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US DOT wins game of chicken vs. Delta-Aeromexico


The US Department of Transportation (DOT) engaged in a game of chicken with Delta Air Lines and Aeromexico, and won. DOT placed a series of conditions on its approval of the Delta-Aeromexico joint venture that the carriers emphatically said were too high a price to pay to gain antitrust immunity for US-Mexico transborder flying.

Just as a reminder, Delta and Aeromexico said in a joint regulatory filing in November that DOT’s conditions were “unprecedented, arbitrary, and untethered to any potential alleged harms related to the [JV].” The airlines added, “The proposed conditions would jeopardize the sizeable consumer and economic benefits that [DOT] recognized would flow from the proposed [JV]. Moreover, they would severely diminish the economic viability of the [JV], and would compel [Delta and Aeromexico] to reconsider undertaking it.”

That is just a sampling. In high-pitched rhetoric, the airlines went on for pages, saying the DOT’s conditions were “unprecedented, unwarranted, and should not be imposed.”

DOT didn’t budge an inch. It wholly dismissed the airlines’ concerns and stuck with its conditions: To gain antitrust clearance for the JV, the carriers would have to divest 24 slot pairs for Mexico-US services at Mexico City International Airport (MEX) and six four slot pairs for US-Mexico services at New York JFK International Airport. DOT additionally limited the JV’s antitrust immunity to five years, after which the airlines will have to reapply.

Last week, DOT gave Delta and Aeromexico—which wanted to divest just eight slot pairs at MEX, none at JFK and have indefinite antitrust immunity—seven business days to accept its terms. Take it or leave it.

And the airlines have now accepted, as DOT surely knew they would. Why? Because while avoiding the slot divestitures would have been ideal, the divestitures are pretty minor in the grand scheme of things, especially since Delta is in the process of increasing its ownership stake in Aeromexico to 49%. Delta has just essentially added Mexico City, Monterrey and Guadalajara to its North American hub network of Atlanta, Detroit, Los Angeles, Minneapolis-St. Paul, New York JFK, Salt Lake City and Seattle. MEX, where Delta and Aeromexico will co-locate facilities and coordinate flight schedules, will become a huge asset for Delta.

Delta knows there is really nowhere to grow in the mature US domestic market. But Mexico is still a developing air transport market where millions of bus travelers have been transformed in recent years into low-cost carrier (LCC) airline passengers. As Aeromexico CEO Andrés Conesa recently said, once passengers get accustomed to air travel, they may eventually migrate from LCCs to long-haul services on more traditional carriers. “These passengers that used to travel by bus are flying with low-cost carriers, but in the future they may be flying with us,” he commented.

Delta CEO Ed Bastian has also noted that Aeromexico is popular with young passengers, who obviously will travel the most over the long term. He has conceded Delta still has a ways to go to become “the airline of choice of the next generation.”

For Aeromexico, accepting DOT’s terms is a no-brainer. Gaining access to what Conesa has called a “wave of traffic” from the US via Delta is a major win for the carrier, boosting its connecting traffic through it hubs. The JV also effectively seals Delta becoming a 49% owner of Aeromexico, giving the Mexico City-based airline serious long-term financial stability.

It additionally gives Aeromexico access to an operating structure—the transnational JV—that Conesa and other major Latin American airline CEOs believe is critical to those carriers’ aspirations of becoming truly global airlines. European and US carriers have gained significantly from a “very developed” transatlantic JV structure, Conesa said recently, adding, “What we’re asking is to be on the same level as other airlines.”

I wonder whether the airlines are regretting the tone of their response to DOT’s conditions. It was so over the top—“unprecedented”, “untethered”—that I suspect DOT didn’t take it too seriously. The department confidently called the airlines’ bluff, knowing they were unlikely to actually scuttle the JV rather than accept DOT’s requirements. What if Delta and Aeromexico had taken a more magnanimous line and indicated a willingness to negotiate? Would DOT have considered, for example, going from 24 to 16 slot pair divestitures at MEX, essentially splitting the difference between the airlines and DOT?

There is a risk to the carriers in the expiration of the JV’s antitrust immunity after five years. What if, say, a second-term President Trump’s DOT gives a thumbs down to a US airline collaborating so closely with a Mexican airline? But that’s way down the road and the airlines have plenty of time to prove the JV’s worth to regulators.

There’s real logic behind this JV. Particularly in commercial aviation, it makes sense to view North America—Mexico, the US and Canada—as a single market. The Delta-Aeromexico JV is the first genuine attempt in the airline industry to do so. 

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What's AirKarp?

Aviation Daily Editor in Chief's blog

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