Editorial: A Tale of Three Cities

The US Dept. of Transportation's recent tentative decisions involving the oneworld antitrust immunity application and the unrelated slot transfer agreement between US Airways and Delta Air Lines, if finalized, suggest that a significant gap exists between how DOT and the Federal Aviation Administration evaluate domestic and international airline competition matters.

In the international arena, DOT appears to accept that greater levels of concentration--in the form of global antitrust-immunized airline alliances--are both inevitable and desirable as long as the balance of competitive power is maintained among the networks of Star, SkyTeam and oneworld. But it continues to view the domestic market through the prism of market share at individual airports and between individual airlines, also the prevailing view in Congress and the Dept. of Justice (which has authority over domestic airline mergers).

Explaining the tentative decision to grant ATI to oneworld members American Airlines, British Airways, Finnair, Iberia and Royal Jordanian and to approve the Joint Business Agreement among AA, BA and IB that will permit the three to coordinate schedules, manage capacity and share revenues, DOT argues that the proposed alliance "will enhance competition around the globe by creating a viable third immunized alliance that is comparable and more competitive with the product and service offerings of Star Alliance and SkyTeam, which have already received grants of antitrust immunity and are proceeding with their own alliance plans and integrated joint ventures."

The Department's only conditions are that the partners agree to sell or lease four slot pairs at London Heathrow, two of which must be dedicated to Boston-LHR service, and that they modify their JBA "to ensure capacity growth." In return, AA, BA and IB will be permitted to enjoy a 47% share of the US-UK market--the largest transatlantic market with 25% of US-Europe traffic--and a 52% share in US-Spain markets.

It is in the specific city-pair markets, however, where the biggest advantage accumulates. Between Dallas and London Heathrow, for example, ATI will give oneworld an 82.9% market share, up from 51%. Between New York JFK and LHR the oneworld alliance share rises to nearly 52% from 17%, and in the Boston-LHR market the share gain is 40 points to 68%.

Turning to the domestic market, DOT/FAA share a different philosophy, as is evidenced by the tentative ruling concerning the agreement between Delta and US Airways under which DL is giving 42 pairs of "slot interests" to US at Washington National and US is transferring 125 pairs of slot interests to DL at New York LaGuardia. As a condition of approving the deal, FAA/DOT will require the carriers to divest 14 pairs of slot interests at DCA and 20 pairs at LGA. And these must be transferred to "new entrant and limited incumbent carriers" (i.e., LCCs).

Why are these slot surrenders necessary? According to FAA, it is because without divestiture, "Delta would ascend to a dominant position at LGA" and US would be by far "the dominant carrier" at DCA. US's share of departures at DCA would rise from 47% to 58% while DL's share of LGA departures would rise from 26% to 51%. How's that again? Isn't that figure pretty similar to what AA/BA will enjoy in the US-LHR market? How different is DL's 51% share at LGA from AA/BA's 48% share at LHR? Is there any city-pair in Delta's LGA route network that will exceed the 83% share of passengers oneworld will enjoy in the Dallas-LHR nonstop market?

Furthermore, DOT agrees that London Gatwick is not a substitute for Heathrow yet accepts these levels of concentration at LHR. By contrast, the Washington and New York metropolitan areas are overflowing with reasonable alternatives to LGA and DCA. JetBlue is the largest carrier at JFK, Continental has a hub across the Hudson at Newark, Southwest is at LaGuardia, Southwest and AirTran Airways both maintain large hubs at Baltimore/Washington International and both have a small presence at Washington Dulles, as does JetBlue.

Despite a popular belief to the contrary, the US domestic market never has been more competitive. The country's largest domestic carrier is also its most famous discounter, yields have fallen to levels not seen in more than a decade and the network airlines continue to beat a retreat. It appears that DOT needs to take a closer look at the two decisions to see why significant concentration is tolerable in US-London markets in which few nonstop alternatives exist but not tolerable in the New York and Washington markets, where several alternatives exist. A foolish consistency may be the hobgoblin of little minds, but consistency is not all foolish.