When the U.S. Department of Transportation gave the nod last year to Delta, Northwest, Air France and KLM to proceed with their antitrust-immune joint venture, the approval came on time, without exceptions and as expected. However, DOT approval of a similar request by Continental Airlines to join an already immune group of Star Alliance carriers—fortified by a joint venture with United, Air Canada and Lufthansa—finally came on July 10, more than a month past deadline, and with some caveats stemming from Justice Department opposition.
While the two applications differed in markets covered and carriers concerned, the divergent approval processes demonstrate the different stances toward air competition taken by the current and previous presidential administrations.
"The last administration would have rubber-stamped anything," said Michael Boyd, president of aviation consultancy The Boyd Group International. "While the current administration can't really rewind what's already out there, they're going to try to make it more difficult. For example, they approved Continental-United, but with exceptions."
DOT's final decision makes some concessions to the Justice Department, which sought to limit the degree of cooperation tentatively approved in April and initially slated for finalization by the end of May (BTNonline, June 22).
Heeding the Justice Department's request to "carve out the transatlantic and transborder markets where competitive harm is most likely to occur, maintain existing carve-outs and limit immunity to transatlantic markets," DOT in the final decision did not extend immunity on the following routes: Houston-Calgary, Houston-Toronto, Cleveland-Toronto, NYC-Halifax, NYC-Ottawa, NYC-Stockholm, NYC-Copenhagen, NYC-Lisbon, NYC-Geneva and NYC-Zurich. DOT also would not extend immunity to United and Continental between the United States and Beijing. On those routes, the carriers cannot coordinate on "pricing, inventory or yield management coordination, pooling of revenues," and other benefits extended elsewhere.
United CEO Glenn Tilton called those provisions "minor adjustments to our very thorough application." Tilton said those carve-outs only "affect a handful of routes," and also said, "The DOT also provided a clear process to reverse these carve-outs under certain circumstances, such as the entry of a new competitor."
Still, Continental president Jeff Smisek, while musing on the likelihood of further airline consolidation during the carrier's second-quarter earnings call on July 21, noted that "this Department of Justice appears to be a tad more aggressive than that of the prior administration."
In a July filing with DOT, American argued that applying different standards to each alliance denies consumers the competition DOJ ostensibly is seeking to preserve. American also said that "changing course on immunized alliances would place existing—and future—Open Skies agreements in jeopardy." American claimed European constituents—particularly those in Spain and the United Kingdom, home to American's would-be immunized partners—regard the first-phase agreement as "one-sided in favor of U.S. carriers."
American's agreement with British Airways and Iberia to form a joint venture—similar to the ones approved for Star and SkyTeam carriers—remains the last major transatlantic joint venture to await antitrust approval from U.S. authorities.
"While DOJ's comments appear to claim that all alliances are equal in their ability to compete for transatlantic traffic, the reality is that some are now more equal than others," American said. "It is important for the Department to apply consistent decisional standards in its adjudicatory proceedings. Ruling on one application inconsistently with the others would tip the scales and deny consumers the benefits of full inter-alliance competition."
"There's a strong feeling that DOJ is really trying to rebuild their presence in the aviation sector," said Business Travel Coalition chairman Kevin Mitchell. "DOT is a little more difficult to discern," noting that "DOJ put DOT in an awkward position" by challenging its tentative approval of the Continental-Star request in April. "The really interesting question becomes: Does DOT with the Oneworld application go a little bit further toward the DOJ position? My guess is they won't."
Despite potential headwind from a more aggressive Justice Department, American anticipates DOT will approve its application by the Oct. 31 statutory deadline. CEO Gerard Arpey during the carrier's second- quarter earnings call said, "The fact that Continental just got approved is more evidence that the facts are on our side, so I don't want to be overly optimistic here, but I do believe the weight of the evidence suggests there is absolutely no reason for us to not be put on a level playing field with our competitors."
Fresh off the DOT approval, Continental CEO Larry Kellner said the carrier and its newfound partners have "a lot of details to work out," noting the carriers "aren't yet ready to project when we will be up and running."
Kellner said, "We are very pleased with what DOT issued, but it took a while, and so I think that puts us in a position where right now we are doing the hard work, and hopefully by next quarter's call, we will have a little better handle on that."
Because of Continental's obligations to its current partners in the SkyTeam alliance, Kellner said the carrier would not be able to join Star and officially initiate its joint venture with United, Air Canada and Lufthansa until after Oct. 24. "We just can't do anything until we get out of SkyTeam to jointly market with any of the Star partners or be involved with any of the Star partners," Kellner said.
Kellner said most of its codeshare agreements with SkyTeam partners Delta and its subsidiary Northwest have "dropped off already," leaving the carrier essentially unaligned for most of the third quarter, though DOT requires the joint venture to be implemented within 18 months.
As a member of the only approved and organized transatlantic joint venture, Delta president Ed Bastian in July said, "We have a fairly significant head start because we don't just have ATI, we have a fully functioning JV with a common bottom line, and we are not waiting to put it together. It is up and running as we speak."
Though DOT last year approved Delta and Air France-KLM to proceed with their joint venture, on June 26, DOT amended its antitrust immunity approval to require SkyTeam members to file annual reports demonstrating they are "producing benefits for consumers."
DOT in the order said, "It is clear that the SkyTeam carriers will engage in increasingly complex cooperation in the future. Given the size and complexity of the alliance, we think the public interest requires new reporting requirements to ensure that public benefits are being realized."
The DOT order will require those carriers to file annual reports detailing goals of the alliance, actions taken to implement agreements and details of how those actions benefit the public.