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.

Preliminary Injunction Denied in Private Suit to Block Airline Merger
This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

After the merger of UAL Corporation, parent of United Airlines, and Continental Airlines, Inc, received regulatory approvals from the Department of Justice, the Department of Transportation, and the European Commission, the federal district court in San Francisco rejected a request for a preliminary injunction blocking the merger in a private suit.

Forty-nine named plaintiffs who had purchased commercial air travel for personal use, and intended to purchase tickets in the future, sought the temporary relief pending trial on the merits.

A private plaintiff may obtain injunctive relief upon a showing of threatened loss or damage, and only when the antitrust injuries are personal. To advance the requisite showing of an antitrust violation—and thereby warrant injunctive relief—both the existence of a relevant market and the pending acquisition’s likelihood of causing anticompetitive effects had to be established.

Relevant Market

The plaintiffs failed to define a valid relevant market for purposes of evaluating the competitive effects of the transaction. The court rejected the three proposed alternative relevant markets:

(1) A market for business passengers served by “network carriers,” characterized as airlines operating on a “hub-and-spoke” business model;

(2) A market of 13 “airport-pairs,” as opposed to “city-pairs”; and

(3) A market consisting of the United States airline industry as a whole.

“Despite a vigorous and forceful attempt, plaintiffs have not carried their burden, under any injunctive relief merits standard, of demonstrating the existence of a viable relevant geographic and product market,” the court said.

The plaintiffs failed to show why "low cost carriers" or LCCs, which traditionally operate on a point-to-point basis, focus on high density routes rather than small communities, and utilize a single aircraft type, should be excluded from a relevant product market limited to business passengers served by network or legacy carriers. The substantial evidence suggested that the LLCs should not be excluded.

With respect to the proposed market defined by "airport-pairs," the expert for the plaintiffs contended that there were "time-sensitive passengers" who were willing to pay more for access to a preferred airport in a particular metropolitan area. Even if some passengers would not use an alternative airport, city-pairs remained the appropriate market, according to the court. Competition from adjacent airports disciplined pricing and had to be considered when defining the relevant market. According to the defendants' expert, twelve of thirteen airport-pairs cited by the plaintiffs' expert were subject to competition from adjacent airports. The court questioned the plaintiffs' expert's "failure to conduct any significant economic or other analysis."

As for the third proposed market, the court said that it "can be more quickly dispatched than the two previously discussed alternatives." The proposed nationwide market failed to examine individual markets involving passenger origins and destinations. Boundaries of a product market were determined by the reasonable interchangeability for or the cross elasticity of demand between the product itself and substitutes for it. The plaintiffs failed to show how, for example, a flight from San Francisco to Newark would compete with a flight from Seattle to Miami, the court explained.

Standing, Injury

Although the plaintiffs had established standing as consumers of airline tickets, they failed to establish any significant harm they would personally suffer that would warrant preliminary injunctive relief. The plaintiffs failed to demonstrate any irreparable harm as a result of the merger or that the balance of equities tipped at all, let alone sharply in their favor.

The plaintiffs did not demonstrate in any way that they themselves would suffer any specific harm were preliminary injunctive relief denied. Because the plaintiffs failed to satisfy their burden on the merits and failed to prove irreparable harm, the court denied the motion for a preliminary injunction.

The decision is Malaney v. UAL Corporation, 2010-2 Trade Cases ¶77,187.

Antitrust Institute to Study Competition, Consolidation in Airline Industry

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

In light of recent consolidation in the airline industry, the American Antitrust Institute (AAI) will undertake a new study on competition in the U.S. airline industry, according to a September 20 announcement.

The study is motivated by the 2008 merger of Delta and Northwest and the recently proposed merger of United and Continental, both of which the AAI opposed.

Significant, Rapid Consolidation

“We have reached the point where the positive or negative effects of significant and rapid consolidation in the U.S. airline industry should be documented,” said AAI Vice President and economist Diana Moss, the lead researcher for the study. “Future merger decisions and aviation law policy can benefit from objective, empirical analysis.”

Consolidation in the airline industry has reduced the number of legacy network carrier systems from six to four, assuming the United/Continental deal is consummated, the AAI noted. The organization believes that American and U.S. Airways might counter the mergers with one or more deals of their own.

The study will assess the effect of recent airline mergers on fares and other fees; quality of service (including flight delays and cancellations); capacity expansions and restrictions; entry by low-cost and other legacy carriers; and choices available to the U.S. travel consumer.

It will attempt to determine whether the claimed cost savings from the mergers are actually realized and the extent to which the savings are passed on to air travelers. The study will also examine the effect of consolidation on low-cost carriers, in particular whether mergers create opportunity for collusion or establish price umbrellas under which low-cost carriers can compete less vigorously.

Justice Department Merger Review

In addition to the mergers themselves, the AAI is concerned with the lack of transparency in the Justice Department’s review of airline mergers. In approving both the Delta/Northwest transaction and the United/Continental combination, the Justice Department issued brief announcements. The AAI is urging the Department of Justice to provide additional statements that will facilitate evaluation of the assumptions and predictions implicit in the Antitrust Division’s analysis.

“The DOJ’s press release approving the United/Continental merger is an example of a common failure to provide sufficient information and explanation to help the public understand the reasoning behind its decisions,” said AAI President Albert Foer. “The public should not be satisfied with an explanation that `The department conducted a thorough investigation.’ Of course we take that for granted.”

In addressing the 2008 Delta/Northwest merger, the Justice Department made no mention of apparent competitive problems, stating instead that the merger would produce “substantial and credible efficiencies.”

The AAI urged the Justice Department to make additional statements that will facilitate public evaluation of the Antitrust Division’s analysis.

Participation in Study

In conducting the study, the AAI will seek input from all affected airlines and related industry groups. Those interested in participating should contact Dr. Moss at aai@antitrustinstitute.org.

Further information regarding the study—and the organization itself—is available here on the AAI website.

The American Antitrust Institute is an independent, non-profit education, research, and advocacy organization based in Washington, D.C. Its stated mission is to “increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy