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Expected DOT Nod To Open U.S.-Japanese Skies

By Jay Boehmer / October 25, 2010 / Contact Reporter
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The U.S. Department of Transportation in the coming weeks is expected to finalize this month's tentative approval of two antitrust-immune joint ventures competing between Japan and the United States. Once approved, American Airlines and its Oneworld partner Japan Airlines and Star Alliance members All Nippon and the recently merged United Airlines and Continental Airlines can move forward their separate joint ventures to coordinate scheduling, pricing, corporate deals and network planning between the two countries.

While the approval of antitrust immunity advances the tentative Open Skies agreement—since Japanese negotiators predicated the bilateral on DOT's granting of antirust immunity—it does not lift Japan's restrictions on point-of-sale discounts in the country, leaving it as one of the few markets in the developed world in which carriers are required to structure deals almost solely through back-end rebates. Sources, however, said Japan's Ministry of Land, Infrastructure, Transport and Tourism is considering a reversal of what some characterized as antiquated pricing requirements.

Representatives from each joint venture said it was too soon to spell out details on corporate strategy with their new transpacific partners, as the carriers are not yet immune from the antitrust rules that govern how they cooperate. Still, given current price restrictions, there is much both alliances will have to reconcile once final approval comes.

"The corporate marketplace is set up very differently in the U.S. and many other countries in the free world," according to Steve Smith, Japan Airlines' vice president of passenger sales for the Americas. "Everybody in the U.S. and most everywhere else goes off of a net discount. Corporations like that because they can see the savings right up front and there's no real hassle. In Japan, it's all based off of a back-end, and that requires a lot of personal labor to handle."

Japan-based airlines can play by the rules of individual markets, and both ANA and JAL structure corporate deals in the United States much like their native competitors, but a rule change would benefit multinational companies with Japanese points of sale, the airlines said.

"It surprises a lot of corporate travel managers to see how the Japanese point of sale works, because it really is still a back-end pricing platform in 90 percent of the cases," said Gary Weiss, ANA director of market development. "Travel managers look at it and they either think they went back in a time machine 20 years or wonder how they're going to manage this in an efficient, Six Sigma environment. Quite frankly, there isn't a good answer to that."

Still, Weiss, Smith and others said they were optimistic that Japan will drop its pricing restrictions. "I'm very involved with our global accounts, and all of our global accounts want a Japan point of sale," Smith said. "At some point, Japan has to change. Major global corporations are coming in there and demanding it."

Meanwhile, the new antitrust-immune joint ventures will shift the competitive landscape between Japan and the United States—a shift that DOT ruled in its tentative approval is pro-competitive.

Based on July 2010 OAG data cited by DOT, the immunized Star carriers would have nearly 36 percent of the seats connecting Japan and the United States, while the immunized Oneworld carriers would have 26 percent. Meanwhile, immunized SkyTeam carriers, which were not involved in this particular antitrust immunity request, hold about 34 percent of the market, DOT said.

"Delta and Korean Air currently operate with immunity, have a strategically placed immunized connecting hub in Seoul and have a sizable presence in the U.S.-Asia market," DOT said in its tentative order.

DOT also examined six citypairs in the U.S.-Japan market where more than one ally currently offers nonstop service and where "the resulting increased concentration could, in theory, give one airline or alliance an increased ability to exercise market power to increase fares to supra-competitive levels." Those markets are Tokyo to Chicago, Honolulu, Los Angeles, New York, San Francisco and Washington, D.C. DOT determined in each case that "market forces are likely to address potential competitive effects."

DOT in its tentative order concluded, "By sharing risk and optimizing the joint network, the Star and Oneworld applicants each state they will be able to accelerate the introduction of new capacity, give consumers more travel options and shorter travel times and reduce fares."

On the Los Angeles-Tokyo route, four competitors would remain—including each of the three primary immunized alliances and Singapore Airlines, a Star member with no antitrust immunity—none with a share greater than 50 percent, which would be "sufficient to discipline fares in the market," said DOT. The same would be true in New York, a large market split among the three immunized alliances.

On the San Francisco-Tokyo route, United and ANA together would claim a larger share of the nonstop market, which links two Star hubs, but should they "attempt to increase prices, we believe that passengers will have ample opportunity and incentive to shift to competing services," DOT concluded. "Also, Oneworld carrier JAL will initiate the only nonstop service between San Francisco and [Tokyo] Haneda, likely an effective means of competing in the competitor's hub-to-hub market."

DOT also suggested that immunized partners operating the Chicago-Tokyo route, where a duopoly would form after the effective loss of two competitors, "would face limited incentives to raise fares above competitive levels because of current connecting traffic volumes." Similarly, though the nonstop Washington-Tokyo market would be left with just one carrier, DOT wrote that the route's role as "a trunk route for connecting traffic" would dissuade any one competitor from cutting capacity or raising fares.

David Jonas contributed to this report.

This report appeared in the Oct. 25 issue of Business Travel News.

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