Docket OST-96-1700 / Docket OST-97-2058 / American and British Airways / American and TACA / Answer of United / July 29, 1997
AMERICAN AIRLINES, INC. et. al. AND THE TACA GROUP RECIPROCAL CODE-SHARE SERVICES PROCEEDING
Joint Application of
AMERICAN AIRLINES, INC. and BRITISH AIRWAYS Plc
under 49 U.S.C. Sections 41308 and 41309 for approval of and antitrust immunity for alliance agreement
DATED: July 29, 1997
ANSWER OF UNITED AIR LINES, INC.
IN SUPPORT OF CONTINENTAL AIRLINES, INC. MOTION
TO REQUIRE SUPPLEMENTAL INFORMATION SUBMISSIONS
By Motion dated July 18, 1997, Continental Airlines requests the Department, among other things, to direct American Airlines to supplement the record in this proceeding by filing in the docket certain information relating to American's recently announced investment in, and alliances with, Aerolineas Argentinas, Austral Lineas Areas ("Austral") and Iberia. United Airlines supports Continental's Motion to the extent it seeks to have American file in this docket information relating to its
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agreements and proposed alliances with Aerolineas Argentinas, Austral and Iberia. /1
United agrees with Continental that American's recently announced agreements with these carriers pose additional risks to competition in U.S.-Latin America air travel markets that need to be reviewed by the Department before acting on the proposed American/TACA Combine alliance. American and the TACA Combine already dominate U.S.-Central America air travel markets. If American now adds to its proposed alliance with TACA the acquisition of a significant ownership stake in Iberia, and an
1/ United also agrees with Continental that American's announced plan to invest in Iberia and Aerolineas Argentinas, and code share with those carriers, needs to be reviewed in the context of the proposed alliance between American and British Airways, which is also looking to acquire an ownership stake in Iberia. This is especially true in view of the unique roles played by London's Heathrow Airport and Miami International Airport in the emerging network-to-network competition between alliances discussed infra at pages 10-15. Nonetheless, because the Department is further along in its review of the American/ TACA alliance, United will focus in this Answer on the reasons the Department should require American to supplement the record in the American/TACA Proceeding. United does agree with the TACA carriers, however, that additional information from those airlines is not required. See the Answer filed by the TACA Group dated July 25, 1997, to Continental's Motion. It does not follow, however, that simply because the TACA carriers themselves may not presently be parties to American's new agreements with Aerolineas Argentinas, Austral and Iberia that the Department does not need to secure full details from American about the reasons for American's pursuing additional alliances in Central and South American markets it already dominates before proceeding to act on the American/TACA alliance.
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agreement to code share with that carrier, American will gain effective control of 97% of the departures in the Miami-Central America market and 74% of the departures in the total U.S.-Central America market. See, Exhibits 1A and 1B.
American's announced plan to acquire an ownership stake in Aerolineas Argentinas, Iberia, and Austral and to enter into code-sharing alliances with these carriers is only the latest in a series of unprecedented alliance relationships American has announced over the past year with a number of its principal foreign-flag competitors in key international markets where American is already the dominant U.S. airline. In addition to its proposed alliance with the TACA Combine, American is seeking immunity from the antitrust laws to implement an alliance with British Airways, and Departmental approval for an alliance with Avianca, despite the fact that American is already one of only two U.S. carriers authorized to serve London's Heathrow Airport, and holds more authority in the entry-restricted U.S.-Colombia market than its only U.S.-flag competitor. American has already obtained approval to implement alliances with TAM for service to Brazil, where American holds more frequencies by a considerable
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margin than any of its U.S.-flag competitors, and with Aero California for service to Mexico. /2
Alliances benefit consumers where they are used to extend carriers' online service networks into markets the carriers cannot serve economically with their own equipment. They do not serve the public interest, however, where, as is true here, they are being used to eliminate substantial horizontal competition between the partners, and to foreclose other carriers from entering into more pro-competitive alliance arrangements.
In order for the Department to be able to conduct a thorough review of the competitive implications arising from American's proposed investments in, and code-sharing agreements with, Aerolineas Argentinas, Iberia and Austral being added to its proposed alliance with the TACA Combine, American should be required to file in this docket the information Continental describes in its Motion. Interested parties should then be given a reasonable opportunity to review and comment upon those submissions, and further proceedings in this docket should be suspended in the interim.
2/ American is also seeking approval to implement an alliance with LAPSA of Paraguay even though American is the only U.S. carrier serving Paraguay at the present time.
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In further support of this position, United submits the following:
1. In its Motion, Continental points out that an alliance among American, Iberia, and the carriers of the TACA Combine will entrench American in its position as the dominant carrier in U.S.-Central America air travel markets, and effectively eliminate all competition on routes between Miami and Central America. /3 As Continental also points out, an alliance among these carriers and Aerolineas Argentinas and Austral would increase American's domination of U.S.-South America markets, and give the alliance partners a virtual monopoly share of U.S.-Argentina service, one of the most restricted aviation markets in the world. See, Exhibits 2A and 2B.
American's planned investments in Aerolineas Argentinas, Austral and Iberia, like its proposed alliance with the TACA Combine, are clearly intended to preempt other U.S. carriers from entering into alliances with these carriers that
3/ Although Aero Costa Rica continues to hold out nonstop service between Miami and San Jose five days per week, that carrier is reported to be in a weakened financial position. As such, it may be virtually impossible for the carrier to remain in the market if American, LACSA, and Iberia, which operate a total of 35 weekly nonstop frequencies between Miami and San Jose, are allowed to enter into alliance relationships and code share on each others' services.
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could lead to increased competition for American in U S -Latin America air travel markets, and to reinforce American's already substantial control of the strategic Miami gateway, which is the principal connecting point for passengers traveling between North America and South and Central America. That American's intent in entering into its proposed alliance with the TACA Combine was to foreclose other carriers from doing so is confirmed by the confidential documents filed in this proceeding.
As with the proposed American/TACA alliance, the Latin America route networks of American, Aerolineas Argentinas, and Iberia essentially overlap. As a result, no meaningful consumer or competition benefits would be obtained from authorizing reciprocal code sharing over these networks. An alliance between Aerolineas Argentinas, Iberia and the TACA Combine carriers, on the one hand, and American, on the other, would, however, effectively preclude these carriers from entering into alliances with American's competitors that might jeopardize American's domination of the U.S.-Latin America market.
Unless the Department is prepared to announce immediately its disapproval of American's and the TACA carrier's joint application to establish a reciprocal code-sharing alliance, the Department should direct American to file in this
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docket the supplemental information Continental identifies in its Motion before acting on American's and the TACA carriers' application. Without a thorough review of this information, there is simply no basis on which the Department could make the public interest findings the statute and the Department's own regulations require in order for the Department to approve the American/TACA alliance. /4
2. Over the past year, American has entered into a wholly unprecedented series of alliance agreements with several of its foreign-flag competitors. /5 Unlike United and other U.S. airlines
4/ The Department has previously refused to authorize American to implement code-sharing alliances with ALM Antillean Airlines and BWIA International Airways that were centered on the Miami gateway, where the Department noted American is the "hub dominant airliner,]" until it could conduct a thorough review of the competitive impact of those alliances. Order 97-2-29 at n. 13.
5/ Previously, American was a vocal opponent of reciprocal code-sharing alliances. See egg., American's Petition for Rulemaking in docket 49620, where American argued that code sharing is an unfair and deceptive practice that threatens competition. American's reasons for opposing code-sharing alliances were entirely transparent. American lacked an alliance partner, and it had one of the largest single-carrier route networks between the U.S. and Europe, and the largest such network by far between the U.S. and Latin America, of any U.S. or foreign carrier. Because of the restrictive bilateral agreements in place with many of our major trading partners in Europe and Latin America, other U.S. carriers could not expect to develop in the near term an online network that could compete effectively with the network American already had in place. American's U.S. and foreign competitors could, however, utilize code sharing and alliances to extend their networks to compete more effectively with American and each other. It was to avoid such increased competition that American was urging the Department effectively to ban code sharing.
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which have entered into alliance relationships in order to extend the reach of their route networks into markets the carriers generally do not serve with their own equipment, American has sought out alliance partners that are among its principal competitors in key international markets where American is already the leading U.S.-flag competitor, and where competition from other carriers is limited.
American's alliance strategy is most evident in Latin America, where American already provides over 63% of the nonstop service offered by U.S. carriers. In this region, American has code-sharing alliances in place with TAM and Aero California for services to Brazil and Mexico, respectively, is currently seeking approval for code-sharing alliances with the carriers of the TACA Combine, Avianca, and LAPSA, and has now announced agreements with Aerolineas Argentinas and Austral, which include plans for code-sharing among the three carriers, as well as Iberia and British Airways .6 American has also announced an intention to
6/ American is seeking approval for alliances with Avianca and LAPSA despite the fact that entry into the U.S.-Colombia market is severely limited by the Colombian government, and the U.S. has no agreement with Paraguay on code sharing. American also sought approval to implement code-sharing alliances with ALM and BWIA, but subsequently withdrew its applications without explanation after the Department initiated an investigation into American's motives in seeking alliances in markets it already dominates. See Order 97-7-5.
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acquire an ownership interest in Aerolineas Argentinas, Austral, and Iberia, which could give American significant influence over, or even control of, these carriers' competitive decisionmaking.
Alliances and code sharing benefit consumers where they are used by carriers to extend their online service networks into new markets which the partners could not individually serve with their own equipment. In these circumstances, alliances and code sharing benefit consumers by making available increased service options and increasing competition, especially in behind and beyond gateway markets. Neither the proposed American/TACA alliance at issue in this proceeding, nor an alliance involving American, TACA, Iberia, Austral and Aerolineas Argentinas will achieve the kind of pro-competitive market extension opportunities that can benefit consumers.
On the contrary, as the record in this proceeding already makes clear, a code-sharing alliance among American, the TACA Combine, Iberia, Austral and Aerolineas Argentinas will
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substantially reduce competition in numerous U.S.-Latin America air travel markets. This is true not only because such an alliance would foreclose viable new entry and expansion in these markets by American's U.S.-flag competitors through code-sharing with these carriers, but because of the substantial number of overlapping routes on which American and its foreign carrier partners are direct competitors, and the high degree of concentration that already exists in these markets. See, Exhibit 3. The harm to consumers from these reductions in competition far outweighs any service or competitive benefits that would result from such code sharing.
It is the large number of overlapping routes on which American and its partners are direct, horizontal competitors, the high degree of concentration on these routes, and the virtual absence of other direct and indirect competitors that makes American's proposed alliances so unprecedented and so anticompetitive. By comparison, when the Department approved United's alliance with Lufthansa and SAS, United and SAS were not direct competitors on any U.S.-Scandinavia nonstop routes (nor are they now), and United and Lufthansa were direct competitors on only two such routes. On both these routes, United and Lufthansa faced direct competition from other U.S. carriers, and bountiful indirect competition from the extensive U.S.-Germany
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services operated by numerous U.S. and foreign carriers Indeed, Germany is served by every major U.S. carrier from one or more of its domestic hubs, and all of the principal European carriers from their homeland hubs, ensuring substantial network-to-network competition for the United/Lufthansa alliance.
Similarly, in the case of United's code-share agreement with Thai, which the Department has approved, neither carrier serves Bangkok nonstop from the United States. As a result, the code-shared U.S.-Thailand services United and Thai provide face substantial direct competition from the extensive on-line connecting services offered between Thailand and the U.S. by all of the Asian carriers that serve the U.S., as well as Northwest.
In the U.S.-Canada market, where United and Air Canada are still waiting for the Department to grant them antitrust immunity, United/Air Canada face substantial direct competition from the American/Canadian alliance, which has enjoyed immunity from the antitrust laws for more than a year, and from other U.S. carriers in virtually all of the small number of transborder city-pair routes where they operate overlapping service. Moreover, the U.S.-Canada market has been found by the Department to be sui generis, supporting more competitive service by more
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carriers than any other international market See, e.g., Order 97-6-30 at 13-14.
The net result is that, unlike the alliances proposed by American, United and its partners in the Star Alliance face significant direct and indirect competition in the small number of U.S. international markets where the alliance partners operate overlapping nonstop service. As a consequence, United has been able to use these alliances to extend the reach of its online network into European, Canadian and Southeast Asian markets United could not economically serve with its own equipment without any risk of a substantial lessening of competition on the small number of city-pair routes where it and its alliance partners operate overlapping nonstop service.
By comparison, a code-sharing alliance between American and the TACA carriers would not produce comparable benefits for consumers, and would inevitably lead to a substantial reduction in competition between the TACA carriers and American. See e.g., Answer of United Air Lines, Inc. dated June 2, 1997, in this docket at 3-6 and 15-17. Adding Iberia, Aerolineas Argentinas, and Austral to the alliance would not change this conclusion. On the contrary, adding these carriers to an American/TACA alliance would serve only to make the alliance even more anti-competitive.
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American and the TACA Combine already control 66% of the nonstop service available between the U.S. and Central America, and Iberia controls another eight percent. Exhibit 1A. Combined, therefore, American, TACA and Iberia control 74% of all nonstop service offered between the U.S. and Central America, and 97% of the service available from the key Miami gateway. Id.
3. American's increasing domination of the strategic Miami gateway is, in itself, a serious threat to competition in all U.S.-Latin America air travel markets. Because of its unique geographic location, the Miami gateway is used by 54% of all U.S.-Central America air travelers and 70% of U.S.-South America air travelers. While United is not opposed to American's pursuing all of the legitimate benefits attendant to its hubbing operations at Miami, American should not be allowed to increase or maintain its established dominant position at Miami through acquisitions and anti-competitive alliances with its principal competitors, or to engage in other activities that raise the costs of its actual or potential competitors in U.S.-Latin America markets.
Over the last several years, competition in international markets has evolved from competition among airlines over point-to-point routes to competition centered upon airline
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networks The linchpin of competition in this new era is the size and strength of a carrier's hubs and its ability to utilize alliance relationships to extend its on-line network into additional markets. In the competitive struggle between alliances, the size and strength of the partners' hubs plays a critical role. This, in turn, is a function of three elements: (1) the size of the local market, which determines the origin and destination demand for service to and from the hub -- the higher the level of such demand, the greater the level of service a carrier can schedule to and from the hub; (2) the hub's geographic location, which determines a carrier's ability to schedule attractive, cost efficient services for connecting passengers; and (3) the infrastructure in place at the hub, which determines the volume of service a carrier can offer and its ability to utilize the hub efficiently. In the global marketplace, the most important hubs are those that combine these three elements to the maximum extent possible in order to attract major flows of international passengers.
Miami International Airport has achieved a dominant position for passengers traveling between North America and Central and South America. Local demand to and from Miami and points in Latin America is significantly higher than in other Latin America city-pair markets, in great part because of the
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large Spanish-speaking community in South Florida and the unique cultural and business ties this community maintains with all of Central and South America. The result is that American's dominance at Miami is far more entrenched than the position of carriers at other hubs, which are more dependent upon flow traffic.
Furthermore, Miami's geographic location is unique. /7 It is a natural gateway point for traffic moving throughout most of North America to South America. For example, it lies almost directly on the great circle routing between Los Angeles and Sao Paulo, Brazil, and is also ideally located to serve as a gateway for traffic moving between all of the major population centers in the Eastern half of North America and any destination in South or Central America. For these reasons, it is much less likely that service via other gateways will provide significant competition for passengers that have online service available via Miami. It is essential, therefore, that other carriers are assured a level
7/ Just as Miami serves as the predominant gateway for U.S.-Latin America traffic flows, London's Heathrow Airport serves as a strategically critical gateway for U.S.-Europe traffic flows due to its unique geographic location and strong local demand to North America. And just as American is seeking to dominate the Miami gateway to insulate itself from competition in U.S.-Latin America markets, the alliance American has proposed with British Airways is designed to dominate Heathrow and thereby insulate American/BA from effective competition on U.S.-U.K. and Europe routes.
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playing field on which to compete with American. Such a level playing field will not exist, however, if American is allowed to acquire substantial ownership stakes in major competitors at Miami, and to enter into anti-competitive alliances with its principal foreign-flag competitors in key Miami markets.
In terms of infra-structure, Miami International Airport is undergoing a major capital improvement program centered on the construction of a new state-of-the-art hubbing terminal for American that is currently forecast to cost, along with related projects, approximately $1.6 billion. This four-story high, mile long facility is intended to be used exclusively by American. Despite this fact, American has induced the local airport authority to finance the construction of the facility by utilizing a cost allocation methodology that requires American's competitors at Miami to subsidize the cost of constructing and operating the facility and directly-related projects. By requiring other carriers to share in the costs Dade County will incur to construct American's hub, American avoids having to pay the full cost of obtaining its new state-of-the-art terminal. By shifting these costs to its competitors, American effectively raises its competitors' cost of doing business. This is a classic form of anti-competitive conduct referred to in economic literature as raising rivals' costs and is well recognized as
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having adverse competitive consequences. See, e.g., Hovenkamp, Antitrust Policy After Chicago," 84 Mich. L. Rev. 213 (1985). /8
Because of Miami's unique role as the pre-eminent gateway for intercontinental travel between North America and Central and South America, if American can successfully insulate its competitive position at Miami from challenge, it will be positioned to dominate U.S.-Latin America air travel markets indefinitely. No carrier can hope to match the online network American already has in place at Miami. Through code sharing, however, United and other carriers have available a cost-efficient means to extend their route networks into Central and South American markets, and thereby to initiate broader intra-hub competition to American at Miami and more extensive network-to-network competition throughout Latin American.
The record in this proceeding already confirms that it is to forestall such competition and to retain its dominant
8/ Once American opens its new terminal at Miami, it expects to publish shorter elapsed times for its U.S.-Latin America flights that operate via Miami in all domestic CRS systems, giving American an unearned competitive advantage in holding out service between points in North American and points in Central and South America -- all at the financial expense of its disadvantaged U.S.-Latin America competitors. See the Recommended Decision of Judge Yoder in docket OST-96-1965 at n. 96.
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position in the market that American is seeking an exclusive code-sharing alliance with the TACA Combine. See e.g., United's June 26, 1997, Answer in this docket at 4-6. United is confident that if the Department directs American to file in this docket the material Continental requests, the resulting record will confirm that American's planned investments in, and alliances with, Aerolineas Argentinas, Austral and Iberia are motivated by exactly the same anti-competitive desire to foreclose these carriers from entering into alliances with American's competitors.
* * * * *
The anti-competitive consequences that would result from allowing American to enter into code-sharing alliances with any or all of these carriers clearly overwhelm any consumer benefits that the parties may claim. The Department should either disapprove the American/TACA alliance without further procedures, or it should require American to supplement the record in this proceeding as requested by Continental. Without such supplemental information, the Department could not assess
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fully the impact of all of American's planned alliances on U.S. Latin America competition, and determine whether approval of any of those alliances would be consistent with the public interest.
Respectfully submitted,
JOEL STEPHEN BURTON
GINSBURG, FELDMAN & BRESS CHARTERED
1250 Connecticut Avenue, N.W.
Suite 300
Washington, D.C. 20036
(202) 637-9130
Counsel for UNITED AIR LINES, INC.
DATED: July 29, 1997