Joint Application Of Air Canada The Austrian Group British Midland Airways Ltd Continental Airlines, Inc. Deutsche Lufthansa AG Polskie Linie Lotniecze Lot S.A. Scandinavian Airlines System Swiss International Air Lines Ltd. Tap Air Portugal United Air Lines, Inc. To Amend Order 2007-2-16 Under 49 U.S.C. §§ 41308 And 41309 So As To Approve And Confer Antitrust Immunity

BEFORE

THE

DEPARTMENT

OF

TRANSPORTATION

WASHINGTON,

D.C.

Joint

Application

of

)

AIR

CANADA

)

THE

AUSTRIAN

GROUP

)

BRITISH

MIDLAND

AIRWAYS

LTD

)

CONTINENTAL

AIRLINES,

INC.

)

DEUTSCHE

LUFTHANSA

AG

)

Docket

OST-2008-0234

POLSKIE

LINIE

LOTNIECZE

LOT

S.A.

)

SCANDINAVIAN

AIRLINES

SYSTEM

)

SWISS

INTERNATIONAL

AIR

LINES

LTD.

)

TAP

AIR

PORTUGAL

)

UNITED

AIR

LINES,

INC.

)

to

Amend

Order

2007-2-16

under

49

U.S.C.

§§

)

41308

and

41309

so

as

to

Approve

and

Confer

)

Antitrust

Immunity

)

PUBLIC

VERSION

COMMENTS

OF

THE

DEPARTMENT

OF

JUSTICE

ON

THE

SHOW

CAUSE

ORDER

Christine

A.

Varney

Communications

with

respect

to

this

document

Assistant

Attorney

General

should

be

addressed

to:

Antitrust

Division

Donna

N.

Kooperstein

Chief

Molly

S.

Boast

William

H.

Stallings

Carl

Shapiro

Assistant

Chief

Deputy Assistant

Attorneys

General

Jill

A.

Ptacek

Michael

D.

Billiel

Oliver

M.

Richard

Tracey

D.

Chambers

Assistant

Chief

Robert

D.

Young

William

H.

Gillespie

Attorneys

Economist

Transportation,

Energy,

and

Economic

Analysis

Group

Agriculture

Section

U.S.

Department

of

Justice

450

Fifth

Street,

N.W.

Washington,

DC

20530

Telephone:

202/307-6607;

Facsimile:

202/307-2784

June

26,

2009

E-mail:

jill.

ptacek@u

sdo

j

.gov

TABLE

OF

CONTENTS

I.

Summary

of

Comments

.........................................................................................................

1

II.

Background

..........................................................................................................................

.3

A.

The

Star

Alliance

and

its

immunized

components

..............................................

.3

B.

Continental

’

s

request

to

join

Star

and

receive

antitrust

immunity

.....................

.

5

C.

The

Show

Cause

Order

..........................................................................................

.8

III.

The

Statutory

Scheme

Disfavors

Immunity

and

Places

a

Significant

Burden

on

the

Applicants

to

Justify

Their

Request

....................................................................................

10

A.

Antitrust

enforcement

plays

a

central

role

in

the

deregulated

airline

industry

..

11

B.

Applicants

must

show

that

immunity

is

required

by

the

public

interest

.............

12

IV.

DOT

Should

Deny

the

Broad

Application

for

Immunity

................................................

13

V.

Immunizing

an

Alliance

that

Includes

Continental

and

the

Other

Star

ATI

Members

Risks

Significant

Competitive

Harm

in

Certain

Markets

................................................

16

A.

Analyzing

the

competitive

effects

of

the

Joint

Application

agreements

.............

16

B.

Competition

on

non-transatlantic

routes

...............................................................

18

C.

Competition

on

transatlantic

routes

.......................................................................

20

1

.

Nonstop

service

is

a

separate

product

market

..........................................

21

2.

Nonstop

overlap

on

specific

transatlantic

routes

......................................

23

3.

The

loss

of

a

nonstop

competitor

is

likely

to

result

in

significant

fare

increases

.......................................................................................................

24

4.

Nonstop

entry

is

unlikely

............................................................................

25

D.

Competition

on

transborder

routes

.......................................................................

26

E.

Competition

on

domestic

routes

...........................................................................

28

VI.

The

Applicants

Make

No

Showing

Why

Immunity

Is

Required

to

Achieve

the

Claimed

Public

Benefits

Arising

from

the

Joint

Application

Agreements

....................................

29

A.

The

Applicants

’

assertion

that

they

will

not

move

forward

without

immunity

is

not

convincing

.........................................................................................................

31

B.

The

Applicants

exaggerate

their

claim

that

“

significant

litigation

risks

”

exist

absent

immunity

.......................................................................................................

33

C.

The

Applicants

inflate

the

importance

of

inter-alliance

competition

.................

34

D.

Immunity

will

not

advance

open

skies

.................................................................

35

E.

The

Applicants

overemphasize

the

likelihood

that

immunity

for

the

proposed

alliance

will

substantially

reduce

double

marginalization

....................................

35

VII.

Any

Grant

of

Antitrust

Immunity

Should

Include

Restrictions

to

Limit

Potential

Anticompetitive

Effects

.......................................................................................................

37

A.

Carve

out

nonstop

overlap

routes

.........................................................................

37

B.

Deny

global

immunity

............................................................................................

41

VIII.

Conclusion

............................................................................................................................

43

Appendix

A:

China/Beijing

...........................................................

................................................

45

Appendix

A:

China/Hong

Kong

..................................................

................................................

46

Appendix

B:

Empirical

Addendum

............................................

................................................

47

COMMENTS

OF

THE

DEPARTMENT

OF

JUSTICE

ON

THE

SHOW

CAUSE

ORDER

The

United

States

Department

of

Justice

(

“

DOJ

”

)

hereby

submits

its

comments

to

the

Department

of

Transportation

’s

(

“

DOT

”

)

Show

Cause

Order

(

“

Order

”

)

in

the

matter

of

the

Joint

Application

of

Air

Canada,

the

Austrian

Group

(

“

Austrian

”

),

British

Midland

Airways

Ltd

(

“

BMI

”

),

Continental

Airlines,

Inc.

(

“

Continental”

),

Deutsche

Lufthansa

AG

(

“

Lufthansa

”

),

Polskie

Linie

Lotniecze

Lot

S.A.

(

“

LOT

”

),

Scandinavian

Airlines

System

(

“

SAS

”

),

Swiss

International

Air

Lines

Ltd

(

“

Swiss”

),

TAP

Air

Portugal

(

“

TAP

”

)

and

United

Air

Lines,

Inc.

(

“United

”

)

(collectively,

the

“Joint

Applicants

”

or

“

Applicants

”

)

to

Amend

Order

2007-2-16

under

49

U.S.C.

§§

41308

and

41309

so

as

to

Approve

and

Confer

Antitrust

Immunity

(the

“Joint

Application

”

or

“

J.A.

”

).

I.

Summary

of

Comments

Antitrust

enforcement

has

played

a

vital

role

in

bringing

increased

competition

and

consumer

benefits

to

the

deregulated

airline

industry.

Accordingly,

any

exemptions

from

the

antitrust

laws

should

be

strongly

disfavored.

To

overcome

the

presumption

against

antitrust

immunity,

applicants

must

demonstrate

that

their

collaboration

will

generate

significant

public

benefits

that

outweigh

any

harm

to

competition,

that

they

cannot

achieve

those

benefits

without

immunity,

and

that

they

have

narrowly

tailored

the

requested

immunity

to

achieve

the

benefits

claimed.

For

many

past

applications,

the

principal

public

interest

benefit

furthered

by

DOT

’

s

grant

of

immunity

has

been

the

negotiation

of

open

skies

agreements

with

the

home

country

of

the

U.S.

carriers

’

alliance

partners.

In

the

present

matter,

open

skies

agreements

have

been

signed

with

the

home

countries

of

all

the

foreign

applicants,

and

those

foreign

carriers

will

continue

to

be

members

of

the

immunized

alliances

whatever

DOT

decides

here.

Granting

immunity

for

Continental

to

coordinate

with

Star

ATI

Alliance

1

members

on

U.S.

to

Latin

American

or

Pacific

routes

is

not

likely

to

result

in

further

liberalization

discussions

between

the

U.S.

and

countries

with

which

we

have

not

yet

negotiated

open

skies,

such

as

China

or

Brazil.

Therefore,

an

expansion

of

immunity

offers

no

open

skies

benefits

for

U.S.

consumers.

Where

an

application

does

not

directly

promote

open

skies

with

its

attendant

consumer

benefits,

applicants

bear

a

heavy

burden

to

prove

benefits

specific

to

their

alliance

agreements

that

justify

immunity.

Where

an

application

involves

the

presence

of

two

major

domestic

competitors,

the

request

for

immunity

warrants

particularly

close

scrutiny.

DOJ

believes

the

Joint

Applicants

have

failed

to

demonstrate

the

required

elements

for

the

broad

immunity

sought

-

immunity

encompassing

transborder,

transatlantic

and

transpacific

markets

without

regard

to

the

planned

level

of

integration

among

Applicants

-

and

that

DOT

should

deny

the

broad

requested

immunity

and

instead

grant

a

more

limited

immunity.

In

considering

the

Joint

Applicants

’

immunity

request,

we

urge

DOT

to

take

into

account

the

following

DOJ

conclusions:

•

The

Applicants

’

proposed

elimination

of

competition

between

United

and

Continental

for

transpacific

and

Latin

American

service

threatens

competitive

harm

in

markets

where

entry

is

limited

by

restrictive

bilateral

agreements.

It

will,

for

example,

substantially

lessen

competition

in

city

pairs

between

the

U.S.

and

Beijing,

where

United

and

1

As

described

in

greater

detail

below,

the

Star

Alliance

is

an

alliance

of

more

than

20

U.S.

and

international

airlines

that

interact

together

at

many

levels

without

antitrust

immunity.

The

Star

ATI

Alliance

is

a

subset

of

nine

Star

Alliance

members

that

have

received

authority

from

DOT

to

coordinate

on

an

immunized

basis.

Two

of

the

Star

ATI

members

-

United

and

Lufthansa

-

have

yet

another

alliance

agreement,

proscribing

a

greater

level

of

integration

than

found

in

the

arrangements

between

the

Star

ATI

members

at

large,

for

which

DOT

has also

granted

antitrust

immunity.

United

and

Lufthansa

refer

to

that

alliance

as

the

‘

Atlantic

Plus

”

or

“

A+

”

agreement.

2

Continental

provide

substantial

connecting

service.

The

Applicants

have

provided

no

concrete

plans

for

cooperation

in

non-transat

l

antic

markets,

let

alone

established

that

immunity

is

necessary

to

achieve

specific

benefits.

A

DOT

grant

of

immunity

for

two

U.S.

carriers

to

coordinate

their

international

operations

outside

of

an

explicit

joint

venture

with

foreign

carriers

would

be

unprecedented.

•

The

Applicants

’

proposed

elimination

of

competition

between

Continental

and

Air

Canada

on

U.S.-Canada

routes

(

“

transborder

routes

”

)

will

substantially

limit

competitive

alternatives

on

certain

transborder

routes

where

entry

is

unlikely.

Applicants

have

provided

no

plans

detailing

any

future

integration

between

the

parties

and

hence

no

justification

for

this

immunity

request.

•

The

Applicants

’

proposed

elimination

of

competition

between

Continental

and

SAS,

Swiss

and

TAP

(as a

function

of

Continental

joining

the

Star

ATI

Alliance)

will

likely

result

in

competitive

harm

for

consumers

in

several

transatlantic

markets,

including

New

York

-

Stockholm,

New

York-Copenhagen,

New

York-Geneva,

New

York-Zurich,

and

New

York-Lisbon.

The

Applicants

have

offered

little,

if

any,

evidence

to

show

that

immunity

between

Continental

and

the

nine

Star

ATI

alliance

members

is

necessary

to

achieve

any

benefits,

or

to

support

their

failure

to

carve

out

these

particular

markets

from

their

immunity

request.

•

The

Applicants

’

proposed

elimination

of

competition

between

United

and

Lufthansa

in

the

Dulles-Frankfurt

and

Chicago-Frankfurt

markets

(by

removing

the

existing

carve

outs

to

immunity)

will

likely

lead

to

higher

fares.

Applicants

have

offered

no

evidence

showing

(1)

that

they

need

to

remove

the

carve

outs

to

achieve

specific

benefits

and

(2)

that

the

value

to

consumers

of

those

benefits

outweighs

the

likely

competitive

harm.

•

Because

the

Applicants

include

two

large,

domestic

competitors,

a

sweeping

grant

of

immunity

raises

significant

concerns

about

harm

to

domestic

competition,

a

risk

that

cannot

be

completely

mitigated

through

confidentiality

guidelines.

Thus,

the

request

for

immunity

should

be

viewed

with

enhanced

skepticism.

II.

Background

A.

The

Star

Alliance

and

its

immunized

components

The

member

airlines

of

the

Star

Alliance

together

operate

flights

to

over

900

destinations

worldwide.

Its

founding

-

and

principal

members

--

-

include:

•

United-.

United,

the

third

largest

U.S.

airline

with

over

$20

billion

in

annual

revenue,

has

hubs

in

Chicago,

Denver,

San

Francisco,

Los

Angeles

and

Washington,

D.C.

United

offers

international

service

to

Canada,

Europe,

Asia,

and

Latin

America.

In

addition

to

its

immunized

participation

in

the

Star

ATI

3

Alliance

(described

below)

and

its

longstanding

immunized

cooperation

with

Lufthansa,

United

also

has

bilateral

immunized

relationships

with

Asiana

and

Air

New

Zealand

that

exist

independent

of

United

’s

relationships

with

the

other

Star

participants.

•

Lufthansa

:

.

Lufthansa

is

one

of

the

world

’

s

largest

airlines,

with

hubs

in

Frankfurt

and

Munich

and

over

$35

billion

in

annual

revenue.

Lufthansa

owns

100%

of

Swiss,

and

has

significant

ownership

interests

in

BMI

and

JetBlue.

Lufthansa

provides

extensive

service

to

the

United

States.

•

Air

Canada

:

.

Air

Canada

is

the

largest

provider

of

scheduled

passenger

service

in

the

Canadian

market,

the

Canada-U.S.

transborder

markets,

and

in

the

international

markets

to

and

from

Canada.

Air

Canada

has

hubs

in

Toronto,

Montreal,

Vancouver

and

Calgary,

and

provides

service

directly

to

numerous

destinations

in

the

United

States

and

cities

in

Europe,

Asia,

and

Latin

America.

The

Star

Alliance

includes

eighteen

additional

members,

2

all

of

which

have

agreed

to

provide

Alliance

customers

certain

joint

services

such

as

codesharing,

coordinated

processes

for

reservations

and

baggage

transfer,

through-ticketing,

frequent

flyer

reciprocity,

and

lounge

sharing.

Star

members

interact

with

one

another

with

varying

degrees

of

integration

and

across

various

sets

of

markets.

The

full

group

of

twenty-one

members

operates

without

antitrust

immunity.

For

example,

US

Airways

’

participation

in

the

Star

Alliance

is

not

subject

to

antitrust

immunity;

therefore,

the

2

The

current

members

of

the

Star

Alliance

are

United,

Lufthansa,

Air

Canada,

Air

China,

Air

New

Zealand,

ANA,

Asiana

Airlines,

Austrian,

BMI,

Egyptair,

LOT,

SAS,

Shanghai

Airlines,

Singapore

Airlines,

South

African

Airways,

Spanair,

Swiss,

TAP,

Turkish

Airways,

THAI

and

US

Airways.

Star also

has

three

regional

members:

Adria

Airways,

Bluel

and

Croatia

Airlines.

4

antitrust

laws

fully

apply

to

its

collaboration

with

other

Star

members

-

including

that

with

its

domestic

rival

United.

Certain

Star

members,

however,

have

entered

into

more

extensive

agreements

with

one

another

for

which

they

have

requested

-

and

received

-

antitrust

immunity

from

DOT:

•

The

United/Lufthansa

Joint

Venture:

In

1996,

United

and

Lufthansa

received

antitrust

immunity

to

coordinate

pricing,

scheduling

and

other

activities

as

part

of

their

alliance

agreement.

DOT

imposed

carve

outs

from

the

immunity

for

the

Frankfurt

to

Chicago/Washington

routes

-

the

only

routes

then

served

by

both

airlines

on

a

nonstop

basis.

The

carve

outs

remained

following

each

subsequent

renewal

of

the

United/Lufthansa

immunity

grant

and

each

expansion

of

the

membership

of

the

Star

ATI

Alliance.

The

two

carriers

instituted

revenue

sharing

in

2003,

when

they

changed

the

name

of

the

venture

to

the

Atlantic

Plus

(

“

A+

”

)

Alliance.

*

The

Star

ATI

Alliance:

United,

Air

Canada,

Lufthansa

and

six

other

Star

members

5

have

entered

into

a

coordination

agreement

to

“

promote

global

cooperation,

while

maintaining

their

distinct

corporate

identities.

”

6

DOT

granted

this

group

global

antitrust

immunity

but

excluded

routes

between

Frankfurt

and

Chicago/Washington

(discussed

above)

and

between

Toronto

and

San

Francisco/Chicago.

DOT

had

previously

carved

out

these

routes

from

bilateral

agreements

between

United/Lufthansa

and

United/Air

Canada

7

due

to

competitive

concerns

and

then

ordered

these

carve

outs

continued

under

the

Star

ATI

Alliance;

accordingly,

the

antitrust

laws

continue

to

apply

to

operations

on

those

routes.

B.

Continenta

l

s

request

to

join

Star

and

receive

antitrust

immunity

Continental,

the

fourth

largest

U.S.

airline

with

hubs

in

Newark,

Houston

and

Cleveland,

has

an

extensive

international

network,

including

significant

transatlantic,

transpacific

and

Latin

American

operations.

It

currently

is

an

non-immunized

member

of

the

Sky

Team

Alliance

and

5

United,

Air

Canada,

Lufthansa,

Austrian,

BMI,

LOT,

SAS,

Swiss

and

TAP

are

the

current

members

of

the

Star

ATI

Alliance.

6

Docket

2005-22922,

Joint

Application

Ex.

2.

7

DOT

first

granted

United

and

Air

Canada

immunity

in

1997.

That

order

exempted

from

immunity

Toronto

to

Chicago/San

Francisco

routes

-

two

of

the

five

routes

where

United

and

Air

Canada

each

offered

nonstop

service

between

the

U.S.

and

Canada

at

the

time.

5

also

participates

in

a

domestic

alliance

with

Northwest

and

Delta.

Continental

competes

with

United

on

numerous

domestic

routes;

the

airlines

also

provide

competing

service

to

Europe,

Canada,

Asia

and

Latin

America.

Continental

now

seeks

to

exit

Sky

Team

and

join

United

in

the

Star

Alliance.

8

In

addition

to

becoming

a

member

of

the

full,

non-immunized

alliance,

the

Applicants

request

that

DOT

provide

antitrust

immunity

for Continental

’

s

inclusion

in

the

Star

ATI

Alliance

agreement,

with

the

result

that

Continental

will

have

global

immunity

to

cooperate

with

the

existing

Star

ATI

participants.

9

The

Applicants

also

propose

an

integrated

joint

venture

among

Continental,

United,

Air

Canada,

and

Lufthansa

patterned

after

the

immunized

A+

alliance.

The

venture

-

named

A++

-

provides

for

the

four

parties

to

engage

in

joint

pricing,

sales

and

marketing,

and

revenue

sharing

for

the

transatlantic

routes

encompassed

by

the

agreement.

The

Applicants

contend

that

revenue

sharing

will

promote

“

sales

without

preference

”

or

“

metal

neutrality,

”

and

allow

the

parties

to

focus

on

jointly

tailoring

their

service

to

serve

customers

better,

rather

than

diverting

passengers

from

one

another.

8

Due

to

contractual

obligations,

Continental

cannot

transition

from

SkyTeam

to

the

Star

Alliance,

or

any

of

the

other

coordination

agreements

set

forth

in

the

Joint

Application,

until

October

24,

2009.

9

Continental

proposes

to

enter

into

bilateral

agreements

with

each

of

the

existing

members

to

facilitate

this

coordination.

10

6

in

support

of

their

overall

request,

the

Applicants

claim

that

Continental

’

s

inclusion

in

the

immunized

Star

ATI

Alliance

will

provide

significant

consumer

benefits,

which

include

expansion

of

service,

prevention

of

service

cuts,

cost

efficiencies,

and

more

vigorous

competition

among

the

three

major

international

alliances

(Star,

SkyTeam

and

largely

non-immunized

oneworld).

They

place

significant

emphasis

on

the

“

common

bottom

line

”

of

the

A++

agreement,

which

they

claim

will

allow

significant

integration

and

operational

efficiencies.

They

assert

that

antitrust

immunity

is

required

to

achieve

these

consumer

benefits

because

a

grant

of

immunity

would

negate

the

“

threat

of

costly

and

burdensome

private

antitrust

litigation;

”

satisfy

“

due

process

”

and

“

equitable

”

considerations

by

providing

the

Star

ATI

Alliance,

plus

Continental,

immunity

to

match

the

immunity

currently

in

place

for

the

SkyTeam

Alliance;

and

further

the

goals

of

the

U.S.-E.U.

open

skies

agreement.

12

The

Applicants

assert

that

the

benefits

justify

global,

unrestricted

immunity;

i.e.,

that

DOT

should

not

impose

carve

outs

on

new

overlap

routes

and

that

DOT

should

rescind

the

carve

outs

that

apply

to

the

Star

ATI

members

’

existing

grants

of

immunity.

13

The

Applicants

claim

that

they

will

not

carry

out

the

joint

activities

contemplated

by

the

proposed

alliance

agreements

without

immunity.

14

11

The

agreement

does

not

specifically

provide

for

expansion

of

the

venture

to

other

international

routes.

The

Applicants

have

stated

that

they

intend

to

pursue

similar

integrated

joint

ventures

to

cover

Latin

America

and

Asia,

but

no

such

contractual

obligation

exists.

12

J.A.

at

97,

13,

and

9.

13

J.A.

at

85.

14

J.A.

at

97.

7

Continental

and

United

also

contemplate

forming

a

domestic

alliance

spanning

their

entire

U.S.

networks.

15

Continental

and

United

assert

that

they

will

maintain

their

separate

domestic

networks

and

make

independent

pricing,

scheduling

and

sales

decision

for

the

domestic

entities.

C.

The

Show

Cause

Order

DOT

conducted

an

analysis

of

the

competitive

effects

and

claimed

benefits

of

the

proposed

agreements.

DOT

explains

that

its

competitive

analysis

treats

the

agreements

as

a

merger

and

that

the

appropriate

framework

is

an

application

of

Clayton

Act

standards.

16

Under

its

review

process,

DOT

analyzes

the

potential

effects

of

the

proposed

agreements

on

competition

in

“

regional,

”

“

country-pair,

”

and

“

city-pair

”

markets,

and

the

Order

finds

the

combination

to

be

pro-competitive

or

neutral

with

respect

to

regional

and

country-pair

markets.

17

With

respect

to

city-pair

markets,

the

Order

notes

that

there

are

fourteen

city

pairs

in

which

Continental

and

a

Star

ATI

carrier

compete

on

a

nonstop

basis.

DOT

states

that

“

each

of

the

nonstop

overlap

markets

will

continue

to

have

adequate

competition

on

a

nonstop

or

connecting

basis

”

but

does

not

discuss

the

specific

facts

of

each.

The

Order

also

states

that

even

“

[wjhere

the

transaction

materially

reduces

the

number

of

competitors

.

..

the

particular

facts

and

circumstances

of

this

15

Continental

and

United

hope

eventually

to

codeshare

on

nearly

all

of

their

domestic

flight

segments,

combine

customer

lounges,

consolidate

their

operations

at

common

airports,

provide

frequent

flyer

reciprocity,

cooperate

on

ticketing,

reservations

and

check-in,

and

perform

joint

procurement.

16

Order

at

7-13.

17

The

Order

does

not

explain

how

DOT

determined that

regional

and

country-pair

markets

are

relevant

markets

under

the

Clayton

Act.

In

its

analysis

of

country-pair

markets,

DOT

focuses

on

the

predicted

effect

of

the

transaction

on

“

inter-alliance

competition.

”

As

discussed

infra,

when

DOJ

analyzes

the

competitive

effects

of

transactions

involving

air

transportation

service,

DOJ

considers

travel

between

city

pairs,

or

nonstop

travel

between

city

pairs,

to

be

the

appropriate

relevant

markets

for

review.

8

case

indicate

that

consumers

will

not

be

harmed.

”

18

DOT

also

explains

its

view

that

carving

out

service

on

transatlantic

overlap

city-pair

routes

from

immunity

would

interfere

with

the

expected

integration

efficiencies

from

the

A++

venture

and

would

disadvantage

the

smaller

Star

carriers

SAS,

Swiss,

and

TAP,

which

compete

on

certain

of

the

overlap

routes

but

are

not

A++

members.

19

In

addition,

the

Order

states

that

entry

is

easy

in

U.S.-Canada

markets,

and

thus

DOT

does

not

impose

carve

outs

of

overlaps

between

Continental

and

the

Star

ATI

members.

20

The

Order

does

not

address

competitive

issues

in

any

other

non-transatlantic

international

city

pairs

(such

as

routes

from

the

U.S.

to

Asia

or

Latin

America).

The

Order

notes

that,

although

there

is

some

risk

that

immunized

coordination

between

Continental

and

United

will

have

spillover

effects

on

competition

in

domestic

markets,

that risk

is

small

and

outweighed

by

the

benefits

of

integration.

The

Order

states

that

the

adoption

of

antitrust

protocols

by

United

and

Continental

is

critical

to

this

finding.

The

Order

concludes

that

the

extensive

integration

contemplated

in

the

A++joint

venture

might

create

a

risk

of

antitrust

litigation

for

the

four

participants.

21

The

Order

does

not

expressly

analyze

why

immunity

is

necessary

for

Continental

to

join

the

broader,

less

integrated

Star

ATI

alliance.

The

Order

states

that

restricting

the

scope

of

the

alliance

agreements

at

this

juncture

would

“primarily

serve

to

disadvantage

Continental

and

its

customers.

”

22

18

Order

at

12.

19

Order

at

13.

20

Id.

The

Order

maintains

existing

transborder

carve

outs

between

Star

ATI

members

United

and

Air

Canada.

Order

at

13,27.

21

Order

at

17-18.

22

Order

at

20.

9

The

Order

grants

global

immunity

for

Continental

to

coordinate

with

the

Star

ATI

members

and

for

the

A++joint

venture.

23

The

Applicants

are

required

to

submit

evidence

showing

that

the

A++joint

venture

has

been

implemented

-

i.e.,

the

parties

must

negotiate

a

revenue

sharing

formula

-

within

18

months.

If

they

do

so,

the

existing

carve-outs

on

the

Washington-Frankfurt

and

Chicago-Frankfurt

markets

will

be

removed.

If

they

fail

to

do

so,

“

the

grant

of

antitrust

immunity

shall

be

automatically

withdrawn.

”

24

III.

The

Statutory

Scheme

Disfavors

Immunity

and

Places

a

Significant

Burden

on

the

Applicants

to

Justify

Their

Request

Under

the

applicable

statute,

DOT

must

disapprove

a

proposed

agreement

if

it

“

substantially

reduces

or

eliminates

competition

”

unless

DOT

finds

that

the

agreement

“

is

necessary

to

meet

a

serious

transportation

need

or

to

achieve

important

public

benefits

”

and

there

is

no

less

anticompetitive

alternative.

49

U.S.C.

§41309(b).

If

DOT

approves

an

anticompetitive

agreement

on

those

grounds,

it

must

exempt

it

from

the

antitrust

laws.

49

U.S.C.

§41308(c).

If

DOT

finds

that

an

agreement

does

not

reduce

or

eliminate

competition

and

is

consistent

with

the

public

interest,

DOT

must

approve

it,

but

exemption

from

the

antitrust

laws

is

authorized

only

if

it

is

required

by

the

public

interest;

even

then

immunity

is

authorized

only

“

to

the

extent

necessary

to

allow

the

person

to

proceed

with

the

transaction

specifically

approved

by

the

order

and

with

any

transaction

necessarily

contemplated

by

the

order.

”

49

U.S.C.

§§41309(b)

and

23

The

immunity

grant

is

subject

to

the

adoption

of

antitrust

guidelines

by

United,

Continental,

and

Lufthansa,

and

does

not

extend

to

any

market

solely

within

the

United

States.

Order

at

27,

Appendix

A.

The

Applicants

also

must

submit

for

prior

approval

any

agreements

materially

altering

their

cooperation

agreements

and

must

resubmit

the

alliance

agreements

five

years

after

issuance

of

the

Final

Order.

Order

at

27.

24

Order

at

26-27.

10

41308(b).

In

such

a

case,

the

burden

is

on

the

Applicants

to

make

“

a

strong

showing

on

the

record

that

antitrust

immunity

is

required

by

the

public

interest,

and

that

the

parties

will

not

proceed

with

the

transaction

without

the

antitrust

immunity.”

25

A.

Antitrust

enforcement

plays

a

central

role

in

the

deregulated

airline

industry

Antitrust

enforcement

protects

U.S.

consumers.

The

antitrust

laws

rest

on

“

the

premise

that

the

unrestrained

interaction

of

competitive

forces

will

yield

the

best

allocation

of

our

economic

resources,

the

lowest

prices,

the

highest

quality

and

the

greatest

material

progress.

”

26

Accordingly,

the

Supreme

Court

has

consistently

held

that

exemptions

from

the

antitrust

laws

are

to

be

narrowly

construed.

27

An

important

goal

of

airline

deregulation

was

to

“make

the

airline

industry

subject

to

the

same

competitive

and

antitrust

standards

applicable

to

other

industries,

as

far

as

is

practicable.

”

28

As

the

Civil

Aeronautics

Board

(

“

CAB

”

)

itself

recognized,

regulatory

protection

from

antitrust

enforcement

may

have

unanticipated

consequences:

Congress

intended

the Board

to

be

circumspect

in

its

use

of

414

[the

antitrust

exemption

for

airlines],

both

because

the

threat

of

antitrust

liability

is

a

valuable

regulator

of

business

conduct

and

because

the

consequences

of

the

grant

of

immunity

can

be

difficult

to

predict.

29

25

Order

93-1-11

(Northwest/KLM)

at

10.

26

N.

Pac.

Ry.

Co.

v.

United

States,

356

U.S.

1,

4

(1958).

27

Union

Labor

Life

Ins.

Co.

v.

Pireno,

458

U.S.

119,

126

(1982);

FMC

v.

Seatrain

Lines,

Inc.,

411

U.S.

726,

732-33

(1973).

This

doctrine

applies

with

equal

force

to

both

implicit

and

express

statutory

exemptions.

Group

Life

&

Health

Ins.

Co.

v.

Royal

Drug

Co.,

440

U.S.

205,

231

(1979);

United

States

v.

McKesson

&

Robbins,

Inc.,

351

U.S.

305,

316

(1956).

28

Air

Carrier

Agreements

Affecting

Interstate

and

Overseas

Air

Transportation,

Order

88-12-11

at

1

(1988).

29

National

Airlines,

Acquisition,

84

C.A.B.

408,

415

(1979).

11

The

CAB

and

DOT

have

in

the

past

exercised

their

authority

to

grant

immunity

mindful

of

competitive

consequences:

In

enacting

the

ADA,

Congress

directed

that

control

of

the

air

transportation

system

be

returned

to

the

marketplace.

We

have

consistently

held

that

a

part

of

the

return

to

market

control

is

exposure

of

participants

to

the

antitrust

laws,

as

that

exposure

exists

in

unregulated

industries.

30

B.

Applicants

must

show

that

immunity

is

required

by

the

public

interest

The

burden

is

on

the

Applicants

to

make

“

a

strong

showing

on

the

record

that

antitrust

immunity

is

required

by

the

public

interest,

and

that

the

parties

will

not

proceed

with

the

transaction

without

the

antitrust

immunity.”

31

DOT

has

“determined

that

it

will

grant

antitrust

immunity

only

if

it

is

necessary

to

enable

a

transaction

that

will

provide

significant

public

benefits

to

go

forward.

”

32

have

described

the

“

high

standard

”

or

exceptional

showing

required.

33

The

courts

have

upheld

this

approach.

For

example,

in

affirming

a

CAB

denial

of

antitrust

immunity,

the

Eighth

Circuit

explained

that

“

[examination

of

[the

approval

and

immunity

provisions]

and

their

legislative

history

clearly

reveals

that

antitrust

immunity

for

30

Competitive

Marketing

of

Air

Transportation,

Order

82-12-85,

99

C.A.B.

1,131

(1982).

“

ADA

”

refers

to

the

Airline

Deregulation

Act

of

1978,

Pub.

L.

No.

95-504,

92

Stat.

1705,

codified

as

amended

at

49

U.S.C.

§§

40101-46501

(2005).

31

Order

93-1-11

(North

west/KLM)

at

10.

32

DOT Report

to

Congress:

Administration

of

Aviation

Antitrust

Functions,

at

16

(May

1987).

See

also

49

U.S.C.

§

41308(b)

(stating

the

“

necessary

”

requirement).

33

See,

e.g,

UATP-1976

Agreements,

Order

80-6-66,

85

C.A.B.

2481,

2512-14

(1980)

(

“

[F]ull

exposure

to

antitrust

liability

is

consistent

with

the

marketplace

orientation

of

[the

Airline

Deregulation

Act]

”

);

Airline

Fuel

Corporation

Case,

Order

79-9-120,

83

C.A.B.

1358,

1363-64

(1979)

(holding

that

Board

’

s

continuing

jurisdiction

over

agreements

was

not

sufficient

substitute

for

antitrust

exposure

and

noting

that

the

threat

of

unwarranted

litigation

is

“

simply

one

of

the

risks

of

doing

business

”

);

see

also,

Competitive

Marketing

of

Air

Transportation,

Order

82-12-85,

99

C.A.B.

1,

13

(1982)

(recognizing

that

“

full

antitrust

exposure

is

consistent

with

deregulation

”

and

setting

a

“high

standard

for

granting

antitrust

immunity”

).

12

airline

agreements

is

intended

to

be

the

exception

and

not

the

rule.

”

34

All

prudent

businesses

devote

some

concern

to

antitrust

liability;

this

level

of

awareness

normal

and,

from

a

consumer

standpoint,

healthy.

Subjective

fears

of

antitrust

litigation

are

an

insufficient

basis

for

granting

immunity:

Petitioners

seem

to

read

the

[Federal

Aviation

Act]

as

authorizing

immunity

on

demand

for

any

agreement

which

produces

public

benefits.

Neither

the

text

nor

the

legislative

history

of

the

statute

supports

such

a

reading,

which

would

make

the

grant

of

antitrust

immunity

turn

on

the

subjective

desire

of

the

parties

to

avoid

antitrust

litigation.

This

desire

is

one

shared

by

all

businesses

subject

to

the

Sherman

Act,

and

we

do

not

believe

that

it

is

relevant

to

the

Board

’

s

task.

Petitioners

are

entitled

to

immunity

on

the

basis

of

an

objective

demonstration

that

the

statutory

requirements

for

such

immunity

have

been

met.

35

An

application

for

immunity

must

therefore

make

a

“

strong

showing

”

that,

from

the

standpoint

of

the

public

interest,

the

predicted

value

of

antitrust

immunity

is

greater

than

the

proven

value

of

the

normal

antitrust

regime.

IV.

DOT

Should

Deny

the

Broad

Application

for

Immunity

Over

the

last

sixteen

years,

DOT

has

exercised

its

authority

to

grant

antitrust

immunity

to

more

than

twenty

alliance

agreements.

36

During

this

time

most

of

the

largest

airlines

in

the

world

have

become

members

of

one

of

three

large

alliances

and,

in

many

cases,

have

been

granted

immunity

from

the

antitrust

laws

by

DOT.

Many

of

the

immunity

grants

DOT

has

issued

were

intended,

in

large

part,

to

further

the

foreign

policy

goal

of

inducing

the

governments

of

the

foreign

alliance

partners

’

home

countries

34

Republic

Airlines,

Inc.

v.

C.A.B.,

756

F.2d

1304,

1317

(8

t

h

Cir.

1985).

35

Id.

(emphasis

in

original).

36

DOT

has

published

lists

of

open

skies

agreements

and

immunized

alliances

at

http://ostpxweb.dot.gov/aviation/X-40%20Role_Files/bilatosagreement.htm

and

at

http://ostpxweb.dot.gov/aviation/X-50%20Role_files/immunizedalliances.htm

.

13

to

enter

into

open

skies

agreements

with

the

United

States.

Indeed,

DOT

asked

Congress

to

retain

the

authority

to

approve

and

immunize

agreements

as

a

tool

to

be

used

in

the

conduct

of

U.S.

international

aviation

policy.

37

For

example,

in

granting

immunity

to

the

North

west/KLM

alliance,

foreign

policy

considerations

led

DOT

to

overcome

its

normal

reluctance

to

grant

antitrust

immunity:

We

have

rarely

been

willing

to

grant

antitrust

immunity

to

carrier

agreements

because

immunity

is

usually

inconsistent

with

airline

deregulation

and

the

promotion

of

airline

competition.

In

this

case,

however,

the

grant

of

immunity

should

promote

competition

by

furthering

our

efforts

to

obtain

less

restrictive

aviation

agreements

with

other

European

38

countries.

The

agreements

facilitated

by

earlier

grants

of

immunity

have

removed

entry

restrictions

and

pricing

regulation

in

most

large

international

markets.

In

this

case,

however,

open

skies

agreements

are

in

place

with

all

of

the

relevant

governments

39

and

an

immunity

grant

to

Continental

does

not

advance

this

important

goal.

40

37

Report

to

Congress:

Administration

of

Aviation

Antitrust

Functions,

May

1987,

at

24.

38

Order

93-1-11

at

11-12.

39

Although

in

some

DOT

granted

immunity

to

a

new

alliance

after

open

skies

were

achieved,

these

decisions

occurred

where

the

foreign

carrier

’s

original

alliance

with

a

U.S.

carrier

had

terminated

or

where

the

citizen

airline

of

the

open

skies

partner

was

newly

joining

an

alliance

with

a

single

U.S.

carrier.

As

DOT

has

explained,

“the

existence

of

an

open-skies

relationship

in

no

way

guarantees

any

grant

of

immunity.

To

the

contrary,

it

is

possible

that

immunity

will

not

be

found

to

be

pro-competitive

or

pro-consumer

in

particular

cases,

notwithstanding

an

open

national

market,

depending

on

such

factors

as

relevant

market

concentration,

potential

future

barriers,

overall

dominance

and

size

of

the

applicants,

among

other

things

[;]

...

an

Open-Skies

agreement

is

a

necessary,

but

not

automatically

sufficient,

basis

for

the

grant

of

antitrust

immunity.

”

Order

2001-12-18

(Delta/Air

France/Alitalia/Czech)

at

2.

40

The

EU

and

the

U.S.

have

negotiated

and

implemented

a

first

stage

open

skies

agreement

and

are

negotiating

an

expansion

of

that

agreement.

There

has

been

no

claim

here

that

granting

expanded

immunity

to

Star

would

lead

to

success

in

those

negotiations.

14

DOT

has

also

based

its

prior

decisions

to

grant

immunity

to

alliances

on

the

assumption

that

immunity

would

allow

the

partner

airlines

to

coordinate

in

ways

that

create

large

public

benefits,

and

that

such

coordination

would

not

occur

without

immunity.

The

primary

benefit

asserted

by

the

Applicants

is

that,

like

other

international

alliances,

immunity

here

will

allow

the

partner

airlines

to

extend

their

networks

to

provide

passengers

with

online

service

in

a

large

number

of

city

pair

markets

that

no

partner

serves

on

its

own.

They

further

argue

that

immunity

will

benefit

passengers

by

creating

broader

frequent

flyer

programs,

improved

access

to

airport

lounges,

and

more

efficient

service

through

shared

airport

facilities

and

passenger

handling.

Time

has

shown,

however,

that

non-immunized

alliances

(including

some

involving

the

Applicants)

routinely

provide

these

same

public

benefits

through

code-sharing,

joint

marketing

programs,

and

operational

cooperation.

See

infra

Section

VI.

A.

The

Applicants

also

argue

that

immunity

would

lead

to

reduced

fares

through

the

elimination

of

double

marginalization.

Comparison

of

immunized

and

non-immunized

alliances,

however,

shows

that

immunity

is

not

necessary

to

achieve

this

benefit.

See

infra

Section

VI.

E.

Finally,

the

Applicants

claim

that

they

would

not

engage

in

the

proposed

coordination

without

immunity

due

to

fear

of

frivolous

antitrust

litigation.

This

fear

is

without

substantial

foundation,

and

long

experience

shows

that

airlines

routinely

engage

in

profitable

and

beneficial

coordination

without

antitrust

immunity.

See

infra

Section

VI.

V.

Immunizing

an

Alliance

that

Includes

Continental

and

the

Other

Star

ATI

Members

Risks

Significant

Competitive

Harm

in

Certain

Markets

DOJ

’

s

analysis

shows

that

the

addition

of

Continental

to

the

immunized

Star

ATI

Alliance

is

likely

to

result

in

harm

to

certain

international

routes,

including

routes

between

the

U.S.

and

China,

routes

spanning

the

U.S.

and

Canadian

border,

and

routes

between

the

U.S.

and

Denmark,

15

Portugal,

Sweden,

and

Switzerland.

The

proposed

agreements

also

pose

harm

to

domestic

competition.

A.

Analyzing

the

competitive

effects

of

the

Joint

Application

agreements

To

determine

the

competitive

effect

of

adding

Continental

to

the

immunized

Star

ATI

Alliance,

DOJ

undertakes

an

analysis

based

on

the

antitrust

agencies

’

Antitrust

Guidelines

for

Collaborations

Among

Competitors

(hereinafter

“

Joint

Venture

Guidelines

”

).

41

The

central

question

is

whether

the

joint

venture

is

likely

to

harm

competition

in

any

relevant

markets

by

increasing

the

participants

’

ability

or

incentive

to

raise

price

or

reduce

output.

42

The

first

part

of

this

analysis

asks

whether

the

venture

may

reduce

competition

in

the

markets

within

which

the

venture

operates.

The

second

asks

whether

the

joint

venture

may

reduce

competition

in

other

markets

where

the

joint

venturers

remain

competitors.

The

likelihood

of

any

harm

to

competition

depends

on,

among

other

things,

“

the

nature

of

the

collaboration,

its

organization

and

governance,

and

safeguards

implemented

to

prevent

or

minimize

such

disclosure.

”

43

A

joint

venture

may

facilitate

collusion

by

providing

the

participants

with

opportunities

to

discuss

and

agree

on

anticompetitive

terms

or

enhancing

their

ability

to

detect

and

punish

deviations

from

a

collusive

agreement.

44

Evaluating

the

competitive

effects

requires

a

detailed

and

fact-intensive

analysis

of

the

specifics

of

the

joint

venture

structure

41

These

guidelines,

prepared

by

DOJ

and

the

Federal

Trade

Commission

and

available

at

http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf

,

explain

the

framework

for

analysis

of

the

competitive

effects

of

joint

ventures.

42

Joint

Venture

Guidelines

at

1.2;

3.3.

43

See

Joint

Venture

Guidelines

at

3.34(e).

44

Id.

at

3.31(b).

16

and

proposed

operations

in

the

relevant

markets.

DOJ

uses

the

principles

contained

in

the

1992

Horizontal

Merger

Guidelines

to

analyze

the

likely

competitive

effects

of

agreements

such

as

those

in

the

Joint

Application,

45

and

DOT

has

adopted

this

Merger

Guidelines

approach.

46

The

analysis

identifies

the

relevant

markets

and

the

firms

that

compete

in

those

markets,

and

considers

whether

entry

into

the

market

is

so

easy

that

the

market

participants,

after

the

transaction,

would

not

be

able

profitably

to

maintain

a

price

increase

above

pre-merger

levels.

47

In

analyzing

airline

matters,

the

relevant

markets

are

no

larger

than

city

pairs.

However,

there

are

often

narrower

markets

for

nonstop

service

because

a

significant

number

of

travelers

may

not

consider

onestop

service

to

be

a

reasonable

substitute

for

nonstop

in

a

given

city-pair

market.

In

principle,

a

transaction

may

not increase

market

power,

notwithstanding

a

significant

increase

in

concentration,

if

entry

were

so

easy

that

profitable

price

increases

could

not

be

sustained

after

the

transaction.

Here,

the

Applicants

have

made

no

showing

that

such

entry

would

be

timely,

likely

or

sufficient

on

the

routes

of

greatest

concern.

Moreover,

experience

shows

that

entry

on

certain

routes,

in

particular

routes

connecting

two

hubs

of

an

airline,

can

be

difficult

for

a

45

For

a

more

detailed

description

of

DOJ

’s

approach

to

analyzing

airline

mergers,

see

Statement

of

James

J.

O

’

Connell

before

the

Subcommittee

of

Aviation,

Committee

on

Transportation

and

Infrastructure,

U.S.

House

of

Representatives

(May

14,

2008)

at

7-10.

46

M

[W]e

primarily

consider

whether

the

alliance

would

significantly

increase

market

concentration,

whether

the

alliance

raises

concerns

about

potential

anticompetitive

effects

in

light

of

other

factors,

and

whether

new

entry

into

the

market

would

be

timely,

likely,

and

sufficient

either

to

deter

or

counteract

a

proposed

alliance

’

s

potential

for

harm.

”

Order

at

7.

47

“

Entry

is

that

easy

if

entry

would

be

timely,

likely,

and

sufficient

in

its

magnitude,

character

and

scope

to

deter

and

counteract

the

competitive

effects

of

concern.

”

Merger

Guidelines

§

3.0.

17

non-hub

carrier.

48

B.

Competition

on

non-transatlantic

routes

If

global

antitrust

immunity

is

granted,

United

and

Continental

will

be

free

to

cease

competing

in

non-transatlantic

international

markets.

Although

the

two

carriers

have

no

nonstop

overlaps

on

non-transatlantic

city

pairs,

they

are

nevertheless

important

competitors

in

non

-

transatlantic

regions.

Pacific

and

Latin

American

markets

tend

to

have

significantly

less

service

from

the

U.S.

than

European

markets,

both

because

the

markets

are

thinner

and

because

service

to

several

countries

is

still

subject

to

limited

entry

bilaterals.

49

The

Order

contains

no

analysis

of

the

competitive

effects

of

immunizing

the

non-transatlantic

international

operations

of

Continental

and

United.

50

The

most

serious

competitive

concerns

raised

by

a

grant

of

global

immunity

involve

China.

U.S.

airlines

must

receive

DOT

authorization

to

serve

between

specific

cities

in

the

U.S.

and

China,

and

such

authorization

has

strict

frequency

limits.

United

and

Continental

are

currently

the

only

two

U.S.

carriers

offering

nonstop

service

to

Beijing

from

the

U.S.

mainland.

Together,

they

account

for

57%

of

the

available

nonstop

seats

to

Beijing,

while

(non-immunized)

48

Entry

by

non-hub

carriers

in

transatlantic

hub

routes

where

only

a

few

airlines

offer

nonstop

flights

is

extremely

unlikely.

For

the

46

transatlantic

hub

routes

studied

in

Appendix

B

that

had

nonstop

service

from

only

one

or

two

carriers,

there

was

only

one

instance

in

the

past

three

years

of

a

non-hub

carrier

entering

a

route

with

regular

service.

See

Appendix

B,

fn.

119.

See

also,

infra

notes

67

and

122.

49

Countries

that

still

have

restricted

bilaterals

include

Brazil,

Mexico,

China,

and

Japan.

50

The

Order

notes

Delta

Air

Lines

’

objection

to

extending

immunity

to

limited

entry

countries,

but

merely

states

that

DOT

is

unwilling

to

“

jeopardize

the

network

benefits

of

the

proposed

alliance

by

limiting

the

points

that

be

served

without

stronger

evidence

of

competitive

harm.

”

Order

at

20.

The

Order

does

not

describe

which

limited

entry

markets

DOT

examined

for

competitive

effects

or

which

evidence

DOT

would

have

found

sufficient.

18

Star

member

Air

China

accounts

for

another

41%.

51

United

and

Continental

are

also

the

only

U.S.

carriers

providing

nonstop

service

from

U.S.

gateways

to

Hong

Kong;

those

nonstop

flights

accounted

for

28%

of

all

nonstop

seats

offered

from

the

U.S.

to

Hong

Kong

in

2008.

52

United

and

Continental

currently

do

not

provide

nonstop

service

between

the

same

U.S.-China

city

pairs

(e.g.,

United

has

authority

to

provide

some

service

between

Beijing

and

Chicago/San

Francisco/Washington,

while

Continental

is

authorized

to

offer

some

service

between

Beijing

and

Newark).

However,

because

DOT

can

authorize

service

to

China

from

only

a

handful

of

U.S.

cities,

53

customers

in

many

U.S.

cities

must

use

connect

service

when

traveling

to/from

China.

Thus,

Continental

and

United

today

compete

for

connecting

traffic

between

numerous

non-gateway

U.S.

cities

and

Beijing.

That

competition

would

be

lost

under

the

terms

of

the

Order.

Under

current

service

patterns,

post-application

the

Star

Alliance

would

provide

a

dominant

share

of

the

onestop

connecting

service

available

to

U.S.

consumers,

with

immunized

Star

ATI

members

Continental

and

United

accounting

for

many

of

the

onestop

options

involving

Eastern

U.S.

points.

Although

significant

new

U.S.-China

service

has

been

negotiated

and

awarded,

54

most

of

that

new

service

has

been

deferred

by

the

recipient

airlines

for

at

least

a

year.

55

51

OAG

data

for

2008.

52

Id.

53

See

Order

2007-9-25,

Docket

OST-2007-28567,

at

2-3

(discussing

limits

on

DOT'S

ability

to

award

service

to

China).

54

See

Order

2007-9-25,

Docket

OST-2007-28567.

55

See,

e.g,

Docket

OST-2007-28567,

Motion

of

United

Airlines,

March

20,

2009,

at

2-

19

Even

if

all

the

authorized

service

were

implemented

eventually,

the

combination

of

the

Continental

and

United

frequencies

will

leave

the

Star

ATI

alliance

with over

half

of

the

authorized

U.S.

carrier

frequencies

from

the

U.S.

to

Beijing.

C.

Competition

on

transatlantic

routes

Continental

has

extensive

transatlantic

operations

-

with

flights

to

25

destinations

in

Europe

-

primarily

from

its

hub

in

Newark

and

more

limited

service

from

Houston

and

Cleveland.

Continental

competes

on

a

nonstop

basis

with

the

Star

ATI

carriers

in

certain

U.S.-

Europe

city-pair

markets,

as

discussed

in

Section

V.

C.

2

below.

58

Granting

Continental

authority

to

join

the

immunized

Star

ATI

Alliance

will

likely

harm

nonstop

competition

in

these

markets.

1.

Nonstop

service

is

a

separate

product

market

In

transatlantic

routes

covered

by

this

Application,

nonstop

service

is

a

separate

product

56

See

Appendix

A.

57

58

With

respect

to

transatlantic

city-pair

markets

in

which

Continental

today

provides

only

connecting

service,

the

proposed

immunity

grant

does

not

raise

competitive

concerns

for

passengers.

20

market.

Empirical

analyses

(discussed

in

more

detail

below)

show

that

the

number

of

nonstop

carriers

competing

in

a

market

has

a

significant

impact

on

the

average

fares

paid

by

customers

in

the

market.

That

finding

strongly

supports

the conclusion

that

nonstop

service

is

a

separate

market,

59

The

evidence

shows

that

for

a

large

group

of

passengers,

connecting

service

is

not

a

reasonable

substitute

and

airlines

can

target

this

group

for

higher

fares.

60

These

travelers

generally

have

fewer

options

on

the

timing

of

trips,

tend

to

purchase

tickets

closer

to

the

time

of

travel,

are

able

to

pay

more

for

better

service

and

flexibility,

and

are

less

likely

to

accept

the

delays

attendant

to

connecting

service

when

nonstop

service

is

available.

In

other

words,

for

many

passengers,

connecting

service

is

not

a

reasonable

substitute

for

nonstop

service.

The

existence

of

a

separate

market

for

nonstop

service

is

supported

by

the

airlines

’

own

documents

and

actions.

The

airlines

structure

restrictions

on

their

tickets

to

segment

time-

sensitive

from

non-time-sensitive

demand,

thereby

encouraging passengers

to

self-select

into

either lower

priced

tickets

with

more

restrictions

purchased

in

advance

of

travel,

or

less

restricted

59

Moreover,

on

transatlantic

hub

routes

the

vast

majority

of

coach

passengers

fly

nonstop

when

it

is

available

even

though

average

connect

fares

are

10%

lower

than

average

nonstop

fares

(see

Appendix

B).

Such

evidence

is

consistent

with

the

existence

of

a

separate

non-stop

market.

60

See,

e.g.,

Armantier,

O

.,

and

Richard,

0.,

2008,

“Domestic

Airline

Alliances

and

Consumer Welfare,

”

39

RAND

Journal

of

Economics

875-904,

and

Berry,

S.,

Ca

rn

all,

M.,

and

Spiller,

P.,

2006,

“Airline

Hubs:

Costs,

Markups

and

the

Implications

of

Customer

Heterogeneity,

”

1

Advances

in

Airlines

Economics

(Darin

Lee,

Elsevier

B.V.,

ed.).

21

tickets

purchased

within

a

few

days

of

travel

at

relatively

high

prices.

61

To

similar

effect,

the

airlines

’

QSI

(

“

quality

of

service

index

”

)

models

award

nonstop

service

a

significantly

higher

projected

share

than

connect

service

when

predicting

the

market

share

a

carrier

should

receive

based

upon

its

level

or

quality

of

service

in

a

market.

62

Finally,

business

travelers

’

conduct

supports

the

existence

of

a

nonstop

market.

63

Many

corporations

have

explicit

guidelines

governing

when

their

employees

are

required

to

take

onestop

alternatives

due

to

lower

price.

Those guidelines

require

a

significant

fare

difference

before

the

onestop

option

is

mandated

-- -

generally

at

least

10%

and

in

some

cases

25%

or

more.

Some

corporations

actually

require

passengers

to

take

nonstop

service

if

available.

This

is

not

surprising

given

the

value

of

employees

’

time,

especially

the

types

of

employees

likely

to

be

dispatched

on

international

travel.

2.

Nonstop

overlap

on

specific

transatlantic

routes

Continental

currently

competes

against

other

Star

ATI

members

on

five

nonstop

transatlantic

routes:

New

York-Stockholm,

New

York-Copenhagen,

New

York-Geneva,

New

61

62

63

DOJ

interviewed

numerous

corporate

travel

managers

about

their

companies

’

travel

policies

during

the

course

of

investigating

the

Joint

Applicants

’

proposals

and

other

airline

transactions.

22

York-Lisbon,

and

New

York-Zurich.

64

The

two

charts

below

show

Continental

and

the

Star

ATI

carriers

’

shares

on

these

five

routes

of

all

passengers

(nonstop

and

connecting)

and

nonstop

passengers:

65

Total

Passenger

Shares

(Nonstop

and

Connecting)

in

Selected

N.Y.C.

Overlap

Routes

New

York

City

2007

CO

Share

Current

Star

New Star

Transatlantic

Service

Passengers

ATI

Share

ATI

Share

Stockholm

Copenhagen

Geneva

Zurich

Lisbon

Total

Nonstop

Passenger

Shares

in

Selected

N.Y.C.

Overlap

Routes

New

York

City

2007

CO

Share

Current

Star

New

Star

Transatlantic

Service

Passengers

ATI

Share

ATI

Share

Stockholm

Copenhagen

Geneva

Zurich

Lisbon

On

each

of

these

routes,

Continental

and

its

potential

immunized

partner

account

for

at

least

of

the

passenger

traffic.

Thus,

even

if

the

relevant

market

is

more

broadly

defined

to

include

nonstop

and

connecting

service,

the

proposed

Application

would

substantially

increase

market concentration

in

each

of

the

above-referenced

markets.

On

four

of

the routes

(New

York

to

Copenhagen,

Geneva,

Lisbon,

and

Stockholm)

they

offer

the

only

daily

nonstop

service

on

the

64

SAS

serves

New

York-Copenhagen/Stockholm,

Swiss

serves

New

York-

Geneva/Zurich,

and

TAP

serves

New

York-Lisbon.

6S

Source:

MIDT

data

(2007).

|

23

route,

and

on

the

fifth

(New

York

to

Zurich)

they

are

two

of

three

nonstop

competitors.

The

proposed

immunity

order

would

thus

significantly

reduce

-

and

in

some

cases

completely

eliminate

-

nonstop

competition

on

these

routes.

As

the

table

below

shows,

the

vast

majority

of

passengers

traveling

in

these

markets

fly

nonstop,

and

the

percentage

of

business

passengers

(identified

by

fare

class)

flying

nonstop

is

generally

even

higher.

66

Business

Class

Share

Coach

Class

Share

New

York

City

Nonstop

Connecting

Nonstop

Connecting

Transatlantic

Service

Carriers

Stockholm

■

■ ■

Copenhagen

■

■ ■ ■

Geneva

■

Zurich

■

■ ■

Lisbon

■

■ ■

■

3.

The

loss

of

a

nonstop

competitor

is

likely

to

result

in

significant

fare

increases

The

immunity

grant

will

substantially

reduce

competition

on

routes

where

the

Star

ATI

members

offer

nonstop

service

in

competition

with

Continental.

Numerous

economic

studies

of

the

domestic

U.S.

airline

industry

since

deregulation

have

shown

that

reducing

the

number

of

nonstop

competitors,

particularly

from

three

to

two,

or

from

two

to

one,

results

in

significant

fare

increases.

67

Recent

work

by

DOJ,

using

cross-sectional

analysis

of

third

quarter

2008

fare

data

66

Source:

MIDT

data

(2007).

Includes

all

carriers

with

at

least

500

passengers

in

the

calendar

year.

67

See,

e.g.,

Kamita,

“

Analyzing

the

Effects

of

Temporary

Antitrust

Immunity:

The

Aloha-Hawaiian

Immunity

Agreement,

”

Journal

of

Law

and

Economics

(forthcoming

2009);

24

for

U.S.

carriers

on

transatlantic

routes,

shows

that

fares

paid

by

nonstop

passengers

increase

by

15%

when

the

number

of

nonstop

carriers

goes

from

two

to

one

(as

would

be

the

result

in

a

number

of

the

nonstop

overlap

markets

at

issue

here

if

immunity

is

granted)

and

increase

by

6.6%

when

the

number

of

nonstop

carriers

goes

from

three

to

two.

68

4.

Nonstop

entry

is

unlikely

The

Applicants

have

failed

to

show

that

nonstop

entry

would

prevent

fare

increases

by

Continental

and

its

immunized

Star

ATI

partners

in

overlap

transatlantic

markets.

If

Continental

has

immunity

to

coordinate

with

the

Star

ATI

members,

the

Star

ATI

Alliance

will,

in

essence,

operate

hubs

at

both

ends

of

the

overlap

city

pairs.

It

is

very

difficult

to

enter

the

hub-hub

market

of

another

carrier

because

the

entrant

does

not

have

access

to

feed

traffic

and

because

the

hub

carrier

has

significant

marketing

advantages.

69

New

York-Copenhagen

and

New

York-Stockholm

Peters,

“

Evaluating

the

Performance

of

Merger

Simulation:

Evidence

from

the

U.S.

Airline

Industry,

”

49

Journal

of

Law

and

Economics

627

(2006);

Joskow,

Werden

&

Johnson,

“

Entry,

Exit

and

Performance

in

Airline

Markets,

12

International

Journal

of

Industrial

Organization

457

(1994);

Borenstein,

“The

Evolution

of

U.S.

Airline

Competition,

”

6

Journal

of

Economic

Perspectives

45

(1992);

Borenstein,

“Hubs

and

High

Fares:

Airport

Dominance

and

Market

Power

in

the

U.S.

Airline

Industry,

“

20

Rand

Journal

of

Economics

344

(1989);

Brueckner,

Dyer

&

Spiller,

“Fare

Determination

in

Hub

and

Spoke

Networks,

”

23

Rand

Journal

of

Economics

309

(1992);

Morrison

&

Winston,

“

Enhancing

Performance

in

the

Deregulated

Air

Transportation

System,

”

1989

Brookings

Papers:

Microeconomics

61

(1989).

Recent

DOJ

empirical

work

on

domestic

markets

also

confirms

that

going

from

three

to

two

nonstop

carriers

increases

fares.

68

The

fare

change

findings

for

two

to

one

routes

are

statistically

significant.

See

Appendix

B,

Section

I,

for

further

description

of

the

analysis

performed.

69

The

hub

carrier

’

s

strong

frequent

flyer

base

and

its

relationships

with

local

travel

agents

make

it

difficult

for

an

entrant

to

attract

local

passengers.

see

also

Gurrea,

“

International

Airline

Code

Sharing

and

Entry

Deterrence,

”

1

Competition

Policy

and

Antitrust

109

(2006);

Lijesen,

Nijkamp,

Pels

&

Rietveld,

“

The

Home

Carrier

Advantage

in

Civil

Aviation,

”

1

Competition

Policy

and

Antitrust

215

(2006).

25

each

have

less

that

local

passengers

per

year,

making

those

routes

particularly

unattractive

for

entry

by

a

non-hub

carrier.

Constraints

on

service

at

New

York

airports

are

another

factor

that

makes

entry

in

these

overlap

markets

unlikely.

All

Continental

transatlantic

nonstop

overlaps

with

the

Star

carriers

involve

New

York

as

an

endpoint.

Long-term,

ongoing

congestion

problems

in

the

New

York

area

airspace

have

resulted

in

actions

by

the

FAA

to

limit

scheduled

operations

at

both

JFK

and

Newark

Liberty.

70

Currently,

it

would

be

difficult

for

a

competitor

to

gain

additional

operating

authority

to

begin

service

in

the

event

fares

increased

on

the

overlap

markets.

D.

Competition

on

transborder

routes

Continental

and

Air

Canada

are

the

only,

or

two

of

only

three,

airlines

providing

nonstop

service

on

five

transborder

routes.

71

As

is

the

case

on

the

transatlantic

overlaps,

the

vast

majority

of

passengers

on

these

routes

travel

nonstop.

72

The

charts

below

show

shares

of

all

passengers

(nonstop

and

connecting)

and

nonstop

passengers

on

five

of

the

Continental/Air

Canada

nonstop

overlaps:

73

70

Order

Limiting

Scheduled

Operations

at

John

F.

Kennedy

International

Airport,

Docket

FAA-2007-29320

(Jan.

15,

2008);

Order

Limiting

Scheduled

Operations

at

Newark

Liberty

International

Airport,

Docket

FAA-2008-0221

(May

15,

2008).

7

1

Continental

and

Air

Canada

also

each

offer

nonstop

service

in

New

York-Vancouver;

however,

Continental

only

serves

this

market

on

a

seasonal

basis

(summer).

The

New

York-

Montreal/Toronto

markets

are

currently

served

by

four

carriers

on

anonstop

basis

-

American,

Delta,

and

the

two

Applicants.

These

are

large

local

markets

(over

passengers

per

year

in

the

case

of

New

York-Toronto);

thus,

nonhub

carriers

are

able

to

profitably

to

provide

service

even

without

access

to

feed

traffic.

Continental

and

United

have

no

transborder

nonstop

overlaps,

but

do

compete

for

connecting

traffic

over

their

various

hubs.

72

The

nonstop

carriers

have

well

over

of

the

coach

Y

fare,

business

and

first-class

traffic

on

all

of

the

transborder

overlaps.

73

Source:

MIDT

data

(2007).

26

Total

Passenger

Shares

(Nonstop

and

Connecting)

in

Selected

U.S-Canada

Overlap

Routes

Transborder

2007

CO

Share

AC

+

UA

CO+AC+UA

Market

Passengers

Share

Houston-Calgary

Houston-Toronto

Cleveland-Toronto

New

York-Ottawa

New

York-Halifax

Total

Nonstop

Passenger

Shares

in

Selected

U.S-Canada

Overlap

Routes

Transborder

2007

CO

Share

AC

+

UA

CO+AC+UA

Market

Passengers

Share

Houston-Calgary

Houston-Toronto

Cleveland-Toronto

New

York-Ottawa

New

York-Halifax

As

detailed

in

our

analysis

of

transatlantic

nonstop

overlaps,

a

grant

of

immunity

will

harm

passengers

in

the

above

markets

unless

the

characteristics

of

these

particular

markets

indicate

that

entry

is

likely

to

counteract

the

anticompetitive

effects.

DOJ

agrees

with

the

Order

that

the

competitive

structure

of

transborder

routes

is

very

similar

to

U.S.

domestic

routes.

74

As

discussed

above

in

Section

V.

C.

3.,

however,

there

is

substantial

evidence

that

a

reduction

in

the

number

of

nonstop

competitors

from

three

to

two,

or

two

to

one,

in

domestic

markets

leads

to

significant

fare

increases.

There

is

no

persuasive

evidence

in

the

record

that

entry

will

occur

on

these

routes.

Entry

is

particularly

unlikely

in

Houston-Calgary,

Houston-Toronto,

and

Cleveland

Toronto

because

Continental

and

Air

Canada

each

operate

a

hub

at

one

end

of

these

routes.

75

74

Order

at

13.

75

The

Applicants

argue

that

low

cost

carriers,

such

as

Westjet

and

Porter

Airlines,

are

potential

entrants

on

the

transborder

overlaps.

Consolidated

Reply

of

the

Joint

Applicants

at

30-

27

E.

Competition

on

domestic

routes

United

and

Continental

are

the

third

and

fourth

largest

domestic

carriers;

if

merged,

the

combined

carrier

would

be

the

largest

airline

in

the

world.

76

Domestically,

United

and

Continental

offer

competing

nonstop

service

between

United

’

s

hubs

(Chicago,

Washington,

Denver,

San

Francisco,

and

Los

Angeles)

and

Continental

’

s

hubs

(Newark,

Houston

and

Cleveland).

In

some

cases

they

are

the

only

carriers

offering

nonstop

service.

In

addition,

the

two

carriers

compete

on

a

very

large

number

of

domestic

connecting

routes.

As

DOT

recognizes,

immunized

cooperation

between

two

U.S.

carriers

on

international

routes

carries

with

it

the

risk

of

competitive

harm

in

domestic

markets.

77

United

and

Continental

have

adopted

antitrust

guidelines

designed

to

lessen

the

risk

of

domestic

spillover.

78

These

guidelines

have

been

reviewed

by

DOJ

and

revised

to

some

extent

in

light

of

our

concerns.

It

is

important

to

understand,

however,

that

no

guidelines

can

completely

eliminate

the

risk

of

domestic

spillover.

An

airline

’

s

domestic

and

international

operations

are

closely

31.

Service

offered

by

Westjet

(an

airline

that

has

traditionally

targeted

leisure

passengers)

via

its

potential

codeshare

with

Southwest

would

likely

be

connecting,

which

as

discussed

above,

is

unattractive

to

time-sensitive passengers.

Porter

’

s

fleet

choice

-

modern

turboprops

-

makes

entry

into

routes

like

Houston

to

Calgary

or

Toronto

extremely

unlikely.

Even

if

Westjet

or

Porter

were

to

enter

the

overlap

transborder

routes

on

a

nonstop

basis,

they

would

still

have

to

overcome

the

advantage

an

immunized

Air

Canada/Continental

relationship

would

have

by

way

of

operating

hubs

at

each

end.

See,

76

See,

e.g.,

77

Order

at

14.

78

Exhibit

JA-2

(revised).

28

integrated,

as

DOT

also

recognizes.

79

Within

the

context

of

their

international

alliance,

United

and

Continental

will

be

discussing

the

most

sensitive

competitive

subjects,

including

pricing,

yield

management,

capacity

planning,

entry

and

exit

decisions,

and

aircraft

deployment.

The

opportunities

and

incentives

to

extend

coordination

to

non-immunized

domestic

operations

are

clear.

Moreover,

this

risk

increases

as

the

scope

of

international

cooperation

between

the

two

domestic

carriers

increases.

,

80

If

the

international

cooperation

is

broad

but

undefined,

however

-

as

is

the

case

for

the

overall

Star

ATI

Alliance

-

the

opportunities

for

domestic

spillover

increase

significantly.

81

VI.

The

Applicants

Make

No

Showing

Why

Immunity

Is

Required

to

Achieve

the

Claimed

Public

Benefits

Arising

from

the

Joint

Application

Agreements

The

Applicants

have

the

burden

of

showing

immunity

is

required

by

the

public

interest.

In

assessing

whether

they

have

met

their

burden,

DOT

considers

the

likely

benefits

of

the

proposed

coordination

and

whether

the

Applicants

could

obtain

those

benefits

without

immunity

The

Applicants

claim,

and

DOT

has

tentatively

found,

that

the

agreements

will

result

in

public

benefits.

DOT

cites

the

Applicants

’

assertion

that

the

A++

“

integrated

”

venture

will

enable

its

participants

to

“

pool

resources

to

achieve

substantial

efficiency

and

cost

savings.

”

Order

at

19.

In

DOJ

’

s

view,

it

is

not

sufficient,

however,

merely

to

point

toward

claimed

benefits;

rather,

the

79

See

Order

at

13-14.

80

J.A.

Ex.

2

(revised).

81

For

example,

we

understand

that

U.S.-Canada

pricing

is

typically

handled

by

the

domestic

pricing

staff.

29

Applicants

need

to

demonstrate

that

immunity

is

necessary

to

achieve

them.

82

In

this

regard,

the

Applicants

fall

short.

It

is

likely

that

Continental

’s

entry

into

the

Star

Alliance

(or

the

smaller

Star

ATI

Alliance)

will

reduce

travel

times

for

some

connecting

passengers

and

increase

the

number

of

itineraries

available

from

which

to

select.

The

Applicants

present

no

evidence,

however,

that

customers

will

receive

quantitatively

or

qualitatively

different

service

if

Continental

receives

antitrust

immunity

to

coordinate

with

the

Star

ATI

members

compared

to

what

would

be

provided

if

Continental

merely

interacted

with

the

level

of

cooperation

expected

of

any

member

of

the

broader,

non-immunized

Star

Alliance.

83

The

Applicants

do

not

describe

which

specific

“

important

”

consumer

benefits

will

be

lost

if

DOT

does

not

grant

the

requested

immunity.

Nor

do

the

Applicants

make any

attempt

to

quantify

how

much

smaller

the

benefits

enuring

to

the

traveling

public

would

be

if

Continental

merely

engaged

with

the

Star

ATI

members,

without

antitrust

immunity,

in

such

standard

alliance

cooperation

practices

as

codesharing,

through-ticketing,

frequent

flyer

reciprocity

and

lounge

sharing

-

in

short,

the

type

of

interaction

Continental

currently

has

with

immunized

SkyTeam

members,

or

that

US

Airways

has

with

the

Star

ATI

members,

including

United.

Rather,

the

82

See,

e.g.,

Joint

Venture

Guidelines

at

3.36

(the

proponents

of

a

potentially

anticompetitive

collaborative

agreement

have

the

burden

of

showing

the

agreement

is

reasonably

necessary

to

achieve

cognizable

benefits

and

there

is

no

less

restrictive

means

of

achieving

those

benefits).

83

30

Applicants

proffer

unsubstantiated

assertions

about

why they

must

have

immunity.

The

Applicants

’

documents

also

indicate

that

cost

savings

of

any

significance

are

unlikely,

84

and,

more

importantly,

none

of

the

evidence

shows

that

cost

savings

are

likely

to

be

passed

on

to

passengers.

A.

The

Applicants

’

assertion

that

they

will

not

move

forward

without

immunity

is

not

convincing

The

Applicants

insist

that

they

would

not

enter

into

the

proposed

alliance

agreements

without

a

grant

of

immunity.

While

it

may

be

true

that

the

Applicants

would

not

enter

into

alliances

exactly

as

set

forth

in

the

Joint

Application,

we do

not

find

it

credible

for

the

Applicants

to

assert

that

they

would

not

engage

in

some

sort

of

cooperation

that

would

provide

nearly

identical

benefits

to

consumers

as

those

likely

to

result

from

the

application

agreements.

Carriers

routinely

enter

into

commercial

relationships

with

each

other

and

make

significant

long

term

investments

in

such

relationships,

without

immunity

from

the

antitrust

laws.

85

8

4

See,

e.

g

.

I

n

add

i

tion,

the

precipitous

drop

in

fuel

prices

since

the

parties

filed

their

application

in

July

2008,

negates

the

Applicants

’

already

less

than

compelling

argument

that

immunized

coordination

was

necessary

to

combat

fuel

costs.

85

31

Both

United

and

Continental

have

invested

significant

effort

into

furthering

their

respective

domestic

alliances

(United

with

US

Airways,

and

Continental

with

Northwest

and

Delta)

to

the

benefit

of

both

the

airlines

and

their

customers,

but

the

airlines

remain

fully

accountable

to

the

antitrust

laws.

Parties

to

domestic

codeshare

agreements

regularly

endeavor

to

consolidate

their

operations

at

airports,

independently

modify

their

capacity

to

facilitate

connections

between

each

other,

and

take

other

steps

to

extend

their

network

offerings.

In

SkyTeam

7,

United

urged

DOT

to

prohibit

immunity

“

as

a

matter

of

policy

between

domestic

U.S.

carriers,

absent

compelling

evidence

that

[granting

immunity]

would

achieve

important

public

benefits

not

otherwise

obtainable.

”

It

explained:

Absent

a

grant

of

immunity,

Northwest

and

Delta

have

.

..

possible

alternatives

available

that

will

allow

them

to

gain

significant

benefits

from

participation

in

the

SkyTeam

alliance.

[E]ither

Delta

or

Northwest

may

forego

immunity

with

the

foreign

members

of

the

SkyTeam

alliance

(and

with

each

other),

but

remain

a

member

of

the

alliance

and

engage

in

cooperative

activities

that

do

not

raise

a

meaningful

antitrust

risk.

This

is

precisely

the

situation

with

US

Airways

and

members

of

the

Star

Alliance;

while

US

Airways

has

no

immunity

with

the

other

Star

members,

it

participates

in

Star

and

generates

benefits

by

code

sharing

with

each

of

the

foreign

members

(and

United),

allowing

it

to

gain

behind

and

beyond

benefits,

network

expansions

and

integrated

scheduling,

ticketing

and

passenger

handling

that

goes

with

such

codesharing.

It

can

also

participate

in

joint

alliance

discount

offers

to

corporate

customers,

subject

to

certain

conditions

designed

to

preserve

competition,

and

participate

in

many

joint

purchasing

programs

and

other

joint

activities

that

do

not

touch

on

competitively

sensitive

behavior.

87

B.

The

Applicants

exaggerate

their

claim

that

“

significant

litigation

risks

”

exist

absent

immunity

The

Applicants

argue

that

they

will

not

attempt

to

achieve

the

claimed

benefits

of

any

of

86

87

Reply

of

United

Air

Lines,

Inc.,

Docket

OST-2004-19214.

32

the

Joint

Application

agreements

without

the

protection

of

antitrust

immunity

due

to

the

risk

of

litigation.

In

particular,

the

Applicants

state

that

because

this

particular

venture

“

contemplates

joint

sales,

route

and

schedule

coordination,

revenue

pooling

and

joint

pricing

decisions,

”

it

carries

with

it

the

threat

of

legal

challenge.

88

As

courts

have

recognized,

however,

a

grant

of

antitrust

immunity

does

not

turn

on

“

the

subjective

desire

of

the

parties

to

avoid

antitrust

litigation,

”

and

“

[i]t

is

not

realistic

to

expect

a

flood

of

antitrust

lawsuits

attacking

a

substantially

procompetitive

agreement.

”

89

If

the

Applicants

’

claims

of

significant

benefits

arising

from

the

agreements

are

accurate,

the

Applicants

will

have

the

incentive

to

pursue

further

integration,

which

they

can

accomplish

in

ways

consistent

with

the

antitrust

laws.

DOJ

is

aware

of

no

legal

challenge

to

the

actions

taken

by

carriers

within

and

in

furtherance

of

a

legitimate

airline

alliance.

90

C.

The

Applicants

inflate

the

importance

of

inter-alliance

competition

The

Applicants

maintain

that

immunity

is

necessary

to

allow

Star

to

achieve

parity

with

the

SkyTeam

alliance,

which

received

immunity.

The

Applicants

also

suggest,

without

evidentiary

support,

that

consumers

benefit

from

competition

between

alliances,

particularly

immunized

alliances.

88

J.A.

at

98.

8

9

Republic

Airlines,

Inc.

v.

C.A.B.,

756

F.2d

1304,

1317

(8th

Cir.

1985).

90

The

cases

cited

by

the

Applicants

regarding

their

“

continuing

risk

of

legal

challenge

by

third

parties

”

(J.A.

at

98,

fn.

190)

are

inapposite.

First,

those

cases

do

not

demonstrate

that

airlines

were

sued

because

they

were

acting

pursuant

to

a

joint

venture.

The

airline

defendants

may

have

been

members

of

various

alliances,

but

the

causes

of

action

were

not

based

on

activities

undertaken

only

because

of

the

joint

venture.

Second,

granting

antitrust

immunity

to

the

Applicants

will

not

provide

them

with

immunity

from

suit

for

coordination

with

carriers

that

are

not

members

of

the

joint

venture,

as

was

the

case

in

the

multi-defendant

travel

agent

commission

litigation.

33

First,

achieving

balance

in

the

market

success

of

differing

alliances

is

not

a

legitimate

goal

of

sound

competition

policy,

in

DOJ

’

s

view.

Alliances

should

compete

against

each

other,

and

the

market

should

determine

the

outcome

of

that

competition.

Second,

those

assertions

are

not

supported

by

any

party

evidence

and

are

inconsistent

with

the

evidence

DOJ

has

gathered,

which

shows

that

immunity

is

not

necessary

for

effective

alliance

competition.

Few,

if

any,

corporate

travel

managers

we

interviewed

during

our

investigation

of

this

application

and

in

the

course

of

other

airline

investigations

have

stated

a

desire

for

increased

inter-alliance

competition.

Even

when

a

particular

corporation

had

negotiated

a

contract

with

an

alliance,

that

contract

seldom

encompassed

all

members

of

the

alliance

or

had

resulted

in

lower

fares

than

if

the

corporation

had

negotiated

separate

contracts

with

the

carriers.

91

Moreover,

the

Order

ignores

the

competition

between

Star

and

oneworld, whose

two

largest

members

-

American

and

British

Airways

---

today

function

effectively

without

immunity

between

each

other.

D.

Immunity

will

not

advance

open

skies

Recognizing

that

granting

the

immunity

application

will

not

itself

lead

to

new

open

skies

agreements,

the

Applicants

assert

that

immunity

is

warranted

because

their

proposed

agreements

will

help

achieve

the

“

goals

”

of

the

U.S.-E.U.

open

skies

agreement.

92

They

claim

that

the

Memorandum

of

Consultations

accompanying

the

U.S.-E.U.

Agreement

“underscores

the

strategic

and

economic

importance

of

antitrust-immunized

alliances

as

a

matter

of

aviation

policy.

”

93

But

the

Memorandum

provides

only

that

U.S.

authorities

will

give a

procedural

91

None

of

the

Applicants

’

corporate

customers

filed letters

in

support

of

the

Joint

Application.

92

J.A.

at

9.

93

J.A.

at

10.

34

guaranty

of

“

fair

and

expeditious consideration

”

of

immunity

applications,

94

E,

The

Applicants

overemphasize

the

likelihood

that

immunity

for

the

proposed

alliance

will

substantially

reduce double

marginalization

The

Order

cites

the

elimination

of

double

marginalization

as

a

significant

benefit

of

the

proposed

immunity

grant,

as

do

the

Applicants

in

the

Joint

Application.

95

Although

alliances

can

lead

to

lower

fares

by

reducing

incentives

for

each

carrier

to

impose

an

additional

markup

on

connecting

traffic,

immunity

is

not

necessary

to

realize

that

result.

It

is

true

that

economic

studies

of

the

fares

offered

by

international

airline

alliances

in

the

1

990s

found

that

immunized

alliance

carriers

charged

interline

fares

that

were

lower

than

the

interline

fares

charged

by

non-immunized

alliance

carriers.

96

These

studies,

however,

never

proved

that

the

airlines

needed

immunity

to

provide

the

lower

fares,

i.e.,

that

the

airlines

could

eliminate

double

marginalization

only

by

engaging

in

activity

that

raised

antitrust

concerns.

The

1990s

were

a

time

of

flux

for

airline

alliances

as

the

airlines

experimented

with

different

partner

alignments

and

degrees

of

coordination

and

integration.

Indeed,

most

of

the

immunized

alliance

relationships

included

in

these

earlier

studies

featured

only

minimal

levels

of

revenue

sharing,

in

most

cases,

no

more

than

dictated

by

a

special

prorate

agreement.

97

Since

94

See

J.A.

at

10

(quoting

Memorandum

of

Consultations).

95

Order

at

19;

J.A.

at

37-39.

96

See

Brueckner,

J.,

and

Whalen,

T.,

2000,

“The

Price

Effects

of

International

Airline

Alliances.

”

Journal

of

Law

and

Economics,

Vol.

43, pp.

503-545.

Brueckner,

J,

2003,

“

International

Airfares

in

the

Age

of

Alliances,

”

Review

of

Economics

and

Statistics,

Vol.

85,

pp.105-1

18.

Whalen,

T.,

2007,

“

A

Panel

Data

Analysis

of

Code-Sharing,

Antitrust

Immunity,

and

Open

Skies

Treaties

in

International

Aviation

Markets.

”

Review

of

Industrial

Organization,

Vol.

30,

pp.39-61.

97

With

the

exception

of

No

rth

west/KLM,

the

immunized

alliances

operating

during

the

time

period

covered

by

these

studies

did

not

engage

in

the

sort

of

revenue

sharing

DOT

35

then,

most

airlines

have

grouped

into

three

major

alliances,

and

more

recent

empirical

work

by

DOJ

strongly

suggests

that

over

the

past

ten

years

(after

the

period

studied

in

those

earlier

papers),

airlines

participating

in

alliances,

whether

immunized

or

not,

have

made

strides

toward

managing

their

inventory

and

pricing

activities

to

provide

more

competitive

fares

when

forming

a

connection

with

another

airline.

98

In

fact,

using

2005-2008

data,

DOJ

has

found

that

connecting

fares

offered

by

non-immunized

alliances

for

transatlantic

routes

are

no

more

expensive

than

fares

offered

by

immunized

alliances.

99

VII.

Any

Grant

of

Antitrust

Immunity

Should

Include

Restrictions

to

Limit

Potential

Anticompetitive

Effects

Approval

of

the

Applicants

’

request

for

global

immunity

for

the

Joint

Application

agreements

will

likely

reduce

competition

in

specific

city

pairs

and

increases

the

risk

of

harm

to

domestic

competition,

all

with

scant

evidence

or

quantification

of

any

consumer

benefits

to

which

such

a

broad

grant

of

immunity

is

inextricably

linked.

Thus,

the

final

Order

should

carve

out

the

transatlantic

and

transborder

markets

where

competitive

harm

is

most

likely

to

occur,

maintain

existing

carve

outs,

and

limit

immunity

to

transatlantic

markets.

A.

Carve

out

nonstop

overlap

routes

As

discussed

above,

the

immunity

DOT

previously

granted

to

the

Star

ATI

Alliance

carves

apparently

believes

results

in

“

metal

neutrality.

”

98

99

See

Appendix

B,

Section

2,

for

further

description

of

this

DOJ

empirical

analysis.

36

out

nonstop

service

between

Frankfurt

and

Chicago/Washington

(maintaining

the

carve

outs

first

mandated

in

the

1996

United/Lufthansa

immunity

authorization)

and

between

Toronto

and

Chicago/San

Francisco

(maintaining

the

carve

outs

first

mandated

in

the

1997

United/Air

Canada

immunity

authorization).

100

The

carve

outs

do

not

prohibit

the

carriers

from

engaging

in

cooperative

conduct,

but

merely

make

that

conduct

subject

to

the

antitrust

laws.

In

the

present

Order,

DOT

has

tentatively

concluded

that

the

Applicants:

•

must

maintain

the

carve

outs

for

Toronto

to

Chicago/San

Francisco,

•

may

remove

the

Frankfurt-Chicago/Washington

carve

outs,

provided

the

Applicants

present

evidence

within

18

months

that

they

have

implemented

the

A++

alliance,

•

need

not

carve

out

any

additional

routes

from

the

scope

of

immunity

held

by

Star

ATI

after

Continental

joins.

The

analysis

underlying

DOT

’s

conclusions

on

carve

outs

is

unclear.

The

Order

declines

to

carve

out

any

of

the

overlap

transborder

routes

in

which

Continental

and

the

Star

ATI

members

currently

compete

on a

nonstop

basis,

without

citing

evidence

from

the

record

describing

the

public

benefits

likely

to

result

from

coordination

on

these

routes.

At

the

same

time,

the

Order

requires

the

Applicants

to

maintain

the

existing

carve

outs

in

Toronto-Chicago/San

Francisco

because

the

Applicants

did

not

demonstrate

“

integrative

benefits

in

the

subject

markets.

”

101

The

reason

for

the

differing

treatment

of

these

routes

is

not

stated.

100

See

Order

2007-2-16.

Over

time,

DOT

has

varied

the

scope

of

the

carve

outs

it

has

imposed.

In

some

cases

all

local

traffic

except

for

bulk

fares

and

corporate

fares

was

carved

out,

in

other

cases

only

restricted

business-type

fares were

carved

out.

Compare

Order

96-5-27

at

App.

A

(United/Lufthansa)(carving

out

“

local

U.S.

point

of

sale

passengers

flying

nonstop

”)

with

Order

2002-1-6

(Delta/Air

France)(carving-out

“

unrestricted

coach-class

fares

or

any

business

or

first-class

fares

for

local

U.S.

point

of

sale

passengers

flying

nonstop”

).

101

Order

at

13.

37

The

Order

declines

to

carve

out

the

six

transatlantic

overlap

routes

where

Continental

and

the

Star

ATI

members

provide

competing

nonstop

service:

New

York

to

Copenhagen/Frankfurt/Geneva/Lisbon/Stockholm/Zurich.

The

Order

defends

this

decision

by

noting

that

these

city

pairs

"are

subject

to

close

cooperation

under

[A++]

”

and

relies

heavily

on

the

alleged

integration

efficiencies

the

Applicants

state

they

will

realize

on

transatlantic

routes

through

the

A++joint

venture

-

including

the

Applicants

’

claim

that

these

efficiencies

will

be

passed

on

to

consumers.

102

But,

as

the

Order

recognizes,

only

one

new

nonstop

overlap

route

actually

involves

parties

to

the

A++

agreement

-

New

York-Frankfurt.

Each

of

the

other

overlap

transatlantic

routes

at

issue

(New

York-Copenhagen,

Geneva,

Lisbon,

Stockholm

and

Zurich)

involves

Continental

and

a

Star

airline

-

SAS,

Swiss

or

TAP

-

that

is

not

one

of

the

A++

partners;

the

purported

A++

integrative

efficiencies

thus

would

not

apply

to

SAS,

Swiss,

or

TAP

’s

operations

on

these

routes.

The

only

explanation

for

DOT

’

s

decision

is

that

carve

outs

would

prevent

the

alliance

members

from

improving

connections

on

these

“

bridge

”

routes

-

i.e.,

the

links

between

Continental

’

s

extensive

U.S.

network

and

the

European

networks

of

SAS,

Swiss

and

TAP

-

thereby

“disadvantaging

the

smaller

carriers

and

jeopardizing

potential

benefits

for

consumers,

”

Order

at

13.

DOT,

however,

does

not

cite

to

evidence

that

carve

outs

in

these

markets

would

foreclose

efficiency-enhancing

network

improvements.

103

DOT

also

states

that

it

will

remove

the

existing

carve

outs

in

Frankfurt-

102

Order

at

12.

103

The

Applicants

state

that

carve

outs

are

not

needed

on

these

routes

because,

even

though

SAS,

Swiss,

and

TAP

are

not

parties

to

the

A++

Agreement,

the

specific

transatlantic

city

pairs

are

“

within

the

geographical

scope

of

the

A++

Agreement.

”

J.A.

at

92,

n.l

81.

They

do

not

-

and

cannot

-

explain

how

the

purported

integrative

efficiencies

of

A++

could

apply

on

routes

where

the

overlap

airlines

are

not

both

A++

members.

38

Chicago/Washington

-

provided

the

Applicants

submit

proof

within

18

months

that

the

A++

agreement

has

been

executed

and

implemented

-

because

the

“proposed

alliance

is

pro-

competitive.

”

104

Other

than

the

fact

that

these

two

routes

fall

within

the

scope

of

A++,

the

Order

cites

no

evidence

to

support

revoking

the

carve

outs

beyond

the

Applicants

’

own

self-serving

statements.

The

Applicants

do

not

provide

specific

evidence

or

quantification

of

diminished

efficiencies

or

consumer

value,

even

though

Star

members

have

long

operated

under

carve

outs

imposed

as

part

of

prior

immunity

grants.

DOJ

recommendation

on

carve

outs

Absent

a

showing

of

substantial

efficiencies

that

would

be

imperiled

by

a

narrower

grant

of

immunity

-

which

the

Applicants

have

not

made

-

we

believe

that

the

competitive

harm

likely

to

be

suffered

by

consumers

in

these

transborder

and

transatlantic

markets

is

not

offset

by

public

benefits.

Therefore,

the

immunity

grant

should

be

more

narrowly

tailored

to

minimize

anticompetitive

effects.

In

the

case

of

the

current

application,

we

recommend

that

any

grant

of

antitrust

immunity

not

apply

to

travel

on

the

following

routes:

Houston-Calgary,

Houston-Toronto,

Cleveland-Toronto,

NYC-Halifax,

NYC-Ottawa,

NYC-Stockholm, NYC-Copenhagen,

NYC-

Lisbon,

NYC-Geneva,

and

NYC-Zurich.

These

routes

are

concentrated

and

entry

would

likely

be

difficult

due

to

the

existence

of

a

Star

ATI

Alliance

carrier

hub

at

either

one

end

or

both.

105

DOT

should

also

maintain

the

existing

Frankfurt

to

Chicago/Dulles

carve

outs.

When

DOT

imposed

carve

outs

in

the

original

United/Lufthansa

immunity

request,

it

1

04

Order

at

13.

105

As

discussed

above,

it

would

be

very

difficult

for

a

non-hub

carrier

to

offer

sufficient

frequencies

to

attract

local

customers

or

to

garner

the

connecting

feed

traffic

necessary

to

sustain

nonstop

service

in

thin

markets.

39

provided

that

antitrust

immunity

would

not

extend

to

coordinated

activity

“

with

respect

to

local

U.S.-point-of-sale

passengers

flying

nonstop

”

on

the

listed

routes.

106

In

subsequent

grants

of

immunity,

however,

DOT

has

limited

the

carve

out

to

coordinated

activity

“with

respect

to

unrestricted

coach-class

fares

or

any

business

or

first-class

fares

for

local

U.S.-point-of-sale

passengers

flying

nonstop

”

in

the

specified

city-pair

markets.

107

Such

a

narrow

exemption

applies

at

most

to

a

very

small

number

of

coach

tickets

and

does

not

include

many

tickets

with

modest

restrictions

commonly

sold

to

business

passengers

at

a

discount

to

full

Y

fares.

Our

analysis

of

coach

fares

on

international

routes

indicates

that

the

narrow

carve-out

language

is

insufficient

to

protect

competition

on

overlapping

hub-hub

routes

operated

by

alliance

partners

because

decreasing

the

number

of

nonstop

competitors

increases

all

nonstop

coach

prices,

not

just

the

prices

charged

for

unrestricted

coach-class,

business

or

first-class

nonstop

fares.

108

To

be

effective,

carve

outs

should

not

be

restricted

to

such

a

limited

range

of

fare

classes;

instead,

DOJ

recommends

a

return

to

the

more

expansive

carve

out

language

used

in

the

1996

United/Lufthansa

order.

B.

Deny

global

immunity

The

Applicants

seek,

and

the

Order

to

Show

Cause

tentatively

grants,

immunity

for

Continental

and

the

Star

ATI

members

to

coordinate

on

a

global

basis,

despite

the

lack

of

any

concrete

plans

for

integration

outside

the

transatlantic

venture.

The

Applicants

present

no

106

Order

96-5-27,

App.

4.

107

See,

e.g.,

Order

2000-5-13

(American/Swissair),

Appendix

1.

108

See

Appendix

B,

Section

I,

which

estimates

that

fares

that

are

paid

by

nonstop

coach

passengers

increase,

on

average,

when

the

number

of

nonstop

competitors

decreases.

The

carve

out

language

proposed

by

DOJ

would

protect

these

passengers;

the

carve

out

language

in

more

recent

DOT

orders

would

not.

40

evidence

that

immunity

for

non-transatiantic

operations

is

required

by

the

public

interest:

they

do

not

describe

how

they

will

integrate

their

operations

in

these

markets,

what

new

routes

they

will

serve,

or

what

public

benefits

will

flow

from

non-transatlantic

immunity.

109

The

Applicants

allege

that

they

plan

in

the

future

to

enter

into

ventures

modeled

upon

A++

covering

areas

outside

of

the

transatlantic.

The

record, however,

is

devoid

of

details

as

to

where

these

additional

joint

ventures

will

operate,

who

the

parties

to

the

ventures

will

be,

what

form

their

integration

will

take,

or when

the

ventures

will

be

implemented.

110

A

public

interest

determination

cannot

be

based

on

entirely

hypothetical

agreements.

Moreover,

the

evidence

in

the

record

shows

that

current

non-transatlantic

cooperation

is

minimal

even

among

the

currently

immunized

Star

members.

Asked

by

DOT

to

describe

the

current

state

of

non-transatlantic

cooperation,

the

best

example

the

Applicants

could

provide

was

the

consolidation

of

airport

facilities

at

Beijing

and

Tokyo.

111

While

such

cooperation

may

constitute

an

efficiency,

it

does

not

require

antitrust

immunity;

in

fact,

the

highlighted

109

DOT

dismisses

concerns

about

the

scope

of

the

immunity

on

the

grounds

that

the

other

Star

partners

have

global

immunity

with

each

other

for

many

years.

Therefore

DOT

concludes

that

it

“has

enough

information

to

analyze

the

alliance

plans

”

and

that

restricting

the

scope

here

would

unfairly

disadvantage

Continental.

Order

at

20.

DOT

does

not

cite

the

“

other

information

”

it

relies

upon

to

analyze

the

alliance

plans,

nor

does

it

explain

how

Continental,

or

more

significantly,

consumers,

would

be

harmed

by

the

lack

of

global

immunity.

110

The

Order

directs

the

Applicants

to

show

that

the

A++

joint

venture

has

been

implemented

as

described

in

the

Joint

Application

within

18

months

to

retain

immunity.

Order

at

26.

There

is

no

requirement

that

the

Applicants

demonstrate,

at

any

point

during

the

5-year

period

covered

by

the

Order,

that

they

have

implemented

similar

integration

agreements

that

cover

non-transatlantic

markets

or

that

include

Star

ATI

members

not

parties

to

the

existing

A++

agreement.

111

Responses

of

Joint

Applicants

to

Clarification

Questions

at

4-5.

41

consolidation

effort

included

a

number

of

non-immunized

Asian

Star

Alliance

carriers.

2

The

documents

cited

by

the

Applicants

as

providing

additional

examples

of

non-transatlantic

cooperation

requiring

antitrust

immunity

contain

similar

examples

of

operational

and

marketing

coordination

such

as

lounge

sharing,

frequent

flyer

cooperation,

and

joint

baggage

handling?

13

Such

coordination

is

a

common

feature

of

non-immunized

alliances,

and

the

non-immunized

members

of

Star

routinely

engage

in

such

conduct.

A

grant

of

global

immunity

between

Continental

and

United

would

eliminate

competition

in

non-transatlantic

international

markets

where

they

currently

compete

and

would

increase

the

risk

of

spillover

effects

in

domestic

markets.

The

Applicants

have

not

shown

that

global

immunity

between

United

and

Continental

is

necessary

to

the

public

interest;

in

the

absence

of

such

a

showing

there

is

no

justification

for

accepting

the

risk

of

harm

to

passengers

in

both

international

and

domestic

markets.

Accordingly,

we

recommend

limiting

the

grant

of

immunity

between

Continental

and

the

other

Star

ATI

members

to

transatlantic

operations.

VIII.

Conclusion

The

immunity

requested

by

the

Joint

Applicants

is

unprecedented

in

scope

and

breadth,

sanctioning

collusion

by

United

and

Continental

on

all

international

service,

eliminating

or

significantly

reducing

competition

between

certain

Star

alliance

members

on

routes

where

they

provide

the

only

-

or

almost

all

of

-

the

competitive

alternatives,

and

removing

previously

112

At

Narita,

the

immunized

Star

airlines

are

located

in

the

South

Wing

along

with

non-

immunized

Star

members

ANA,

Shanghai,

Thai

and

US

Airways.

113

42

imposed

protections

designed

to

preserve

competition

on

overlap

routes.

The

result

is

likely

to

be

substantia]

consumer

harm.

Our

empirical

work

indicates

that

fares

are

likely

to

increase

by

roughly

15%

on

routes where

the

number

of

nonstop

competitors

decreases

from

two

to

one,

and

by

roughly

6%

on

routes

where

the

number

of

nonstop

competitors

decreases

from

three

to

two.

Competition

will

be

significantly

diminished

in

limited

entry

markets

such

as

China,

where

United

and

Continental

today

present

the

best,

and

in

some

cases,

only

service

alternatives.

Domestic

competition

between

United

and

Continental

may

also

be

affected.

The

Joint

Applicants

have

offered

little

in

the

way

of

consumer

benefits

arising

from

the

application

to

counter

the

likely

harm;

in

contrast,

DOJ

empirical

work

shows

that

carriers

in

non-

immunized

alliances

offer

lower

prices

than

those

in

immunized

ones.

In

short,

the

Joint

Applicants

have

not

justified

their

extraordinary

immunity

request.

Thus,

for

these

and

all

the

foregoing

reasons,

the

DOJ

believes

the

DOT

should

amend

its

Order

granting

the

Joint

Application.

Respectfully

submitted,

Christine

A.

Varney

Assistant

Attorney

General

Antitrust

Division

Molly

S.

Boast

Carl

Shapiro

Deputy

Assistant

Attorneys

General

Donna

Kooperstein

Ji

ll

A.

Ptacek

Chief

Michael

D.

Billiel

William

H.

Stallings

Tracey

D.

Chambers

Assistant

Chief

Robert

D.

Young

Attorneys

43

Oliver

M.

Richard

Assistant

Chief

William

H.

Gillespie

Economist

Economic

Analysis

Group

Dated:

June

26,

2009

Transportation,

Energy

&

Agriculture

Section

U.S.

Department

of

Justice

450

5th

Street,

N.W.,

Rm.

8008

Washington,

D.C.,

20530

Telephone:

202/307-6607

Facsimile:

202/307-2784

44

Appendix

A:

China/Beijing

U

.S origin

City

to

Beijing

New

Orleans

Syracuse

Manchester

Tulsa

Cleveland

Rochester

Richmond

W

Palm

Beach

Buffalo

Boston

Tampa

Pittsburgh

Orlando

Columbus

Fort

Lauderdale

Jacksonville

Raleigh

Kansas

City

Nashville

Indianapolis

Austin

Charlotte

Atlanta

Birmingham

St.

Louis

Houston

Miami

Baltimore

U.S.

to

Beijing

Passenger

Shares

for

One

and

Two

Stop

Passengers,

2007Q4

-

2008Q3

nw interline total

all

co

C

O

UA

NW

All

Other

Interline

CO+UA

other

pass

Share

Pass

share

pass

share

Airlines

share pass

share

Share

Pass

Data;

O

D

I

B

passengers with

one

or

two

stops

for

2007

Q4

-

2008Q3,

adjusted

for

sampling

by

multiplying

by

10.

Routes

must

have

at

least

200

passengers

for

each

of

CO

and

UA

to

be

included,

and

a

combined

CO

+

UA

share

of

at

least

50%

of

all

passe

nger

Interline

passengers

have

different

marketing

carriers

on

different

segments

of

their

trip.

Share

Appendix

A:

China/Hong

Kong

U.S.

to

Hong

Kong

Passenger

Shares

for

One

and

Two

Stop

Passengers,

2007Q4

-

2008Q3.

U.S Origin

city to hong

kong

C

O

Pass

CO

Share

UA

Pass

UA

share

NW

Pass

NW

share

All

Other

Air

l

in

es

All

others

share

Interline

pass

I

nterline

Share

CO

+UA

Total

Pass

W

Palm

Beach

Rochester

Columbus

Richmond

Cleveland

Fort

Lauderdale

Greensboro

Birmingham

Wash

Dulles

Providence

Orlando

Kansas

City

Baltimore

Hartford

New

Orleans

Tampa

San

Antonio

Pittsburgh

Boston

Houston

Jacksonville

Raleigh

Wash

National

Nashville

St.

Louis

Cincinnati

Data;

O

D1B

passengers

with

one

or

two

stops

for

2007

Q4

-

2008Q3,

adjusted

for

sampling

by

multiplying

by

10.

Routes

m

u

st

h

ave

at

least

200

pass

eng

ers

for

each

of

CO

and

UA

to

be

include

d,

and

a

c

o

mbined

CO

+

UA

share

of

at

lea

st

50% o

f

all

passengers.

Interline

passengers

have

different

marketing

carrier

s

on

different

se

gments

of

their

trip.

46

Appendix

B:

Empirical

Addendum

The

empirical

analyses

in

this

Addendum

use

the

publicly-available

DB1B

ticket

database

maintained

by

the

U.S.

Department

of

Transportation.

The

DB1B

data

are

a

10%

random

sample

of

tickets

either

ticketed

by

a

U.S.

carrier

or

where

a

U.S.

carrier

operated

at

least

one

flight

in

the

ticket

’

s

itinerary.

The

data

are

compiled

quarterly.

The

only

information

provided

by

a

ticket

in

DB1B

is

the

purchased

price

(in

dollars),

number

of

coupons

in

the

ticket

’s

itinerary,

1

14

number

of

sampled

passengers

traveling

the

itinerary

at

the

particular

fare,

and,

for

each

coupon,

the

fare

class,

115

origin

and

destination

airports

as

well

as

the

operating

and

marketing

carriers.

Tickets

ticketed

by

foreign

carriers

that

include

no

flights

operated

by

U.S.

carriers

are

not

reported

in

DB1B.

I.

Price

Effects

from

the

Loss

of

Nonstop

Competition

in

Transatlantic

Routes.

Our

empirical

evidence

shows

that

a

reduction

in

the

number

of

competing

airlines

offering

nonstop

transatlantic

flights

may

result

in

large,

statistically

significant

price

increases.

To

determine

the

effects

from

changes

in

the

number

of

competing

airlines

offering

nonstop

transatlantic

flights,

we

analyze

the

DB1B

data

for

the

3

rd

quarter

of

2008.

We

define

a

route

as

a

non-

directional

city

pair

with

one

endpoint

in

the

U.S.

and

the

other

endpoint

in

Europe

(that

is,

transatlantic

routes)

.

We

extract

from

DB

1B

1

-coupon

coach-class

tickets

(one-way

tickets)

and

2-coupon

coach-class

round-trip

tickets

that

have

the

same

starting

and

ending

city.

116

We

split

the

round-trip

tickets

into

one

-

way

tickets

and

divide

the

fare

by

two,

so

that

the

data

are

on a

one-way

basis.

Following

Brueckner

and

Whalen

(2000),

117

we

drop

tickets

with

one-way

fares

below

$50

since

these

may

represent

trips

purchased

with

frequent-flyer

miles

or

made

by

airline

employees

at

significantly

reduced

fares.

We

then

compute

the

passenger-weighted

average

fare

for

each

route.

The

object

of

the

empirical

analysis

is

to

analyze

how

the

average

fare

varies

across

transatlantic

routes

based

on

the

number

of

airlines

offering

nonstop

flights

in

a

route,

controlling

for

other

factors

that

may

affect

fares.

In

the

hub-and-spoke

networks

that

the

major

transatlantic

carriers

operate,

the

majority

of

nonstop

service

that

an

airline

offers

radiates

from

its

hubs,

and

the

airline

relies

on

connections

through

its

hubs

to

serve

thousands

of

other

routes.

Given

this

structure,

the

major

network

carriers

provide

overlapping

transatlantic

nonstop

service

on

routes

between

their

hubs

or

from

the

same

hub

airport

if

they

share

a

hub

airport.

To

control

for

the

economics

of

hubs,

we

focus

our

attention

on

routes

between

two

hubs

of

an

immunized

alliance

and

routes

served

by

multiple

carriers

with

a

hub

airport

in

the

route.

Our

sample

data

include

65

routes

(see

the

Attachment

for

a list).

To

identify

the

number

of

nonstop

competitors

in

these

routes,

we

use

flight

listing

data

from

the

1

4

A

coupon

may

denote

a

nonstop

flight

or

a

direct

flight.

A

direct

flight

is

a

connecting

flight

(that

is,

a

flight

with

a

stop

at

an

intermediate

transit

airport)

with

no

change

of

aircraft

or

flight

number.

1

5

The

DB

IB

data

reports

the

generic

fare

class

for

each

coupon

in

a

ticket.

The

most

common

fare

classes

are

C,

D,

X,

and

Y,

where

C

and

D

are

business

fare

classes,

X

is

the

main

coach

cabin

fare

class,

and

Y

typically

stands

for

full-fare

coach

fare.

DB1B

provides

no

other

data

on

passenger

mix.

1

6

We

focus

on

tickets

in

which

all

coupons

have

coach

fare class

X.

These

tickets

represent

90%

of

all

tickets

in

our

data.

Our

results

are

not

affected

if

we

also

include

tickets

with

Y

fare

class

coupons

(only

1.5%

of

tickets

have

coupons

with

Y

fare

classes).

117

Brueckner,

J.,

and

Whalen,

T.,

2000,

“

The

Price

Effects

of

International

Alliances,

”

Journal

of

Law

and

Economics,

43,

503-454.

These

authors

analyze

the

price

effects

of

immunity

grants

in

transatlantic

routes

with

nonstop

service

using

1997

quarter

three

data

from

DOT.

They

estimate

that

average

fares

rise

by

about

5%

when

immunity

is

granted

to

two

previously

competitive

carriers.

47

Official

Airline

Guide.

An

airline

is

counted

as

serving

a

route

nonstop

if

it

offers

at

least

60

flights

in

each

direction

during

the

quarter.

Different

airlines

serving

the

route

nonstop

are

counted

as

competing

unless

they

were

immunized

members

of

the

same

alliance

during

the

quarter,

in

which

case

they

count

as

a

single

competitor.

158

We

define

dummy

variables

to

denote

the

number

of

competitors

in

a

route.

Monopoly

routes

are

the

reference

group.

The

competitive

variables

equal

one

when

there

are,

respectively,

2, 3, 4,

or

5

or

more

nonstop

competitors

in

the

route

and

zero

otherwise.

Eighteen

of

the

65

routes

in

our

data

are

nonstop

monopolies,

28

have

2

nonstop

competitors,

13

have

3

nonstop

competitors,

4

have

4

nonstop

competitors,

and

2

have

6

nonstop

competitors.

519

Having

already

controlled

for

hub

effects,

following

Brueckner

and

Whalen

(2000),

we

include

as

additional

control

variables

the

mileage

of

the

route

and

the

route

’

s

population

potential,

which

is

computed

as

the

geometric

mean

of

the

population

at

the

two

endpoint

cities

in

the

route.

120

Lastly,

the

airports

in

our

transatlantic

routes

are

major

U.S.

and

European

airports,

at

which,

to

begin

with,

members

of

all

of

the

major

airline

alliances

have

flight

operations.

These

alliances

include

multiple

members

that

make

available

a

large

number

of

single-connect

and

double-connect

travel

itineraries

to

passengers

across

the

sample

routes.

121

That

is,

there

is

significant

connecting

service

offered

across

all

of

our

routes.

We

use

the

ordinary

least

squares

method

to

estimate how

average

fares

vary

across

routes

based

on

the

number

of

nonstop

competitors

in

a

route.

In

particular,

we

estimate

how

the

natural

logarithm

transformation

of

the

average

fare

varies

as

a

function

of

the

dummy

variables

denoting

the

number

of

nonstop

competitors,

the

natural

logarithm

transformation

of

the

mileage

distance,

and

the

population

potential.

122

Results

are

listed

in

Table

1.

The

model

explains

59%

of

the

variation

in

average

fares

across

118

This

assumes

that

non-immunized

members

of

the

same

alliance

remain

vigorous

competitors.

If

not,

then

the

price

effects

we

estimate

from

the

loss

of

a

nonstop

competitor

may

underscore

the

magnitude

of

the

true

price

effects.

119

In

seven

routes,

an

airline,

such

as

Air

India,

Eurofly,

Malaysia,

Kuwait

or

Pakistan

International

Airlines,

offers

less

than

60

nonstop

flights

in

each

direction

(it

typically

offers

30

to

40

flights

during

the

quarter).

Dropping

these

routes

from

our

data

does

not

affect

our

findings:

the

estimated

price

effects

are

statistically

significant

and,

if

anything,

slightly

larger

in

magnitude

than

those

reported

in

Table

1.

We

note

that,

over

the

past

three

years,

there

is

only

one

instance

of

a

non-hub

carrier

beginning

to

serve

any

of

the

46

transatlantic

hub

routes

that

have

one

or

two

nonstop

competitors

in

quarter

three

2008.

Chicago-Frankfurt

had

two

nonstop

competitors

in

quarter

three

2008;

during

quarter

four

2008,

Air

India

increased

its

Chicago-

Frankfurt

service

(part

of

its

longer

haul

service

to

India)

to

about

90

flights.

120

The

mileage

is

the

great

circle

distance

mileage

between

the

endpoints

of

the

route.

We

use

the

2008

U.S.

metropolitan

area

population

data

at

http://www.census.

g

ov/popest/metro/metro.html

.

European

population

data

is

from

European

Spatial

Planning

Observation

Network,

Study

on

Urban

Functions

(Project

1.4.3),

Final

Report,

Chapter

3,

(ESPON,

2007),

located

at

http://www.espon.eu/mmp/online/website/content/proiects/261/420/index

EN.html.

Additional

connecting

travel

itineraries

are

also

available

as

a

result

of

traditional

interline

agreements

or

bilateral

arrangements

between

airlines

not

in

alliances

or

across

different

alliances.

122

We

assume

that

the

number

of

airlines

offering

nonstop

flights

in

a

transatlantic

route

is

determined

prior

to

these

airlines

’

pricing

decisions.

This

assumption

is

reasonable

at

several

levels.

First,

given

that

airline

demand

is

revealed

over

time,

and

the

high

costs

associated

with

establishing

transatlantic

nonstop

service,

airlines

who

enter

a

transatlantic

route

will

publish

their

flight

schedule

and

advertise

their

new

service

well-ahead

of

actual

departure

dates.

Second,

the

number

of

airlines

with

nonstop

flights

in

our

hub

routes

is

quite

stable

over

time,

and

almost

exclusively

made

of

airlines

with

a

hub

at

an

endpoint

of

the

route.

Moreover,

across

our

sample

routes,

over

the

period

2005-2008,

the

number

of

nonstop

airlines

during

quarter

three

equals

that

in

quarter

two

99%

of

the

time.

We

also

note

48

routes

(R

2

0.59),

=

which

means

that

the

model

fits

the

data

well.

We

estimate

that

reducing

the

number

of

nonstop

competitors

in

a

route

from

2

to

1

raises

average

nonstop

fares

in

the

route

by

15.0%,

all

else

equal.

123

This

effect

is

statistically

significant

at

the

1%

level.

In

addition,

we

estimate

that

reducing

the

number

of

nonstop

competitors

in

a

route

from

3

to

2

(4

to

3,

respectively)

raises

average

nonstop

fares

by

6.6%

(6.3%,

respectively),

all

else

equal.

12il

These

findings

are

consistent

with

both

previously

published

work

and

internal

DOJ

analyses

on

the

price

effects

from

the

loss

of

a

nonstop

carrier

in

domestic

hub

routes.

125

Moreover,

across

our

routes,

the

vast

majority

of

coach-class

passengers

(73%)

fly

nonstop,

even

though

average

connecting

fares

are

10%

lower

than

average

nonstop

fares.

Hence,

even

if

connecting

service

is

in

the

relevant

market,

the

loss

of

nonstop

competition

significantly

increases

concentration

levels

in

the

market,

and

we

have

evidence

of

large,

statistically

significant

price

effects

from

the

loss

of

nonstop

competition

on

the

fares

paid

by

the

vast

majority

of

passengers.

II.

Price

Differences

across

Tickets

within

a

Route.

The

parties

claim

that

immunity

grants

to

airline

alliances

are

necessary

to

reduce

a

double

marginalization

problem,

which

otherwise

arises

from

the

uncoordinated

choice

of

alliance

fares

in

the

absence

of

immunity.

To

support

their

claim,

they

cite

empirical

evidence

in

the

economics

literature

that

finds

that

immunized

alliance

fares

for

connecting

travel

itineraries

were

lower

in

the

1990s

than

non-

immunized

alliance

fares.

126

Since

the

1990s,

however,

the

airline

industry

has

undergone

major

global

changes,

including,

but not

limited

to,

an

increase

in

the

global

demand

for

travel

and consolidation

in

Europe.

Airlines

have

also

grouped

into

three

major

global

alliances

(Oneworld,

Sky

team,

Star)

and,

within

these

alliances,

non-immunized carriers

appear

to

have

made

significant

strides

towards

managing

more

efficiently

their

yield

management

and

capacity.

In

this

Section,

using

quarter

three

DB1B

data

for

2005

through

2008,

we

provide

newer

empirical

evidence

on

pricing.

Our

evidence,

which

shows

that

immunized

alliance

fares

are

higher

than

non-immunized

ones,

does

not

support

the

parties

’

claims

on

immunity

grants

and

double

marginalization.

that

if

we

delete

from

the

data

routes

with

entry

or

exit

in

other

quarters

in

2008,

we

obtain

similar,

statistically

significant

effects.

123

We

obtain

similar

results

running

the

model

on

quartile

fares

(25

th

,

50

th

,

or

75

th

percentile

fare)

rather

than

on

the

average

fare.

We

also

obtain

similar

results

if

we

expand

the

sample

to

include

all

129

transatlantic

nonstop

routes

for

which

we

have

data

(adding

to

the

model

a

dummy

variable

to

control

for

the

presence

of

dual

hubs

on

the

65

routes

of

focus

in

the

text).

The

itinerary

in

a

DB

1

B

ticket

is

reported

in

terms

of

coupons,

and

the

estimated

effects

apply

to

passengers

in

nonstop

and,

if

any,

direct

flights.

In

only

7

of

the

65

routes,

there

are

1-stop

direct

flights

reported

in

the

Official Airline

Guide

data,

in

the

text,

for

parsimony,

we

discuss

the

estimates

in

terms

of

their

effect

on

the

fares

paid

by

nonstop

passengers.

124

There

are

few

routes

in

our

data

with

3

or

more

competitors,

and

the

3-to-2

and

4-to-3

effects

are

not

statistically

significant.

125

See,

e.g.,

Peters,

C.,

2006,

“

Airline

Merger

Simulation,

”

Journal

of

Law

and

Economics,

49,

pp.627-649.

He

computes

actual

price

increases

of

between

7.2%

and

29.4%

following

the

loss

of

nonstop

competition

in

overlap

domestic

routes

involved

in

mergers.

126

See,

e.g.,

Brueckner

and

Whalen

(2000),

Brueckner,

j.,

2003,

“

International

Airfares

in

the

Age

of

Alliances,

”

Review

of

Economics

and

Statistics,

85,

pp.

105-118,

and

Whalen,

T.,

2007,

“

A

Panel

Data

Analysis

of

Code-Sharing,

Antitrust

Immunity,

and

Open

Skies

Treaties

in

International

Aviation

Markets,

”

Review

of

Industrial

Organization,

30,

39-61.

49

We

define

a

route

as

a

city-pair

in

a

quarter,

with

origin

u.s

the

U.S.

and

destination

in

Europe.

As

in

Brueckner

and

Whalen

(2000),

Brueckner

(2003)

and

Whalen

(2007),

we

drop

from

the

data

(i)

routes

from

U.S.

cities

where

foreign

carriers

offer

at

least

one

nonstop

flight

per

business

day

to

Europe,

because

the

DB

1

B

data

do

not

report

tickets

ticketed

by

foreign

carriers,

and

(ii)

routes

that

have

nonstop

flights

between

their

endpoints,

to

focus

on

routes

where

service

by

domestic

and

foreign

airlines

is

complementary

1

27

We

extract

from

DB1B

tickets

with

itineraries

that

represent

round-trip

travel

with

same

starting

and

ending

city.

Itineraries

may

have

up

to

6

coupons,

but

no

more

than

3

coupons

one-way

and no

surface

transfers.

Tickets

with

round-trip

fares

below

$100

(in

2008

quarter

three

dollars)

are

dropped,

since

these

may

represent

trips

purchased

with

frequent-flyer

miles

or

made

by

airline

employees

at

significantly

reduced

fares.

We

then

differentiate

between

tickets

that

are

either

online

tickets,

immunized

alliance

tickets,

non-immunized

alliance

tickets,

or

interline

tickets.

A

ticket

is

an

online

ticket

if

all

of

the

coupons

in

the

ticket

are

operated

and

marketed

by

a

single

airline

(including

its

regional

affiliates).

12

8

An

immunized

alliance

ticket

is

a

ticket

that

lists

two

or

more

airlines

as

operating

or

marketing

carriers

and

all

of

the

airlines

listed

on

the

ticket

are

immunized

members

of

the

same

alliance.

A

non-immunized

alliance

ticket

is

a

ticket

that

lists

two

or

more

airlines,

and

all

listed

airlines

are

members

of

the

same

alliance,

and

at

least

one

of

the

airlines

is

not

an

immunized

alliance

member.

Lastly,

a

ticket

is

an

interline

ticket

if

it

is

none

of

the

above?

29

Using

these

definitions,

67.8%

of

all

tickets

in

the

sample

are

online,

7.4%

are

non-immunized

alliance

tickets,

17.4%

are

immunized

alliance

tickets,

and

the

other

7.4%

are

interline

tickets.

We

use

ordinary

least-squares

regression

to

analyze

how

prices

vary

across

tickets

based

on

the

type

of

ticket,

the

major

U.S.

airline

reporting

the

ticket

130

,

and

the

mileage

and

number

of

coupons

in

the

ticket

’

s

itinerary.

We

use

dummy

variables

to

denote

each

of

the

type

of

ticket

(online,

immunized

alliance,

non-immunized

alliance,

or

interline

ticket)

and

carriers.

Online

tickets

are

the

reference

group.

We

also

include

in

the

model

route

fixed

effects

to

control

for

all

of

the

factors

that

are

invariant

in

a

route,

including,

but

not

limited

to,

the

level

of

competition

in

the

route.

We

estimate

the

model

using:

(i) all

of

the

tickets

in

the

data,

and

(ii)

coach-class

tickets

only?

31

Results

for

both

data

are

reported

in

Table

2.

We

discuss

below

the

results

based

on

the

coach

class

tickets;

the

estimated

fare

differentials

127

Within

the

U.S.,

we

exclude

Hawaii.

Within

Europe,

we

focus

on

destinations

in

the

European

Union,

Switzerland,

Norway,

and

Croatia.

Our

data

include

approximately

23,000

routes.

128

A

coupon

in

a

ticket

is

online

if

the

operating

carrier

is

the

marketing

carrier

on

the

coupon.

If

the

carriers

do

not

match,

the

coupon

may

yet

be

online

since

the

operating

carrier

may

be

a

regional

affiliate

of

the

marketing

carrier.

We

use

the

flight

listing

data

in

the

Official Airline

Guide

to

identify

regional

carrier

affiliations

for

major

airlines

on

an

individual

coupon

basis.

If

all

of

the

coupons

in

a

ticket

are

online

coupons

from

the

same

carrier,

then

the

ticket

is

online.

129

These

tickets

include

traditional

interline

tickets

and

tickets

that

obtain

from

bilateral

arrangements

between

airlines

not

in

alliances

or

in

different

alliances.

130

To

be

included

in

the

DB

1

B

data,

a

ticket

must

be

either

ticketed

by

a

U.S.

airline

or

include

at

least

one

flight

operated

by

a

U.S.

airline.

We

identify

the

major

U.S.

airline

listed

as

marketing

or

operating

carrier

across

the

coupons

in

the

ticket.

Fortractability,

we

drop

the

few

tickets

(5%

of

tickets)

that

list

two

or

more

major

U.S.

carriers.

131

The

coach

class

tickets

are

tickets

in

which

all

coupons

have

coach

fare

class

X.

In

this

Section,

these

tickets

represent

93%

of

all

tickets

sold.

We

note

that

Brueckner

and

Whalen

(2000),

Brueckner

(2003),

and

Whalen

(2007)

estimate

a

model

similar

to

ours

using

all

of

the

tickets

in

the

DOT

data,

but

for

first-class

tickets.

First-class

tickets

account

for

only

0.2%

of

all

the

tickets

in

our

data.

Dropping

these

tickets

is

inconsequential

for

the

results

in

Table

2

that

use

all

of

the

tickets

in

the

data.

50

are

slightly

larger

if

we

look

at

the

results

based

on

all

of

the

tickets.

We

estimate

that

interline

tickets

have

the

highest

sales

prices.

Interline

fares

are,

for

instance,

6.3%

higher

than

online

fares,

all

else

equal.

We

also

find

that

non-immunized

alliance

fares

are

1.5%

lower

than

online

fares.

This

difference

is

not

statistically

significant.

More

importantly,

controlling

for

other

factors,

we

estimate

that

immunized

alliance

fares

are

2.1%

higher

than

online

fares

and

3.6%

higher

than

non-immunized

alliance

fares.

Both

of

these

fare

differentials

are

statistically

significant

at

the

1%

level.

51

Table

1

Price

Effects

from

Loss

of

Nonstop

Competition

on

Transatlantic

Routes.

The

Dependent

Variable

is

In

(Average

Fare)

Estimate

Change

in

#

Estimated

Explanatory

Variables

(Standard

error)

of

nonstop

price

effect

in

competitors

percentages

1

—

Number

of

Nonstop

2

-.140*

2

to

1

+15.0%*

Competitors

(.043)

3

-.204*

3

to

2

##

+6.6%

(.044)

4

-.265*

4

to

3

+6.3%

(.064)

5

or

more

-.422*

(.081)

ln(Mileage

of

the

Route)

.638*

(.114)

Mean

of

City

Populations

.948

in

the

Route

(.731)

Constant

term

1.218*

(.953)

R

2

-

0.59.

Number

of

observations

(routes)

=

65.

Standard

errors

computed

with

White

heteroskedasticity

correction.

The

population

variable

is

divided

by

100

million,

for

scaling

purposes.

*

Indicates

statistical

significance

at

a

1%

level.

#

The

2

to

1

percentage

effect

equals

exp(,140)

-

1

-

15.0%.

##

-

=

6.6%.

The

3

to

2

percentage

effect

equals

exp(-.

1

40+.204)

1

##

#

The

4

to

3

percentage

effect

equals

exp(-.204+.265)

-

1

=

6.3%

52

Table

2

Price

Differences

Across

Tickets

based

upon

the

Type

of

Ticket.

The

Dependent

Variable

is

ln(

Ticket

Fare

)

Coach

Class

All

Tickets

Coach

Class

Tickets

Estimate

Estimated

Explanatory

variables:

(Standard

Price

Differentials

error)

Type

of

ticket:

Online

tickets

—

(

reference

group)

Non-immunized

alliance

-.017

-.015

relative

to

-1.5%

tickets

(0.010)

(0.009)

online

tickets

Immunized

alliance

.035*

.021*

relative

to

+2.1%*

tickets

(0.008)

(0.007)

online

tickets

Interline

tickets

.070*

.061*

relative

to

+6.3%*

(0.009)

(0.007)

online

tickets

#

Mileage

of

itinerary

-.046

-0.096*

in

ticket

(0.044)

(0.036)

Number

of

coupons

-.054*

-0.046*

in

itinerary

(0.005)

(0.004)

R

2

0.25

0.30

Number

of

tickets

126,520

117,494

Standard

errors

computed

with

White

heteroskedasticity

correction.

Estimates

for

route

and

carrier

fixed

effects

not

shown

in

the

Table.

*

Indicates

statistical

significance

at

a

1%

level.

#

The

percentage

effect

is

computed

as

exp(0.061)

-

1

=

6.3%

53

Attachment

Price

Effects

from

Loss

of

Nonstop

Competition

on

Transatlantic

Routes.

List

of

Transatlantic

Routes

in

the

Sample

Data.

U.S.

European

U.S.

European

endpoint

Atlanta

Amsterdam

New

York

City

Stockholm

Atlanta

Paris

New

York

City

Athens

Atlanta

Rome

New

York

City

Barcelona

Atlanta

Frankfurt

New

York

City

Brussels

Atlanta

London

New

York

City

Budapest

Cincinnati

Amsterdam

New

York

City

Paris

Cincinnati

Paris

New

York

City

Copenhagen

Cincinnati

Rome

New

York

City

Dublin

Denver

London

New

York

City

Edinburgh

Detroit

Frankfurt

New

York

City

Rome

Detroit

London

New

York

City

Frankfurt

Detroit

Amsterdam

New

York

City

Lisbon

Detroit

Paris

New

York

City

London

Detroit

Frankfurt

New

York

City

Madrid

Washington

Amsterdam

New

York

City

Manchester

Washington

Paris

New

York

City

Milan

Washington

Frankfurt

New

York

City

Shannon

Washington

London

New

York

City

Berlin

Washington

Munich

New

York

City

Zurich

Washington

Zurich

Chicago Amsterdam

Houston

Amsterdam

Chicago

Paris

Houston

Paris

Chicago

Dublin

Houston

London

Chicago

Rome

Los

Angeles

Frankfurt

Chicago

Frankfurt

Los

Angeles

London

Chicago

London

Memphis

Amsterdam

Chicago

Manchester

Miami

Paris Chicago

Munich

Miami

London

Philadelphia

Paris

Miami

Madrid

Philadelphia

Frankfurt

Minneapolis

-

St

Paul

Amsterdam

Philadelphia

London

Minneapolis

-

St

Paul

Paris

San

Francisco

Frankfurt

New

York

City

Amsterdam

San

Francisco

London

Salt

Lake

Cit

y

Paris

54

CERTIFICATE

OF

SERVICE

I

hereby

certify

that

a

copy

of

the

foregoing

COMMENTS

OF

THE

DEPARTMENT

OF

JUSTICE

have

been

served

this

day

by

e-mail

upon

each

of

the

following

addresses:

jonathan.moss@wilmerhale.com

carl.nels[email protected]

lachter@starpower.net

dvaughan@kelleydrye.com

recohn@hhlaw.com

[email protected]

howard_kass@usairways.com

kevin.montgomery@polaraircargo.com

nssparks@fedex.com

[email protected]

1

dwasko

@ero

ls.com

john.fredericksen@suncountry.com

Jeffrey

.

ogar@aa

.

com

[email protected]

prrizzi@hhlaw

.

com

bruce.rabinovitz@wilmerhale.com

[email protected]

[email protected]t

[email protected]

lhalloway@crowell.com

[email protected]

dhainbach@ggh-airlaw.com

[email protected]

scott.mcclain@delta.com

sametta

.c

.

barnett@de

l

ta.com

david.heffernan@wilmerhale.com

[email protected]om

Kathleen.Knowlton@wilmerhale.com

[email protected]

[email protected]om

jrichardson@johnlrichardson.com

matwood@sherblackwell.com

[email protected]

Shannon.edwards@evergreenaviation.com

[email protected]

[email protected]com.mil

[email protected]

amendelsohn@sherblackwell.com

[email protected]

Benjamin.slocum@usairways.com

[email protected]

russell.bailey@alpa.org

[email protected]

slachter@lachter-clements.com

[email protected]

June

26,

2009

_________

Jill

Ptacek

55