Open Skies Breeding Antitrust-Immune Ventures

Antitrust-immune joint ventures have emerged as the key to international network growth as U.S. carriers face restricted access to foreign capital, legal barriers to entering some foreign markets and substantial costs in sustaining international growth the old-fashioned way—with their own planes and people.

Joint ventures proliferated across the Atlantic in the wake of the 2008 enactment of the U.S.-EU Open Skies agreement and now are taking root between the U.S. and Japan, which announced a similar agreement in December. Airline executives, aviation policymakers and antitrust experts expect the joint venture model to continue to evolve and spread as global air markets further liberalize.

Describing joint ventures as de facto operational mergers, Allan Mendelsohn, a transportation industry lawyer with Sher & Blackwell, who saw international air alliances grow during his tenure as Deputy Assistant Secretary of State for Transportation Affairs in 2000 and 2001, said, "They've been created only because of the inability to merge airlines internationally. You're acting as one entity, but it doesn't involve the problems of integrating unions. There are a lot of problems that alliances with antitrust immunity avoid."

A joint venture behaves as a single entity in the areas of network planning, marketing and distribution, pricing, revenue sharing, joint procurement and frequent flyer programs. Still, carriers operating under or proposing joint ventures have maintained individual brand identities, kept labor groups separate—though there are shared services under the joint venture—and maintained distinct ownership structures and executive management functions.

Daniel Kasper, who focuses on aviation and antitrust issues as managing director of consulting firm LECG and also served as director of international aviation for the United States Civil Aeronautics Board, said, "The basic driving force for all of these joint ventures is a recognition that airlines can't serve—for a variety of legal and economic reasons—on their own metal a lot of these places where their customers want to go."

Delta Air Lines CEO Richard Anderson has embraced the joint venture as the linchpin of the carrier's Atlantic and Pacific networks. "The joint venture model is key to growth overseas," Anderson told BTN. "We've tried to set about building a complete network worldwide."

The pieces of Delta's increasingly partner-centric international network include a transatlantic joint venture with Air France-KLM, a U.S.-Australian joint venture proposal with Virgin Blue Airlines Group that awaits DOT approval and yet another with Japan Airlines—which entered bankruptcy in January undecided as to who would be its U.S. venture partner and billion-dollar-plus benefactor, Delta or Oneworld partner American Airlines.

"If you see the world as a big puzzle, we're trying to put all the puzzle pieces in," Anderson said. "What the joint venture model allows you to build is a single network with a common economic interest with your partners. We've done a very good job of developing those capabilities and knowledge."

Delta is hardly alone among U.S. carriers. American Airlines and British Airways await antitrust immunity to enact a transatlantic joint venture; Continental Airlines joined Star Alliance in October with an already approved joint venture with Air Canada, Lufthansa and United Airlines on the Atlantic. All Nippon Airways, meanwhile, filed in December a request with Continental and United for a similar structure on routes between the U.S. and Japan.

During a speech at the Wings Club in New York on Jan. 21, United CEO Glenn Tilton bemoaned U.S. restrictions on access to foreign capital that "precludes us from using business tools and options available to virtually every other industry for investment, cross-border ventures, business alliances, mergers and acquisitions."

Asked by Julius Maldutis, president of airline consultancy Aviation Dynamics, whether the joint venture model is a "surrogate for a traditional financial merger," Tilton said, "I think in some instances that will be true, and I will point you to the extraordinary drama playing out in Japan."

Tilton said the enactment of Open Skies in Japan would lead "to closer ties between Asian carriers, Japanese carriers and U.S. carriers, which is going to lead to integration of systems, which will create efficiencies and bring carriers closer together." He later added, "the airline industry is showing itself to be very creative as it works against inhibitions that are unique to this industry."

Kasper used the U.S.-Japan market as an example as to why developing a joint venture is more effective for an airline than going it alone. "It looks like we'll reach an Open Skies deal with the Japanese, but it's hugely expensive to try to bash your way into that market," Kasper said. "Just the variable costs of the airplanes, the crew and the fuel are stupendous. Then, if you're trying to battle it out in a market with a group of incumbents that are well established, it's disheartening and probably deters entry. In the joint venture context, when you align the incentives of the parties and make them metal-neutral, that really drives consumer benefits."

United's Tilton said such benefits of joint ventures often begin with the network. "When you connect those networks, you create a customer value that none of us could create otherwise," he said of the carrier's proposal with Continental and All Nippon. By their math, United and Continental operate at 212 U.S. airports, while ANA operates at 52 airports in Asia. Combining the two networks under an antitrust-immune joint venture totals 11,024 "new immunized U.S.-Asia airport pairs," according to the carriers' application for antitrust immunity.

Though carriers must relinquish some control by linking their operations and strategy so inextricably to another carrier, Delta's Anderson shrugged off that concern, saying, "That's the nature of a joint venture." He said success comes down to picking the right partner and sharing the same goals. "The key is antitrust immunity," he said. "Once you have antitrust immunity, then you have the ability to structure a relationship that gives people at both companies the incentive to act as one."

Mendelsohn, however, said the joint venture model "represents some decline in American dominance in aviation," he said. "They don't need dominance any longer; they need survival. I happen to favor these joint ventures, because I don't think the airlines have much of an alternative. If they didn't have the alliances, more of them may be going out of business."

Deputy Assistant Secretary for Transportation Affairs John Byerly, the chief U.S. negotiator for Open Skies agreements, told BTN that the U.S. in the spring expects to start a new round of negotiations with China and continues to pursue liberalization with Brazil, South Africa and other African nations. "We're in discussions with countries as diverse as Saudi Arabia and Israel," Byerly said. "I can't tell you we're going to get to Open Skies there, but we're working on it."