13-Mar-2019 8:25 PM
In early 2018, when the US and the governments of the UAE and Qatar reached a truce over the years-long subsidy debate between American, Delta and United and Emirates, Etihad and Qatar, many questioned how long the cease fire would last.
The answer was: barely a few months. American argued that fellow oneworld member Qatar Airways could be violating aspects of the agreement through its stake in Air Italy, which was adding services from Milan to Miami and New York JFK.
The argument continues to simmer, but proving that Qatar is in fact violating the terms of the truce could prove difficult.
Nonetheless, it did appear to many foreign governments that the highly influential Big 3 were trying to turn the clock back to an era where national airlines were protected from competition, regardless of the wider national interest.
The White Paper appeared to be an attack on open skies
When in early 2015 American, Delta and United released the now famous White Paper that sought to prove Emirates, Etihad and Qatar were being illegally subsidised by their respective governments, it was widely perceived as an attempt by the Big 3 to roll back open skies. The US airlines argued that the Middle Eastern operators had received USD40 billion in subsidies over a ten-year period, and they sought to open government-to-government consultations that spurred larger debates about open skies agreements.
No similar concern was expressed about openly-subsidised Chinese airlines in which US airlines have made equity investments. In the first case operations were governed by open skies agreements; but the China-US agreement is still capacity limited by the US.
JetBlue, Hawaiian, FedEx and Atlas Air banded together to stress the importance of open skies agreements and warned that it was dangerous to tamper with agreements that support millions of tourism jobs and billions in direct spending by tourists.
“Fair skies, not open skies”
The US “Big 3” had not gained much traction on the issue under the previous administration of President Barak Obama – although the administration did prevaricate for many months on the terms of access for Norwegian, eventually being forced to accede to the LCC’s access to the North Atlantic.
Eventually, under a publicity onslaught, the Trump Administration reached an agreement with the governments of the UAE and Qatar that entailed Emirates, Etihad and Qatar committing to financial transparency and an ambiguous pause in fifth freedom flying.
In many ways, Emirates’ launch of Dubai-Milan-New York JFK in late 2013 had galvanised the Big 3 to mount their subsidy campaign. Delta stated that that Emirates service was “ground zero” on fifth freedoms, noting, “we have to stay vigilant to get fair skies, not open skies”. Since that time, Emirates launched fifth freedom service on a Dubai-Athens-Newark pairing, which prompted United to act.
Open skies agreements are prerequisites for JVs - which are anti-competitive but offset by consumer benefits
One of the great advantages of open skies pacts has been the ability of airlines, conspicuously including the US Big 3, to enter into antitrust immunised, “metal neutral” joint ventures on major routes.
The US market has now seemingly reached a certain level of maturity, and the result has been the continued evolution of, and establishment of, airline joint ventures. But JVs are garnering new levels of scrutiny, and recently established immunised pairings now have some operating conditions that were absent in the past.
JV applications between Hawaiian and Japan Airlines, Delta and WestJet, American and Qantas and American and LATAM Airlines Group are awaiting the administration’s approval, and it will be instructive to see what conditions the administration might impose in granting approval of those proposed tie-ups.
North Atlantic JVs could attract more scrutiny after Brexit
Even as the US and UK have reached an agreement to keep air services at status quo after the Mar-2019 Brexit deadline, the uncertainty swirling around Brexit and the UK and European partners of US airlines could also create challenges in the North Atlantic. It is an example of how trade and aviation are becoming even more entangled in the current operating environment.
One of the many unanticipated consequences of the uncertainties raised by Brexit is increased regulatory scrutiny of North Atlantic airline joint ventures. Members of these JVs are allowed to coordinate schedules and prices only with regulatory immunity from competition rules.
In Oct-2018 the UK's Competition and Markets Authority (CMA) launched an investigation into the JV inside oneworld between British Airways, Iberia, Finnair and American Airlines. The JV had been approved by the European Commission in 2010 after JV members gave commitments to release slots to competitors on six city pairs: London-Dallas, London-Boston, London-Miami, London-Chicago, London-New York and Madrid-Miami.
The commitments expire in 2020, after the UK's scheduled exit from the EU, and five of the routes touch the UK, hence the CMA's investigation ahead of their expiry. It is expected to report in Mar-2019.
Competition benefits have been limited under the JVs
CAPA analysis indicates that there has been only a limited increase in competition, if any at all, on these routes and on the two routes most important to the other JVs (Paris-New York and Frankfurt-New York). Recent analysis conducted by CAPA shows seat capacity among the three large JVs on the North Atlantic fell slightly from 2010 to 2018, from 74.5% to 67.6%, but the total JV share, which included Virgin Atlantic’s capacity since 2014, was a healthy 72.1% in 2018.
Competition investigations are complex, and it would be foolhardy to second guess their outcome, but the CMA's study could prompt other regulators to review the North Atlantic aviation market.
The US now has more than 120 open skies agreements with countries worldwide, and one of the most visible by-products of those partnerships is the establishment of powerful airline JVs. The immunised JVs that are the most mature – those covering the North Atlantic – have been in place for almost a decade.
During the past three to four years those agreements have been attracting more scrutiny as some smaller non-immunised competitors have argued that the scope of those JVs is uncompetitive.
Given the still high concentration, there’s little doubt – if and when Brexit takes effect – that trans Atlantic JV agreements will come under scrutiny.
As CAPA has previously noted: “The UK is expected to sign an open skies style agreement with the US, but the JVs involving BA and Virgin will then fall under multilateral jurisdiction (the US and the UK and EU), rather than merely bilateral as is the case before Brexit.” Once this can of worms is opened, it requires a level of bravery to predict outcomes.
JVs will continue to evolve; new requirements for approval may grow stronger
There are few remaining regions where the US needs to forge open skies agreements. China is the most important market missing from the list, but broader trade issues mean that open skies is not likely to be implemented in the near term.
The evolution of existing and future JVs will be closely watched, and for now it seems that US regulators are following the advice of smaller airlines in attempting to require new conditions for antitrust approval that were absent in the past.
Meanwhile, the link between open skies and JV approvals appears to remain critical.
The Doha Declaration, endorsing open skies; Feb-2019
In Feb-2019, CAPA held its first Aeropolitical and Regulatory Summit in Doha, attended by leading regulators from the EU and other jurisdictions (the US DoT representative was unable to attend due to the US government shutdown).
That conference produced the following Declaration:
75 years after the aviation regulatory framework was established, it is time for a serious global review of its relevance today; the “business of freedom” underpins 10% of global GDP.
It is too important to be constrained by economic regulation that was designed to meet entirely different conditions
Relax restrictive airline ownership and control rules, which underpin the bilateral air services system, constraining rationalisation of market access;
Increase efforts to encourage plurilateral liberalisation, for example as promoted by the European Union;
Enhance sustainability – in its broadest meaning – in the aviation sector;
Actively encourage aeropolitical discussion and further engagement at the highest levels.