forthcoming paper in the International Review of Law and Economics on that very subject, The Role of Aviation Laws and Legal Liability in Aviation Disasters: A Financial Market Perspective (currently available from SSRN here). From the abstract:
Legal liability claims against airlines and airplane manufacturers following an aviation disaster are determined through a myriad of international treaties, intercarrier agreements, and federal and state laws. Which law applies in a specific situation depends on various circumstances surrounding the accident. As a result, pecuniary and non-pecuniary damage awards for the families of the accident victims may vary substantially from case to case. Our study examines how aviation disasters affect the short and long-term performance of U.S. airlines and U.S. airplane manufacturers and explores the factors that drive the performance differences. While prior research has largely focused on brand name effects and rising insurance premiums as possible determinants of stock price losses, our results suggest that the regulatory environment that applies to a given aviation accident has a significant impact on how the market reacts to its announcement. Ceteris paribus, we find that accidents that are governed by state laws which place no limit on damage claims entail particularly large stock price declines. Accidents for which federal laws or international treaties restrict claimable damages, on the other hand, are associated with smaller stock price drops.
Tuesday, July 23, 2013
Wednesday, July 17, 2013
Monday, July 15, 2013
Friday, July 12, 2013
Here's a quick rundown of some of the most noteworthy aviation stories from week's end:
- Another Dreamliner caught fire, this time at Heathrow.
- US Airways shareholders have approved the proposed merger with American.
- The FAA has finalized the rule changes on pilot qualifications that were proposed and made available for public comment back in February.
- The EU has removed Philippine Airlines from its blacklist. Philippine authorities are still working to secure approval for the State's other carriers and to convince U.S. regulators to upgrade the country from Category 2 to Category 1 status.
Thursday, July 11, 2013
During a conversation about Asiana Flight 214 earlier this week the question was raised whether passengers would receive advance payments or have to wait for their claims to be settled or litigated. I believe the question to have been prompted by what I consider a misinterpretation of Article 28 of the Montreal Convention. In researching this issue I've come across multiple examples, including a few journal articles, in which Article 28 is described as requiring all carriers to provide advance payments to meet the immediate economic needs of persons in injurious or fatal aircraft accidents, with the amount of advance compensation to be determined by national law. This interpretation appears to be contradicted by the text of Article 28:
"In the case of aircraft accidents resulting in death or injury of passengers, the carrier shall, if required by its national law, make advance payments without delay to a natural person or persons who are entitled to claim compensation in order to meet the immediate economic needs of such persons. Such advance payments shall not constitute a recognition of liability and may be offset against any amounts subsequently paid as damages by the carrier." (emphasis added)
The clearest interpretation to me is that not only does each State determine the amount of advance payments required of its carriers, but whether those payments are required at all. This also comports with my understanding of why Article 28, which was not in the Warsaw Convention, was added in 1999. Two years prior, the European Community had adopted regulation 2027/97 which required community carriers to make advance payments sufficient to meet economic needs within 15 days of the identification of the person entitled to compensation. The regulation set a minimum payment in the event of death of at least 15,000 Special Drawing Rights (SDRs) which was later increased to 16,000 SDRs by regulation 889/2002. It is my understanding that Article 28 was intended to enable regulation 2027/97 to coexist with the Montreal Convention, rather than to impose its substance on all contracting States. I'm not currently aware of any States not subject to regulation 2027/97 that similarly require their carriers to make advance payments. If any readers know of other States with advance payment requirements, I'd encourage you to please list them in the comments.
Assuming my reading is correct, this makes Article 28 a somewhat unusual provision. It runs contrary to the Convention's primary purpose of creating a uniform liability regime for international carriers. Of course, courts around the globe have varied in their interpretations of a number of the Convention's articles so the notion of uniformity shouldn't be oversold. Nonetheless, Article 28 would be unique in affecting plaintiffs differently depending on the nationality of the carrier, rather than the jurisdiction in which the claim is heard. For example, with regard to Asiana Flight 214, if the Republic of Korea requires Asiana to provide advance payments to injured passengers (which, again, I don't believe to be the case) then Asiana will have to do so regardless of whether passengers bring suit in China, South Korea or the United States.
Wednesday, July 10, 2013
In Monday's post on Asiana 214 we were overly hasty in writing that all plaintiffs will have their choice of bringing claims in the U.S. or South Korea. Jurisdiction is partially dependent upon the ticketing situation of each passenger and its certainly possible that some of the plaintiffs will not be able to bring claims in U.S. courts.
The Wall Street Journal has a good rundown of the jurisdictional questions raised by the Asian Flight 214 crash. Actions for damages under the Montreal Convention must be brought according to the jurisdictional rules set out in Article 33 of the Convention. Generally speaking, claims can be brought in the State of domicile or principal place of business of the carrier (South Korea in this case), the State in which the ticket was purchased (if the airline has a place of business there), the passenger's final destination, or the State of the passenger's principal and permanent residence (if the carrier operates services there).
Without knowing the individual circumstances of each passenger, we can still say with certainty that any of the passengers can bring a claim in South Korea. The Chinese and American passengers will also likely be able to bring suit in their home States, assuming that's where they have their permanent residence. The more difficult question will be whether Chinese or South Korean passengers can bring claims in the United States. Those flying on one-way tickets to San Francisco will have jurisdiction to bring their claims in the U.S. under the final destination rule. However, non-U.S. residents flying on round-trip tickets may lack a jurisdictional basis to bring their claims in U.S. courts as their final destination would be considered Seoul or Shanghai. As the article points out, courts have not applied this rule consistently and this limitation only applies to claims against airlines under the Montreal Convention.
Tuesday, July 9, 2013
Monday, July 8, 2013
Obviously the big news over the weekend was Saturday's crash landing by Asiana Airlines flight 214. Here is a quick legal primer on Asiana's likely liability based on what is known so far:
- Any legal claims brought by passengers or their relatives against Asiana Airlines will be governed by the 1999 version of the Convention for the Unification of Certain Rules for International Carriage by Air, otherwise known as the Montreal Convention.
- This is because it was an international flight and all three of the States which could be considered origin or destination points (China, South Korea and the United States) are all parties to the 1999 Convention.
- Under Article 33 the Montreal Convention, plaintiffs will have their choice of bringing their claims in either South Korea or the United States. Additionally, any deceased or injured passengers who purchased their tickets in China or who are residents of China should be able to have their claims heard there as well.
- Unlike the regime under the Warsaw Convention, which predated Montreal, there is no hard cap on the amount of damages recoverable by the passengers.
- All passengers should be able to recover provable damages up to 113,100 Special Drawing Rights. Plaintiffs with larger damages should be able to recover up to the extent of their injuries unless Asiana can prove the accident did not result from its own pilots' negligence but was solely the fault of San Francisco International Airport.
- If the airport is at all responsible, Asiana will be able to bring a claim against the airport for at least partial indemnification for its liability to passengers.
- The Montreal Convention doesn't preclude the passengers' ability to bring claims against the airport or manufacturer should those prove the better legal strategy.
- While U.S. courts don't award damages under the Montreal Convention solely for emotional distress, in a case like this plaintiffs should have no trouble demonstrating physical injuries that will allow them to also recover for provable emotional damages.