DOT and DOJ Provide Differing Views on Application by Continental Airlines for Antitrust Immunity

Economists Ink: A Brief Analysis of Policy and Litigation


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Gloria J. Hurdle has testified on a number of airline matters. Her airline experience includes mergers, code-share agreements, pricing analysis, predation, and issues related to global distribution systems.Erica E. Greulich specializes in empirical microeconomics, which she has used to analyze antitrust matters and calculate damages in numerous industries.

 

The Department of Transportation (DOT) recently allowed Continental Airlines to join both the Star Alliance and a new “A++” joint venture with current Star Alliance members United, Air Canada and Lufthansa. The A++ application anticipates that the four airlines will jointly arrange capacity, coordinate sales and marketing, and share revenues in international markets. Both A++’s and the 10-airline Star ATI Alliance’s applications for antitrust immunity were granted, subject to “carve-out” exceptions, even though the Department of Justice (DOJ) recommended much more limited immunity.

While DOT has ultimate authority in granting antitrust immunity to international carriers, DOJ also analyzes the competitive effects of granting that immunity. In this case, DOJ defined a market as nonstop service between a city pair. DOJ observed the number of nonstop carriers on each route, considered the likelihood and timeliness of future entry, and estimated price effects of the loss of nonstop competition on certain routes. It recommended retaining existing carve-outs to antitrust immunity and implementing carve-outs in ten concentrated city-pair markets and on U.S.-China routes.

DOT and DOJ both supported their conclusions with empirical analyses, and each agency criticized the methodology used in the other’s studies. DOT ultimately disagreed with DOJ that nonstop service for a given city-pair is a relevant market. Nevertheless, DOT did follow DOJ’s suggestion to carve out certain routes where the number of non-stop competitors would otherwise decrease from two to one and DOT determined that potential entry would not deter anticompetitive fares. Thus DOT apparently concurred with DOJ’s conclusion that a two-to-one reduction could lead to a significant price increase.

DOT and DOJ have disagreed before. As far back as 1996, in the Delta/Swissair/Sabena/Austrian alliance, DOT carved out only three of the seven city pairs requested by DOJ. Even when DOT and DOJ agreed on the city pairs to carve out, DOT made the limitation to antitrust immunity narrower than DOJ had requested. DOJ here requested that the carve-outs apply to all fare categories. DOT disagreed and limited the carve-outs so they do not apply to most corporate and group fares, or to promotional, consolidator/wholesaler, and government fares.