Chilean Antitrust Immunity Singles Out Corporate Market

<B> Chilean Antitrust Immunity Singles Out Corporate Market</B>

By Jay Campbell

For the first time since September 1997, the U.S. Department of Transportation has approved, albeit tentatively, an application for antitrust immunity for an international airline alliance, this time between LanChile and American Airlines.

AA and LanChile were granted three years of immunity with the proviso that they not engage in coordinated pricing, inventory or yield management, or revenue pooling with respect to "unrestricted coach class fares or any business or first class fares for local U.S. point-of-sale passengers flying nonstop between Miami and Santiago," according to DOT's show cause order.

DOT created these exceptions, sometimes called carve-outs, at the suggestion of the Department of Justice in order to prevent airlines from charging exorbitant fares to last-minute business travelers. They are included for monopoly or duopoly city pairs in previous DOT antitrust immunity approvals for other alliances. But in this case, as in those, DOT chose to remove corporate and group fares from the exemption that applies to full fare passengers.

"In the case of corporate and group fare products, nonstop Miami-Santiago U.S. point-of-sale traffic shall constitute no more than 25 percent of a corporation's or group's anticipated travel (measured in flight segments) under its contract with American and LanChile," DOT said in its order.

Asked to explain the removal of corporate fares from the immunity exemption, a DOT analyst indicated that companies securing "percentage discounts from specified published fares, net prices, volume discounts or other forms of discount" don't need the kind of protection individual business travelers do--unless Miami-Santiago reaches more than a quarter of the company's segments with AA-LanChile. With regard to the seemingly arbitrary 25 percent figure, he said DOJ wanted to protect competitors (in this case, United) by preventing a given alliance working in a dominant market from getting all of the business of a given corporate account--particularly through exclusive contracts.

But a DOT spokesperson said it would not investigate such matters unless it already had sufficient reason to believe that competition was in jeopardy, particularly if other airlines brought the situation to light.

"I am opposed to DOT's position regarding allowing full coordination of corporate contract travel within the scope of carve-outs," said Kevin Mitchell, chairman of the Business Travel Coalition. "This policy will likely increase business travel costs at a time of continued record-setting fare levels, which is against a near-inflationless environment. The consequences of such action will likely be: 1) to further burden corporations with cross-subsidization of leisure fares in those routes; 2) to dilute corporations' negotiating leverage in other markets; and 3) to encourage the airlines to sign agreements with spurious economic benefits with unsuspecting small to midsize companies."

But DOT said previous cases demonstrated that such alliances can benefit consumers through increased efficiency, integrated service to more markets and increased global competition.

DOT said full immunity would be granted to AA-LanChile upon implementation of the open skies agreement between the United States and Chile that was initiated in late 1997. In addition to its rules on the Miami-Santiago route, DOT installed other exceptions to immunity, one of which says the carriers have no immunity when it comes to interests and operations of the CRSs owned by AA and LanChile, Sabre and Amadeus Chile, respectively.

Further, the airlines are required to withdraw from International Air Transport Association tariff coordination conferences with respect to prices between the United States and Chile, as well as between the United States and any other countries whose carriers are or become members of immunized alliances with U.S. carriers.

DOT said the alliance agreement between AA and LanChile indicates the airlines plan to code share on 10 routes operated by LanChile and 27 operated by AA. The agreement also mentions the intention to coordinate on pricing, marketing, sales and distribution, revenue pooling and sharing, and internal information systems including yield management, inventory, reservations, ticketing and distribution.

A LanChile spokesperson said the airline's sales team now is more directly targeting the corporate market and soon will announce a new first and business class configuration. LanChile will join AA's Oneworld partner, British Airways, in Terminal A in Miami International Airport, sharing with BA the new VIP lounges there and in New York JFK.

DOT said Chilean international air traffic is expected to grow 10.5 percent annually through 2002.