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In examining the effects of antitrust immunity for airline alliances, the U.S. Department of Justice determined that competition between oneworld, SkyTeam and the Star Alliance matters little to the carriers' corporate travel clients. DOJ's assertion came in a 26 June filing submitted to the U.S. Department of Transportation detailing an objection to the inclusion of Continental Airlines in a far-reaching, antitrust-immunized partnership with the Star Alliance. DOJ instead suggested "a more limited immunity" covering only transatlantic operations.
"Few, if any, corporate travel managers we interviewed during our investigation of this [Star Alliance-Continental] application and in the course of other airline investigations have stated a desire for increased interalliance competition," DOJ wrote. "Even when a particular corporation had negotiated a contract with an alliance, that contract seldom encompassed all members of the alliance or had resulted in lower fares than if the corporation had negotiated separate contracts with the carriers."
American Airlines, which said it takes "no position" on Star's request for expanded immunity (as it awaits a decision on its own request to form an immunized alliance with oneworld partners, which it expects "by 31 October"), noted "serious concerns" with many of DOJ's findings. It implored DOT to approve the oneworld and expanded Star Alliance immunity requests "under the precedent set" in granting immunity for SkyTeam carriers.
Of course, Continental and the Star Alliance carriers also thoroughly rejected DOJ's findings. They wrote that DOJ advocates "a radical shift" in U.S. aviation policy, fails to "account for current market realities" and make numerous faulty assumptions. "Every existing ATI alliance now holds global antitrust immunity," they wrote, noting "not a single international nonstop overlap between Continental and United."
DOT, DOJ At Odds
DOT in April issued a tentative approval for Continental to join an already globally immunized Star Alliance partnership that includes Air Canada, Austrian Airlines, bmi, Lufthansa, Lot Polish, SAS, Swiss International Air Lines, TAP Air Portugal and United Airlines. It concluded that "the proposed alliance is consistent with the public interest, will produce public benefits and will not substantially reduce competition."
In stark contrast, DOJ wrote that the Star Alliance-Continental request--"unprecedented in scope and breadth"--raises many competitive concerns without proving enough consumer benefit. It also sanctions "collusion by United and Continental on all international service, eliminating or significantly reducing competition between certain Star Alliance members on routes where they provide the only--or almost all of--the competitive alternatives," according to DOJ.
In downplaying the importance of competition between alliance--in an opposing viewpoint to that of DOT and all airlines involved in any of the three global partnerships--DOJ wrote that "achieving balance in the market success of differing alliances is not a legitimate goal of sound competition policy. Alliances should compete against each other, and the market should determine the outcome of that competition."
DOJ's analysis determined that cooperation between Continental and United would "substantially lessen competition in city pairs between the U.S. and Beijing," markets in which the two carriers "account for 57 percent of the available nonstop seats," while nonimmunized Star partner Air China accounts for 41 percent. Continental and United also account for "a dominant share of the one-stop connecting service" to Beijing. DOJ characterized these findings as the "most serious" competitive concerns.
DOJ also noted that United and Continental are the only U.S. carriers operating nonstop service between the United States and Hong Kong.
In response, Star and Continental described U.S.-China markets as "highly competitive and well served" by U.S. and foreign airlines. In its reaction to DOJ, the Newark Regional Business Partnership predicted that on routes to both Beijing and Hong Kong from the United States, "abundant competition will be introduced when the current downturn in U.S.-China traffic ends."
Meanwhile, DOJ also said Continental-Star cooperation would "substantially" reduce competition on certain U.S.-Canada and U.S.-Latin America routes. Star and Continental responded by saying DOJ failed to back that assertion.
While DOJ suggested that Continental and Star should enjoy antitrust immunity on only transatlantic routes, it argued for exclusions in five markets: New York to Copenhagen, Geneva, Lisbon, Stockholm and Zurich. "These routes are concentrated, and entry would likely be difficult due to the existence of a Star ATI alliance carrier hub at either one end or both," DOJ wrote. "DOT should also maintain the existing Frankfurt to Chicago/Dulles carve-outs."
In noting the "nonstop overlap" in those markets, DOJ added, "For a large group of passengers, connecting service is not a reasonable substitute and airlines can target this group for higher fares.
"Many corporations have explicit guidelines governing when their employees are required to take one-stop alternatives due to lower price," DOJ continued. "Those guidelines require a significant fare difference before the one-stop option is mandated--generally at least 10 percent and in some cases 25 percent or more. Some corporations actually require passengers to take nonstop service if available."
American objected to "carve-outs," saying DOJ used "flawed assumptions" in making its case. "DOJ's claim that connecting itineraries do not compete with nonstop flights is directly contradicted by empirical evidence," the airline wrote. "On routes with significant local traffic but just one or two nonstop options, consumers do substitute connecting itineraries where that makes sense.
"To deny airlines the opportunity to integrate and organize their broad transatlantic networks in the most efficient manner because of unproven concerns about consumer harm on a handful of individual O&D city-pairs would be a poor public policy decision in the long-run," AA continued.
Noting Star has "the smallest alliance presence" in the New York/New Jersey area, the Newark Regional Business Partnership wrote that "interalliance competition in the region will continue to be heavily imbalanced in favor of SkyTeam and Delta." NRBP called "irrational" DOJ's conclusion that entry on specified routes would be difficult, noting existing and potential AA and Delta services from New York JFK.
Similarly, Star said DOJ's conclusion "does not withstand scrutiny" and "wholly ignores" AA's and Delta's "extensive global operations at JFK."
The Fare Question
Meanwhile, the question as to whether consumers generally would see lower airfares following expanded Star ATI remains an open debate.
"By sharing risk and optimizing the joint network, the alliance members will likely accelerate the introduction of new capacity, give consumers more travel options and shorter travel times, and reduce fares at the margin," DOT wrote in its tentative approval, noting other "fare benefits for consumers."
DOJ, however, produced findings contrary to the Continental-Star Alliance application, which had insisted antitrust immunity would lead to lower fares. DOJ found that "fares are likely to increase by roughly 15 percent on routes where the number of nonstop competitors decreases from two to one, and by roughly 6 percent on routes where the number of nonstop competitors decreases from three to two. Although alliances can lead to lower fares by reducing incentives for each carrier to impose an additional markup on connecting traffic, immunity is not necessary to realize that result."
Siding with DOJ, the Consumer Federation of America submitted comments suggesting that alliance "efficiency claims are inevitably overstated and even where there might be some such gains, without competition those gains are not passed through to the public."
But Star and Continental questioned the methodology DOJ used to determine the impact on pricing, and offered contrasting research.
AA wrote that alliance airlines "have an incentive to increase capacity on hub-to-hub overlaps. This calls into question DOJ's conclusion that reducing the number of competitors on such routes from two to one would result in a 15 percent fare increase. Capacity is the primary determinant of fares."
Open Skies Helped Or Hindered?
DOJ also opined that adding Continental to the immunized Star grouping would not forward the U.S. policy of establishing "open skies" air treaties with other countries. The department noted that all countries with carriers involved in the request already have open skies deals with the United States. "Granting immunity for Continental to coordinate with Star Alliance members on U.S. to Latin American or Pacific routes is not likely to result in further liberalization discussions between the U.S. and countries with which we have not yet negotiated open skies, such as China or Brazil," DOJ added. "Therefore, an expansion of immunity offers no open skies benefits for U.S. consumers."
Star and Continental disputed that assertion, writing that "such a myopic policy would jeopardize current and future open skies agreements."
AA also disagreed. Noting that negotiations on a second phase of U.S.-E.U. Open Skies are taking place this summer--and "negotiations to liberalize other historically closed aviation markets," including Brazil, China, Japan and Russia, are currently occurring--the carrier told DOT that DOJ's request for the United States "to retreat from its alliance policy could not come at a worse time.
"DOT's efforts to liberalize international aviation are far from complete," AA continued. "Alliances will help open those markets to new competition--unless, of course, DOT succumbs to pressure to turn back the clock."
Though Continental and United said they would not cooperate on domestic operations, DOJ asserted that "where an application involves the presence of two major domestic competitors, the request for immunity warrants particularly close scrutiny." It suggested that "opportunities and incentives to extend coordination" to domestic from international theatres--including discussion on "the most sensitive" competitive subjects--"are clear." The risk of such coordination, according to DOJ, "cannot be completely mitigated through confidentiality guidelines."
Despite all of DOJ's concerns, United and Continental still expect DOT to finalize the expanded Star Alliance application, a development they said "is necessary" for Continental to compete (Continental is scheduled to leave SkyTeam in October). United expects the final ruling "in mid-July."
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