Why AA/BA Antitrust Immunity Makes More Sense now than ever…

Art © TWC 2009

The History 

When American Airlines (AA) and British Airways (BA) filed for antitrust immunity in 2002 there was little hope that an agreement could be reached with the US and EU Regulatory authorities. New entrants into the EU-US market were prohibited, and AA and BA were opposing businesses nearing an effective monopoly hold on daily departures between Heathrow and the US.

In 2007, the first phase of the new EU-US Open Skies accord was reached. Since then several new entrants have started flights in this lucrative market. This agreement has allowed these new market entrants to fundamentally change the competitive landscape at Heathrow and other airports throughout the EU. Ultimately the passengers now have a wider choice of carriers, service levels, and new non-stop destinations than ever before. As a result, consumers on both sides of the Atlantic should urge their lawmakers to approve the AA/BA application for immunity.

The Opposition from Virgin 

In spite of these competitive changes some consumer groups, and competitors such as Virgin Atlantic (VS), vehemently oppose the proposal. Virgin Atlantic claim that if the deal were to be approved that AA/BA would have a “stranglehold on London Heathrow-US services, and be able to coordinate schedules enough to inflate demand, and as a result also inflate fares. While the anti-trust immunity would arguably have some impact on frequency and schedule as the two carriers coordinate, in the end consumer demand and pressure from new competitors will keep fares in check and provide passengers an alternative choice of carriers on a scale not previously available.

The Politics

Since the implementation of the Open Skies agreement, we have seen many carriers such as Air France, Delta, and US Airways, and Northwest begin to challenge the established carriers in the Heathrow-US market. While the economic downturn has temporarily scaled down the expansion efforts of some like Air France, these are an example of the healthy competition that comes from open markets.  Since then Congressman Orbester has made his protectionist position clear via US HR 831, while UK Transport Minister Hoon Geoff Hoon stopped short of threats to dissolve the current EU-US open skies agreement as he reinforced European calls for further liberalisation in stage two talks during a speech to the International Aviation Club in Washington two weeks ago.
 
Hoon indicated that if no second-stage agreement is reached next year, either party has the right to withdraw traffic rights secured under phase one – an option highlighted by previous UK transport officials but not by Hoon. It was the stance of his predecessor Ruth Kelley the former Transport Minister.

During the meeting of aviation professionals Hoon said that “[we] should stay clear of retaliation,”. “I have no doubt the United States should not be afraid of opening up its aviation business to further competition.”

In our opinion it is entirely likely that with the European and Local elections in June, and current turmoil over UK domestic policy issues such as MP’s expenses, and the recent defeat in the House on the issue of Gurkha’s, it is possible that this Labour Government, and its ministers, will not be present around the final negotiating table.
 
In his speech Hoon indicated that protectionism offers cold comfort in an economic downturn. That same day United States Congressman James Oberstar (D-MN) was receiving an award for “service to aviation’ while at the same time being the main architect of H.R. 831 calling for limited the power of the DoJ and calling for tougher reviews, restrictions, and rollbacks on airline alliances and

immunity.  

What is the rest of the world doing? 

In a related story, Canada raised it’s foreign-ownership limits this week to just short of 50%, while Inida continues to liberlise it’s foreign ownership criteria.
 
Another concern for the UK, and EU, is the US reaction to including commercial flights in the EU carbon emissions scheme, which we at TWC have lobbied against. 

The New Threat at Heathrow

There is also a serious potential contender in the London-US market. BMI (BD) and their majority owner Lufthansa have been raising their profile to business travelers over the past few months As Heathrow’s second largest airline could direct links to US be far off? Lufthansa’s recent increase in its BMI stake is further evidence of the emerging strength and competition in the Heathrow market by the Star Alliance, who already operate with antitrust immunity.

The past few years have also seen some important experimentation with trans-Atlantic links between other London airports, such as Stansted and Luton, with mixed results. Fairly radical change came at Gatwick as a near mass exodus of carriers shifted their Gatwick operations to Heathrow soon after the final agreement on Open Skies was in place. Virgin Atlantic also has a unique opportunity to redefine the overall London-US airport experience as it leads a consortium proposing the purchase of Gatwick Airport from the British Aviation Authority (BAA). If it succeeds in its bid, they will have the opportunity to potentially shift consumer preference away from Heathrow with a superior airport experience.

The Upshot

We agree that consolidation is no silver bullet, and it will not solve any carriers problems overnight.   That said, we feel that there is no cogent argument for opposing the AA/BA request for the same immunity that has been granted many other alliances in the EU and US already. We believe that its approval will level the playing field between the airline alliances, increase competitive pressures, and ultimately benefit consumers as a result.

"Does anyone here object to his union?" Queue Congressman Orbester (Pic copyright of TWC 2009)

After lobbying from Alaska Air and other labour groups, it would appear that Congressman Oberstar (Democratic Congressman and Chairman of the House Transportation Committee) has requested that U. S. Transportation Secretary LaHood look into the “nationality” of Virgin America for potential violations of U.S. foreign ownership rules.

We find this ironic, given today’s news from the G20 summit in our own hometown.  While protesters went about their business in the Square Mile, down in the Docklands something truly important was happening.  In the final communiqué the G20 found common ground, in principle, against trade barriers.  We predict that we will see implicit ripple effects onto Open Skies Mark II as a result.  We also think that a US Congressman would be more concerned with American jobs being lost vs. the blatant protectionist politics and his obsession with HR 831.

Ironically, the Virgin issue has very little to do with HR831, as it is a stand-along player that Oberstar is righteously trying to protect against what his calls ‘whiny’ legacy airlines.

Perhaps we should all think this through to its logical conclusion?  In our opinion both Oberstar is missing the point.   We are talking about American jobs here, and it is my sincere hope that the legislators of both Houses from California and New York will be so kind as to remind the Congressman of that pertinent fact.  

In addition, is it possible that while the investors may have indeed decided to extract some of their remaining investment from this venture, that perhaps they still retain critical voting rights as part of the contract’s structure?   I am no lawyer, but what I do know is this: The Virgin Group and its CEO are both known quantities to me personally, and I would not underestimate how particularly adept they are at doing their jobs.

While we understand the position of Alaska Air, we are a bit more puzzled by the reaction of some of the labour unions who are exercising their muscle on this issue as well.    While I appreciate that times are tough, but I have to wonder if ALPA be singing a different tune if Virgin America’s pilots were dues paying members?

Oberstar has missed the fundamentals.  We live in a global economy now, and airlines are on the front line.  They are our physical lifeline to the new global economy, a tangible manifestation of the reality of international commerce, trade, and leisure.  

At TWC we will continue to use our resources to highlight what we interpret as the dangerous brand of political protectionism practiced by the Chairman of the US House Transportation Committee.

Disclaimer:  The author holds no current positions or active contracts with any of the carriers mentioned in this blog.

BLOGROLL ON THIS TOPIC

http://eyeonlaaviation.blogspot.com/2009/04/oberstar-claims-vx-may-be-violating.html

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