collusive alliances and intercontinental competition hubert horan airneth/european aviation club den...

Collusive Alliances and

Intercontinental Competition

Hubert HoranAirneth/European Aviation Club

Den Haag 8 December 2011Brussels 9 December 2011

Horan Airline Transactions Forum 1 March 2011

My perspective on consolidation

Developed original NW/KL alliance network Also managed from European (SR/SN) side Shut down multiple unprofitable alliances

Consolidation via Alliance Antitrust ImmunityConsolidation via Alliance Antitrust Immunity

Direct experience with economic plans, results

Direct experience with true Cross-Border mergers Congressional and DOT testimony

recent Transportation Law Journal article

Consolidation via MergerConsolidation via Merger

Active involvement with current consolidationActive involvement with current consolidation


Counter-revolution against liberal international airline competition

Intercontinental consolidation since 2003—biggest structural shift in industry history---was wholly anti-competitive Totally dissimilar to pro-consumer ATI of mid 90s Unlike shorthaul/regional markets, Intercontinental

sector always competitively deficient Billions in anti-competitive pricing power created Synergy claims false; Regulatory justification

fraudulent End of liberal, market-based competition

means industry efficiency will likely decline Legal protections gone; Cartelization spreading

globally Growing threat of cross-border regulatory arbitrage


Issue is role of alliances in consolidation, (not alliances per se)

Alliances

And Global

Competition

Alliances

And Global

Competition

Collusive Alliances(with antitrust immunity—same competitive impact as merger)

Not “Branded” Alliances(no one objects to Star Alliance frequent flyer reciprocity, lounge sharing)

Intercontinental(longhaul)markets—55% of global revenue—exclusive focus of consolidation movement

Not regional/ shorthaul markets—45% of global revenue—no calls for consolidation

Alliances driving high concentration and Cartelizationindustry structure impact

Not original 1990s alliance interline codesharing links


“Industry Consolidation” Movement: we need fewer Intercontinental airlines

0

100

200

300

400

500

600

700

800

900

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Tota

l Pax

Airl

ines

, exc

ludi

ng ve

ry sm

all p

rope

ller o

pera

tors

total industry growth

total industry growth

Intercontinental—no growth in 30 yearsIntercontinental—no growth in 30 years

All growth fromshorthaulairlines

All growth fromshorthaulairlines

Regional/shorthaul sector (45% of global revenue)All industry growth—intensely competitive butno calls for consolidation

Regional/shorthaul sector (45% of global revenue)All industry growth—intensely competitive butno calls for consolidation

Intercontinental sector(55% of global revenue)always competitively deficientdue to huge entry barriers(both political, economic)Lets merge everyone into just three global competitors!

Intercontinental sector(55% of global revenue)always competitively deficientdue to huge entry barriers(both political, economic)Lets merge everyone into just three global competitors!


IC consolidation strictly North Atlantic; First (mid 90s) phase was pro-consumer Original mid-90s ATI did create Consumer BenefitsOriginal mid-90s ATI did create Consumer Benefits

Thousands of markets got online service, discount fares for the first time

AMSZRHAMSZRH

DTWATLDTWATL

original alliance benefits KL-NW (92) and SR-DL (95):

fully exhausted by 1999

original alliance benefits KL-NW (92) and SR-DL (95):

fully exhausted by 1999

Original Collusive Alliances—still robust competitionOriginal Collusive Alliances—still robust competition

Alliance connections totally displaced traditional interline connections

Consumer benefits only on North Atlantic markets; not pursued elsewhere

1991 1993 1995 1997 1999 2001Concentration-total North Atlantic market (55 million annual pax)

top 3 share 35% 42% 42% 45% 47% 47%number of US-EU competitors with minimum departure share of 2%

15 15 13 13 11 11


Post 2003 phase: no consumer benefits; permanent Cartel created

DeltaNorthwestUnitedContinentalUSAirwaysAmericanTWAFinnairAustrian

Air FranceKLMLufthansaBritish AirIberiaBrusselsAir CanadaAer Lingus Virgin

SASAlitaliaSwissLOTTAPCSATurkishBMI

LH-ledCollusive Alliance

AF-led Collusive Alliance

BA-ledCollusive Alliance

26competitorsmerged intoa permanent

Cartel

26competitorsmerged intoa permanent

Cartel

the NorthAtlanticCartel

the NorthAtlanticCartel

Total North Atlantic 1991 2001 2012

Concentration-top 3 51% 47% 98%# Competitors (>2%) 15 11 3

TotallyArtificial

Consolidation

TotallyArtificial

Consolidation

mostly market forces

mostly market forces

assumes last 3 airlines (US,VS,EI) unable to survive as small indepedents and join Cartel groups after approval of BA/AAassumes last 3 airlines (US,VS,EI) unable to survive as small indepedents and join Cartel groups after approval of BA/AA

Two separate “consolidation” processesTwo separate “consolidation” processes

All market exits since 93 totally artificial—big carriers petitioned government to reduce competition


Post-2003 Cartelization: biggest shift in industry history, with more to come

DeltaNorthwestUnitedContinentalUSAirwaysAmericanTWAFinnairAustrianSASAlitaliaSwissLOT

Air FranceKLMLufthansaBritish AirIberiaBrusselsAir CanadaAer Lingus VirginTAPCSATurkishBMI

LH-ledCollusive Alliance

AF-led Collusive Alliance

BA-ledCollusive Alliance

26trans-Atlanticcarriers

26trans-Atlanticcarriers

DeltaNorthwestUnitedContinentalAmericanHawaiianCathay PacAir ChinaChina EastChina SouthHainanAir CanadaPhilippines

SingaporeThaiMalaysianJALANAKoreanAsianaChinaEVAQantasAir NZV AustraliaAir Pacific

26trans-Pacificcarriers

26trans-Pacificcarriers

Pacific:Sham US-Japan

“Open Skies”

Pacific:Sham US-Japan

“Open Skies”

Unlike original 90s “Open Skies” designed to massively reduce competition, facilitate subsidies, slot rules and other distortions

Cartel using its control of longhaul access to the huge EU/US markets

worldwide:artificial market

power is key

worldwide:artificial market

power is key


BUT TRULY LIBERAL CONDITIONS NEVER

ESTABLISHED IN INTERCONTINENTAL MARKETS

Pricing/market entry freedom

Access to capital markets

No artificial competitive barriers

Transparent financial reporting

Open corporate control market

Strong antitrust rules, enforcement

Efficient bankruptcy process

No political barriers to exit—no carriers “Too Big To Fail”

Objective: Maximum consumer/efficiency gains economy-wide (not interests of specific companies/employees)

Intercon: conditions to let the market decide “how many airlines” don’t exist

LIBERAL COMPETITIVE CONDITIONS CAREFULLY

ENGINEERED IN MOST DOMESTIC/SHORTHAUL

MARKETS

Pricing/market entry freedom

Access to capital markets


Transparent financial reporting


Strong antitrust rules, enforcement


No political barriers to exit—no carriers “Too Big To Fail”

Objective: Maximum consumer/efficiency gains economy-wide (not interests of specific companies/employees)

??

Consumers, investors decide“how many airlines”

Consumers, investors decide“how many airlines”

Governments, entrenched incumbentsdecide “how many airlines”

Governments, entrenched incumbentsdecide “how many airlines”


Claims of big “scope/scale synergies” from consolidation are false

82—CO/TI

86—TW/OZ

86—NW/RC

87—BA/BR

89—AF/UT/IT

79—PA/NA 88—CO/EA

85—PE/FL 88—US/PI

86—AA/OC 98—SR/SN

87—DL/WA 98—KL/AZ

87—CO/PE 00—AA/TW

87—US/PS 00—UA/US

Hub City Synergybut all 20 years ago

Hub City Synergybut all 20 years ago

”Scope+Scale Synergy” MergersAll failed—few synergies, huge costs

”Scope+Scale Synergy” MergersAll failed—few synergies, huge costs

Also some successesin bankruptcy cases

(HP/US, LH/LX)

Also some successesin bankruptcy cases

(HP/US, LH/LX) Recent mergers (KL-AF, DL-NW, UA-CO) claiminghuge efficiencies not found in any previous merger

--and provided no evidence to support merger claims

Recent mergers (KL-AF, DL-NW, UA-CO) claiminghuge efficiencies not found in any previous merger

--and provided no evidence to support merger claims


Post-2003 Consolidation has createdhuge anti-competitive market power

Top 3 Concentration 03->09total Continent 67%-> 98%total No.Atlantic 54%-> 92%

Top 3 Concentration 03->09total Continent 67%-> 98%total No.Atlantic 54%-> 92%

80

90

100

110

120

130

140

150

160

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Form

41

Pax

Reve

nue/

Empl

anem

ent

--in

dex

1993

=100 North Atlantic Passenger Fares Have Risen 3X Faster Than US

Domestic Fares since Extreme Consolidation began in 2003

ATLANTIC rev/pax

DOMESTIC rev/pax

Total North Atlantic 1991 2001 2010

Concentration-top 3 51% 47% 98%# Competitors (>2%) 15 11 3


Biggest shift in industry history in less than 10 years----three key drivers

#1-EU shift from liberal to “managed” competitionpurely anti-competitive 2003 KL/AF merger

#1-EU shift from liberal to “managed” competitionpurely anti-competitive 2003 KL/AF merger

#2—staged sequence of follow-on ATI/mergers;DOT willingness to disobey law, use fraudulent evidence

#2—staged sequence of follow-on ATI/mergers;DOT willingness to disobey law, use fraudulent evidence

Brussels proactively driving consolidation Rig markets to favor “National Champions” (LH/AF),

weaken LCCs; subsidies for weak (AZ, OS, OA, LX) totally different merger rules for AF, FR US Open Skies delayed 5 years—wanted more mergers

KL/AF: no synergies/consumer benefits; ends EU longhaul competition, establishes Cartel; forces USA consolidation

#3—huge “Consolidation is Inevitable” PR campaign#3—huge “Consolidation is Inevitable” PR campaign


All ATI Consumer Benefits findings based on willful DOT regulatory fraud

Falsely claims that physical barriers force interline carriers to always set fares $200-300 higher than online/ATI connecting fares

Falsely claims that ATI always and automatically cut connecting fares $200-300 regardless of market/competitive conditions “Double Marginalization” violates laws of supply and demand

False “rule” that reducing competition always reduces prices designed to nullify both the law and rules of evidence Every ATI application automatically justified; no need for case-specific

evidence False claims fabricated by one UAL consultant in one paper;

DOT claims “rule” justified by multiple, independent researchers based on regression of 1990s data that is totally unrelated to the pricing

claim No evidence of any pricing benefits from any ATI grant since

90s No actual consumer pricing evidence submitted in any recent ATI case DOT uses fraudulent “rule” as basis for rejecting evidence of higher prices

“Double Marginalization”—ATI automatically reduces fares 15-25%--sole basis of $90 million annual Oneworld consumer benefits claim

“Double Marginalization”—ATI automatically reduces fares 15-25%--sole basis of $90 million annual Oneworld consumer benefits claim


All recent Star/Skyteam/Oneworld ATI depended on DOT’s disregard for the law DOT disobeyed Clayton Act requirement for market power test

No ATI decision had any of the pricing data, entry barrier or market contestability evidence needed to show ATI would not create market power

DOT disobeyed legal requirement that ATI cannot be granted without proof of “public benefits” Private benefits to applicant (i.e. consolidation benefits Star Alliance) used by

DOT as demonstration of “public benefits” DOT accepted “improved frequent flyer program” claims as proof of “public

benefits” even though frequent flyer benefits decreased DOT public benefits “findings” not based on any objective data or analysis;

just “copy/pasted” applicants unsubstantiated claims Newest DOT regulatory fraud—”metal neutrality” designed to

extend collusion to large overlapping nonstop O&Ds Previous ATI cases had carve-outs, given pricing risks in LHR-ORD type

markets DOT established new “rule” based on false claim that “metal neutral”

alliances cannot function if any routes excluded Rule based on paper by same consultant who fabricated “Double

Marginalization”


“Industry Consolidation movement”-- successful misinformation/PR campaign

There has been no independent (regulatory, media, academic)scrutiny of these “Industry Consolidation” claims

There has been no independent (regulatory, media, academic)scrutiny of these “Industry Consolidation” claims

Inevitable trend towards industry consolidation

Industry growing for decades“Trend” just biggest Atlantic carriers

Industry consolidation driven by market forces

All from government actions; Capital markets not interested

Consolidation OK—lots of competition remains

shorthaul competitive; Intercon always stagnant/getting and worse

Consolidation justified by big scale/scope synergies

No previous merger found synergies; United isn’t too small to compete

ATI always drives lower consumer fares

No verifiable evidence of any consumer benefits since 1999

Alliances create FF and other consumer benefits

Branded alliance benefits falsely attributed to Collusive Alliances


Counter-revolution against liberal international airline competition90s: Global

LiberalizationToday: Intercon Cartelization

Who determines number of competitors?

Consumers, investors in the open marketplace

Governments, entrenched incumbents via private “backroom” discussions

Capital flows, efficiency gains

From less-efficient to more-efficient

More-efficient at mercy of less-efficient (but Too Big To Fail)

Legal/regulatory objective

consumer welfare, long-term industry efficiency, “level-playing field”

Protect/enrich a handful of private companies, especially “national champions”

Legal/regulatory approach

Neutral umpire enforcing transparent rules using objective data/evidence

Undermine law/precedent with fraudulent evidence; opaque rules applied arbitrarily

Role of “Open Skies”

Facilitate new entry, reduce cross-border and artificial barriers

Facilitate reduced competition and regulatory arbitrage; increased protection of weak;

Driver of airline success

Efficiency, service quality, network strength

Ability to capture regulators; control of alliance access


Looking forward given tomorrow’s highly illiberal environment

reducing trans-Pacific from 26 to 3 competitors BA acquiring BMI; only 4 carriers for entire USA crude Canadian/German anti-EK protectionism

Competition weakens further—3 alliance competition unsustainable

LHR-based Oneworld uncompetitive with continental duopoly squeeze of small alliance members and domestic LCCs

UAL IAD-MAD precedent; Qantas offshoring; Tiger safety lapses

Continuing, artificial consolidation--many moves unthinkable 10 years ago

Continuing, artificial consolidation--many moves unthinkable 10 years ago

Negative outlook for markets and industry--stagnant competition means declining efficiency

Negative outlook for markets and industry--stagnant competition means declining efficiency

growth of cross-border regulatory arbitragethreatens financial/consumer/safety protections

growth of cross-border regulatory arbitragethreatens financial/consumer/safety protections


Current Branded/Collusive Alliance models evolved 15+ years ago

“Branded” Alliances 90-Global Excellence

97-Star98-Oneworld00-Skyteam

“Branded” Alliances 90-Global Excellence

97-Star98-Oneworld00-Skyteam

Collusive Alliances on the North Atlantic

92-KL-led alliance(NW)95-SR-led alliance (DL)97-LH-led alliance (UA)00-AF led alliance (DL)09-BA led alliance (AA)

Collusive Alliances on the North Atlantic

92-KL-led alliance(NW)95-SR-led alliance (DL)97-LH-led alliance (UA)00-AF led alliance (DL)09-BA led alliance (AA)

Alliances categories pre-1990Alliances categories pre-1990

Frequent Flyer partnersforeign airlines join United’s Mileage Plus program or American’s Aadvantage program

No anti-competitive risks

Narrow route-extention codesharingforeign airlines codeshare on US domestic flights, providing connecting service to points it would (could) not otherwise serve

No anti-competitive risks

Route-revenue pooling with codesharingPan Am/Saudia pool revenues, profits from each other’s flights in a specific market

Obvious risksvery rare in US markets since 70s; but still common outside US

new post-1990 Alliancesnew post-1990 Alliances


Decades of strong, continuous structural growth


Driving structural growth>dynamic competitive “churn”

Competitive “churn”-- active entry and exit—reallocation of capital from weak to strong

Churn (exit) since 1980:77%--USA56%--W. Europe/rest of Western Hemisp.40%--rest of world

Churn (exit) since 1980:77%--USA56%--W. Europe/rest of Western Hemisp.40%--rest of world

Innovation/productivity driven by both serious threat of failure/entry and real opportunity to grow

If weak carriers don’t exit, strong incumbents, entrants can’t grow


Alliance Public Benefits: 30% of North Atlantic seriously underserved in 1990

JFKJFK LHRLHR

CDGFRACDGFRA

ORDATLORDATL

Nonstop Big Gateway New York to top 20 EU cities London to top 20 US cities

One-stop Big Gateway cities to Interior citiestop 5-6 EU cities to hundreds of US cities (via US hubs)top 5-6 US cities to hundreds of EU cities (via EU hubs)

USA Interior cities to EU Interior cities (i.e. St. Louis-Brussels, Milwaukee-Munich)

no online or coordinated schedules; passengers forced to change airlines and terminals; only highest

fares availableprevious solution (PA/TW hubs in Europe) had

failed

70% of market had good online schedules, full range of discount fares70% of market had good online schedules, full range of discount fares

but 30% of market had poor service and very few discount faresbut 30% of market had poor service and very few discount fares


UK and Continental Europe markets---very different competitive dynamic

UK/Ireland-USA market15 million pax

pure nonstop marketnot served via European hubs;

80% is London traffic

UK/Ireland-USA market15 million pax

pure nonstop marketnot served via European hubs;

80% is London traffic

ContinentalEurope—USA40 million pax

pure hub market London no longer seriously

competes for US-Europe connecting traffic

Continental Hubs don’tserve London/Dublin traffic

ContinentalEurope—USA40 million pax

pure hub market London no longer seriously

competes for US-Europe connecting traffic

Continental Hubs don’tserve London/Dublin traffic

AMSAMS

PARPAR

LONLON

SFOSFO

LAXLAXDFWDFW

IAHIAH

CVGCVG

ORDORD

DTWDTW

MIAMIA

ATLATL

IADIAD

PHLPHLEWREWR

JFKJFK

BRUBRU

MUCMUC

CPHCPH

MADMAD

FRAFRA

ZRHZRH

MXPMXP

FCOFCO


Huge risk to consumers with Cartel, 95%+ concentration in place

1995 1997 1999 2001 2003 2005 2007 2009Concentration levels of US-Continental Europe market (40 million annual pax)

top 3 share 47% 55% 56% 61% 67% 85% 88% 97%Concentration levels of total North Atlantic market (55 million annual pax)

top 3 share 42% 45% 47% 47% 54% 68% 66% 97%number of total North Atlantic competitors with minimum departure share of 2%

13 13 11 11 9 7 6 3

RapidlyIncreasing

Concentrationafter 2004

RapidlyIncreasing

Concentrationafter 2004

PermanentCartelwith huge

entry barriers

PermanentCartelwith huge

entry barriers

Healthy, Profitable Competition,

even with Alliances

Healthy, Profitable Competition,

even with Alliances

SeriousSerious HUGEHUGEvery lowvery low

concentrationconcentration

Risks toConsumers

Risks toConsumers


North Atlantic competitors,concentration and departure shares 1991-200819 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 06 20 07 20 08

top2 23.8% top2 31.1% top2 29.0% top2 31.5% top2 34.6% top2 36.1% top2 41.0% top2 55.6% top2 54.1% top2 54.2% top2 55.5%top 3 34.6% top 3 42.3% top 3 42.4% top 3 45.0% top 3 47.5% top 3 47.3% top 3 54.0% top 3 67.9% top 3 66.2% top 3 65.8% top 3 67.2%top4 44.0% top4 50.2% top4 51.3% top4 53.2% top4 59.1% top4 58.0% top4 65.2% top4 79.4% top4 77.6% top4 76.5% top4 78.1%CA% 0.0% CA% 0.0% CA% 7.3% CA% 25.6% CA% 42.0% CA% 43.6% CA% 48.6% CA% 55.6% CA% 54.1% CA% 54.2% CA% 55.5%number of competitors with minimum departure share of:0.5% 24 0.5% 25 0.5% 22 0.5% 19 0.5% 19 0.5% 18 0.5% 14 0.5% 9 0.5% 9 0.5% 9 0.5% 92% 15 2% 15 2% 13 2% 13 2% 11 2% 11 2% 9 2% 7 2% 6 2% 6 2% 65% 6 5% 6 5% 7 5% 6 5% 6 5% 7 5% 6 5% 5 5% 5 5% 5 5% 5

19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 06 20 07 20 081 BA 12.0% DL 16.5% DL 14.5% SR 17.9% SR 17.3% SR 18.1% LH 20.7% AF 28.7% AF 28.4% AF 28.3% AF 28.9% 12 PA 11.8% AA 14.6% AA 14.4% BA 13.5% LH 17.3% LH 18.0% AF 20.3% LH 26.8% LH 25.6% LH 25.9% LH 26.6% 23 TW 10.7% BA 11.2% BA 13.4% AA 13.5% BA 12.9% BA 11.2% BA 12.9% BA 12.3% BA 12.2% BA 11.6% BA 11.7% 34 AA 9.4% UA 7.9% UA 9.0% UA 8.2% AA 11.7% AA 10.8% AA 11.2% AA 11.5% AA 11.4% CO 10.7% CO 10.8% 45 LH 8.7% LH 6.5% KL 7.3% KL 7.7% KL 7.4% KL 7.5% KL 7.6% CO 8.4% CO 10.1% AA 10.4% AA 10.5% 56 DL 6.4% TW 5.8% LH 5.9% LH 6.1% CO 6.3% CO 6.6% CO 7.2% VS 4.8% VS 4.7% VS 4.9% VS 5.0% 67 AF 4.9% AF 4.1% TW 5.1% AF 4.4% AF 4.6% AF 5.6% VS 4.6% EI 2.0% EI 2.0% EI 1.8% EI 1.8% 78 KL 4.3% KL 3.9% AF 4.3% CO 3.9% VS 4.3% VS 4.5% US 4.5% IB 1.5% IB 1.3% IB 1.4% IB 1.4% 89 SR 3.5% NW 3.7% VS 3.5% VS 3.9% US 3.3% US 4.2% SR 2.8% SU 0.7% SU 0.6% SU 0.5% SU 0.6% 9

10 SK 3.4% CO 3.4% CO 3.0% TW 3.6% TW 2.4% AZ 2.6% EI 1.9% TK 0.5% MP 0.5% E0 0.5% E0 0.5% 1011 NW 3.3% SR 2.7% AZ 2.8% AZ 2.9% AZ 2.0% EI 2.0% IB 1.6% MP 0.4% TK 0.4% TK 0.4% MY 0.4% 1112 UA 2.6% SK 2.5% SR 2.5% US 2.8% EI 1.7% IB 1.6% LO 0.9% AY 0.3% OA 0.3% MY 0.4% GJ 0.3% 1213 AZ 2.4% AZ 2.5% SK 2.0% SK 2.1% IB 1.4% TW 1.2% SU 0.7% OA 0.3% AY 0.3% MP 0.4% OA 0.3% 1314 CO 2.2% VS 2.5% SN 1.7% EI 1.7% SU 1.1% LO 0.9% TK 0.5% MA 0.2% MA 0.2% GJ 0.3% AY 0.2% 1415 VS 2.2% US 2.3% EI 1.3% IB 1.2% LO 0.9% OK 0.8% TP 0.4% VV 0.2% E0 0.2% OA 0.3% MA 0.2% 1516 IB 1.8% IB 1.5% IB 1.2% LO 1.1% OK 0.8% SU 0.7% MP 0.4% A7 0.0% MY 0.2% AY 0.2% VV 0.2% 1617 SN 1.7% SN 1.0% US 1.1% SU 1.0% MP 0.8% TK 0.6% AY 0.3% VV 0.2% MA 0.2% Y2 0.2% 1718 US 1.2% EI 0.9% LO 0.8% OK 0.9% TP 0.6% MP 0.6% OA 0.3% A7 0.1% VV 0.2% A0 0.1% 1819 EI 1.1% SU 0.8% SU 0.8% TP 0.5% TK 0.5% TP 0.5% MA 0.2% GJ 0.1% A0 0.1% Y7 0.1% 1920 LO 0.8% LO 0.7% OS 0.8% AY 0.5% AY 0.4% OA 0.4% RO 0.2% Y7 0.1% 2021 TP 0.7% OS 0.7% OK 0.8% TK 0.4% OA 0.3% AY 0.3% VV 0.0% A7 0.1% 2122 SU 0.7% OK 0.7% AY 0.6% AI 0.4% MA 0.3% JK 0.3% A7 0.0% 2223 AY 0.6% TP 0.7% TP 0.5% OA 0.4% H2 0.3% MA 0.3% 2324 JU 0.5% AY 0.6% OA 0.4% MA 0.3% RO 0.2% UX 0.2% KL indicates Collusive Alliance group 2425 OA 0.4% OA 0.5% MA 0.4% UX 0.2% JK 0.2% RO 0.1% CA% total Collusive Alliance departure share 2526 OS 0.4% TK 0.4% TK 0.3% RO 0.2% FF 0.2% H2 0.0% USDOT Form 41 T100 data 2627 OK 0.4% NG 0.2% RO 0.3% FF 0.2% UX 0.1% for 12 months ending 2nd Q of year shown 27


Liberal competition drove decades of profitable industry growth

LIBERAL AIRLINE COMPETITION—ECONOMIC REQUIREMENTS

Pricing/market entry freedom Transparent financial reporting

Access to capital markets Strong antitrust rules, enforcement




No political barriers to exitLIBERAL AIRLINE COMPETITION—POLITICAL

REQUIREMENTS

Let Consumers/Capital Markets pick winners (level-playing field)

Focus on Maximum Gains Economy-Wide (not favored companies)

Objectives of Airline Deregulation and US Open Skies treatiesObjectives of Airline Deregulation and US Open Skies treatiesConsumers:More serviceat lower fares

Consumers:More serviceat lower faresInnovation/productivity gains

continuously improve industry capital allocation—better airlines prosper/grow

bad airlines shrink/exit market

Innovation/productivity gainscontinuously improve

industry capital allocation—better airlines prosper/grow

bad airlines shrink/exit market

pressure fromLiberal AirlineCompetition

pressure fromLiberal AirlineCompetition

Industry:Profits, capital

for growth

Industry:Profits, capital

for growth


Consolidation: recent, artificial, and not driven by market competitiveness In 21 of the 22 cases competition reduced artificially--

petitioning governments for approval to merge or join a collusive alliance

Consolidation used to protect small/weak airlines

competitive exit of

Large/MediumNorth Atlantic

carrierssince 1993

competitive exit of

Large/MediumNorth Atlantic

carrierssince 1993

PA 1993 market forcesNW 1993 artificial joined KL, then AF-led collusive allianceDL 1995 artificial joined SR, then AF-led collusive allianceSN 1995 artificial joined SR-led collusive allianceOS 1995 artificial joined SR, then LH-led collusive allianceUA 1997 artificial joined LH-led collusive allianceSK 1997 artificial joined LH-led collusive allianceBD 2001 artificial joined LH-led collusive allianceTW 2002 artificial acquired by AAAZ 2002 artificial joined AF-led collusive allianceOK 2002 artificial joined AF-led collusive allianceUS 2004 artificial joined LH-led collusive allianceKL 2004 artificial acquired by AFSR-LX 2005 artificial joined LH-led collusive allianceLO 2005 artificial joined LH-led collusive allianceTP 2005 artificial joined LH-led collusive allianceTK 2008 artificial joined LH-led collusive allianceCO 2009 artificial petitioned to join LH-led collusive allianceAA 2009 artificial petitioned to join BA-led collusive allianceVS 2009 artificial considering joining LH-led collusive allianceIB 2009 artificial petitioned to join BA-led collusive allianceAY 2009 artificial petitioned to join BA-led collusive alliance


Consolidation: recent, artificial, and not driven by market competitiveness 21 of the 22 large/medium carriers that stopped competing

independently did so artificially--by petitioning governments for approval to merge or join a collusive alliance since 93 only very small carriers were forced to exit by market

competitioncompetitive exit-Large/Medium carrierscompetitive exit-Large/Medium carriers

exit of very small competitorsexit of very small competitors

PA 1993 market forcesNW 1993 artificial joined KL, then AF-led collusive allianceDL 1995 artificial joined SR, then AF-led collusive allianceSN 1995 artificial joined SR-led collusive allianceOS 1995 artificial joined SR, then LH-led collusive allianceUA 1997 artificial joined LH-led collusive allianceSK 1997 artificial joined LH-led collusive allianceBD 2001 artificial joined LH-led collusive allianceTW 2002 artificial acquired by AAAZ 2002 artificial joined AF-led collusive allianceOK 2002 artificial joined AF-led collusive allianceUS 2004 artificial joined LH-led collusive allianceKL 2004 artificial acquired by AFSR-LX 2005 artificial joined LH-led collusive allianceLO 2005 artificial joined LH-led collusive allianceTP 2005 artificial joined LH-led collusive allianceTK 2008 artificial joined LH-led collusive allianceCO 2009 artificial petitioned to join LH-led collusive allianceAA 2009 artificial petitioned to join BA-led collusive allianceVS 2009 artificial considering joining LH-led collusive allianceIB 2009 artificial petitioned to join BA-led collusive allianceAY 2009 artificial petitioned to join BA-led collusive alliance

JU 1992 market forcesUT 1994 artificial-acquired by AFNG 1995 artificial--joined SR/LH-led alliances6U 2000 market forcesUN 2000 market forcesTZ 2000 market forcesH2 2001 market forcesJK 2002 market forcesUX 2002 market forcesFF 2002 market forcesRO 2004 market forcesA7 2007 market forcesMA 2008 market forcesMP 2008 artificial-acquired by AFE0 2008 market forcesMY 2008 market forcesA0 2008 artificial-acquired by BAY7 2008 market forces


Almost every merger since deregulation has been a dismal financial failure80: Pan Am/National 1-Post Dereg FAILURE—largely liquidated

82: Texas Intl/Continental

1-Post Dereg FAILURE—quickly bankrupt

85: Southwest/Muse 2-Quasi-BK Profitable—cheap acquisition

85: People Exp/Frontier 4-Synergy/Scope

FAILURE—soon bankrupt

86: TWA/Ozark 1-Post Dereg Profitable—Restructured STL

86: Northwest/Republic 1-Post Dereg Profitable—Restructured DTW/MSP

86: American/Aircal 4-Synergy/Scope

FAILURE—totally liquidated

87: Continental/PE/NY/FL

4-Synergy/Scope


87: Delta/Western 4-Synergy/Scope

FAILURE—largely liquidated

87: Continental/Eastern

4-Synergy/Scope


88: USAir/PSA 4-Synergy/Scope


88: USAir/Piedmont 4-Synergy/Scope


94: Southwest/Morris 3-Small Acquis Profitable—easy fit with SWA

99: American/Reno 4-Synergy/Scope


00: American/TWA 4-Synergy/Scope


00: United/USAir (plan) 4-Synergy/Scope

FAILURE—quickly bankrupt

05: America West/USAir

2-Quasi-BK Jury Out—low asset cost

5 categoriesof mergers:1—Post Deregulation Hub Restructuring2—Bankruptcy-type Asset restructuring3—Small Acquisition easily integrated4—Cost Synergies/ Network Scope5—Anti-Competitive; exploit dominance, entry barriers

5 categoriesof mergers:1—Post Deregulation Hub Restructuring2—Bankruptcy-type Asset restructuring3—Small Acquisition easily integrated4—Cost Synergies/ Network Scope5—Anti-Competitive; exploit dominance, entry barriers


Anti-competitive impacts confirmed by preliminary 2010 pricing data

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201080

90

100

110

120

130

140

150

160

Artificial Market Power on North Atlantic drove rapid 2010 price recovery not seen in Domestic or Other International markets

DOMESTIC rev/pax

ATLANTIC rev/pax

INTexclATL rev/pax

Form

41 P

ax R

evenue/E

mpla

nem

ent-

-index 1

999=

100

post 2004 market power defied laws of supply and demandDomestic fares +15% because seats only + 1%

Atlantic fares +46% despite seats +45%

post 2004 market power defied laws of supply and demandDomestic fares +15% because seats only + 1%

Atlantic fares +46% despite seats +45%


Post-2003 consolidation required gutting all key antitrust tests

Evidence must be significant, market-wide Evidence must be market/case specific and

linked to competitive advantage in these markets

Evidence of comparable benefits in similar cases

Need objective, verifiable evidence to meet testsNeed objective, verifiable evidence to meet tests

Does consolidation increase risks of sustainable anti-competitive market power? Are markets contestable? Entry barriers large?

Does consolidation create significant, market-wide consumer benefits (lower prices/increased output)? Clearly large enough to offset competitive risks?

Two Tests—Central to all Competition LawTwo Tests—Central to all Competition Law

collusive alliances and intercontinental competition hubert horan airneth/european aviation club den...

Documents

consolidation alliances

global competition alliances

ic consolidation

current consolidation

s alliance

branded alliances

se alliances

role of alliances