Airline Alliance Partners Prepare To Do Battle W/ DOT

The decision by Continental, Delta and Northwest airlines to implement their trilateral alliance in defiance of the U.S. Department of Transportation sets the stage for a drawn out legal battle that could set precedent for federal aviation policies and oversight for years to come. The conflict not only pits the nation's third, fourth and fifth largest carriers—each struggling for survival—against a federal government burdened with a weakened economy, but also calls into question the jurisdiction of both DOT and the U.S. Department of Justice in these matters.

Shortly after the airlines suggested modifications to certain alliance conditions required by DOT, and completely disregarded others, DOT said it would abandon neither its responsibilities nor its congressional mandate. "DOT intends aggressively to enforce its statutory authority to challenge the transaction and require such conditions as it deems necessary to preserve competition," said a DOT spokesperson.

The conditions required by DOT would limit cooperation in code sharing and joint contracting for corporations and travel agencies, and specify how certain airport facilities must be used or surrendered.

One of the carriers' proposed modifications excludes traffic originating in 50 cities they dominate from joint contract bids for corporations and agencies based in those cities. DOT's conditions would prohibit completely joint bids to companies in those cities.

Eliminating local-originating traffic from joint bids may prove to be a minor concession considering many companies in those 50 cities have no choice in many cases but to use Continental, Delta or Northwest. "We would agree that no condition in this area is necessary at all," said Northwest president Doug Steenland.

Additionally, the three carriers said they would not make contractual discounted fares or commissions dependent on the satisfaction of minimum purchase or booking requirements for specific city pairs unless requested by the corporation or travel agent, or in a good faith effort to respond to a competitive bid. DOT stipulated that the carriers could not, in any circumstance, offer such contract terms.

"DOT took an aggressive approach to the federal statute it is relying on and is looking to regulate airline behavior above and beyond what antitrust law would require," Steenland said. "The Justice Department lets airlines be vigorous, robust competitors and lets consumers benefit." The three carriers said they earlier had accepted such specific conditions suggested by DOJ as exclusion of hub-to-hub routes.

Southwest Airlines CEO Jim Parker last week told a small group of reporters that "our position is that DOT does have the authority to require conditions as recommended." He added that DOT's imposed requirements are "pretty modest" and that limiting a combined entity that would control 35 percent of the domestic market "is in the public's best interest." Parker also noted the alliance, if pursued, would have no immediate impact on Southwest, one of several smaller carriers that had lobbied against a Continental-Delta-Northwest tie-up.

Now that the three airlines stated their intention to move forward without DOT's blessing, the ball is in Transportation Secretary Norman Mineta's court. Should he call for a formal enforcement action, as DOT indicated, the Office of Aviation Enforcement and Proceedings would prepare a case to be heard by an administrative law judge within the department. The judge's decision, subject to DOT review, would be open for appeal, which then would take the case to the U.S. Court of Appeals.

"The carriers intend to defend their marketing agreement vigorously while continuing to implement it," the airlines said in a joint statement, noting the "unprecedented crisis" facing the airline industry.

"Heels are dug in on both sides, but DOT will take a hard line," said Michael Boult, COO of Eclipse Advisors, a technology unit of Rosenbluth International. "They have to draw a line or it all goes to hell." He added that "there are things that can be done to make this all go away quietly," suggesting the carriers may relent in exchange for tax abatement, funding for jeopardized pension plans or even a second wave of Air Transportation Stabilization Board relief.

Boult also said American Airlines and British Airways, despite failing twice in recent years to come to acceptable terms with government regulators, should move forward with their own alliance plans. "If the DOT rules are not applied to everyone," he asked, "why wouldn't they just join the fun and also get sued?"