The long-sought antitrust immunity between British Airways, American Airlines and Iberia for their OneWorld alliance has hit another patch of turbulence with the E.U. as they attempt to gain the same interoperability enjoyed by competing Star Alliance and SkyTeam.

For years and through two previous AA/BA antitrust immunity applications, the E.U. and U.S. regulators have faced problems with the two airlines’ control of Heathrow Airport. But now, some insiders say the tie-up with Iberia has added to some new antitrust concerns

For years, Virgin Atlantic who competes with BA in and out of Heathrow has been adamant against the fruition of this alliance. They have repeatedly stated, “Virgin Atlantic would expect the Commission to find that the proposed alliance would damage competition and consumer interests on all six of the routes from [London] Heathrow to the US on which BA and AA both operate currently. These include Heathrow to New York JFK on which BA and AA together would control 62 percent of all capacity and would have an unassailable grip on time-sensitive premium passengers.”

In the U.S., the OneWorld alliance is the only one of the three major alliances that has not received the blessing of the Department of Transportation (DOT).

SkyTeam with Delta and Air France-KLM as the leading airlines, is in the midst of actually setting up a joint venture that will lead to the closest cooperation possible — bordering on a separate international airline without U.S. domestic rights.

The Star Alliance anchored by Lufthansa, United and (soon) Continental has been exchanging international marketing information and coordinating flights for years. They even have a livery painted as Star Alliance. From the paint job, one wouldn’t know whether they were getting aboard a United, USAirways or Lufthansa plane.

But these alliances are not out of the regulatory woods yet. The FAA Reauthorization Bill passed by the House of Representatives has a controversial “sunset provision” (H.R. 831) that would require a re-examination of the current airline alliances. And the E.U. has signaled that their investigators still are not finished looking at the other two major alliances.

The EC competition watchdog said it had sent a charge sheet to the three airlines. Since April, it has also been investigating similar deals between the 24 members of the rival Star Alliance – including BMI, United (UAUA) and Lufthansa (LHAG.DE) – as well as the SkyTeam partnership of 11 airlines including Air France-KLM (AIRF.PA), Delta (DAL) and Aeroflot (AFLT.RTS). It has yet to move on either inquiry.

Obviously the international alliance game is still afoot.

OpenSkies, once branded as the ultimate competition machine, designed to break the decades-old system of bilateral airline agreements, has not kicked into full gear because of the world’s economic problems. Someday, when funds become available and passengers begin to travel in greater numbers, airlines will be able to focus on more point-to-point routes.

Here at home, the DOT approves alliance antitrust immunity based on phantom customer service improvements and the Department of Justice continues to focus on loss of competition. In the wings congressmen are harboring serious concerns about the growth of airline alliances and their effect on suppliers and airports as well as passengers.

The battle of airline alliances within the federal bureaucracy is heating up. The Senate committee responsible for transportation and aviation issues is lining up against their opposite in the House. The Department of Transportation (DOT) has squared off against the Department of Justice (DOJ).
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An interesting dynamic has emerged in Congress with discussions about airline alliances, The House Transportation and Infrastructure Committee is staunchly against such antitrust immunity and the Senate Commerce Science, & Transportation Committee is strongly in favor of these arrangements.
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Orignial published on Tripso.com

When the Department of Transportation (DOT), over the objections of the Department of Justice (DOJ), approved the Continental/United Airlines antitrust immunity deal this wasn’t included. DOT needs to take another look, now.

These two airlines have announced that they are building a new common IT platform that will serve as the backbone of their joint operations. This is the kind of cooperation that Delta is now implementing with Northwest. But Delta had to merge with Northwest before starting such integration.

Continental and United are attempting to take this merger-like step outside of a merger. They are using the antitrust immunity grant as a merger-in-fact agreement and are beginning to cooperate in ways never envisioned by the luminaries in the DOT alliance offices.

Unless these IT changes and cooperation are limited to international flights, Continental Airlines and United Airlines have a lot of explaining to do. They are simply breaking the law by cooperating intimately on on everyday domestic airline operations.

Domestic collusion is strictly forbidden in the antitrust immunity/airline alliance agreements that DOT allowed to go forward. United is pushing the envelope to see how far they can go before the administration reigns them in. Continental is probably going along since they are with a lame-duck CEO who is also interested in seeing how far airline can push the limits of the law.

Star Alliance, to which both Continental and United will belong, currently uses Amadeus to provide blended international IT services.

This IT cooperation according to Continental and United is only for international endeavors, but that is hard to believe. The algorithms and inside information to create a blended IT system goes far beyond the limited antitrust immunity currently in force.

Plus, the Amadeus platform, based in Europe, and dominate there, can serve any IT needs the airlines require for international interoperability.

DOT should take a close look at what Continental and United are tinkering with under the disguise of international antitrust immunity. This is a step too far.

Here is a copy of the letter sent by the Judiciary Committee to the Department of Justice and the Department of Transportation regarding the antitrust immunity applications by airline alliances.

——————-

COMMITTEE ON THE JUDICIARY
WASHINGTON, DC 20510-6275

December 19,2008

The Honorable Michael B. Mukasey
Attorney General
United States Department of Justice
950 Pennsylvania Avenue, NW
Washington, D,C. 20530

The Honorable Mary Peters
Secretary
United States Department of Transportation
1200 New Jersey Avenue, SE
Washington, D.C. 20590

Dear Mr. Attorney General and Madame Secretary:

We write to express our concern that the Department of Transportation (“DOT”) may grant further antitrust immunity, pursuant to 49 U.S.C. § 41308, to airline alliances. We understand that United Air Lines, Continental Airlines, Deutsche Lufthansa AG and seven other members of the Star Alliance have filed an application for antitrust immunity that would create the world’s largest airline immunized alliance and that another airline group, the One World Alliance, led by American Airlines and British Airways, is also seeking immunity. The DOT should exercise its statutory authority to grant antitrust immunity sparingly, and only in what we expect would be rare circumstances where parties seeking immunity have sustained their heavy burden of establishing that competition must be supplanted to serve some other public interest.

Where firms engage in conduct that delivers benefits to consumers and does not harm competition, they have nothing to fear from the antitrust laws. A grant of antitrust immunity, therefore, has the effect of enabling conduct that undermines free-market competition and can substantially harm consumer welfare, leading to higher prices, reduced output, lower quality, and reduced innovation for consumers, Given these substantial risks, immunity from the antitrust laws should be granted only in extraordinary circumstances.

The members of the alliances that have filed applications for antitrust immunity argue that these alliances can produce significant benefits. The DOT should consult with the Department of Justice (“DOJ”) and thoroughly investigate and examine all aspects of these proposed transactions to ensure that consumers will not be harmed.

Particular attention should be given, with respect to the Star Alliance proposal, to whether cross-ownership by an immunized carrier of a non-immunized domestic competitor will raise competition concerns in the domestic market, and the implications of granting immunity on routes to markets that do not have open skies agreements with the United States. We are also interested to learn what protocols would be in place to ensure that potentially anti-competitive conduct beyond the any immunized arrangement will not occur.

Any analysis of these proposals should be conducted using established principles of antitrust law to identify the air routes where competition may be harmed as a result of the expanded alliances. DOT should give substantial deference to any recommendations made by DOJ applying its antitrust analysis. Further, we recommend that DOT be cognizant of the joint study, currently being undertaken by the United States and the European Commission, on transatlantic aviation markets and competition. This study is scheduled for completion in mid-2009.

Thank you for your attention to these matters.

Sincerely,

PATRICK LEAHY
Chairman
Committee on the Judiciary

ARLEN SPECTER
Ranking Republican Member
Committee on the Judiciary

HERB KOHL
Chairman
Subcommittee on Antitrust,
Competition Policy and Consumer Rights

ORRIN HATCH
Ranking Republican Member
Subcommittee on Antitrust,
Competition Policy and Consumer Rights

The recent Department of Transportation “tentative” approval of Continental’s application to joint the Star Alliance and immunize the “joint venture” is based on faulty reasoning and airline-industry-cooked studies. Plus, the approval and its “joint venture” ramifications are shrouded in secrecy.

The Transportation Department tentatively concluded that “granting antitrust immunity to Continental to join the alliance and approving the joint venture would be in the public interest because it would support increased levels of service in international markets served by the carriers, give consumers more travel options and shorter travel times, and reduce fares.”

The DOT is wrong on all four counts.

• No alliance has even increased levels of service.
• No alliance has ever given consumers more travel options.
• Alliances have never provided shorter travel times.
• No alliance has resulted in reduced fares.

Moreover, any DOT consideration of airline alliances must be made with the increased alliance powers included in these new requests rather than being based on past alliance activities.

The DOT release wording is ominous: “Under the venture, the carriers would jointly arrange capacity, sales and marketing as well as share revenues.”

Here is an alternative dose of reality regarding the four “benefits” of a joint venture, to counteract the DOT misguided assertions.

Increased levels of service
The only increase in level of service that will result is the number of different airline designations that will be attached to the same aircraft. Having a Lufthansa airplane filled with 300 passengers holding tickets on LH999 is no different from from having the same flight with 100 passengers holding UA tickets, another 100 holding CO tickets and 100 with LH tickets. The level of service is the same. The level of codesharing misinformation is multiplied.

More travel options
Having a CO flight connect with a LH flight is no different than having a CO flight connect with the same LH flight but with a CO designation on the ticket. Alliance and codesharing do not create any additional service. In fact, the collusion may reduce options.

Provide shorter travel times
There may be some truth if the options for flights are only between alliance partners. However, when all options are considered, travel times are almost always similar. If anything, by strong-arming passengers onto connecting alliance partner flights, the travel times may increase. In many cases, these alliance members do not even share terminals, in which case, hassles and connection times are increased.

Reduced airfares
Here the results of anti-competitive alliances are exactly the opposite. By having antitrust immunity for marketing, pricing and route structure, the alliances can coordinate pricing better than ever. Such price fixing is blatantly anti-consumer. I do not think that there exists any examples of reduced competition resulting in reduced prices. Plus, the creation of three defacto massive international airlines will serve as an insurmountable barrier to entry for any long-haul low-cost carriers.

The DOT order, alliance application and public comments are available on the Internet at http://www.regulations.gov, docket number DOT-OST-2008-0234. Make your voice heard.

Originally published on Tripso, April 10, 2009

DOT 42-09
Tuesday, April 7, 2009
Contact: Bill Mosley
Tel: (202) 366-4570

DOT Proposes to Approve Star Alliance Plan to Add Continental, Establish Joint Venture

The U.S. Department of Transportation (DOT) today proposed to grant antitrust immunity to Continental Airlines for its participation in the Star Alliance, and to approve a new joint venture among four of the alliance’s members. Antitrust immunity allows airlines to coordinate their services and act as a single carrier for international air services covered by the immunity.

In a show-cause order issued today, the Department tentatively decided to grant immunity to new alliance member Continental and to allow Air Canada, Deutsche Lufthansa Airlines, United Air Lines, and Continental Airlines to place a portion of their international air services within a new joint venture, to be called Atlantic Plus-Plus. Under the venture, the carriers would jointly arrange capacity, sales and marketing as well as share revenues.

The Department tentatively concluded that granting antitrust immunity to Continental to join the alliance and approving the joint venture would be in the public interest because it would support increased levels of service in international markets served by the carriers, give consumers more travel options and shorter travel times, and reduce fares. The United States has open-skies aviation agreements with all of the home countries of the carriers involved in today’s decision. Open-skies agreements provide for international market access to all home-country airlines.

As a condition of obtaining antitrust immunity, the Department proposed to require that the carriers implement the new joint venture within 18 months. The carriers also must provide annual reports to the Department about the implementation of their alliance agreements. The Department stressed that the carriers would remain subject to antitrust laws with respect to domestic service.

The Department first granted immunity to Star Alliance partners in 1996, when it approved an alliance between United and Lufthansa. Other members of the alliance are Air Canada, Austrian Airlines, British Midland Airways, LOT Polish Airlines, Scandinavian Airlines System, Swiss International Air Lines, and TAP Air Portugal.

Interested parties will have three weeks to file objections to today’s tentative decision. The parties then will have seven business days to respond to objections. After analyzing all comments filed, the Department will issue a final decision. The show-cause order, alliance application and public comments are available on the Internet at http://www.regulations.gov, docket number DOT-OST-2008-0234.

-END-

I’ve heard a story about Abraham Lincoln that can apply to codesharing. He stated, “If you call a tail a leg, how many legs has a dog? Five? No, calling a tail a leg don’t make it a leg.” The same applies to codesharing between airlines. As it now is practiced, it is simply bait and switch. At best, codesharing can be called misleading.

Codesharing is where one airline sells seats on another airline’s aircraft and uses its own airline nomenclature and flight numbers. To the consumer, looking at their ticket or online reservation, it appears that the flight is on a single airline. Unfortunately, that is not always the case. These codesharing procedures that allow a United airplane to be called a US Airways flight or a Delta aircraft to be designated with an Air France flight number are simply bald-faced lies condoned by our government. The only purpose the codeshares serve is to mislead the public.

Alliances are in the news these days with the apparent approval of Continental’s alliance with United and the rest of the Star Alliance. Even outside of alliances, codesharing is continuing with deals between US Airways and Qatar Airways in which each airline will be able to sell seats on the other operator’s planes and similar arrangements are in force between US Airways and Swiss International Airlines on flights between Zurich and Philadephia.

Internationally, the airline code-share partner airlines rules and regulations don’t match. Much carry-on luggage allowed on an an American Airlines (AA) flight to London will not be allowed on continuing flights in Europe. The same rule conflicts exist between virtually every codesharing U.S. and foreign carrier, but passengers rarely learn about these differences until they are stopped unexpectedly when attempting to board continuing flights in Europe, Asia or Australia.

Lost luggage rules make the lost luggage the responsibility of the last codeshare carrier. Even though a passenger’s ticket is designated as being on AA flights from the U.S. to Europe, AA will disown any responsibility for lost luggage if the bags are transferred to another airline, even to their own codeshare partner flying a plane with an AA flight number. Plus, minimum liability is far lower for AA than it is for Iberia, Finnair or Qantas. Warsaw Convention international liability is only $640 per suitcase, where U.S. DOT standards apply $3,000 of liability per passenger.

Perhaps even more pernicious and misleading is the major airline branding of regional carriers. Colgan Air flies under the colors of Continental Airlines. Mesaba operates as an arm of Northwest. Atlantic Southeast Airways has Delta spashed on its tail. Comair flies with similar Delta markings. These airlines are shown on websites and in Internet searches as part of a single seamless major airline. However, when problems strike, passengers learn quickly that, legally speaking, these airlines designated as part of a larger airline, are in no way related other than through marketing agreements.

Even DOT regulations treat these smaller airlines far different than the major airlines and their pilots have far less flying experience in many cases. While hoodwinked passengers assume they are flying on Delta when they buy a ticket on Delta.com from Boston to Washington DC, in most cases they never set foot on a Delta aircraft. In the Northwest, Horizon Airlines flies many routes for United, even though the tickets are sold through the United site and there is no clear delineation between Horizon and United.

I could tap out hundreds of words just listing the current code-sharing flights. If these were automobile companies, this codesharing foolishness would be tantamount to calling a Ford truck a Honda Civic, or a Chevy Metro a Cadillac Escalade. When Air China is Air Canada, when United is Lufthansa and Delta Air Lines is CSA Czech Airlines it seems apparent that the public is being mislead.

Why? Why shouldn’t consumers be able to clearly see on which airline’s aircraft they will actually be flying? Why should one airline be allowed to claim a route that its planes, pilots and flight attendants never fly? Why should the government be complicit in this misinformation?

It’s time for a bit of honesty from our airlines and transparent rules from our government.

Originally published in Tripso, April 7, 2009