The Transportation Antitrust Update
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Summer 2002 Issue No. 9 The Transportation Antitrust Update Transportation Industry Committee • Section of Antitrust Law • American Bar Association In This Issue: Note from the Chair: he Committee sponsored several The Antitrust Review of the Japan Airlines Tsuccessful programs this past spring. See and Japan Air System Merger page 31 for a brief description. by Naveen C. Rao .................................................. 2 The articles in this issue of our newsletter New Competition-Related Railroad cover a range of transportation competition Legislation Introduced in the Senate issues. Naveen C. Rao of the Federal Aviation by Andrew B. Kolesar III..................................... 13 Administration analyzes the Japan Fair Trade Commission’s approval of the merger of Japan The Orbitz Controversy: Airlines and Japan Air System earlier this Travelocity’s Perspective year. Andrew B. Kolesar III of Slover & by Andrew B. Steinberg....................................... 19 Loftus provides a summary and analysis of S. 2245, the Railroad Competition, Arbitration, and Service Act of 2002, introduced by The Transportation Industry Committee Senator Conrad Burns this past April. As the WEBSITE is here: second part of a point/counterpoint exchange, http://www.abanet.org/antitrust/committees/ Andrew B. Steinberg, formerly general industry/trans.html counsel of Travelocity.com and currently Our website includes pages with reports of general counsel of Church & Dwight Co., recent developments, announcements of responds to the perspectives on antitrust issues upcoming meetings, and useful links. Back relating to the Orbitz online travel service that issues of this newsletter are available as well. were offered in our last issue by Gary We invite you to visit the website and provide Doernhoefer, general counsel of Orbitz, us with your feedback. L.L.C. Special thanks go to each of our contributors and to our “desktop publishers,” Deborah Papineau and Cindy Eagle of Covington & Burling. I am also pleased to recognize the contributions of our Committee Vice Chairs, Denise Díaz and Carolyn Corwin, who are making significant contributions to our Committee’s activities. Trey Nicoud Summer 2002 - Issue 9 The Transportation Antitrust Update TRANSPORTATION INDUSTRY COMMITTEE LEADERSHIP (2002-2003) Committee Chair: ..................................Trey Nicoud THE ANTITRUST REVIEW Committee Vice-Chair: ...................... Denise L. Díaz OF THE JAPAN AIRLINES Committee Vice-Chair:................ Carolyn F. Corwin Council Liaison: ......................... Calvin S. Goldman AND JAPAN AIR SYSTEM MERGER Naveen C. Rao* NEW MEMBERS INVITED New members are cordially invited to join the n April 26, 2002, the Japan Fair Trade Section of Antitrust Law and the Commission (JFTC) approved the Transportation Industry Committee. Most of Omerger of Japan Airlines (JAL) and the Section’s programs are developed by the Japan Air System (JAS) in a transaction that Committees, giving members the opportunity will combine that country’s second and third 1 to plan and participate in programs that will be largest domestic carriers. When the of the most value to their practices. Similarly, transaction is complete later this year, the 2 the newsletters, Handbooks, and Monographs resulting carrier, known as “JJ” in Japan, will published by the Committees offer a unique leapfrog All Nippon Airways (ANA) and chance to work on publications that will have become Asia’s largest airline, with estimated 3 a national distribution. At Transportation annual revenues of US$17.5 billion. The Industry Committee programs, members can new company will be the third largest carrier meet attorneys from across the country who in the world after American Airlines and are also interested in transportation antitrust United Airlines in terms of revenue and sixth law. · * Naveen C. Rao is an attorney in the Office of the Chief Counsel at the Federal Aviation Administration. He lived in Fukuoka Prefecture Japan for two years prior to law school and is a private pilot. The opinions expressly in this article are solely those of the author and do not represent the views of the Federal Aviation Administration. The author gratefully acknowledges the assistance he received from Rebecca Fuller and Larry Arima in preparation of this article. 1 Japanese Fair Trade Commission, Business Consolidation by Japan Airlines Co. Ltd. and Japan Airsystem Co. Ltd. Through Establishment of a Holding Company, Apr. 26, 2002 [Available at: http://www.jftc.go.jp/e-page/press/2002/april/020426 JJ.pdf]. 2 Geoffrey Thomas, ANA’s youthful state of mind, Air Transport World, Mar. 1, 2002, at 26. 3 Sumiko Oshima and Michael Mecham, Troubled Times Put JAL on Acquisition Path, Aviation Week & Space Technology, Nov. 19, 2001 [Available at: http://www.aviationnow.com/content/publication/aws t/20011119/avi_air.htm]. 2 The Transportation Antitrust Update Summer 2002 – Issue No. 9 largest in terms of passengers carried.4 The market. Finally JAS, primarily a domestic merger will entail the creation of a new carrier with a handful of international routes, holding company in October 2002; actual has a 23% domestic market share. Even before operational consolidation will occur in 2004. JAL and JAS announced their intent to merge in November 2001, Japan already had a highly While these figures are impressive, the truly concentrated airline industry. staggering numbers relate to the market concentration that will result from this merger. During the 1990s, the Japanese government According to Transport Minister Chikage Ogi, began to deregulate the domestic airline the new carrier will account for 70% of industry. Prior to 1997, the big three were the Japan’s combined domestic and international only carriers that provided domestic service. traffic. There will be a virtual duopoly for air New entry was finally allowed in 1997, and a service in Japan, with ANA and JAL-JAS number of new names have taken to Japanese holding a 97% market share of domestic skies as a result: Skymark Airlines (Skymark), traffic between them.5 In spite of these Hokkaido International Airlines (Air Do), conspicuously high figures, the JFTC gave JJ Lequios Airlines, Fair Inc., Amakusa Airlines, the green light. and Iki International. These carriers operate domestically and do not carry significant The following is an analysis of the Japanese amounts of traffic.8 domestic airline industry and the antitrust review conducted by JFTC. Information on Prior to deregulation, air fares had long antitrust in Japan generally is included in been regulated by the Transport Ministry. order to place the JFTC decision in context. Prior to 1995 the Transport Ministry had to approve all fares. Carriers could discount CURRENT STATE OF THE JAPANESE fares up to 50% upon notifying the Transport AIRLINE INDUSTRY Minister, so long as the discount was not Japan’s domestic airline industry currently projected to reduce total revenue.9 The first consists primarily of three carriers: JAL, JAS, step towards true fare deregulation came in and ANA.6 ANA is currently Japan’s largest September 1995, when carriers were allowed domestic carrier, with 49% of passenger air to set fares at their discretion within a range transportation services within Japan as marked by a price ceiling and a price floor measured by the number of passengers.7 JAL, equivalent to 25% of the ceiling price.10 In the country’s flagship international carrier, is early 1997, the government approved a in second place, with 25.2% of the domestic Revised Deregulation Action Plan that eliminated supply and demand controls for · domestic passenger air transportation in Fiscal 4 Id. at 1. 5 Turbulence Ahead, Asahi Shimbun, Jan. 8, 2002. · 6 ANA, JAL, and JAS each have several subsidiaries 8 for commuter, charter, and regional services. The The combined market share of these carriers totals ANA group consists of the ANA mainline, Air Japan, about 3% of the domestic market. Air Nippon (ANK), and Nippon Cargo Airlines. The 9 Study Group on Government Regulations and JAL group includes the JAL mainline, Japan Asia Competition Policy, Review of Government Airways (JAA), J-Air, Japan Trans-Ocean Air (JTA), Regulations in Domestic Air Passenger JAL ways (JAZ), and JAL Express. The JAS group Transportation Services-Research Report by the consists of the JAS mainline, Japan Air Commuter Study Group on Government Regulations and (JAC), Harlequin Air, and Hokkaido Air System. Competition Policy, at http://www.jftc.go.jp/e-page/ Source: 2002 Japan Air Directory. report/survey/1997/970312ap.htm. See also Section 7 ANA did not begin international services until 1986 105.4 of the Civil Aeronautics Law. and still lags far behind JAL in international traffic. 10 See Section 105.4 of the Civil Aeronautics Law. 3 Summer 2002 - Issue 9 The Transportation Antitrust Update Year 1999.11 In February 2000, Japan discounted fares and therefore provide lower abolished the system of air fare approvals yield per seat than full fare passengers. The entirely and implemented a file-and-use individual passengers who form the core of system under which carriers simply inform the ANA’s customer base typically pay higher government of fare levels. Air fares today are fares.14 As a result, JAL and JAS would have set at the discretion of carriers. higher break-even load factors15 than ANA. IMPETUS BEHIND THE JAL-JAS Thus, both JAL and JAS are especially MERGER sensitive to downturns in travel and were hit hard by the economic situation, particularly The Japanese economy has been in a after September 11. recession for over a decade. All three of the big carriers, like their counterparts on the Airport constraints provided an important other side of the Pacific, have struggled to cut incentive for JAL to seek a union with JAS. costs to remain profitable. The atrocities of JAL has long wanted to strengthen its position September 11 had a tremendous effect upon in the domestic market by adding flights. airlines across the globe, and Japanese carriers However capacity constraints, particularly at 16 were no exception. JAL had the greatest Tokyo Haneda Airport, had prevented JAL 17 exposure to overseas turmoil.