On the hop

While their arguments were enough to persuade the Australian Competition and Consumer Commission (ACCC) and New Zealand Ministry of Transport, the US Department of Transportation (DOT) took a different view and in late November denied the application for anti-trust immunity (ATI) on trans-Pacific routes.

In a decision that appeared to, at least publicly, surprise Qantas and American, the DOT’s Show Cause Order published on November 18 argued the metal-neutral, revenue-sharing joint-venture would harm competition and reduce consumer choice.

It centred on the fact Qantas and American would have a combined 60 per cent market share of all seats between the US and Australia. Moreover, the pair would be the largest operator on 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.”

Would the expanded alliance have cut fares?

Singapore-based Shukor Yusof, head of aviation research firm Endau Analytics, said Qantas’s large market share was too big a hurdle to overcome.
“Qantas already has the bulk of the capacity, so I don’t see how adding American would be better for passengers or help reduce fares,” Yusof told Australian Aviation via email.

Former Qantas chief economist and the managing director of Airline Intelligence and Research Tony Webber said his market research suggested ticket prices tended to increase when a competitor was taken out of a market.

“Typically when you go from a four- to a three-player market it will add about 12 per cent to fares,” Webber told Australian Aviation in an interview.
“That’s not based on analysis on that particular route, it is just my general analysis on most routes.

“Qantas and American are effectively taking out a player by joining forces in that way.”

In response to the DOT ruling, Qantas said the decision was “unprecedented”, represented a “significant departure from precedent” and ignored the evidence of intense competition on the trans-Pacific.

Further, the two carriers reiterated their belief the alliance offered a “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.

Qantas chief executive Alan Joyce said the two carriers would continue to work closely together while evaluating what the next steps will be.

“American and Qantas before this application were always working closely together so there’s obviously a strong partnership within oneworld and there is a strong bilateral partnership between the two carriers and that will continue no matter what,” Joyce told Australian Aviation after launching the G’Day USA program inside Hangar 96 at Qantas’s Mascot facility on December 9.

“We will continue working on promotional activities and other activities to promote traffic on each of our networks.

“We just have to have dialogue with American, figure out what the next stage is and then we will make the announcement at the appropriate time.”
Joyce said it was disappointing the US DOT could not be persuaded of the real consumer benefits of the expanded alliance and combined network.

DOT ruling also win for Hawaiian’s way of thinking?

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.

Qantas and American go way back

The two carriers have worked closely together on the trans-Pacific market for many years, 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 groupings 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 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 US end of the market has seen some extremely low fares in recent times as additional capacity from the likes of Qantas, American and United, as well as some currency changes that have affected demand, pushed down ticket prices.

In April, travel websites reported US-New Zealand itineraries, including some via Australia, were being offered for as low as $US225 return. There have also been sales for US-Australia flights for less than $US400.

Currently, Qantas flies from Brisbane, Melbourne and Sydney to Los Angeles. The Flying Kangaroo also offers nonstop service from Sydney to Honolulu, San Francisco and Dallas/Fort Worth, as well as seasonal flights to Vancouver.

New US administration represents chance for new application

There was one more slap in the face at the end of a long, 18-month process.

Qantas and American had sought an extension to the deadline to respond to the Show Cause Order, given it came out just before the Thanksgiving Day public holiday in the United States.

But the DOT rejected their application for more time, saying it found their arguments “unpersuasive”.

“The movants have offered no compelling reason to alter the schedule that we have set, nor do we see any,” the DOT said.

“The facts and legal issues involved have been well developed and argued by the parties to this proceeding, including the applicants.”

That was the last nail in the coffin, prompting the two carriers to withdraw their application. For now.

It was expected they will try again at an appropriate time after new leadership is installed at the DOT following the change of US President in January 2017.

In the meantime, uncertainty surrounds the future of the new routes that have been launched.

“Without antitrust approval, Qantas and American Airlines will be severely limited in their ability to work together to grow on the trans-Pacific routes. As a consequence, each airline will need to assess their trans-Pacific networks,” Qantas said.

Webber said he expected changes, given the level of capacity in the market currently.

“It’s difficult to believe how some of those routes will work simply because there is a lot of competition on LA-Auckland and a lot of competition on Sydney-LA relative to demand,” Webber said.

“Those routes are problematic because of the elasticity of demand is low and if you create excess supply you are doomed.

“It’s very difficult to see how the market is going to cope with the additional players.”

It’s difficult to believe how some of those routes will work.
Tony Webber

A research note from Aviation thinktank CAPA – Centre for Aviation said while Qantas was likely to keep expanding on the trans-Pacific market – the strongest part of the Flying Kangaroo’s network – American may have to reconsider planned future expansion.

“Qantas will continue growth in North America, its most successful international market, but American Airlines’ growth is uncertain,” CAPA’s research note of December 6 said.

“There are seemingly greater questions around American Airlines’ future in Australia and New Zealand. The industry expected American Airlines to be finalising plans for a Los Angeles-Melbourne service to be announced after DOT approval. That may now be in jeopardy.

“In the DOT’s view the market will be better off, and overall growth will be stronger, than if the JV was approved.”

Virgin’s View

At this point it is worth recalling comments from Virgin Australia chief executive John Borghetti, who has seen the market’s ups and down over his more than three decades in the industry.
Speaking to Australian Aviation a year ago, Borghetti warned that history showed big jumps in capacity tended not to end well.
“I’m old enough to remember. I’ve seen this before,” Borghetti said in the January/February edition of Australian Aviation.
“I’ve seen the Australian dollar go down, I’ve seen a whole lot of capacity being put onto the Pacific and then I’ve seen what follows and what typically follows is at least one player pulls out and I’m just seeing the same thing again.”
“We’re not pulling out. Our strategy going forward with Delta is a long-term strategy, not just short-term opportunism because of where the currency is now because one day the short-term opportunism will disappear. Our strategy is more designed on sustainability of whatever we do.”