filing

Docket # OST-2001-10387

U.S. Department of Transportation

PL-401 - Nassif Building

400 Seventh Street, SW

Washington, DC 20590-0001

November 2, 2001

The Business Travel Coalition (BTC) supports the application of American Airlines (AA) and British Airways (BA) before the U.S. Department of Transportation (DOT) for antitrust immunity for their proposed alliance.  BTC also supports the antitrust immunity application of United Airlines and bmi british midland (OST-2001-10575).

I.  POSITION SUMMARY

Specifically, BTC supports the AA-BA application for 3 reasons:

1--A nearly ten-year-old evolution from competition between international airlines to competition among global, networked alliances is almost complete.  An immunized American and British Airways alliance would create via the oneworld alliance a fourth competitive global alliance as an alternative for corporate buyers of air transportation services, and considerably strengthen network competition.

2--An immunized AA-BA alliance is the lever DOT requires to achieve an Open Skies agreement between the United States and the United Kingdom.  There is a finite and fast disappearing opportunity to liberalize this huge aviation market and drive billions of dollars in benefits to U.S. and UK consumers through increased competition and lower airfares.

3--A U.S.-UK Open Skies agreement would likely be a catalyst for acceleration of efforts to create a fully liberalized trade zone for air transport between the European Union (EU) and the U.S., which if successful, could serve as a template for global air trade agreements. 

II.  COMPETITION

The current U.S.-UK bilateral agreement, known as Bermuda II, restricts access to Heathrow to just 12 U.S. cities served by 2 U.S. and 2 UK carriers.  Some airline opponents of AA-BA immunity make the argument that AA and BA together have an excessive 60% of U.S.-to-Heathrow frequencies.  If one does the math, one would at least expect that 2 carriers at 25% each would be 50% of the marketplace.

That AA and BA control only 60% is arguably surprising given the market-closing nature and intent of Bermuda II.  In 1977, the UK successfully negotiated access to Heathrow for U.S. cities that were essentially non-hubs for U.S. carriers in an endeavor to protect BA from competition.  Nevertheless, United Airlines and Virgin Atlantic were able to grow their frequency between the U.S. and London Heathrow by 64% and 68% respectively, in just the past several years alone.   

The larger point, however, is that with Open Skies, 4 new U.S. airlines plus bmi british midland--with its 14% slot holdings at Heathrow--would implement U.S.-to-Heathrow services.  Moreover, bmi british midland and its Star alliance partners will hold 27% of Heathrow slots and have announced their intent to build and invest over $70 million in a Heathrow hub, which would make London Heathrow the only two-hub airport in Europe.  AA’s and BA’s combined market shares can only decrease as these new entrants reshape the competitive landscape in a battle for the high yield business traveler.

In response to ownership restrictions in bilateral aviation agreements--that prevent mergers and acquisitions in international air transport--global alliances were born in the early 1990’s as a proxy for true consolidation.  Northwest and KLM (Wings) received antitrust immunity in 1993 and United, Lufthansa and SAS (Star) received it in 1997.  Delta Air Lines and Air France (SkyTeam) are all but certain to receive antitrust immunity soon as a result of U.S.-France Open Skies.

With a decade-long transition from city-pair and airline-to-airline competition to competition among globally networked alliances nearly complete, only oneworld remains without an immunized transatlantic alliance at its core, and consequently is relatively non-competitive.  This is resulting in artificially higher business airfares as corporate buyers of global air transportation services on both sides of the Atlantic have fewer alliance choices than is desirable or possible. 

It is a well-voiced concern, for example, among UK and U.S. corporate travel and purchasing managers that, in terms of negotiating a truly global air services agreement, there is no close second choice to the Star alliance with its 15 members and global network reach.  Unfortunately, this reduces a buyer’s leverage at the negotiating table with airlines.

Indeed, the marketplace acceptance of the Wings and Star alliances has led to an ascendancy of Schiphol and Frankfurt airports vis-à-vis Heathrow, and a concomitant 23% decline in combined Europe-to-U.S. market share for AA and BA, since 1996.  Likewise, AA’s and BA’s share of the UK-to-U.S. market eroded 20% in the same period to a 40% share. 

In reality, an immunized AA-BA represents a partnership between the number 1 and 4 carriers, in the Heathrow-to-U.S. market.  Today, United Airlines carries 42% more passengers to London Heathrow than does American, while Virgin Atlantic carries 26% more than does American.  AA has slipped from the number 2 position to the number 4 position in terms of U.S.-U.K. passenger market share in recent years.

Whether or not and to what extent an AA-BA immunized alliance would require some measure of regulatory remedy in overlapping markets, or at Heathrow, is beyond BTC’s expertise. 

However, BTC is convinced that:

1—the linking up of AA’s and BA’s two networks would provide many benefits for customers of the air transportation system;

2--the scope and breadth of the Star alliance have grown significantly--and would continue to grow with an immunized bmi british midland arrangement--such that customers need a competitive counterbalance in the form of a fourth, truly competitive global alliance; and

3--an immunized AA-BA would be the key enabling factor to reach Open Skies with the UK.

III.  U.S.-UK OPEN SKIES

DOT’s strategy to “surround Heathrow” with Open Skies agreements with other countries has worked brilliantly.  DOT was right in the late 1990s not to have caved into the UK government’s version of “my-way-or-the-highway” Open Skies.  Instead of acquiescing to another infamous win-lose Bermuda II-type of aviation agreement, the U.S. held fast in the belief that the UK would come under increasing pressure to negotiate an equitable Open Skies agreement as Heathrow lost its dominant market position to other European gateways.

The erosion of Heathrow’s preeminence is exactly what has transpired.  Because of DOT’s strong leadership, the U.S. is on the cusp a historic Open Skies agreement with its most important commercial and political ally, the UK.  Moreover, U.S. businesses and consumers are closer than ever to having 4 networked global alliances in an all out competition for their business and loyalty.

Adding to the probability, and indeed the urgency, of a successfully negotiated Open Skies agreement is a pending EU court ruling with respect to the European Commission’s (EC) position that it alone possesses jurisdiction to negotiate an aviation agreement with the U.S. on behalf of all EU members.

If as is expected, the EU court rules in favor of the EC position, all previously existing Open Skies agreements would be grandfathered.  Those countries without such agreements in place would have to wait for the EC to: 1) gather facts for the development of a negotiating strategy, 2) consult with European airlines, 3) build consensus among EU members for a negotiating position, and 4) enter into and conclude negotiations with the U.S.  In short, if an Open Skies agreement with the UK is not concluded in the next few months, it would likely be 5 to 7 years before Heathrow is opened up to new competition from U.S. airlines.

The benefits of a U.S.-UK Open Skies agreement are many.  In addition to securing a fourth competitively viable global alliance--oneworld--some 5 new competitors would have the opportunity to launch services in the U.S.-UK market.  This would bring countless new non-stop and one-stop air service alternatives to Heathrow to communities across the country.

U.S. communities of all sizes would have new links to important business centers in Europe, and around the world.  Moreover, new levels of price competition, because of Open Skies, would deliver billions of dollars of savings to U.S. consumers.  DOT studies have shown that in markets with Open Skies agreements, average airfares have fallen 20% as compared with 10% in markets where no such agreements exist.

Unfortunately, some airline competitors are perhaps unwittingly placing consumer welfare at risk.  The September 5th Financial Times reported that, “In a motion filed by Continental and supported by Delta, the airlines said they both would need at least 140 weekly landing and takeoff slots at Heathrow to ensure transatlantic competition with BA-American, and insisted that more than 600 weekly slots would be needed to accommodate all potential competitors.”

Together AA and BA possess 582 weekly U.S. to Heathrow slots!  Demanding the divestiture of 600 slots is dangerous posturing.  BTC understands that Delta, Continental and Northwest desire to avail themselves of some free slots at Heathrow--worth millions of dollars each--that may become available by way of government-required remedies. 

However, through their demands, these carriers are placing at significant risk the achievement of both a competitive fourth alliance and a U.S.-UK Open Skies agreement as well as billions of dollars of U.S. consumer benefit that would be derived from lower airfares.  If such competitor demands frustrate negotiations between the U.S. and UK, and if the EU court rules in support of the EC’s negotiating jurisdiction, the curtain will have been lowered on new U.S. airline access to Heathrow for years to come.

IV.  EU – U.S. LIBERALIZED TRADE ZONE

Airlines’ corporate customers are paying higher business airfares than necessary due to some 3,500 restrictive, costly bilateral air trade agreements.  The customer has a keen self-interest in encouraging progress toward a global open trade model wherein costs are taken out of the system for airlines and entry barriers are reduced for start up airlines.

If the U.S. and the UK can conclude an Open Skies agreement, then many experts believe that momentum behind a more comprehensive EU-U.S. free trade zone for air transport would build.  Foreign ownership, cabatoge and other issues important to the UK, the U.S. and other countries will not have been addressed by a U.S.-UK Open Skies agreement.  It would make abundant sense to handle these more complex and contentious issues in the context of EU-U.S. negotiations.

A liberalized air trade arrangement between the U.S. and the EU could provide a template and be a linchpin for liberalized air trade agreements around the globe.  BTC strongly favors such a liberalized trade regime for the commercial air transportation sector.