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Airline Competition 1980-2010 R.I.P.

Part 6 :  The evolution and growth of anti-trust immunity grants


There are more and more planes and more and more people flying than ever before, and to more and more destinations.

So why are we seeing fewer and fewer airlines to choose from?

And how is it that we're being told, every time airlines link together to form another airline alliance, that this reduction in competition is good for us?



Air travel has steadily grown in the almost 100 years the industry has existed.  More and more people are flying to more and more places, and more frequently.

There are more planes in the air, more airports, and more most other things to do with air travel than ever before.

But there's one notable exception to this growth.  Although this seems entirely counter-intuitive, the number of different independent airlines and/or airline groups is steadily reducing and reducing.

Significantly, after aiding and abetting this process in the past, the US Department of Transportation now cites this process - largely caused (or at least, passively allowed) by itself as justification for allowing it to continue.

The net result is that one of the most important routes in the world, in terms of passengers flown and revenue earned - a route which surely would see every possible airline clamoring for a share of - now sees service offered by only three different airline groups, along with a few remaining independent airlines with concentrations of service in certain regional areas.

The DoT, echoing the major airline groups, assures us this is for our benefit, and that we, as passengers, will enjoy lower fares and more flights to more places than would be the case if more airline competitors existed.

But, when pressed for specifics to support claims that seem to fly in the face of commonsense and basic business economics, the DoT was unable to offer any concrete substantiation at all, other than to repeat what the airlines had told it, as if that was to be treated as received gospel truth.

Regulation, De-regulation, and now Regulatory Immunity

To be fair, the heading of this article mixes together two not completely related events.  Ol three alliances (Skyteam, Star and now Oneworld too) to work together as closely as they wish, no longer competing against the other members of their alliance, but now competing solely against the other two alliances.

We've gone from 50+th of airline competition.

So, to get your new airline started, it looks like you have only one possible strategy.  You would need to partner with AirTran and base your operation in Baltimore - a decision that may or may not be viable, but the best decision open to you.

If you want to expand in the future, you could do so to Milwaukee and Atlanta.  But if you wanted to add any west coast destinations, or if you wanted to add service to New York or Chicago or Dallas or most other places, you'd be out of luck.

Proof of the Impossibility of New Airline Competition

How many new airlines have started service to the US in the last five or ten or any years?  And how many of them are still operating today?





Which leaves us only one route to



We've gone from 50+ airlines flying across the Atlantic to three major alliances and several minor unaligned airlines, most notably Virgin Atlantic. DOT figures for the 12 months ended June 2009 show the following market shares :


The Slow Death of Airline Competition

Until the last few decades, airlines have been subject to a great deal of government regulation, and particularly in the context of international air travel.  Formal treaties between governments and between groups of governments ratified general rules and procedures for international air travel (for example, to do with baggage liability) so as to bring some consistency and predictability to air travel between countries that sometimes may have very different legal systems and processes.

Formal treaties also existed that defined and limited the access of foreign airlines to each country's airspace and airports.  These treaties made no attempt to conceal their true nature - they were designed first and foremost to protect each nation's 'flag carrier' - typically most countries had one 'official' national airline that flew internationally to other destinations, and all countries (and their national airlines) were fearful to the point of paranoia at the possible negative impacts of competition from other airlines in other countries.

Just like children afraid of the dark, countries had hard-to-express and harder-to-justify fears about the consequences of uncontrolled competition for air travel between their country and other countries.

Even the nature of the protectionist barriers to free airline competition became standardized and enshrined in what became known as 'Freedoms of the Air', dating back to an international treaty established in 1944.

This was an early example of the 'doublespeak' that came from George Orwell's novel '1984' (written in 1948), because these so-called 'Freedoms' were actually nothing to do with giving business and operational freedoms to airlines, but rather were about strictly defining and limiting what freedoms the airlines had.  We list the Freedoms of the Air here.


Nothing occurs in a vacuum, and so too it is not possible to consider this approval process without considering what has gone before.  This is the third time AA & BA have applied for anti-trust exemption - understanding the past failures to secure this approval, and the changes since then in the marketplace help us to understand the reasons for granting approval now.

Background to the AA/BA Anti-trust Approval

Nothing occurs in a vacuum, and so too it is not possible to consider this approval process without considering what has gone before.  This is the third time AA & BA have applied for anti-trust exemption - understanding the past failures to secure this approval, and the changes since then in the marketplace help us to understand the reasons for granting approval now.

So too, this is the third request by an airline alliance grouping of carriers for anti-trust approval, and the DoT itself has very much framed its response to this request in terms of the approvals it has already extended to the Star and Skyteam alliances.



Three wrongs don't make a right, but the most relevant part of the DoT's decision to approve the joint business agreement request by AA, BA, and three other airlines seems to be their previous decisions to give similar approvals to the Skyteam and Star airline groups.

it is fair to point out that the AA/BA joint business agreement is the third such agreement to be approved by the US Department of Transportation (DoT).

Prior to this approval, the DoT had already granted approval for similar tie-ups for what are almost mergers between two other airline groupings operating across the Atlantic.  The first out the door was a Skyteam based alliance of Air France, KLM (these two airlines having already merged in 2004), Delta and Northwest (these two airlines also being then in the process of merging, a process now fully completed).

This was followed up by approval being given to a Star Alliance based grouping comprising Air Canada, Lufthansa and United Airlines (and subsequently Continental too), which was given antitrust immunity in 2009.

The AA/BA joint agreement (which actually extends beyond the two major airlines, American Airlines and British Airways, to also include Iberia, Finnair and Royal Jordanian) represents the applicable Oneworld grouping of carriers, and could even be looked at as being a necessary competitive response to the earlier Star and Skyteam tie-ups.

From this perspective, it would be unusual and even unfair for the DoT to now reverse its earlier policy on approving such arrangements, and there's a large measure of truth in that thought.

But we're also looking at the AA/BA tie-up from 'first principles' - should such tie-ups be allowed or not?  If the AA/BA tie-up makes no sense, then the DoT should review and possibly reverse its earlier approvals, rather than dig a deeper hole and further disadvantage us as travelers.

The Impact of the US/EU Open Skies Agreement

This is not the first time AA & BA have sought permission to link up their services across the Atlantic.  It is, in fact, the third time, but obviously is now the first time that approval appears likely to be granted.

There's been a possibly relevant development between the second and third applications, and that is the implementation of the EU-US Open Skies Agreement, which came into effect in March 2008.

In general terms, this agreement allows any EU airline to fly from anywhere in Europe to anywhere in the US, and it allows any US carrier to fly from anywhere in the US to anywhere in the EU, and also to fly from anywhere in the EU on to anywhere else in the EU.  Note that this right to fly within the other region was not a reciprocal right and was not extended to allow EU carriers to fly within the US.

This agreement superseded a number of existing agreements between the US and individual European nations, and also extended the scope of the earlier agreements.

The agreement also contained one additional provision - it annulled the former 'Bermuda II' agreement between the UK and US that limited the ability of airlines to fly between the US and London's Heathrow airport (LHR).

The Bermuda II agreement, which superseded an earlier agreement in 1946, was signed in 1977, and limited the carriers allowed to operate between LHR and the US to four - two UK carriers (British Airways and Virgin Atlantic) and two US carriers (originally Pan Am and TWA, subsequently United and American).  It also extended the rights of several other airlines to maintain their services - these were Air New Zealand (LAX-LHR), Air India (JFK-LHR) and Kuwait Airways (JFK-LHR).  El Al and Iranian Airlines also had rights, but El Al had chosen not to use their rights and Iranian Airlines is banned from flying to the US.

The new 2008 agreement allowed any airline to fly between LHR and the US, with Heathrow now being treated the same as all other European airports.

The Magic of Heathrow

London's Heathrow airport is a curious anomaly, because it is simultaneously one of the most hated airports in the world, but also the London airport that airlines most wish to access, presumably because their passengers also want to fly in and out of Heathrow.

We discuss Heathrow Airport here, and also offer similar information on all five of London's airports in a comprehensive seven part series.

For sure, Heathrow is twice the size of the next largest London airport (Gatwick - LGW) and so offers a wider range of connecting flight opportunities for passengers flying beyond London - more flights to more destinations - but in terms of any special attributes to make it specially appealing to passengers flying into London itself, the airport has very little to recommend itself or to distinguish it from its four competitors.  In addition to Gatwick, the other three airports are London City (LCY), Luton (LTN) and Stansted (STN).

But although airlines want to fly to Heathrow, they are confounded by not being able to readily do so, even after the restrictions of the Bermuda II treaty were lifted.  This is because Heathrow is operating at capacity (in terms of the number of flights a day that can be handled).  Although in theory any airline can now operate service to Heathrow, actually doing this in reality would require the airline to buy a pair of 'slots' - the right for a plane to land and subsequently to take off again at Heathrow.

Due to the shortage of slots and their popularity, they have historically been priced very highly - in 2007 Continental paid $116 million for two pairs of slots, and later that year paid another $93 million for two more slots, but the global slowdown in air traffic in 2009 has caused a softening in demand and a drop in value for Heathrow slots of at least 20% compared to 2008, although this may be a temporary situation.

Slots vary massively in value depending on what time of day they give the airline landing rights.  The most valuable slots are ones allowing for morning arrivals; afternoon and evening slots are not nearly as valuable, and a slot pair with bad timings might sell for as little as $1.5 million.

In addition to Continental adding four flights a day, Delta (and formerly Northwest) have started service, and so too has US Airways.  This means that not only is the Oneworld alliance represented with flights between LHR and the US (by AA and BA) but so too is Star (by UA and now US and CO too) and by Skyteam (DL including the former NW services).

Other airlines have started service to other London airports but subsequently failed and closed down again (eg Eos, Maxjet and Silverjet).

Past Applications to Join Forces by AA and BA

This current application is the third time AA and BA have asked for approval to work together and to be exempted from anti-trust provisions.

Their first application commenced way back in 1997.  After a lengthy and very slow process, they broke off their attempt in 1999 due to issues relating to allowing other US carriers to access Heathrow.

Interestingly - and possibly coincidentally - 1999 was also the year that their alliance, Oneworld, was formed.  Cynics have long viewed the airline alliances (the other two major alliances being Star, founded in 1997, and Skyteam, founded in 2000) to be little more than ways of circumventing national restrictions on airline partnerships and ownerships.

In 2001 they applied again, but refused to accept the terms that the DoT imposed on them in 2002 as part of giving them approval.  The DoT required them to give up 16 slot pairs, which were to be awarded to Delta (6 pairs), Continental (5 pairs), Northwest (3 pairs) and US Airways (2 pairs).

The Evolution of the Successful Application

With all the past as background, it now becomes possible to understand how AA & BA secured a more favorable approval now than had previously been offered to them in 2002.

There have been two major changes between 2002 and 2010.

The first change has been the evolution, almost by stealth, of the two other alliances and the formation/approval of their own marketing agreements.  The Skyteam alliance back in 2004 didn't seem too threatening, with its focus on the two European hubs of Amsterdam (for KLM) and Paris (for Air France) - neither of these two hubs had anything like the prominence or dominance of Heathrow, and both hubs were surrounded by other airports (albeit in other countries) that were also good European hubs (most notably perhaps, Frankfurt).

That's not to say that the approval granted to the Skyteam airlines was a good thing.  But their request was perhaps the least contentious of the airline alliance requests, and so the easiest to be granted.

The second approval, to the Star airlines, was a more aggressive move by the involved airlines, with two heavyweight airlines (LH and UA) as well as two medium weight airlines (AC and CO) making for a more dominant force.  But with tough economic conditions causing the airlines major problems, and with the Skyteam alliance already approved, the four carriers somehow managed to persuade the DoT to give them approval to band together.

And so, with these two approvals already granted, it becomes much harder to single out the AA/BA alliance exclusively and not give them similar position.

The second change is that Heathrow has 'opened up' and service between Heathrow and the US is no longer limited, by law, to only two US carriers and two UK carriers.  In the past, if AA and BA were to join forces, and with no likelihood of UA and VS (Virgin Atlantic) joining forces in response, the amalgamation of BA and AA would have created a much more dominant force than is the case now, with CO, DL and US all operating flights to Heathrow as well (albeit in very limited numbers) and all other US carriers also being free to establish service to Heathrow if they wish.

It had been the unique situation applying to Heathrow that had been the largest stumbling block in the previous two applications by BA and AA.  While it is probably true to say that the two airlines have retained their dominance at LHR at all relevant times from their first application through to the present day, at least in theory, other airlines could now challenge their dominance if they wished to do so, and again, at least in theory, the other two alliances have similar marketplace strength and would be able to mount a viable challenge to AA/BA if it suited them.

The Flip Side of this Evolution

Okay, so if you see your glass as half full, you can contend that the BA/AA alliance is countered by the UA/CO/US alliance and by DL into Heathrow, and of course, in the broader perspective of travel to Europe, there are the additional Skyteam and Star alliance partners joined together


There are two issues, really.

The first is - are there any benefits to travelers; the second is, is there any harm.




Airline Arguments in Favor of Being Granted Immunity


Source :  In footnote 14 of the DoT Show Cause order, the airlines say 


SourceCustomers will be able to travel more easily on the three airlines’ combined route network which will serve 443 destinations in 106 countries with nearly 6,300 daily departures and more frequent and convenient schedule options than any of the three carriers could offer individually. By working together to provide links for connecting passengers, the airlines can expand customer choice by supporting routes that would not be economically viable for the individual airlines.

Response :  How is this different from current codesharing operations?  It is exactly the same thing, which the airlines have been doing, even well before the creation of the three airline alliances in the late 1990s.


SourceWith only two runways, Heathrow operates at full capacity, leaving little room for more flights. Many passengers who connect through LHR do so out of necessity. However, Madrid (MAD) has plenty of room to expand. According to IB [Iberia], MAD could handle an additional 90 operations an hour. Such flexibility is a luxury in a major international market.

If anti-trust immunity is granted to AA/BA/IB, new US-Europe services could take advantage of this connection point where delays are rare—thanks to an absence of overcrowding—and a terminal that is both convenient and pleasant for the user.

Response :  There's nothing to stop the airlines from doing this without the need for anti-trust immunity.  The Openskies agreement allows any airline to fly from anywhere in the US to Madrid, and then on from Madrid to anywhere else in the EU already.  Additionally, Iberia can already code share flights it operates from MAD, and if it chooses to, could schedule them to work around international arrivals/departures from the US operated by itself, BA and/or AA.

SourceIn addition, immunity could save money for travellers. Currently, if a trip is booked from the USA to Europe the passenger must travel both directions on the same airline. Thus, if BA had a lower return fare, but AA had a better outbound fare, there would be no way to combine the two to create a less expensive trip. With immunity in place, all three airlines would combine schedules and fares. The "immunized" airlines could also better plan schedules to meet demand.

Response :  There's nothing to stop the airlines from selling one way fares at half the roundtrip price, the same as has become increasingly common within the US.

Airlines such as BA already sell fares on a one-way basis, with different rates applicable in each direction, based on day of the week and seat/fare availability, but at present the airlines require these low fares to be purchased on a roundtrip basis.  If all airlines removed this requirement - which is entirely of their own creation - then passengers could enjoy even greater benefits at present, being able to pick and choose the lowest fare in each direction not just from members of one closed alliance but from all airlines that serve the route, just like is possible in the US today.



The EU – US Open Skies agreement, which came in to effect in March 2008,
abolished restrictions on which airlines can fly to the US from Heathrow.
Before Open Skies only four airlines (two UK and two US) were allowed to
fly from Heathrow to the US. Despite the general reduction in flights in
the current aviation downturn, there are still more airlines and flights
from Heathrow to the US now than before Open Skies was implemented.

Four new airlines have begun transatlantic services: two from Star (US
Airways and Continental) and two from SkyTeam (Delta and Northwest though
now one airline having merged). Those airlines are able to increase their
presence at Heathrow as both Star and SkyTeam can reallocate slots between
airline members at Heathrow to launch further US services. Continental
recently announced two new daily flights from Heathrow to New York

Of the 73 additional flights to the US each week in summer 2009 (compared
to summer 2007) 58 were operated by competitors of oneworld.

IF ASKED - what slot share do BA, AA and Iberia have at Heathrow?

46 per cent

(note that Iberia's slots aren't used on transatlantic routes)

IF ASKED - how many daily departures does BA and AA have across the

About 130


The Role of the EU


EU-US market

The EU-US market is and will remain highly competitive with 43 airlines
operating non-stop between the EU and the US.

The Star alliance (including Lufthansa, United, bmi, Singapore Airlines and
Air Canada) has 41 per cent of this market, and SkyTeam (including Air
France/KLM, Delta) has 29 per cent. Both have been granted anti trust
immunity (ATI).

oneworld has 20 per cent. It is the only global alliance not to have been
granted transatlantic ATI.


(AC) Received approval from the U.S. Department of Transportation (DOT) (in 2009) for the formation of a transatlantic alliance among . The DOT granted antitrust immunity to the four carriers that allows them to develop an integrated joint venture, referred to as “A++”, and strengthen their transatlantic network creating new options and benefits for customers.
In May 2008, Air France, KLM, Delta and Northwest were granted anti-trust immunity by the US Department of Transportation, authorizing them to work in a close and coordinated way on the North Atlantic through a unique joint-venture. During the 2008-09 financial year, the four partners cooperated within the framework of their respective agreements while preparing for the new jointventure which has been in force since April 1, 2009.
With Delta and Northwest having merged, this joint-venture between the European and US market leaders creates, to the benefit of their customers, the number one operator on the North Atlantic with more than 200 daily flights linking six main hubs, Paris, Amsterdam, Atlanta, Detroit, Minneapolis and New York, with a market share of 25% and revenues of $12 billion.

All these factors would have seemed to indicate an airline that was growing and thriving.

He slip 'twixt cup and lip' seemed to be the applicable adage, and the press release advising their closure referred obliquely to 'some issues arose that we could not overcome' that prevented them securing the financing that had seemed to have already been obtained.


What actually is the difference between code sharing and 'basic marketing agreements' and whatever else and a full anti-trust immunity deal?



To DoT

Can you quantify the statements on page 2 of your order and advise how you have found these to be true and also explain which of these require anti-trust immunity as compared to other ordinary business structures

"With its own immunized alliance and joint venture, oneworld could provide the traveling and shipping public with a wide range of valuable benefits, including:
 Lower fares on more itineraries between city-pairs,
 Accelerated introduction of new routes,
 Additional flights on existing routes,
 Improved schedules,
 Reduced travel and connection times, and
 Product and service enhancements that can provide full reciprocal access to their networks."


Also on page 2,

"The proposed alliance, if approved, would also allow the alliance partners to improve efficiency, reduce costs, and strengthen their networks to better meet the demands of global customers. In the circumstances of this case, these benefits for the airlines would be passed on to consumers and airline employees. The anticipated expansion of each partner’s network would increase the supply of air service, particularly in transatlantic markets, which would exert downward pressure on fares so that consumers would continue to have affordable air travel options."

What leads you to believe that cost savings would result in lower fares rather than higher profits?


What leads you to believe that 'efficiencies' would result in an increase in flights/seats rather than a reduction?  Surely expanding capacity is an uncoordinated and inefficient act?


How much do you expect airfares to reduce as a result of your granting anti-trust immunity?


Will it decrease more or less on routes where AA/BA is strongest?


How will you measure the change in fares attributable to this (and the other) mergers?


What is the trigger point for revisiting your approvals in terms of lack of customer benefits (or actual customer harm)?  1%  2%  3%  5%  10%?  plus or minus?



Have you monitored the reality of what has happened to the Star and Skyteam alliance immunity grants in the past - on page 22 you say it is too soon for results to be apparent?  Will you subsequently publish your findings?  If you plan to keep them secret, what can you disclose and why are you not publishing them in full?  What will you do if your monitoring shows no benefits or actual harm?



Also on page 2

"We tentatively find that one immediate and tangible consumer benefit will be transatlantic code-sharing and fully reciprocal frequent-flyer programs for oneworld customers. Transatlantic code-sharing and full frequent-flyer cooperation allow customers of one airline to earn and redeem miles on the flights of another airline. Due to unique commercial issues affecting oneworld airlines, the oneworld alliance has been unable to provide consumers with these benefits absent an integrated joint venture that operates with a grant of immunity."

Earning miles on other airlines is a long established and current/common practice.  What extra enhancement will now occur, and why could it not have been done without anti-trust immunity?


You say, again on page 2 and spilling on to page 3

"Due to limited runway capacity at Heathrow, takeoff and landing rights – otherwise known as “slots” – are scarce. As a result, new competitive entry is difficult. Since the proposed alliance would allow oneworld to control almost half of Heathrow’s available slots [on page 25 you say '47.2%, including a large share of slots usable for transatlantic service' - presumably more than 50% of these], making new entry even more difficult, we tentatively find that it is necessary to take precautions to ensure adequate competition in the U.S.-Heathrow market."

On page 25 you also say that the slot constraint 'poses the greatest risk of harm for consumers'.

You are proposing that AA/BA make four slot pairs 'available' to competitors.  Heathrow has approximately 1300 flights a day - these 4 slot pairs represent approximately 0.3%, which virtually unchanges the almost half of Heathrow's available slots controlled by oneworld.  What made you decide that a 0.3% reduction would resolve your concern?  What would your response be if BA/AA bought additional slots from other airlines (or simply shifted some of its other current slots) to restore the 4 slot pairs lost?


As regards your slot solution on p 26/27, what will happen if slots are leased rather than sold, at the expiration of the ten year leases?  What will happen if no third party airlines avail themselves of the slot offers?




A large part of your justification seems to be in comparing the AA/BA tie-up to those now created/approved for Skyteam and Star.  But what if these earlier tie-ups are of detriment too?  We're ending up with three major players and no other individual airlines of any market impact at all for all routes between EU and US, compared to prior to 2008 and prior to the alliances where we had, I don't know, how many tens of airlines?



DoT's provisional 'show cause' order




Why did Eos Fail?

So, what caused the demise of this airline and are there any lessons to be learned?  Interestingly, the airline avoided trotting out the usual scapegoa

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Originally published 2 May 2008, last update 30 May 2021

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.



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