Antitrust authorities are positioning themselves as the new policeman of the world marketplace. And as they do so, they begin to replace the old forms of airline regulation. While that may be a long term necessity to keep deregulated markets honest, it leaves some awkward questions over just which rules now apply.
Disagreements between Washington and Brussels over "open skies" and antitrust immunity for transatlantic alliances are vivid examples of how governments see airline competition differently. This is set to become a global debate. Conflicts between competition laws and the challenge about how to live with those differences, or narrow the gaps, could dominate aviation policy for the next decade.
Grey areas too are apparent between competition and transport departments in both Brussels and Washington. The current US Department of Transportation (DoT) proposals on predatory conduct guidelines are criticised for being a step back to regulation. Another view is that this debate is just part of a growing global discussion about which competition laws should apply to airlines.
The DoT dispute stems from two separate sets of competition standards. One comprises US antitrust laws, enforced by the Department of Justice (DoJ) and private plaintiffs. They apply to anyone who does business in the USA. The antitrust statutes read like a constitution, stating broad principles that the courts have to interpret and apply. Those court precedents have developed into a distinct set of rules.
Airlines are subject to antitrust legislation. But the DoT has other competitive standards imposed by law that are independent of antitrust. These congressionally mandated standards include "-preventing unfair, deceptive, predatory, or anticompetitive practices" and "-avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier-unreasonably to increase prices, reduce services, or exclude competition." Congress also told the DoT to encourage entry by carriers "-to ensure a more efficient and competitive airline industry".
The Federal Aviation Act allows the DoT to investigate and order an airline to stop any practice the agency finds to be an "-unfair or deceptive practice or an unfair method of competition".
US competition policy
These are the statutes on which the DoT bases its proposed guidelines. It acknowledges that the prohibited practices identified in those guidelines are probably not antitrust violations. The DoT's multiple and perhaps conflicting authority is what much of the recent shouting has been about.
John Dasburg, Northwest Airlines president, has declared that "-the DoT's role should be consistent with the antitrust laws and no greater". He expresses a common complaint among US airlines that the DoT is moving the goal posts by attempting to outlaw conduct allowed by antitrust laws.
Mark Leddy, a Washington lawyer who represents the Air Transport Association (ATA), the club of US majors, worries that the DoT is changing the boundary between competition that is aggressive but fair and that which amounts to illegal predatory pricing. At a recent gathering of the American Bar Association's Air and Space Law Forum in Washington, he told lawyers that the government's attempt to regulate an incumbent airline's response to a new entrant's low fares, "-hits the central nervous system of competition". The DoT's proposed guidelines, according to Leddy, are "inconsistent with antitrust policy".
The ATA points to similar debates with the Federal Trade Commission (FTC). Because the "unfair competition" language applying to the DoT was borrowed from the Federal Trade Act, the ATA says those precedents apply. Several cases and commentators held that the commission's authority to prohibit unfair competition did not justify attempts to ban conduct allowed under antitrust laws.
The ATA also argues that the US Supreme Court's interpretation of "predatory" in an antitrust context was meant to apply to all competition laws. Moreover, Congress intended predatory conduct between airlines to be construed by the DoT as the same as under the antitrust laws. The ATA's bottom line is that the DoT's seemingly broader authority does not permit it to forbid any conduct that the antitrust laws allow.
Others disagree. David Jordan, DoT attorney, insisted before the same group of lawyers that his agency could stop practices that are "not necessarily an antitrust violation". The DoT used this broader authority to convince Northwest Airlines to back down three years ago in its reaction to new competition from Reno Air.
Mark Cooper, research director for the Consumer Federation of America, poses a key question: "If the Federal Aviation Act is to be enforced the same way as the DoJ enforces the antitrust laws, then what do we need the DoT for?" He believes that the answer lies with the original legislators. He explains that Congress decided in some industries to set further competition standards as well as the antitrust laws. "We have always believed that the airline industry is a different case. It relies on essential bottleneck facilities - airports. Many people think it is an infrastructure kind of industry, like communications or transportation. On both the supply and demand sides, the industry may have unique characteristics. So we have different standards," he says.
Cooper's summary is simple: "The DoT is applying a different standard, there's no doubt, but that's what the act told them to do."
Mark Hough, a former FTC lawyer who practises antitrust law in Seattle, agrees. "If Congress had wanted the DoT to be constricted by the Sherman [antitrust] Act, instead of having a definition of unfair competition that was copied from the Federal Trade Act, they would have copied language from the Sherman Act."
International rules
This dispute rumbles on, but is only one of many - with more to come. William Kovacic, visiting law professor at Georgetown University, has spent much of the past eight years working for the US Agency for International Development, and international agencies such as the World Bank and United Nations Development Programme, that are trying to help emerging nations adopt their own competition laws. According to Kovacic, this effort "-opened my eyes to the fact that we have a remarkable multiplicity of regulatory institutions".
Any airline with international routes, warns Kovacic, will "-quickly start bumping into a host of different regimes which are not entirely similar".
Over the next five years he foresees a proliferation of competition laws around the world. Multinational pacts, such as the North American Free Trade Agreement, South America's Mercosur and Andean Pacts, and the Asia Pacific Economic Cooperation group, encourage this. Kovacic also sees Asia's fiscal crisis as a special catalyst for change.
"A big part of the foreign technical assistance and IMF bailout package for Malaysia, Indonesia, and the Philippines includes a requirement that they adopt stronger competition laws," Kovacic says. "Indonesia will have a new law in three to four months. Malaysia will not be far behind. Vietnam will probably have a new law in two years. Over the next five years we will see five to 10 new systems emerge in South East Asia, along with development of a more robust system in China."
How will this affect aviation? So far, officials in emerging nations have focused on their own airlines. "The immediate concern, especially for the larger Latin American countries, is to inject rivalry into the domestic sector," Kovacic says. "They are not to the point yet where they are starting to think much about alliances with foreign airlines."
Australia and New Zealand have done their thinking. Their competition agencies have focused on the Qantas-British Airways and Air New Zealand-Ansett-Singapore Airlines accords, underscoring Kovacic's forecast that as more nations assert control over their own policies, they too will take more interest in global airline competition.
The question is how much individual rules in this growing cacophony will vary from each other and from the relatively mature, albeit still debated, policies of the USA. "-In transition economies, the European Union [EU] model of antitrust policy is ascendant," warns Kovacic.
He offers several reasons - among them that some countries hope to join the EU and that more nations share Europe's civil law heritage than the common law heritage of the USA and the UK. But the biggest reason is that EU standards are seen as more egalitarian than the efficiency-oriented US antitrust laws. According to Kovacic, "-EU standards provide a more flexible framework for achieving political and social objectives that go beyond attaining greater efficiency".
The world seems to be forming into these two camps. Apart from the debate over the DoT's guidelines, Europe's position is even more fluid. The continent is in transition from a patchwork of national laws to unified rules.
On paper, the European Commission (EC) has jurisdiction over cross-border issues within and beyond Europe, while national authorities take the lead on local practices. In air transport, that line is far from clear and the resulting confusion has led to cases where EC and national officials have both taken action and to others where neither did.
Across Europe, national competition enforcement ranges from somnolent to assertive. German and UK competition watchdogs have been the most active in aviation. Both have contested EU conditions imposed on any antitrust immunity for alliances involving their flag carriers. The issue is complicated by the fact that it strays into the sensitive territory of bilateral air treaties - the question of national sovereignty versus European authority is still a delicate one, especially in the UK.
Historically, there has also been the occasional tension between the EC's transport and competition directorates. But the two now share a common desire to assert authority to negotiate air rights on behalf of Europe as a whole - based on the argument that by creating the single air market six years ago, Brussels gained a say in bilaterals with third countries. The UK has opposed this while other national governments have shown little enthusiasm for the idea.
TransportCommissioner Neil Kinnock had grudgingly been given authority to open a dialogue with Washington on "soft rights". Washington showed little interest. Kinnock is, meanwhile, keeping the issue alive with a legal challenge to the member states which have already signed up for USopen skies. He is also working on papers looking at ensuring a more competitive industry within Europe. In this context, the harsh penalties drawn up by Competition Commissioner Karel Van Miert for the alliances looks like part of a double-pronged assault on the status quo enjoyed by Europe's flag carriers.
Transatlantic traumas
To the extent that Brussels can speak for Europe despite these internal disputes, it is clear that it and Washington disagree on aviation policy. Van Miert re-emphasised these differences before the American Bar Association's Air and Space Law Forum in January. He likened transatlantic alliances to cartels. He disputed the advantages of gateway competition over point-to-point service. He called open skies bilaterals with the US anti-competitive and discriminatory.
When asked if the EC ought not to expand its view of relevant markets before condemning alliances, Van Miert reiterated the lack of passenger choice between Brussels and New York and blamed the problem on narrowly focused open skies bilaterals. Would he be willing to bless such arrangements under a broader analysis? Van Miert replied: "Don't count on me."
That is consistent with Professor Kovacic's observations about the major differences between US and European competition policy. According to Kovacic, the EC:
* defines the relevant market more narrowly,
* finds substantial market power at lower thresholds,
* is more concerned about individual competitors than the effect of behaviour on users generally
* adopts a broader definition of dominant firm behaviour that may be unlawful.
"If we had a business manager asking us the simple question: 'are my antitrust risks for the same company greater in Europe than they are in the USA?' then the answer would be yes," says Kovacic.
That leads to the ultimate question, posed at the Washington conference by Ulrich Schulte-Strathaus, Lufthansa's vice-president for international relations. "Who determines the rules of the game in such a global aviation market - the US authorities, the EU competition authorities or individual national authorities?"
That is the question posed by every international airline official. The short answer is that it is too early to hope for much convergence with emerging nations that are still groping to find their direction. Between the USA and EU, however, there is some movement toward consensus. It started with a US-EC accord on antitrust cooperation and coordination. The EC has issued its own guidelines on relevant markets. They do not mirror US advice on mergers, but they are similar.
On a simple scale, Kovacic says that five years ago the competition policies of Europe and the USA were perhaps only 40-50% convergent. Today, he believes it is more like 70% and could reach a "long-term equilibrium" of 80-85%.
The ATA's lawyer, Mark Leddy, agrees. "Over time the gap will shrink. It's not so much a matter of regulatory pressure as it is being forced by the market to have a consistent policy. It may not be totally our policy or totally theirs, but at some point it has to be uniform. On the same road, you can't have two different speed limits."
Source: Airline Business
