Busy Week of Antitrust Developments in Aviation Industry

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The Department of Transportation's antitrust immunity grants to two groups of air carriers seeking to jointly market trans-Pacific routes were among a number of interesting antitrust developments in the aviation industry this week.

American Airlines and Japan Airlines (JAL), members of the oneworld alliance, announced on November 10 that the DOT had granted final approval to their request for antitrust immunity with respect to their trans-Pacific joint business. The arrangement has also been approved by Japan's Ministry of Land, Infrastructure, Transport and Tourism. Both airlines anticipate launching their coordinated services in early 2011, according to their joint statement.

American and JAL filed their application for antitrust immunity for the joint business agreement (JBA) in February 2010. At that time, the carriers said that, under an immunized JBA, American and JAL would cooperate commercially on flights while continuing to operate as separate legal entities. They would coordinate fares, services, and schedules.

United Airlines, Continental Airlines, and ANA also announced on November 10 that the DOT issued a final order granting antitrust immunity for their trans-Pacific joint venture under which the carriers intend to jointly develop flight schedules and sales activities. United Continental Holdings, Inc. is the holding company for United and Continental, which recently merged to form the world's largest airline. ANA is a leading Japanese provider of air transportation services.

Southwest/AirTran Merger

Earlier this week, Southwest Airlines Co. and AirTran Holdings, Inc. announced that the Department of Justice Antitrust Division had issued a “second request” in its investigation into the combination of the low-cost air carriers.

A second request is issued when the antitrust agency reviewing the deal determines during the initial waiting period that it needs additional information and/or documents to complete its analysis of competitive effects under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act. The second request extends the waiting period imposed by the HSR Act until 30 days after the parties have substantially complied with the request.

Second requests are not uncommon in federal antitrust reviews of large mergers. The Justice Department issued a second request in the recently consummated United/Continental merger.

“Both parties are in the process of gathering information to respond to the second request and will continue to work cooperatively with the DOJ as it reviews the transaction,” according to the carriers' joint statement of November 9. Southwest and AirTran expect the transaction, which was announced on September 27, 2010, to close in the first half of 2011.

Air Cargo Cartel

Meanwhile, on the other side of the Atlantic, the European Commission (EC) announced on November 9 that 11 air cargo carriers had been fined a total of nearly €800 million for operating a worldwide cartel. Air Canada, Air France-KLM, British Airways, Cathay Pacific, Cargolux, Japan Airlines, LAN Chile, Martinair, SAS, Singapore Airlines, and Qantas were fined a total of €799.445.000 by the EC for coordinating surcharges for fuel and security over a six year period. Lufthansa (and its subsidiary Swiss) received full immunity from fines under the EC's leniency program.

The EC fines follow a number of guilty pleas from these same carriers to price fixing charges filed by the U.S. Department of Justice since August 2007.

UAL/Continental Asset Transfer Assuages Antitrust Division’s Merger Concerns

This posting was written by Georgia Koutouzos, Editor of CCH Aviation Law Reporter.

In light of the recent agreement by United Airlines and Continental Airlines to transfer takeoff and landing slots and other assets at Newark Liberty Airport to Southwest Airlines, the U.S. Department of Justice announced on August 27 that it has closed its investigation into the proposed merger of UAL Corporation, United’s parent company, and Continental.

The two carriers entered into the arrangement with Southwest in response to the DOJ's principal concerns regarding the competitive effects of the proposed United/Continental merger.

The Justice Department’s investigation determined that the proposed merger would combine the airlines’ largely complementary networks, resulting in overlap on a limited number of routes where United and Continental offer competing nonstop service.

The largest of those routes are between United’s hub airports and Continental’s hub at Newark Airport, where Continental has a high share of service and where there is limited availability of slots, making entry by other airlines particularly difficult.

The transfer of slots and other assets at Newark to Southwest—a low cost carrier that currently has only limited service in the New York metropolitan area and no Newark service—resolves DOJ's principal competition concerns and is likely to significantly benefit consumers on overlap routes as well as on many other routes, the agency said. The slot transfer is through a lease that permanently conveys to Southwest all of Continental’s rights in the assets, in compliance with FAA rules.

Text of the Department of Justice news release appears here.

In announcing the settlement in an August 27 statement, United and Continental said that the slot pair transfer was expected to have minimal impact on combined carrier's route network.

Jeff Smisek, Continental's Chairman, president and CEO, described the leasing arrangement as “a fair solution that would allow Continental and United to create an airline that will provide customers with an unparalleled global network and top quality products and services, while enhancing domestic competition at Newark.”

In a further statement, UAL Corporation chairman, president and CEO Glenn Tilton said that he looked forward to the airlines’ stockholders’ votes on September 17 and expected to close the merger by October 1, 2010.

Continental and United announced an all-stock merger of equals on May 3, 2010. In July, the airlines’ proposed merger received clearance from the European Commission, which found that the transaction would not raise competitive concerns in Europe or on trans-Atlantic routes.

United, Continental Heads Address Antitrust Concerns over Proposed Merger

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The heads of United Airlines and Continental Airlines Inc. told a Senate panel yesterday that their proposed merger would not reduce industry competition due to the small number of overlapping routes and the abundance of low cost carriers (LCCs), which maintain downward pressure on prices.

The two airlines announced earlier this month that they would join forces in a partnership that would be completed, pending regulatory clearance, by the fourth quarter of 2010.

Senate Subcommittee Hearing

At a hearing of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, Chairman Herb Kohl (D, Wis.) acknowledged the airlines’ position that the merger was “built to pass” antitrust scrutiny because their routes do not substantially overlap and LLCs “will constrain their ability to raise prices.”

However, he pointed out that the merger will reduce the number of national networked airlines. “Two years ago, we had six, after this merger we’ll have four. So we need to ask the question—at what point do we reach a tipping point for competition?”

Kohl framed the issue as balancing the difficulties faced by the airline industry in recent years with problems faced by travelers today—including frequent delays, puzzling prices, and a decline in service.

“So we must ask the critical questions—how will the loss of competition between these two national systems impact airfares and service? Will a combined United/Continental be a stronger competitor to the previously merged Delta/Northwest or will the large, networked airlines that remain dominate the airline industry across the country and internationally? Will the low cost carriers be able to step in and fill the competitive void or will they feel less competitive pressure to keep fares low or compete by offering things like free checked bags? And how will small and medium sized cities fare after this merger, at the very time that they most need frequent and inexpensive air service for their economic health?”

Airline Responses

United chairman and CEO Glenn Tilton, responding to questioning, said “I don’t think there’s any worry here that competition is going to be lessened by the combination of two companies who do not overlap in the main and are committed to using the combined network to increase frequency of service rather than reducing it.”

Continental chairman and CEO Jeffery Smisek, meanwhile, told subcommittee members that his airline is “eking out a hand-to-mouth existence and, as far out as I can see, we’ll continue to eke out a hand-to-mouth existence.”

By merging with United, “we can create a carrier that will have a future and a future profitability which is good for communities and good for us to be able to continue air service.”

Asked about the likely future of its domestic hubs, Tilton said they are “extraordinarily important markets” with significant business travel demand, “so I don’t think there’s any jeopardy whatsoever to those hubs.”

Low Cost Carrier Alternative

In a joint statement Tilton and Smisek noted that more than 85 percent of passengers traveling non-stop on either Continental or United have an LCC alternative.

“There once was an assumption that LCCs would have difficulty competing at the hubs of network carriers. This assumption has long since been disproven,” the airline chiefs said.

Tilton noted in questioning that low-cost-carrier Southwest Airlines, the largest carrier in the U.S., would still be the largest carrier after the merger.

“In sharp contrast to legacy carriers, they have shown a steady, steady pattern of growth,” Tilton said. “They have shown an ability to accommodate change in their strategy. They’re building a more complex proposition to customers which includes frequent flyer schemes and even connections to international carriers both north and south.”

Darren Bush, an associate professor at the University of Houston Law Center, argued that while some LCCs have managed to penetrate major hubs, generally “the larger the network the easier it is to drive out low cost carrier competition.”

Bush also questioned the real reason behind the United/Continental merger. “It should not be presumed that the merger’s purpose is profit maximization and efficiencies,” Bush said. “[I]t is difficult to see how two organizations in the same dire straits will, when combined, produce a better airline.”

Text of Senator Kohl’s introductory statement appears here on the Senator’s website.

Trade Regulation Tidbits

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

News, updates, and observations:

 House Transportation Committee Chair James L. Oberstar (D, Minn.) announced his opposition to the proposed merger between United Airlines and Continental Airlines in a conference call with reporters on May 6. Rep. Oberstar sent a letter on May 5 to Christine A. Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division, urging the agency’s disapproval of the proposed merger. "If United and Continental merge, another domino in a chain of mergers will fall, and there will be strong pressure for further consolidation, " Oberstar’s letter reads. "As I predicted when I wrote your predecessor in 2008 on the Delta-Northwest merger, approval of that merger created conditions that have persuaded Delta’s competitors to pursue their own combinations. The United-Continental transaction is the latest, but it likely will not be the last." The text of the letter is available here on the website of the U.S. House of Representatives Transportation and Infrastructure Committee.

 Former FTC Chairman Timothy J. Muris is the 2010 recipient of the Miles W. Kirkpatrick Award for Lifetime FTC Achievement. The award was announced on May 5. “Tim Muris provided inspired service to the Federal Trade Commission and to the American public,” FTC Chairman Jon Leibowitz said, citing Muris’s contributions and the agency’s mission to protect consumers and encourage competition. “He understood the value of combining economic and legal analyses with common sense, and the measures he advanced to realize this vision, such as the National Do Not Call Registry, raised the FTC’s stature among public institutions throughout the world and among our nation’s consumers.” Muris served as FTC Chairman from 2001 through 2004. Earlier, he held other key positions at the Commission, including Director of the Bureau of Competition, Director of the Bureau of Consumer Protection, and Assistant Director of the Planning Office. Currently, Muris is of counsel at the law firm of O’Melveny & Myers and is Co-Chair of the firm's Antitrust/Competition Practice. Further details appear here on the FTC website.

 Four current and former British Airways executives have been acquitted of price fixing charges by a jury in London, the United Kingdom Office of Fair Trading (OFT) announced in a May 10 press release. The OFT said that it asked the jury to acquit the defendants in the U.K.'s first criminal competition law trial following "the discovery last week of a substantial volume of electronic material, which neither the OFT nor the defence had previously been able to review." The OFT said: "Given that the trial had already begun and the volume of material involved, the OFT accepts that to continue with the trial in light of this unforeseen development would be potentially unfair to the defendants." The OFT "acknowledge[d] responsibility for its part in this oversight, which occurred at a time when the UK criminal cartel regime was still relatively new and the OFT's approach to the handling of leniency applications in the context of parallel criminal and civil investigations was still evolving." The OFT also said that it would review the role played by Virgin Atlantic Airways and its advisers in light of the airline's obligations, as a leniency applicant, to cooperate with the OFT. The previously-undisclosed electronic material included e-mails sent or received by a former Virgin Atlantic employee. In an August 7, 2008 press release, the OFT announced that it had charged four individuals with cartel offenses, in connection with its criminal investigation into price-fixing of fuel surcharges for long-haul passenger flights. The individuals were alleged to have dishonestly agreed with others to make or implement arrangements that directly or indirectly fixed the price for the supply of passenger air transport services by British Airways and Virgin Atlantic Airways in the United Kingdom. The charges related to a period between July 2004 and April 2006, when the defendants were employed by British Airways.

Trade Regulation Tidbits

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

News, updates, and observations:

 Senator Herb Kohl (D, Wis.), chairman of the Senate Antitrust Subcommittee, said his subcommittee was likely to hold a hearing to examine whether the merger of Continental and United Airlines will lead to higher prices or lower quality of service. Continental and United announced a difinititve merger agreement on May 3. The carriers said that the combination would “bring together the two most complementary networks of any U.S. carriers, with minimal domestic and no international route overlaps.” In a May 3 statement, Senator Kohl commented that the merger “would create the nation’s largest airline and will no doubt affect the travel choices for millions of consumers across the nation.” While voicing concern that the major airlines face competitive pressures and high costs, Kohl spoke of a “need to insure that airline consolidation does not diminish the competitive choices for air travelers.”

 Legislation to extend permanently the Antitrust Criminal Penalties Enforcement and Reform Act (ACPERA) of 2004 was introduced in the Senate on April 27. Senator Herb Kohl (D, Wis.), sponsor of the measure, said “permanent extension of ACPERA would encourage participation in the Antitrust Division’s leniency program.” ACPERA limits the civil liability of leniency participants to the actual damages caused by that company, rather than treble damages usually available in civil antitrust lawsuits. The law was amended in 2009 to extend the de-trebling provision for one year. Without amendment, it would expire in June. The measure (S. 3259), which was co-sponsored by Senator Orrin Hatch (R, Utah), also calls for the Comptroller General to submit a report to the Committees on the Judiciary of the House of Representatives and the Senate on the effectiveness of the Antitrust Criminal Penalties Enforcement and Reform Act of 2004.

 The FTC told congressional lawmakers that the rapid-fire pace of technological change, including an explosion in children’s use of mobile devices and interactive gaming, has led the agency to accelerate its review of the Children’s Online Privacy Protection Rule (COPPA Rule) to make sure that it is still adequately protecting children’s privacy. Although the FTC reviews most of its rules every 10 years, the COPPA Rule is being reviewed only five years after its last review, in 2005. The comments were made in agency testimony, prepared for delivery by Jessica Rich, Deputy Director of the FTC Bureau of Consumer Protection, before the Senate Commerce, Science and Transportation Committee's Subcommittee on Consumer Protection, Product Safety, and Insurance on April 29. The FTC’s COPPA Rule, which took effect in 2000, requires operators of Web sites and online services that target children under age 13 to obtain verifiable parental consent before they collect, use, or disclose personal information from children. The operators must give parents the opportunity to review and delete personal information their children have provided.

Some Administration Officials Oppose DOJ's Antitrust Enforcement Efforts: News Report

This posting was written by John W. Arden.

Christine Varney, who has pledged stricter antitrust enforcement during her tenure as chief of the Department of Justice Antitrust Division, is “finding some resistance from officials within the administration,” according to a front page story in the Sunday, July 26, New York Times.

Varney has begun investigations in the telecommunications, agricultural, and pharmaceutical industries and is examining the competitive effects of the Google book search settlement agreement, according to Times reporter Stephen Labaton.

However, some of these efforts are being opposed by administration officials who “fear that the crackdown is coming at a bad time, as corporate America is reels from the recession” or believe that “larger companies and industry alliances can provide consumer benefits by making their businesses more efficient,” the story said.

One example of the differences in opinion cited by the story involved Continental Airlines’ attempt to join the Star Alliance, a global airline network. Against some of the Antitrust Division’s recommendations, the Transportation Department granted antitrust immunity to Continental to join the alliance and approved a new joint venture among four of the alliance’s members.

The Antitrust Division had filed comments indicating that the applicants failed to demonstrate the required elements for the broad immunity sought and suggesting that the Department of Transportation grant a more limited immunity.

This conflict “became so heated that the president’s chief economic adviser, Lawrence H. Summers, was called in to mediate,” the article stated.

Proposed legislation to eliminate the antitrust exemption for commercial railroads (The Railroad Antitrust Enforcement Act of 2009) also was referenced as the subject of potential disagreement. Although the proposal (H.R. 233, S. 146) is supported by senior Democrats, the administration has not taken a position.

In addition, the administration’s proposal to overhaul financial regulation rejected antitrust enforcement “as a way to reduce the size of large companies considered too big to be allowed to fail,” Labaton wrote.

The article (“Antitrust Chief Hits Resistance in Crackdown”) appears here on the New York Times website.