DOT’s shift from protecting the public to protecting large airlines

In preparation for Senate testimony on airline consolidation, I have been researching the inexorable consolidation of the airline industry. This consolidation has been taking two tracks. First, airlines are merging. Second, antitrust immunity granted to airline alliances has created an international, government-approved oligopoly that controls 85 percent of the market.

Take a look at mergers. Many observers will tell you that this is nothing new. Mergers have been happening for decades. That is partially true. What is different today is the size and scope of the mergers. Today’s mergers are not simply joining two airlines, they are changing the landscape of the transportation world.

Delta and Northwest merged to create the largest airline on the planet. Now that the ink is barely dry on that consolidation, Continental and United have proposed another corporate marriage that will create an even bigger airline.

In Europe consolidation is alive and well. Lufthansa has gobbled up Swiss, Austrian, British Midlands and Brussels airlines. Air France and KLM tied the knot years ago and though they have different paint jobs, operations are tightly controlled by a single board of directors and executives. British Airways is engaged to Iberia.

Observers are hard-pressed to find consumer benefits to these combinations, but the corporate bottom line has been improved as consolidation leads to lower costs, better pricing control and increased profits.

But no one ever has suggested that corporate actions should be influenced strictly by the public good. However, in antitrust laws, administered by the government, the public good is the overriding principal.

Here, our Department of Transportation (DOT) has evolved from an organization focused on the good of the public as they were while the original antitrust immunity was passed between KLM and Northwest for travel between the U.S. and Holland, to an agent of the legacy airlines. In the early 1990s the main “public interest” objective for the first grant of antitrust immunity was the encouragement of Open Skies agreements with more European countries.

Since then, the DOT acquiescence in granting antitrust immunity to international airline alliances has also changed the economic landscape and tilted it in favor of airline corporations rather than consumers. Ironically, the very antitrust laws that were created to protect the public interest are being legally bent to protect corporate interests.

The original public interest, back in the 1990s — the expansion of Open Skies — has been achieved, but the antitrust agreements remain in force. They are now being expanded with last year’s approval, over Department of Justice (DOJ) objections, of an antitrust immunity deal with Continental and United. Airline watchers are already predicting the imminent approval of the American Airlines petition to have antitrust immunity with British Airways, Iberia and other partners.

Today we are faced with the reality of three major airline alliances between the world’s largest carriers. Lufthansa, United, US Airways, and Singapore airlines and others form the Star Alliance. American Airlines, British Airways, Iberia, Finnair, Qantas and others make up the OneWorld alliance. Delta, Northwest, Air France, KLM, Korean Air and others have created SkyTeam.

This antitrust immunity allows alliance airlines to work together as a joint venture with a separate board of directors. Alliances are already jointly coordinating flights, schedules, route planning, marketing efforts, advertising, sales campaigns, frequent flier programs, catering and maintenance. These alliances are defacto mergers of the alliance’s international business. Together these three alliances now control around 85 percent of international airline traffic.

DOT has found itself approving antitrust immunity deals that the DOJ finds not in the public interest. The worm has turned.

I’m not certain what kind of syndrome this is, but DOT has become a captive of the very airline interests they were designed to control when it comes to international alliances. What started as a program to further the public good has morphed into a series of policy decisions that support the corporate good, often at the expense of the public who the laws were designed to protect.

Luckily, these antitrust immunity agreements can be undone. DOT’s approval came with that provision. As the mergers of our biggest airlines dramatically change the landscape of airline competition within the U.S. it is time that DOT take another look at antitrust immunity grants based on the shift in economic realities.

I hope that while the Department of Justice is pondering the merger proposal of Continental and United airlines, the DOT will take a hard look at the defacto mergers and the resulting international airline oligopoly they have created.

Charlie Leocha is writing as the director of the Consumer Travel Alliance. You can watch the Senate Commerce Committee hearings. This hearing on the The Financial State of the Airline Industry and the Implications of Consolidation will start on Thursday, May 27, at 10 a.m.