Continental, United Win Antitrust Bid on trans-Atlantic Flights

Posted by: Justin Bachman on July 10, 2009

Continental (CAL) and United (UAUA) scored a big win today when the Dept. of Transportation agreed to their request to coordinate flight schedules, prices and marketing efforts on trans-Atlantic flights. The government’s assent on antitrust immunity represents a key component of the airlines’ plan for a close working relationship, as Continental joins United in the Star Alliance on Oct. 25.

The decision will allow Continental and United to coordinate their capacity to Europe, and set fares, while allowing joint marketing and frequent-flier program activities. The Department of Justice, consumer advocates and travel agents, argue that such deals hurt passengers by reducing competition – a position the Transportation Dept. has largely rejected in its recent alliance reviews. The airlines further contend that such alliances enhance customer service through greater flight selections.

The Continental-United decision could also play a role in the continuing assessment of a similar application from American (AMR) and British Airways. Those airlines have sought for years to more closely coordinate their flights in their oneworld alliance, but have been repeatedly thwarted because of their market dominance on the major routes between America and London. A third alliance, the Delta (DAL)-Air France-led SkyTeam, won immunity across the Atlantic in May 2008. DOT spokesman Bill Mosley says the antitrust decision on UAL-CAL does not affect the agency’s review of the American-BA application.

The ruling, which largely dismissed antitrust objections the Dept. of Justice raised last week, does not grant the carriers antitrust immunity on flights between the U.S. and Beijing. Both Continental and United serve the Chinese capital, but other airlines have delayed service there citing the global recession. The DOT decision also does not offer the carriers immunity on nonstop flights between New York and Copenhagen, Geneva, Lisbon and Stockholm, and on flights between Toronto and Continental’s hubs. The airlines will also have to file annual reports on their joint venture activities. “We’re pleased that DOT addressed some of our antitrust concerns in certain overlapping markets,” Justice Dept. spokeswoman Gina Talamona said Friday.

“The DOT decision greatly benefits our customers, employees and shareholders,” Continental CEO Larry Kellner said in a joint statement with United CEO Glenn Tilton. “It ensures global competition with other antitrust immunized alliances while encouraging the retention and growth of open skies between the U.S. and other nations.”

Eight other Star Alliance airlines flying trans-Atlantic – Air Canada, Austrian Airlines, British Midland (bmi), Lufthansa, LOT Polish, Scandinavian Airlines (SAS), Swiss International, and TAP Air Portugal – are also covered by the decision.

Here’s the department’s reasoning. I think it’s worth noting that the DOT highlights the inability of U.S. carriers to sell majority stakes to their financially stronger partners overseas.

While DOJ has suggested that less anticompetitive measures are available and that immunity does not benefit consumers, we are not persuaded to alter our fundamental initial assessment of the Joint Applicants’ request. First, the public benefits possible through an immunized alliance are not available through other means. Ownership restrictions preclude truly integrated joint ventures or mergers, similar to those pursued in other industries, among U.S. and foreign air carriers, and the Joint Applicants have demonstrated that they will not proceed without immunity. Second, immunity enables the Joint Applicants to coordinate fares, services, and schedules so that consumers are offered a broader array of choices within the alliance than could be offered without immunity. Third, when alliances offer broader mixes of products, supporting the objective of offering service “from anywhere to everywhere,” an alliance faces competitive pressure both from other carriers in particular city-pair markets and from other alliances offering global network connectivity. Finally, the vast majority of transatlantic passengers use connecting services and benefit from the improved connecting products at lower fares that integrated alliances provide. Even for those passengers who choose nonstop travel, the existence of coordinated connecting services offered by integrated alliances disciplines fares on nonstop routes.

In other DOT news, one day earlier the agency fined United $80,000 for failing to disclose to customers when some of its flights would be operated by a partner airline, as required by federal rules. The department said its enforcement unit had called United reservation clerks about some flights and were not told when some segments were to be flown on a code-sharing basis. “We are committed to ensuring our customers fully understand their travel arrangements prior to ticketing, and have taken steps to ensure our continued compliance,” United spokeswoman Jean Medina said in an e-mail.