Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Resolution of Open Skies dispute should not maintain barriers to market entry: AAI, (Nov 10, 2015)

By Edward L. Puzzo, J.D.

The current Open Skies dispute between the major “Big 3” American airlines and Gulf air carriers should not be resolved by government agencies in a way that facilitates the use of Open Skies agreements to maintain barriers to entry in markets where the Big 3 are dominant, according to a comment issued November 9 by the American Antitrust Institute (AAI).

Open Skies agreements in commercial passenger aviation, such as with the European Union in 2007, have been used to liberalize the international aviation market. Currently, the Department of Commerce (DOC), the Department of Transportation (DOT) and the Department of State (DOS) are evaluating whether the Big 3 American carriers—Delta Airlines, United Airlines, and American Airlines—are being unfairly harmed by the alleged subsidization of Gulf airlines by their governments. Without rendering an opinion on the specifics of that dispute, the AAI issued its comment to address the major competition policy raised: Should the Big 3 use Open Skies as a way to maintain their oligopoly on air travel in the U.S., and their air travel dominance internationally?

From the perspective of what is best for competition, Open Skies agreements generally have generated benefits for competition and consumers by creating more choice and route connectivity along with fare reductions, the AAI stated. The Big 3 have acknowledged that Open Skies has been successful in liberalizing the aviation industry.

Recent consolidation. However, the AAI notes, due to 5 major airline mergers in 10 years, the Big 3 enjoy a domestic oligopoly with significant control over capacity, fares and fees. Through their alliances for international routes (Delta’s “SkyTeam,” United’s “Star,” and American’s “oneworld”) carrying about 75 percent of all global passengers, the Big 3 are largely immunized from antitrust scrutiny.

Because the Big 3’s dominance is threatened by attempts by foreign carriers to expand to international routes serving U.S. cities, they have found reasons to challenge proposed expansion by foreign carriers. In the current dispute, The Big 3 allege that Gulf carriers possess an artificial competitive advantage as a result of government subsidies.

Barriers to entry. In resolving the current dispute, the AAI argues, government agencies should keep in mind the broader competition policy underpinnings for Open Skies and resist any attempt by dominant U.S. carriers to maintain barriers to entry to the domestic and international markets in which they are dominant. The entry of foreign carriers into U.S. markets would decidedly be in the interest of competition and consumers, the AAI maintained, even if it threatens the Big 3’s private interests.

Antitrust immunity. Under Open Skies, the Big 3’s coordination of operations with their partners in their international airline alliances is granted immunity from antitrust enforcement. There is a cost to this immunity, the AAI maintains, in the form of eliminated competition on overlapping gateway-to-gateway routes and foreclosure of rivals’ access to alliance-dominated hubs. With these costs in mind, AAI advocates a periodic and transparent reevaluation of these grants of antitrust immunity.

The comment concludes that, in resolving the current Open Skies dispute between the Big 3 and the Gulf carriers, government regulators should consider: (a) whether consolidation in the airline industry has changed the incentives for the Big 3, causing them to put their private economic interests above the economic liberalization benefits embodied in Open Skies; (b) whether the demonstrated benefits to competition and consumers of the entry by foreign carriers to U.S. should factor into the assessment of disputes involving specific agreements, as well as new Open Skies agreements; and (c) whether there should be transparent periodic review of immunity grants to the Big 3 carriers, given the powerful lever their international alliances give them in expanding into international markets.

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