September 8 The Consumer Is The ‘North Star’ 


The Consumer Is The ‘North Star’ When It Comes To Open Skies And Antitrust Policy 

It’s Time for the U.S. Congress to Correct Course and Revisit Antitrust Immunized Airline Alliances

The Gulf carriers (Emirates Airlines, Qatar Airways and Etihad Airways) in entering U.S. markets stimulate demand, offer consumers more competitive choices and new destinations, lower international fares and pressure U.S. airlines to improve their product and service offerings. The Gulf carriers also help lower domestic fares. For example, when JetBlue’s partner Emirates entered the Boston market in 2014 its passenger feed enabled JetBlue to introduce service on the Delta Air Lines-monopolized Boston/Detroit route lowering fares for consumers 40 percent.

As the Boston/Detroit entry demonstrates, Open Skies policy stimulates new domestic service while disciplining domestic pricing. These consumer-friendly domestic impacts are particularly welcome as they come at a time when consolidation has greatly reduced rivalry among the Big 3 U.S. airlines (Delta Air Lines, American Airlines and United Airlines). The need for and importance to consumers of this new model for domestic competition cannot be overstated.

These benefits from foreign carrier new entry are evidence of a functioning competition and an Open Skies policy delivering anticipated outcomes for consumers. A 2014 academic report from the University of Maryland[i] by independent academic researchers concluded in the Abstract section of its report:

“Gulf carriers, such as Emirates Airline, Etihad Airways, and Qatar Airways, have expanded aggressively and are creating an increasingly dense global network... Based on data obtained from the U.S. Department of Transportation, the empirical results suggest that greater competition by Gulf carriers in U.S. international markets is associated with (1) significant growth in U.S.–Middle East traffic volumes and (2) small but statistically significant traffic losses and fare reductions for U.S. carriers in route markets connecting the U.S. with Africa, Asia, Australia and Europe.”  

Now that the Big 3 airlines have secured antitrust immunization (ATI) for their global alliances and have driven domestic U.S. consolidation, their distain for the free market and disregard for consumers’ and other stakeholders’ interests has reached an unprecedented level as evidenced by their (1) refusing to provide ancillary fee information to consumers (e.g., for premium seating); (2) undermining their regulator’s consumer protection authority (H.R. 4156); (3) endeavoring to kill the EX-IM Bank; (4) blocking the Norwegian Air International (NAI) application to serve the U.S.; and (5) attacking the Gulf carriers.[ii]

The Big 3 wants to freeze Gulf carriers’ access to U.S. markets and limit consumer choice, and with it, efficient, affordable access to foreign destinations. With no sense of irony-in-the-extreme, while slamming the Gulf carriers, and the global connectivity that they provide, Delta Air Lines this year announced reductions in international service to include 15 to 20 percent reductions in service from Japan, 15 percent to Brazil and 15 to 20 percent to Africa, India and the Middle East.[iii] This brazen attempt at “capacity management,” just like Senator Richard Blumenthal’s (D-CT) concern about domestic “capacity discipline” and signaling, is nothing short of an effort to keep fares artificially high by creating a mismatch between available seats and consumer demand to fly.

What’s really going on here?

When Southwest began to grow from a small airline in Texas to the national consumer-focused powerhouse that it is today, the established network airlines sought to beat it through regulatory restrictions. Fortunately for consumers, they failed. Later, when ValuJet very successfully established a base in Atlanta, the implication was that Delta Air Lines had made a serious, strategic mistake in allowing the carrier to gain a foothold at Atlanta. The industry mantra became: “There will never be another ValuJet!” The major carriers subsequently waged a military-like campaign against low-cost airlines and began flooding their markets with tens of thousands of cheap seats to prevent them from achieving break-even load factors.

Today, NAI’s business model and application before the U.S. Department of Transportation (DOT) is perceived in the same threatening way. Today’s mantra: “Let’s stop NAI before its business model is tested and proven and other carriers endeavor to emulate their success. There will be Ryanair ads in Washington and Tiger Airways ads in Los Angeles.” The problem with that thinking is that it contravenes 20 years of consumer-centered U.S. aviation policy and international agreements.  And it is a slap in the face of the American consumer.

In addition to closing down the U.S. market to additional competition, in a report published on April 10, 2015 entitled ‘Gulf airlines under fire. Aside from the rhetoric and dust flying, what’s the underlying agenda?’ the independent and influential CAPA research organization concluded: “It is these European partners – at least Lufthansa and Air France whose shared interests the 55-page white paper looks to protect.”[iv]

To their credit, British Airways, Iberia and Air Berlin quit the Association of European Airlines over that trade group’s support of proposed EU commercial-protectionism policy vis-à-vis the Gulf carriers. British Airways, in particular, has been a long-time proponent of market liberalization[v] and, like the vast majority of Open Skies stakeholders, knows that the reason the Big 3 and their immunized alliance partners in the EU cannot add consumer harm to their case against the Gulf carriers is because consumers are benefiting from more choice and better products. In the longer term, EU and U.S. carriers will have to compete and improve their offerings across the board in response to market forces, further benefiting consumers.

The consumer is the “North Star” when considering the efficacy of competition, antitrust and Open Skies policies. A consolidated U.S. airline industry, a dramatic decrease in international competitors because of antitrust immunized global alliances, disciplined domestic seat-capacity growth and international service reductions by U.S. carriers combine to shine a bright light on the bedrock principle that new entry is the only available antidote to ATI and carrier-imposed capacity constraints and service reductions.

In fact, ATI is predicated on open markets and meaningful competitive entry.  To protect consumers, immunity and Open Skies go hand-in-hand. When U.S. carriers leap further and endeavor to keep foreign carriers out of U.S. markets altogether, such as NAI, one must ask should Congress now intervene and require DOT to reconsider existing and future grants of ATI?

In granting ATI to airline partners in global alliances to which the Big 3 belong there is always analysis of how the anticipated benefits of ATI outweigh the inherent risk to consumers and competition. When doing those benefit/risk analyses did DOT expect massive interalliance political campaigns like the Gulf carriers and NAI assaults, which are clearly designed to thwart competitive entry? 

Did DOT anticipate that 80 percent of transatlantic market capacity would be controlled by three alliances - that virtually free from competition oversight - would seek to use their political muscle to lock-in that market power by attempting to block competitive entry and deny consumers additional choice by attacking Gulf carriers’ 5th Freedom rights[vi] and NAI’s application?

If not, shouldn’t regulators reevaluate their benefit/risk balancing test in light of real world, marketplace developments? For example, in the case of NAI - where U.S. consumers have been denied new competitive choices for 18 months - the emergence of coordinated, joint alliance activities to block competitive entry has decidedly changed the ATI benefit/risk calculus for consumers.

As U.S. airline industry consolidation accelerated in 2008, and combined with ATI joint ventures among alliance partners, so did the Big 3’s anti-consumer and anti-competitive policies and practices. Increasingly, industry participants,[vii] consumer groups and regulators are questioning the expansion and efficacy of ATI. For example, the U.S. Department of Justice concluded in its 2011 paper, Antitrust Immunity and International Airline Alliances, “Rather than being an exceptional event designed to induce positive regulatory changes, antitrust immunity has become virtually the norm for participants in all major international alliances.”[viii]

Yes, it’s time for the U.S. Congress to intervene.[ix]   

NOTES

[i] Martin Dresnera, Cuneyt Eroglub, Christian Hoferc, Fabio Mendezd, Kerry Tand, The Impact of Gulf Carrier Competition on U.S. Airlines (2014) University of Maryland, http://btcnews.co/1JNmadb

[ii] Kevin Mitchell, Letter To State Attorney’s General, Business Travel Coalition, July 2, 2015, http://btcnews.co/1dA6NLl

[iii] Jad Mouawad, Delta Posts Record Net Income; Reduces International Service, The New York Times, April 15, 2015, http://btcnews.co/1EOfPRS

[iv] Gulf airlines under fire. Aside from the rhetoric and dust flying, what’s the underlying agenda?, CAPA, April 10, 2015, http://btcnews.co/1HnTs4D

[v] IAG's British Airways quits European trade body over policy differences, Reuters, April 16, 2015, http://btcnews.co/1FO1Y8t

[vi] The right of an airline to carry revenue traffic from country A to country B and then pick up and drop off traffic from country B to country C. Forward Cabin, January 8, 2015, http://btcnews.co/1EKB9rD

[vii] Roger Dow, The Unfriendly Skies of Legacy Carriers, The Wall Street Journal, September 3, 2015, http://btcnews.co/1EKBoDl

[viii] William Gillespie, Oliver M. Richard, Antitrust Immunity and International Airline Alliances, U.S. Department of Justice, Economic Analysis Group, Discussion Paper, http://btcnews.co/1EOjzTw  

[ix] For U.S. Open Skies policy foundational documents, analyses, statements and press reports, please visit http://OpenSkies.travel.


ABOUT OpenSkies.travel

Mitchell is the founder of OpenSkies.travel the mission of which is to bring significant organization to the task of maintaining aviation liberalization agreements in accordance with the intent of the signatories to such accords. See Founding Members at http://btcnews.co/1BiYrkx.

ABOUT BTC
Founded in 1994, the mission of Business Travel Coalition is to interpret industry and government policies and practices and provide a platform so that the managed travel community can influence issues of strategic importance to their organizations.

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