Academic journal article Houston Journal of International Law

Continental Joins the (All)star Alliance: Antitrust Concerns with Airline Alliances and Open-Skies Treaties

Academic journal article Houston Journal of International Law

Continental Joins the (All)star Alliance: Antitrust Concerns with Airline Alliances and Open-Skies Treaties

Article excerpt

I.   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. …

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