(Photo: Star Alliance/US Airways)
The Department of Transportation has approved the application of Continental Airlines and the member airlines of Star Alliance to operate a joint venture that would include anti-trust immunity for several member carriers on worldwide routes, in a decision released July 10. Continental, which is defecting from Air France/KLM and Delta-led SkyTeam to become the newest member of United and Lufthansa anchored Star Alliance this October, had applied for the anti-trust immunity in cooperation with its new Star Alliance bedfellow United as part of a wider code share and frequent flier partnership between the two US legacy carriers.
Within the alliance, Lufthansa, United, and Air Canada previously enjoyed the ability to pool revenue and collectively agree on tariffs with an exemption from existing antitrust laws, under what was then termed as the A+ agreement. The new agreement approved by the DOT is to be termed A++, and includes Continental Airlines to the four-way immunity agreement. While previously the agreement mostly centered on code share and revenue sharing on transatlantic and transborder routes, the addition of Continental increases the carriers ability to code share on their worldwide networks, especially with the increased presence in Latin America Continental would bring to the table, a geographic hole in the Star Alliance fabric after flailing Brazilian carrier VARIG was booted from the alliance for failing to maintain membership requirements.
The agreement is, however, not without certain requirements in place to protect public interests. One is that the carriers implement the agreement within 18 months, ostensibly to maximize the value to consumers the DOT has determined would take effect. The second is the use of “carve-outs” or certain markets in which the carriers are already dominant, and thus the anti-trust immunity would cause a monopoly, and increase reporting requirements by the carriers, so the DOT can continue to monitor the effects of the joint venture have on competition.
The Department of Justice had opposed the application on the grounds that the antitrust immunity would limit competition and cause a monopoly. The Department particularly pointed to the reduction in number of carriers serving a route nonstop if the JV members efforts are combined, and the especially the lack of competition between the United States and Mainland China. American Airlines issued a statement in disagreement with the DOJ’s position, pointing out that the DOJ methodology differed slightly from that used by the DOT to approve earlier applications such as the original A+ agreement, as well as the JV for members of the SkyTeam Alliance. American, working on similar agreements with OneWorld partners, particularly British Airways, would stand to lose big if the DOT predicated a change in antitrust immunity allowances by following the DOJ’s findings.
Three travel agent associations, ARTA, ISTA, and ASTA, filed concerns with the Department that the new alliances would decrease commissions to travel agents and the decrease in competition would result in higher fares for the consumer. ISTA/ASTA also requested a carve-out to protect distribution through travel agencies, and require the airlines to report on their distribution practices. The DOT denied all except the last, arguing that the combined market share of the new immunized JV would amount to only 31.7% of the market, not enough to wield the market power the associations claim will reduce their compensation and raise fares.
The Master Executive Council for the Air Line Pilots Association (ALPA) that represents United pilots also raised concerns that the concept of “metal neutrality” or the ability of the JV partners to schedule aircraft and crews interchangeably would reduce the amount of flying done by United, as a form of “off-shoring” the work performed by United’s pilots in favor of a foreign carrier. The MEC asked for limitations which would protect the share of the work performed by ALPA represented United pilots, but the DOT rejected this, saying such limitations would damage the benefits brought by the A++ agreement in the first place.
In the decision, the DOT argues that passengers will benefit from fare combinability, allowing passengers to combine any number of airlines to reach the best fare or schedule, whereas many fares and journeys previously limited choices to one airline per roundtrip. The DOT argues that this will increase options for passengers to find a low fare and a convenient schedule. The DOT also states airlines will benefit because of synergies, economies of density (fuller airplanes), reducing costs and passing savings along to consumers in the form of lower fares.
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