After more than a year of deliberation, the US Department of Transportation (DOT) has rejected American and Qantas’s application for an expanded alliance and anti-trust immunity (ATI) on trans-Pacific routes, arguing it would harm competition and reduce consumer choice.
The DOT said in its Show Cause Order, published on Friday November 18 (US time), the combined Qantas-American network would represent 60 per cent of all seats between the US and Australia, while the pair would have the largest market share in about 200 city-pair markets.
This would be sufficient for the alliance to “exert market power”, with the DOT noting the US-Australasia market featured “long, thin markets that are isolated from other global traffic flows”.
Further, there were few passengers connecting via intermediate points in third countries, which limited the potential for competing networks to “discipline” the proposed alliance, as well as limited flow within Australasia or to other countries beyond Australasia.
“In such circumstances, there is a high risk of competitive harm from approving and granting antitrust immunity,” the DOT Show Cause Order said.
The DOT also questioned some of the claimed consumer benefits in Qantas and American’s application that would result from having their anti-trust immunity approved.
“For example, we tentatively find that, based upon information in the record, the proposed alliance is unlikely to grow capacity over the next five years faster than what the Department would expect based upon the historical growth rate,” the DOT said.
“Additionally, many public benefits from customer service coordination could be obtained through traditional arms-length cooperation such as codesharing.
“Based upon these tentative findings, the Department proposes to disapprove the alliance agreements and withhold ATI.
“In sum, the Department tentatively concludes that the proposed alliance would substantially reduce competition and consumer choice, without producing sufficient countervailing public benefits.”
Qantas said in a statement it was disappointed with the DOT tentative decision to deny authorisation and would review the Show Cause order in the days ahead.
The two carriers, who lodged their application with the DOT in June 2015, reiterated the alliance offered “a greater choice of destinations, a more coordinated network and schedule and world-class travel experiences when travelling across the Pacific”.
“The Trans-Pacific is a highly competitive market served by a number of carriers and the partnership is one that can support and strengthen the economic, cultural and tourism ties between Australia and New Zealand with the United States,” Qantas and American said in a joint statement.
American spokesman Matt Miller told Fort Worth’s The Star-Telegram newspaper the oneworld alliance member would file an objection to the tentative decision.
“This represents a significant departure from prior DOT decisions, which have long recognized the pro-competitive benefits of combining complementary international networks,” Miller said.
“Other airlines have the significant competitive advantage of antitrust immunity in the US-Australasia market. With the same opportunity, American and Qantas will be able to compete more effectively and increase consumer benefits in the market.”
Qantas and American have worked closely together on the trans-Pacific market since 2011, albeit without ATI. The pair started codesharing on each other’s flights in 1989 and helped establish the oneworld alliance as founding members. The other two major alliance groups on the trans-Pacific market were the Delta Air Lines-Virgin Australia tie-up and a JV between United and Air New Zealand.
However, American’s decision to start flights from Los Angeles to Sydney in December 2015 – and Los Angeles to Auckland in June 2016 – prompted the two carriers to seek ATI as part of an expanded joint business agreement and establish a metal-neutral, revenue-sharing joint-venture to reflect the US carrier’s entry into the market with its own aircraft.
In February 2016, the Australian Competition and Consumer Commission (ACCC) authorised the JV for five years, while the New Zealand Ministry of Transport gave its approval in November 2015.
This ACCC decision meant that while Qantas and American were able to align pricing on tickets sold in Australia, the pair was not able to do so on outbound US fares without the green light on the alliance from the DOT.
The DOT received objections to the Qantas-American application from a number of interested parties, including US airlines Hawaiian and Jetblue.
Hawaiian in particular was one of the strongest voices against the alliance and called for the DOT to place conditions on any approved joint-venture.
In its submission to the DOT, Hawaiian argued immunised alliances made it more difficult for independent carriers to reach arm’s length, pro-competitive codeshare or interline agreements with international alliance members.
It told the DOT its revenues from its arms-length relationship with Virgin Australia “dropped precipitously” after the Virgin established its alliance with Delta and believed its arms-length relationship with Qantas would “similarly suffer” should the ATI be granted.
The Honolulu-based carrier also cited research it produced on what happened to fares and customer choice on the trans-Atlantic market between the US and Europe following tie-ups such as American-British Airways, United-Lufthansa and Delta-Air France-KLM, as part of its submission.
Hawaiian Airlines chief executive Mark Dunkerley welcomed the DOT Show Cause Order.
“It is encouraging to see the US DOT, in its tentative ruling, recognize the importance of small independent carriers in maintaining competition, which is good for the industry and ultimately consumers,” Dunkerley said in an emailed statement to Australian Aviation on Saturday.
Currently, Qantas flies from Brisbane, Melbourne and Sydney to Los Angeles. The Flying Kangaroo also offers nonstop service from Sydney to Honolulu and Dallas/Fort Worth, as well as seasonal flights to Vancouver.
The DOT said parties had 14 days to respond to the Show Cause Order.