OST-98-3341 / Northwest/KLM Antitrust / Response of American / March 11, 1998

 

In the matter of:

NORTHWEST/KIM ANTITRUST IMMUNITY OST-98-3341

under 49 USC 41308 and 41309

 

MOTION FOR LEAVE TO FILE AND RESPONSE OF

AMERICAN AIRLINES, INC.

 

American Airlines, Inc. hereby moves for leave to file the following response to the motions and answers submitted by Continental Airlines, Inc. and Northwest Airlines, Inc. on March 3, 1998. In their answers, Continental and Northwest take issue with American's request of February 20, 1998 in this docket that, in light of the announced strategic global alliance between Continental and Northwest, the Department should conduct a comprehensive review of the antitrust immunity held by Northwest and KLM Royal Dutch Airlines.

American's response should be accepted in the interest of a complete record for the Department's consideration of this important matter. In support hereof, American respectfully states as follows.

 

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Continental attempts to minimize its relationship with Northwest as a mere "announcement [ ] of [a] future codeshare alliance[ ]" (p. 1). That is an utter mischaracterization of the Northwest/Continental transaction. As shown by Northwest's press release of January 26, 1998, Northwest has acquired "approximately 51 percent of [Continental's] outstanding common stock voting power." /1 Northwest said that its "strategic global alliance" with Continental "will connect the two carriers' networks and will include code-sharing, frequent flyer program reciprocity, cooperation between Continental and KLM Royal Dutch Airlines, Northwest's transatlantic partner, and other cooperative activities."

In an interview published in Business Travel News on February 24, 1998 (Attachment 1), Continental's CEO, Gordon Bethune, called the transaction a "virtual merger," and said

1/ In its answer, Northwest brashly states that "American's assertion that Northwest intends to gain 'control' over Continental is false" (p. 1 n. 2). However, as TWA has documented in its answer of March 5, 1998 in the U.S.-Japan Combination Service Proceeding (OST-98-3419), "Northwest did enter a Governance Agreement with Continental, effective only for six years, under which Northwest agreed to vote its 51.8% control of Continental as recommended by Continental's Board, except when the airline is facing 'significant actions.' These include acquiring or being acquired by another carrier, selling assets, declaring a dividend or issuing significant debt. Northwest thus achieved its goal of absolute control over major corporate actions of Continental. Northwest will also have representation on Continental's Board and, after the six years, will have the unfettered right to exercise its voting control. Under these circumstances it is unlikely that Continental will ever act independently of Northwest" (pp. 4-5).

 

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that Continental is now a "joined-at-the-hip partner with Northwest" (emphasis added). He went so far as to warn competitors that "[p]eople will start looking at us a little differently...you better watch out because if we do get upset...[w]e have a lot of different ways that we can pay you back." This hardly falls into the category of a simple announcement of a future code-share alliance; as Continental's CEO sees it, Northwest and Continental have virtually merged.

Northwest's top executives clearly contemplate integration of Continental into the Northwest/KLM alliance. Northwest's president and CEO, John Dasburg, stated in a Business Travel News interview on February 24, 1998 that "Northwest and KLM have to work more closely with Continental before talking to additional partners, but clearly we see the formation of a global network with Continental, Northwest, and KLM at its heart" (Attachment 1). Similarly, Northwest's chairman of the board, Gary Wilson, stated in a speech before the National Press Club on March 6, 1998 that "the combination of Northwest, Continental, KLM and Alitalia will create one of the world's premier global airline networks."

In these circumstances, Continental's reliance on the Department's American/TACA Group orders is completely misplaced, and we are surprised that Continental would so blatantly misinterpret those orders to support its untenable position.

 

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By Notice dated August 22, 1997 in OST-97-1700, the Department determined that the American-Iberia and American-Aerolineas Argentinas and Austral proposed codeshare arrangements "involve matters relevant to our assessment of the competitive implications that we have been addressing in this case" (p. 3), and ordered American and the TACA Group to provide, within three business days,

"(1) a detailed explanation of the content, scope, objectives, and timing of these proposed cooperative arrangements and how the participants will be integrated; (2) complete information concerning investment by American in Aerolineas Argentinas, Austral, and Iberia; (3) complete information (including copies of commercial arrangements, particularly on its relationship to the proposed American/TACA Group alliance, in terms of corporate strategy, marketing, yield and capacity management, and pricing; and (4) complete information on the extent to which these cooperative arrangements would affect operations between the U.S. and Central America by American and the TACA Group with respect to passengers with an origin or destination in third countries" (p. 3).

In fact, in issuing this Notice, the Department was ruling favorably on a motion submitted by Continental to require supplemental information from American and the TACA Group. /2 Similarly, in Order 97-12-35, December 31, 1997, the

2/ As the Notice recites, "Continental...filed a motion to require supplemental information submission. Continental states that American has announced that it is investing in and entering into an alliance with Aerolineas Argentinas and Austral, and that it and its proposed alliance partner, British Airways...have entered into alliances with Iberia.... Continental maintains that American's acquisition of an interest in these foreign carriers is related directly and relevant to the Department's public interest concerns and must be considered in addressing the competitive issues in this case" (p. 2).

 

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Department ordered American and the TACA Group to provide detailed and complete information on the proposed American/Lan Chile alliance, an outcome that was also strenuously urged by Continental. /3 In response, American provided thousands of pages of information and documents, despite the fact that there were no plans for integration of any of these other transactions into the American/TACA Group arrangement.

Notwithstanding these precedents, Continental and Northwest still contend that they should not be required to provide any information unless and until they reach an agreement with KLM for a codeshare alliance and seek antitrust immunity for it (Continental, p. 3; Northwest, p. 2). But that is not at all how the Department dealt with American and the TACA Group; as shown above, the applicants were ordered to make a detailed and complete submission with respect to other transactions, even though those transactions were totally unrelated, and the applicants had no plans for integrating them. Here, in sharp contrast, Northwest has referred in its press release to "cooperation between Continental and KLM," and top Northwest and Continental executives, in public statements,

3/ See Answer of Continental to motion of United, September 22, 1997 (OST-96-1700).

 

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plainly contemplate a near-term alliance of Northwest, Continental, KLM, and other European airlines.

In light of the clear precedents in the American/TACA Group proceeding, the broad scope of the Northwest/Continental transaction (which includes Northwest's purchase of a controlling interest in Continental's outstanding common stock voting power), and the parties' stated intent that Continental will become part of the Northwest/KLM alliance, there is no question that the Department, and interested persons, are entitled to complete details of these matters.

 

The Department should conduct a comprehensive review of whether the antitrust immunity granted to Northwest and KLM should continue beyond five years, as American requested in its initial petition of January 20, 1998. As part of that review, Northwest, KLM, and Continental should be required to respond in full to the request for information and documents set forth in American's amended petition and reply of February 20, 1998 in this docket.

 

Respectfully submitted,

CARL B. NELSON, JR.

Associate General Counsel

American Airlines, Inc.

March 11, 1998