Before the DEPARTMENT OF TRANSPORTATION , D.C.

______Joint Application of

DELTA AIR LINES, INC. and AEROVIAS DE , S.A. DE C.V. DOT-OST-2015-0070

Under 49 U.S.C. §§ 41308 and 41309 for Approval of and Antitrust Immunity for Alliance Agreements ______

COMMENTS OF TRAVELERS UNITED, INC. ​ IN RESPONSE TO DELTA-AEROMEXICO ANTITRUST IMMUNITY (ATI) PROCEEDING

Charles Leocha President and Founder Travelers United PO Box 9934 Arlington, VA 22219 Tel: 202-713-9596 Email: [email protected]

June 30, 2016

1 Before the DEPARTMENT OF TRANSPORTATION Washington, D.C. ______Joint Application of

DELTA AIR LINES, INC. and AEROVIAS DE MEXICO, S.A. DE C.V. DOT-OST-2015-0070

Under 49 U.S.C. §§ 41308 and 41309 for Approval of and Antitrust Immunity for Alliance Agreements ______

COMMENTS OF TRAVELERS UNITED, INC. ​ IN RESPONSE TO DELTA-AEROMEXICO ANTITRUST IMMUNITY (ATI) PROCEEDING

Travelers United, Inc., submits these comments in response to the Delta-AeroMexico Request for Antitrust Immunity (ATI). Given the current consolidation of the marketplace and the alliance agreements already in place, no additional ATI should be granted.

Simply stated, granting ATI to Delta/AeroMexico is not in the public interest. At best, the proposal provides no benefit to American consumers overall and almost certainly will result in higher fares for the traveling public. In fact, its approval would significantly undercut the consumer benefits that are readily achievable if the US and Mexico would simply implement the new bilateral aviation that was recently negotiated and ratified by the Mexican Senate.

Importantly, this request for ATI between Delta and AeroMexico, which will result in the coordinated control of 50 percent of the Airport slots, is anticompetitive and anti-consumer. This market needs more competition, not less.

Any ATI request by nature is anticompetitive and so the Department of Transportation (DOT), in protecting and promoting the public interest, must thoroughly scrutinize this proposal and require Delta and AeroMexico to meet a very high burden in demonstrating their claims of consumer benefits. After careful review of this latest ATI proposal, Travelers United has concluded that the Delta/AeroMexico ATI request should be rejected.

Consumers are already facing less and less competition and higher and higher airfares because of the creation of international airline alliances. And, in the case of Mexico, there is even less

Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 2 competition, no Open Skies agreement, and a labyrinthian, opaque system of slot controls that is stopping the development of a competitive marketplace in its tracks.

The mission of the Department of Transportation (DOT) is to protect the American consumers by promoting and enabling robust competition between . To achieve this competition, DOT, together with DOJ, must ensure the aviation free market is functioning by maintaining the groundwork and framework for competition.

Travelers United notes that the competition landscape has changed dramatically in the aviation marketplace because of consolidation within the domestic market through DOJ-approved mergers, and the formation of three giant joint ventures that are all-but-in-name mergers, blessed by DOT with antitrust immunity in the international aviation arena.

This concentration of power has turned what was once seen as pro-consumer and robust competition into a system that shuts out consumer choice, thwarts the free market, stymies competition, and that is “adverse to the public interest.”

Dramatic action, “in the interest of the public,” is needed in the aviation marketplace to bring back competition, allow it to grow in the future, and control the unintended anti-consumer forces unleashed by DOJ approval of airline mergers and DOT encouragement of airline alliances, metal neutrality and joint ventures.

Moreover, since the creating of the airline alliances and granting of ATI by DOT, competition in international routes has been decimated. Plus, recent actions by airlines are eviscerating the original rationale for approval of ATI grants and the creation of airline alliances.

Consolidation, airline alliances and ATI have moved the aviation world to a competition inflection point

After a series of smaller mergers prior to 2008, the aviation world has seen a series of megamergers that had changed the competitive landscape in the aviation marketplace. In the period of 2008-2010 Delta Air Lines merged with . In 2010-2012 merged with . And, in 2013 the merger of with US Airways was approved and is ongoing. Together with these three giant mergers, took over AirTran Airways and has merged with MIdwest and . Plus, a few months ago, Airlines and Virgin America proposed the latest airline merger.

Four airlines now control about 80 percent of the domestic aviation marketplace and three alliances control more than 70 percent of the international aviation market. Arguments about whether or not these airlines provide enough competition to each other have raged in the stakeholder world. However, the deed has been done. From this point, the government has a

Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 3 duty to carefully manage the behemoths that it has allowed to be created in terms of its antitrust responsibilities.

The work of protecting the interests of the public from damages of industry consolidation falls with two agencies when it comes to international aviation.

The responsibilities of the government, when it comes to antitrust protection in the international routes, lie with the Department of Transportation (DOT) and the Department of Justice (DOJ). In the past, These organizations have worked independently of each other. That kind of siloed responsibility is no longer in the public interest. The demands of consolidation require the entities to carefully coordinate their efforts.

● The DOJ is responsible for antitrust enforcement at the corporate level. ● The DOT has carved out an antitrust responsibility for airline alliances (a relatively new phenomenon) and permitting code-sharing among domestic and international airlines.

Today, each of these organizations fills a specific niche in our country’s antitrust enforcement. architecture. The actions of DOT in granting antitrust immunity (ATI) for international alliances can work against the interests of America’s flying public. Plus, DOT permission for code sharing allows airlines to maintain control of airport slots by allowing code-share partners to utilize their slots thereby allowing them to maintain control of restricted airports.

This is happening today at Mexico City Airport (MEX). A dysfunctional marketplace for takeoff and landing slots married to this request for the granting of ATI from DOT will created a totally non competitive and opaque market for the USA to MEX aviation marketplace.

The enforcement powers of the government must be coordinated and focused on the public good. Previous regulatory actions such as code sharing, airline alliances, and antitrust immunity, approved in the interest of consumers, are now being used to harm consumers, constrict international competition and thwart comparison shopping.

Airline alliances — antitrust Immunity (ATI) and international code sharing

When we discuss international airlines, the antitrust issues balloon. In this area DOT has usurped what one might expect to be a DOJ jurisdiction — the granting of antitrust immunity to airlines within alliances.

DOT and DOJ are working with two different standards when it comes to antitrust enforcement. The friction between the two departments is palpable.1

1 http://www.law.du.edu/documents/transportation-law-journal/past-issues/v37-03/Horan-Double-Marginalizati on.pdf page 253 ​ Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 4 The dispute over evidentiary standards surfaced in late 2009 when the Antitrust Division ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ of the U.S. Department of Justice (DOJ) objected to the DOT having rubber-stamped the ​ ​ ​ ​ ​ ​ ​ ​ StarAlliance Continental applicants' unsubstantiated benefit claims. The DOT ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ emphatically rejected the DOJ's objections as an inappropriate interference with the ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ DOT's aviation policy and bilateral negotiation prerogatives, a position that was more ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ fully articulated in a recent Dean and Shane Air and Space Lawyer commentary, which ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ claimed that all recent DOT decisions were fully consistent with longstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ pro-consumer, pro-competitive policies, and attacked the DOJ and Congressional critics ​ ​ ​ ​ ​ ​ ​ of the DOT's antitrust approach as hostile to the interests of the US airline industry. This ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ paper argues that the policies favoring extreme concentration and the effort to render the ​ ​ ​ ​ ​ ​ ​ ​ public benefits and Clayton Act tests meaningless reflect a major policy shift towards ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ more active governmental management of airline industry structure, and represent a ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ counter-revolution against the liberal airline competition policies of the 1990s. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

The initial granting of these antitrust immunities and code sharing back in the early 1990s was established together with the advent of the Open Skies Treaties. The initial agreements and ATI were instituted between KLM and Northwest Airlines, two relatively small carriers.

This structure has grown dramatically over the past 25 years to where, for the most part, US legacy carriers no longer operate transatlantic flights, nor do immunized foreign carriers. Though their planes soar across the Atlantic, they are flying under a different corporate structure of metal-neutral, joint ventures mutually managed by the US airlines and their foreign alliance partners.

Three giant airline alliances control something like 80 percent of the transatlantic aviation traffic and a like amount of the transpacific traffic. Here are the airline members as disclosed on the alliance websites on September 7, 2015.

Oneworld includes (not all members have antitrust immunity, however all code share):

American Airlines LAN

British Airways TAM SriLankan Airlines

Cathay Pacific Mexicana

Finnair

Iberia

Japan Airlines

Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 5 SkyTeam, anchored by Delta and AirFrance/KLM has an alliance with the following (Again not all of these airlines enjoy antitrust immunity, however all code share.):

Aeroflot Eastern

Aerolíneas Argentinas China Southern

Aeromexico

Air Europa Delta Air Lines TAROM

Alitalia

China Airlines XiamenAir

Star Alliance members include (not all members have antitrust immunity, however all code share):

Adria Airways JP

Aegean Airlines A3 Avianca in Brazil

Air Canada AC ZH

Air China CA Airlines SQ

Air India SA

Air New Zealand EGYPTAIR SWISS LX

ANA TAP Portugal TP

Asiana Airlines EVA Air THAI TG

Austrian LOT Polish Airlines TK

Lufthansa United UA

Travelers United doesn’t list these airlines like this only to inform, but show how far out of line the airlines have taken the original idea of limited alliances, code sharing and ATI.

Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 6 These alliances started out as an association of airlines, casually referred to as a “poor man’s merger.”2

ATI and metal neutral operations greatly change the shape of alliance membership relations – especially for the elite few. If the global alliances remained simple marketing extensions, complemented by bilateral airline arrangements, they would not have the power – or the value – they have today. As it is, they may be poised to grow exponentially, as the grant of antitrust immunity for metal neutral operations allows immunized member airlines to share information, pricing, capacity and frequency, as well ​ ​ as route strategies.

These enhancements raise the advantage of immunized joint ventures to something very close to merger in the markets where they apply or, perhaps even better in some ways, allowing the partners to avoid the complexity that goes along with full integration.

Worse, these empowered airline alliances are a creation, not of avaricious and monopolistic airline executives, but of misguided bureaucrats at DOT working at odds with the DOJ.3

Metal neutrality is described by the DOT (which has the authority to issue immunity and regulate alliances) as a JV [Joint Venture] in which the airlines “become effectively indifferent to which plane or ‘metal’ carries a passenger ... this form of cooperation is a close substitute to a merger because it typically involves full coordination of the major airline functions on the affected routes, including scheduling, pricing, revenue management, marketing and sales”.

This situation may appear odd: the US authorities normally set out to make companies compete not collude, and regularly punish erring executives with gaol time. The logic is linked into the evolution of Antitrust Immunity (ATI) through which the US authorities allow airlines in a joint venture (JV) to discuss and set fares, schedules, etc. ATI has been used as an incentive to advancing the policy aim of greater international liberalization, first awarded in 1993 to KLM and Northwest following the first Open Skies agreement between the Netherlands and the US. KLM and Northwest, with their dual hub system, achieved metal neutrality but other immunized alliances like that between and United did not initially take their cooperation that far. ATI was granted back in 1996.

Former KLM General Counsel and the world’s leading expert on metal neutrality Paul Mifsud explained in the November 2010 edition of the Airneth newsletter how the DOT’s position has crystallised into almost obligatory metal neutral conditions following an initial

2 http://centreforaviation.com/analysis/global-airline-alliances-transformed-by-antitrust-immunity-but-confronte d-by-uncertainty--part-1-54369 3 ibid. Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 7 disapproval for ATI for all four main carriers linked by the 2005 merger of and KLM; in approving the re–submitted plan, the DOT stated:

“…the Joint Applicants now supply a detailed joint venture agreement that integrates international operations to such an extent as to suggest metal neutrality and seamless travel across one joint network. The proposed alliance is likely to result in the introduction of new capacity and greater availability of discount fares across the entire joint network – benefits that we tentatively find to be substantial in the circumstances of this case. Building on the highly integrated common bottom line arrangement in the Northwest/ KLM alliance, the four–way JV represents a significant shift in the way in which SkyTeam plans to deliver benefits to the travelling and shipping public.”

Since that case, it appears that a metal neutral joint venture has become a DOT requirement for a grant of ATI. The DOT has conditioned subsequent ATI approvals with the specific requirement that the major participants enter into a metal neutral joint venture within 18 months of approval.

The rationale for this ATI was the belief that these grants would ultimately work in the consumer’s benefit.4

One of the key criteria for the DOT is that the immunized JVs should bring public benefits.

These can include greater route choice, better scheduling, sharing of FFPs and – in particular – a reduction in fares, which is surprising. In anticipating fare reductions the DoT has relied heavily on the work of Jan Brueckner, an academic who has analysed the impact of alliances on interline fares, using the theory of double marginalisation. Basically this states that the more integrated an alliance, the less incentive the participating airlines will have to maximize fares on their legs of a connecting flight, hence the integrated fare will fall.

In his latest analysis (October 2010) Brueckner estimated that the impact of a codeshare on a transatlantic interline fare is to reduce it on average by 3.9%, an alliance agreement reduces the fare by a further 7.6% and a fully immunised JV takes off another 4.4% — so, in total, interline fares would benefit to the tune of 15.9% due to the introduction of immunized JVs. A fully merged transatlantic airline would produce fare savings of 18.9% compared to the base interline fare.

Experience over the past two decades has shown the opposite. Passenger revenue per available seat mile (PRASM) has skyrocketed on international routes.

Travelers United estimates that the controls 88 percent of the Frankfurt/Munich/Zurich airline traffic. SkyTeam controls 71 percent of the traffic at their

4 ibid Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 8 and hubs. And, controls just over 50 percent of its international hub traffic. Competition has been effectively eliminated.5

The abandonment of consumer welfare-based airline antitrust policies and the sudden shift to unprecedented levels of international airline concentration was made possible by the DOT's evisceration of traditional antitrust immunity evidentiary standards. The DOT's recent immunity grants to members of the Star, Skyteam and Oneworld alliances were based on willful non-enforcement of the Clayton Act market power test and the Horizontal Merger Guidelines' requirement that applicants present verifiable, case-specific evidence of public benefits in order to meet the 49 U.S.c. § 41308(b) ​ ​ stipulation that immunity be required by the public interest. The DOT has supplanted the ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ need for verifiable, case· specific evidence with a series of arbitrary "rules" that ensure ​ ​ ​ ​ ​ ​ ​ ​ ​ that almost any antitrust immunity proposal will be found to automatically produce public ​ ​ ​ ​ ​ ​ benefits without any risks of creating market power. The most important of these is ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ "double marginalization," a rule which asserts that every time an immunity grant reduces ​ ​ ​ ​ ​ ​ ​ ​ international competition, consumer prices in certain connecting markets automatically ​ ​ ​ ​ ​ fall fifteen to twenty-five percent, regardless of actual market or competitive conditions. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

What has developed from this quest for airline policy based on the concept of “double ​ marginalisation,”6 is the creation of old–style IATA–type cartels — de facto mergers — without the input of antitrust experts and without the messy consideration of nationality requirements.

MEX has no commercially viable slots available for competitors Delta/Aeromexico competitors — JetBlue and Southwest Airlines — cannot get decent takeoff and landing slots at MEX according to their filed comments and based on the current reality. This has been proven by experience. Delta and Aeromexico control almost half of the available slots and many of the remaining slots are functioning in a legal limbo. Therefore, competition cannot flourish. And, ATI-protected collusion between Delta and AeroMexico is not acceptable.

Department should take all steps needed to encourage that MEX make slots available for viable competition, and develop a clear process for purchase and sale, or exchange of slots. This slot issue only one part of larger competitive consequences of any approval of the Delta-AeroMexico ATI proceeding.

The Mexico/US aviation market is not part of an Open Skies treaty and is not ready for any form of antitrust immunity. Until DOT has a clear record of how the new, yet unrealized Bilateral Agreement’s effect on competition in the Mexico/US aviation market, and until there is a full Open Skies treaty, DOT cannot justifiably make any decisions on ATI.

5 ibid 6 Double Marginalization is an economic theory that claims integrated monopolies are better for consumers than separate monopolies. The more integrated an alliance, the less incentive the participating airlines will ​ have to maximise fares on their legs of a connecting flight, hence the integrated fare will fall. Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 9

According to procedures applied in the late 1990s regarding grants of ATI between American Airlines and along with oneworld partners //Royal Jordanian, such deliberations should only take place after a full open skies agreement is in place and a slot remedy is formalized. In those days, slots at were in play. Today, with Delta/AeroMexico’s ATI request, not only is the slot question not settled, but the open skies agreement is not in place.

At that time, Delta Airlines (with Northwest Airlines) opposed ATI on the same rationale that Travelers United opposes ATI for the pair in the Mexico/US aviation marketplace.

Today, the shoe is on the other foot. Additionally, the aviation marketplace has been distorted by the creation of airline alliances, joint ventures, and ATI grants by DOT that no longer create a public benefit.

Travelers United urges the Department not to add another anti-consumer, anticompetitive, metal-neutral ATI grant to the international aviation marketplace.

Plus, the Department should re-examine current ATI grants and airline alliances based on the most recent actions by members that are erasing many of the stated reasons for airline alliances and ATI.

With the DOT-enabled creation of an international oligopoly of three airline alliances, the reality of public benefit is being destroyed. There is no longer a public benefit of seamless travel and airline alliances are engaged in monopolistic market activities. In fact, there are now a series of obvious public harms.

● Airline groups are now refusing to sign interline agreements between alliances and other non-alliance airlines. ● British Airways (BA) has eliminated seamless travel for passengers with different reservations, even within the same airline as well as airline alliances, by no longer transferring baggage, even between BA flights when on different reservations. ● Delta Air Lines and American Airlines have stopped interlining agreements.

These activities serve no public interest. They are brute force business actions that will force consumers to fly only within alliances, limit passenger flexibility, increase travel costs, and require many to fly on tickets created to ensure that consumers can no longer benefit from seamless travel programs such as frequent flier programs that link with paid airline travel, one-stop check-in, and baggage transfers among other customer service benefits once touted at the reasons for the creation of airline alliances and the granting of ATI.

These discussions about a new grant of ATI in an aviation marketplace that does not have any of the structure in place in all other ATI grants are not in the public interest. And, with the

Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 10 changing relationships of international airlines and airlines within alliances, ATI should be closely reviewed and realigned.

DOT should re-examine any claims of “public benefit” developed by ATI grants. The Department should clearly delineate the consumer benefits that were described in the original ATI applications.

Not a single carrier in an immunized joint venture or DOT, itself, has ever published data showing that the US consumer is better off because of any ATI grants. Carriers that apply for ATI protection for their joint ventures make many promises. However, DOT has never demonstrated that these promises are actually delivered to consumers.

No more ATI grants should be allowed until the Department conducts a complete review of the current ATI grants. These “periodic reviews” were included in the original ATI grants. Travelers United respectfully requests that these promised periodic reviews be completed and the continuing “public interest” be confirmed prior to any new ATI actions by DOT.

Respectfully submitted,

Charles Leocha CEO and President Travelers United, Inc.

About Travelers United Travelers United is the country’s largest consumer travel advocacy group organized as a 501(c)3 organization. Travelers United is a nonprofit, nonpartisan organization that works to provide an articulate and reasoned voice in decisions that affect travel consumers across travel’s entire spectrum. Travelers United staff gathers facts, analyzes issues, and disseminates that information to the public, the travel industry, regulators, and policy makers.

Comments of Travelers United, Inc. In respose to Delta-AeroMexico Antitrust Immunity (ATI) Proceeding 11