Continental joins the (all)star alliance: antitrust concerns with airline alliances and open-skies treaties.

• Author: Hand, W. Robert

1. INTRODUCTION II. FROM REGULATION TO OPEN SKIES: BACKGROUND OF THE INTERNATIONAL AIRLINE INDUSTRY A. History of U.S. and European Regulation B. Formation of International Airline Alliances C. Hypothetical Passenger Example III. SYSTEMS COMPETITION: ALLIANCE SYSTEMS AND OPEN SKIES A. Airline Joint Ventures B. DOT Grant of Antitrust Immunity C. The Atlantic-Plus-Plus Agreement (A++) and the Continental-Star ATI Agreement D. Immune Alliances Undermine Open Skies Agreements E. The Global Hub and Spoke Model F. Predatory Pricing G. Collusion IV. RECOMMENDATIONS AND CALL TO ACTION A. H.R. 831: Rep. Oberstar's Bill B. Phase H of the U.S.-E. U. Open Skies Agreement V. CONCLUSION I. INTRODUCTION

   On October 27, 2009 Continental Airlines switched from the Delta-dominated SkyTeam Alliance to partner with United Airlines in the Star Alliance. (1) The move was praised by many, but criticized by some as the equivalent of collusion between competitors determined to concentrate international airline markets and destroy competition. (2) The United States has turned to "Open Skies agreements," such as that entered into with the European Union in April 2007. (3) Open Skies agreements are negotiated with foreign nations and are aimed at alleviating anticompetitive concerns in the international aviation industry. (4) The U.S.-E.U. agreement permits any U.S. or E.U. airline to fly freely between any city in the United States and any member state of the E.U. (5) The agreement, to be implemented in phases, claims to increase competition among carriers and open access to more international airports, enabling a competitive global market. (6) However, many feel that the agreement will only produce temporary benefits for international travelers, which may disappear with the implementation of Phase II at a later date. (7) Phase II will allow foreign airlines to own greater shares in U.S. airlines, a provision that the United States has said it may not accept. (8) This could lead to a highly concentrated global airline market, opening the door for monopolization or collusion by a few dominant carriers. Thus, any benefits to consumers under an Open Skies agreement would be undermined by the concentrated market.

   This fear is enhanced by the recent trend in airline mergers and joint ventures, and the increased concentration of international airline alliances. (9) Airline alliances (i.e., Star, SkyTeam, and Oneworld) are agreements between domestic and foreign airlines allowing them to share revenues and coordinate prices, scheduling and code sharing (enabling baggage transfer on connecting flights). (10) Because foreign ownership of airlines is prohibited in the United States, as well as in many E.U. countries, airline alliances serve much of the same functions as a merger, only without the formality of transferring ownership rights. (11) In other industries, coordination of pricing and scheduling among top competitors would constitute collusion and a per se violation of section 1 of the Sherman Antitrust Act. (12) However, none of the three global alliances need to worry about prosecution under the U.S. or E.U.'s antitrust laws: Oneworld, Star, and SkyTeam alliance members have all been granted antitrust immunity by the U.S. Department of Transportation (DOT) and the E.U.'s European Commission. (13)

   Two of the major anticompetitive concerns created by immunized alliances are that they (1) eliminate horizontal competition among member carriers and, (2) encourage alliance-dominated hubs in both the United States and European Union. (14) Such effects undermine the principles of the U.S.-E.U. Open Skies Agreement, which is supposed to allow airlines to fly freely to any city within member states' boundaries. (15) More and more independent airlines around the world are essentially forced into an alliance just to gain access to alliance-dominated hubs so they can compete in the international market. (16) Meanwhile, the alliances themselves are happy to welcome additional members in order to extend their dominance into new international markets and to create new exclusive hubs. (17) Another major concern is the United States' dominance of the global airline industry. (18) Before the trend toward Open Skies agreements, the major U.S. airlines were losing money and on the verge of bankruptcy due to the deregulation of the industry and overcapacity in domestic markets. (19) Foreign capital investment in U.S. airlines was severely limited by restrictions on foreign ownership. (20) To offset the problem of domestic losses, the United States pressured European governments to enter into Open Skies treaties. (21) This, in turn, led to the formation of joint ventures and alliances between U.S. and foreign carriers who could not merge because of the ownership restrictions. (22) And now these joint ventures are not subject to antitrust scrutiny from the U.S. Department of Justice (DOJ) because they have received immunity from the DOT. (23) In sum, if the United States was not protectionist and allowed foreign investment in U.S. carriers--in other words, if they allowed the free market to operate--the airlines would not need to seek bankruptcy protection or antitrust immunity.

   Even though member states of the European Union have enacted similar ownership restrictions, the United States retains an advantage because American carriers, unlike their European counterparts, can still offer service among European countries. (24) This has allowed U.S. "legacy carriers" (25) to maintain their dominant positions in the international travel market without fear of foreign competition. (26) Thus, the U.S. airlines wield considerable international market power through restrictions on foreign ownership. (27) Phase II of the U.S.-E.U. Open Skies Agreement is supposed to remove many of these restrictions to create a more competitive, global airline industry. (28)

   The European Union must demand that the United States make concessions to allow increased foreign ownership of U.S. airlines. This will globalize competitive market forces in the airline industry and remove the need for immunized alliances. Further, carrier cooperation should be subject to a higher degree of scrutiny by the DOJ than it currently is by the DOT. Also, the United States must pass laws that create greater oversight of the DOT's power to grant antitrust immunity to alliances. (29) Immunity needs to be a last resort, not a first impulse. Further, the United States and European Union should attach sunset provisions to immunity grants so that alliances must regularly re-apply to maintain their privilege of immunity. This will prevent any one alliance or airline from gaining a long-term, dominant position in the global market. Without changes, all of these factors contemplate a future global airline market dominated by only three players: the three major airline alliances immune to antitrust laws.

   This Comment is organized into five parts. Part II discusses the background of the airline industry and the formation of alliances, and shows how alliances affect a hypothetical passenger's itinerary from El Paso, Texas to Florence, Italy. Part III is an analysis of airline systems competition, joint venture agreements, and the immunization of alliances. Further, Part III offers an analysis of how the global "hub and spoke" airline system, predatory pricing, and collusion worries accompanying alliances undermine principles of Open Skies treaties. Part IV includes recommendations that the United States adopt former Representative Oberstar's bill limiting antitrust exemptions and that the European Union demand that the United States reduce the restrictions on foreign ownership in Phase II of the U.S.-E.U. Open Skies Treaty. Part V will conclude this Comment.

2. FROM REGULATION TO OPEN SKIES: BACKGROUND OF THE INTERNATIONAL AIRLINE INDUSTRY

   A. History of U.S. and European Regulation

   Since the beginning of commercial aviation, the U.S. government has heavily restricted airline competition through administrative regulation. (30) The Air Commerce Act of 1926 required U.S. citizens to own at least 51% of any registered aircraft and comprise at least two-thirds of the board of directors of any U.S. airline. (31) In 1938, the Civil Aeronautics Act (CAA) further restricted foreign ownership, mandating that U.S. citizens own 75% of voting rights for any U.S. carrier. (32) The CAA also established the Civil Aeronautics Board (CAB), which essentially established a de facto oligopoly in the airline industry. The Board was responsible for fixing prices and establishing entry barriers that protected "legacy carriers" such as American Airlines. (33) By 1978, the American public had grown tired of regulation, as experts testified that prices were likely 40%-100% higher due to the CAB's price fixing. (34) In response, Congress passed the Airline Deregulation Act of 1978. (35) The benefits of deregulation were felt immediately. Within three years of deregulation there were eleven new entrants in the U.S. airline market, giving consumers lower fares, expanded routes, and more service choices. (36) However, the restrictions on foreign ownership remained. (37)

   International regulation has its roots as far back as 1919 when several countries adopted the Paris Aeronautical Convention following World War 1. (38) The core principle of the Convention was that every nation should retain sovereignty within its own airspace. (39) Following World War II, the major world powers convened in Chicago in order to form another, more comprehensive, multilateral agreement on aviation. (40) This convention set the stage for U.S. dominance in the global market, as many of the United States' military planes would soon be converted to commercial use. (41)

   Signatories to the Chicago Convention granted each other the right to fly across each other's states without landing and the right to land for non-traffic purposes. (42) This created the first...