'No way,' he says from his Washington office. 'Nuh-uh. It ain't going to happen. We won't do it. Not acceptable. Period.'
He is talking about agreeing to a potential watering down of the antitrust immunity enjoyed by the Northwest-KLM codesharing alliance. But why? And why so emphatic?
In 1997, the US Department of Transportation will undertake a review of the alliance, which in 1992 was awarded five years of full immunity from the potential of civil and criminal charges of collusion. The review may well have been a perfunctory affair had it occurred before last September, when Delta Air Lines applied for antitrust immunity for its codesharing alliances with Austrian Airlines, Sabena and Swissair. United Airlines' subsequent immunity request for its alliance with Lufthansa only complicated things, as did American Airlines' application regarding its partnership with Canadian Airlines International.
If these applications are either rejected or authorised with qualifications, Northwest with its unrestricted immunity will be faced with a dilemma next year: would it agree to the same restrictions placed on other alliances with immunity, or, worse, be forced to give it up altogether?
Seiden's response underscores the value airlines attach to holding an immunity exemption. While the board-level dispute between KLM and Northwest made the headlines recently, the apparent commercial success of their alliance, as well as the new wave of immunity-seekers, suggest that immunity offers considerable potential. Current conventional wisdom is that alliances without it, such as the British Airways-USAir partnership, will suffer.
But is this true? Officials at the US Department of Justice, among others, do not think so. Since DOT has sole right of approval for these immunity requests, DOJ only has the authority to screen them for their impact on competition. Still, Justice has held up the Delta and United applications over the past seven months. Apart from concerns over market concentration and an ideological distaste for immunity, Justice officials also say that no international airline partnership has ever been questioned about collaborating, and only one suit alleging collusion has ever been filed - Freddie Laker's 1979 complaint against 15 carriers. Since the Northwest-KLM approval, the climate in Washington has chilled to proposals that would concentrate markets. The Justice officials are in essence saying: 'Explain why you need it.'
For the likes of Delta, United and Lufthansa, the easy answer is that Northwest and KLM have it. More specifically, however, they want the protection from competitors' law suits or consumer class actions and the consequent freedom to do what Elliott Seiden almost boasts about: 'We fix prices.'
In a world that does not permit crossborder ownership of air carriers, antitrust immunity provides the legal authority for airlines to act as a single entity. 'Airlines have a large disadvantage in that they cannot merge,' says Jeffrey Shane, partner at Wilmer, Cutler & Pickering in Washington. 'They need to find a surrogate for that, because they must respond to the exigencies of the global marketplace. Immunity is their response to a unique disadvantage.' As the Bush administration's assistant secretary for international policy at the DOT, Shane was the person to sign the first order giving an alliance immunity (for Northwest-KLM).
The US stands more or less alone in possessing the need to award immunity; its harsh antitrust laws and court rulings date back to the Sherman Act of 1890, described gushingly by one Washington attorney as 'the bedrock of our democratic capitalist society'. Competition laws in the US are the toughest anywhere, and the potential outcome of any infraction - an automatic trebling of damages - usually forces airline managers into deafening silence when subjects like pricing or route planning arise during discussions with counterparts at partner carriers.
It is because of these long-held strictures on competition that the granting of immunity is seen as a unilateral decision for the US. And it is because of the need for that approval, as well as the fact that the US makes up 40 per cent of the world's commercial aviation market, that DOT officials in both the Bush and Clinton administrations have in strong measure been able to sell other countries on the concept of open skies. 'Foreign carriers not used to living in this treble-damage environment like the idea of immunity,' says James Campbell, an antitrust attorney with Wilmer, Cutler, Pickering. 'Because of that, they are willing to open their markets. [Immunity] becomes a bargaining chip that opens markets for US travellers.'
The result has been that US transportation officials have, since 1992, proffered the notion that foreign trading partners who establish open skies with the US would be rewarded with immunity. The US has negotiated with 11 European countries in the past five years, and 10 of them have signed open skies accords in the past 18 months. All have forthrightly stated that they expected the bestowal of antitrust immunity on the alliances that their airlines have with US carriers. One - Germany - boldly forced the US to agree that open skies is contingent upon Lufthansa and United being granted immunity.
Clearly, immunity brings results from a US policy point of view. But what about the commercial perspective? Some argue it may not be as productive as has been thought.
There is little new about antitrust immunity in the airline industry: the most far-reaching immunity for colluding practices has been on the books for almost 50 years. The International Air Transport Association has long maintained US immunity, allowing it to hold tariff setting conferences for international airlines to agree pricing ceilings, among other things. Historically, the conference has had a major impact on commercial operations for international carriers, but its powers for swaying fares have been diminishing every year (see Dateline Washington).
In its place are the evolving alliances, where carriers can come together to rationalise capacity in particular markets, transfer online traffic and, in the case of Northwest-KLM, coordinate many aspects of their operation, including such sensitive areas as creating a common travel agent commission programme and coordinating pricing initiatives. This alliance has set the standard in six years of cooperation, first with a block-seat arrangement and then, after 1992, by meshing systems. When Timothy Hannegan of the US General Accounting Office studied codesharing alliances last year, it was the immunity that he found gave the alliance a competitive upper hand, especially in one area. 'We found that it gives them an advantage in selling corporate accounts, because they can discuss discounts together,' he says.
Though the Northwest-KLM immunity is generally considered to be a highly significant component of the alliance, its effects on the bottom line remain uncertain. Northwest claims the alliance creates an extra $50 million in annual revenue for itself, an amount carrier officials suggest would be considerably less without immunity. In the first three years after immunity was put into place, the partnership grew from seven weekly codesharing flights between Detroit and Amsterdam to 35 from Detroit, Minneapolis and Memphis. But it is almost impossible to pinpoint how much is really due to the immunity and what can be credited to a strong codesharing alliance. Says an official close to BA-USAir: 'There is nothing clear about this stuff. No one can say exactly what you can get with immunity versus what you can do without it.'
Such divergent opinion, however, holds little sway over the Delta group and United-Lufthansa. While officially their immunity applications are being treated separately, the political reality is that they are enmeshed with one another - either both will receive it or neither will. One Lufthansa official says that in addition to cost-saving synergies, immunity 'provides us the opportunity to become a little more competitive with KLM.' And a Delta executive says that the most obvious benefit is converting a competitor into a partner: 'You are really creating a single entity. It eliminates the disincentive to flow traffic over the network, so all the alliance partners are incentivised to put passengers on the network.'
In filing for immunity last September, Delta figured it would be a quick process, with little conflict from DOT. The immunity proposal was consistent with transportation secretary Federico Peña's 18-month old international aviation policy, the airline correctly presumed. What it did not count on was the Justice Department's lack of willingness to rubber stamp the proposal, and Peña's collegial approach to decision-making - he did not want to approve anything without DOJ coordination.
Some speculate that the applicants considered Northwest-KLM as a template - a country pursues open skies, and its airline receives immunity. But antitrust immunity is a fluid process. Since then a change in presidential administrations has meant that a more dubious eye is cast on mergers. There was little direct competition between the applicants in 1992; Northwest scarcely had a presence in the US-Dutch market, so the US-Netherlands market would not consolidate much. Politically, Northwest was a year away from its nadir when it almost went bankrupt. And the relationship between Transportation and Justice may have been more independent.
But perhaps the most significant difference has been how markets have been defined in the Justice Department's analysis. According to Seiden of Northwest, in 1992 DOJ did a competition analysis of the north Atlantic market as a whole, and placed it in the lowest of three categories of market concentration using the Herfindahl-Hirschman Index (HHI). However, the applications for Delta and United were analysed for hub-to-hub effects: for Delta, Austrian, Sabena and Swissair, this means flights from Atlanta, Cincinnati and New York to Vienna, Brussels and Zürich. For United and Lufthansa, concentration concerns are from Chicago and Washington to Frankfurt.
Soon after the Delta group applied for immunity, it was made clear that some quid pro quo would have to be put in place for both Transportation and Justice to be satisfied. DOT suggested that Delta remove itself from the Iata tariff coordination conference in exchange for approval; at the time, DOJ agreed to this. But Delta hesitated, unable to move quickly on the proposal, sources say.
Whether DOJ would have accepted this proposal in the end is not clear, but by the time Delta was prepared to respond DOJ had decided it was not satisfied with the airline simply moving out of the Iata conferences. In the past four months, antitrust officials in the Justice Department have begun to demand that the Delta group, as well as United and Lufthansa, 'carve out' parts of their alliances that are considered areas of concentration: in these cases, they mean the price inelastic business travel market between hubs. One transportation official says that the carve-outs 'represent a tiny fraction of the value of the alliance. I think that is the price to keep things competitive; it should be worth it to the airlines.'
But this sequence of events has raised the ire of airline industry officials in Washington. One, terming the market protection scheme a benefit to passengers 'numbering in the tens and twenties,' simply terms the parameters 'bizarre.' Another says that because of the way that an immunity-protected alliance is structured, even small protected areas 'could imperil the whole thing.' Instead of streamlining four sales operations into one, 'the airlines may have to keep four going for the benefit of 20 seats,' says an official with Delta's group of carriers. 'You're talking about putting limits on an airplane in the Cincinnati-Zürich market which is there only because of [the alliance] anyway.'
In the end, the DOT does have the right to ignore DOJ's recommendations, though this seems unlikely, and airlines can petition antitrust decisions made by Justice. Alternatively, says Mark Gerchick, DOT's deputy assistant secretary who has overseen the US-Germany open skies talks, 'a review period could be considered to see if there is some lack of empirical data.' But, he adds, 'Immunity can be overestimated; it is a tool perhaps to enhance efficiencies. The fundamental development is alliance-building.'
The irony, of course, is that after all the lobbying to obtain what has been deemed an essential part of a global alliance, the end result, especially for Delta, could be compromised. But really, the potential risk is far greater. Besides Northwest facing the prospect of having its immunity of five years whittled away by the review next year, any kind of limitation placed on an alliance with immunity exemption could just as easily be enforced on an alliance that codeshares without antitrust protection.
'It's clear that the Justice Department has a problem with two carriers on a nonstop route from a point in the US to one in Europe where there is a substantial amount of O&D traffic,' says antitrust lawyer James Campbell. 'If we do enter a carve-out era, it could potentially affect all international airline alliances. Even if they don't come in for immunity, they will be subject to antitrust laws.'
Source: Airline Business
