United, Continental Antitrust Application Slammed by DOJ

It was looking like a pretty easy ride for Continental, United, Air Canada, and those on the other side of the Pond in their quest for antitrust immunity when the DOT said that it was in favor of the proposal. That was until the DOJ got involved. The Department of Justice isn’t happy, and they have serious concerns about whether this plan should be allowed to proceed. Uh oh.

Let me summarize the DOJ’s comments (PDF). The DOJ says that it is happy to see antitrust immunity granted in cases where it will end up encouraging the other country to liberalize air service with the US. That’s not likely to happen here, so the “applicants bear a heavy burden to prove benefits specific to their alliance agreements that justify immunity. Where an application involves the presence of two major domestic competitors, the request for immunity warrants particularly close scrutiny.”

DOJ has decided that this alliance doesn’t measure up, and instead a more limited one should be approved. Specifically, they have the following concerns:

• The United/Continental immunity will further restrict competition in Latin America and Asia, something that is of great concern to them because there are strict limits on flights in those markets. They cite Beijing flights as an example, though the Continental/United combination shouldn’t be much more concerning than the already approved Delta/Northwest merger.
• Continental and Air Canada will eliminate competition between certain cities in the US and Canada and it’s unlikely that others will step in to add competition.
• Elimination of competition between Continental, TAP, Swiss, and SAS will hurt competition on some Transatlantic routes and there’s no proof that antitrust immunity including Continental will add any benefit.
• Elimination of competition between United and Lufthansa in hub-to-hub markets (currently carved out of the agreement) will result in decreased competition without any proven benefit.
• Since there are two large domestic carriers involved here (Continental and United), there is the chance that domestic competition could be impacted even if it’s not in the agreement.

As you can see, the concerns are pretty much all the same. The DOJ isn’t happy that competition will be reduced without any real benefit for consumers coming out of the agreement. In the DOJ’s analysis, they assume that fares will rise 15 percent on routes where there is no longer any competition and 6 percent where only one competitor will exist if this is approved.

I tend to think that considering the shape that the industry is in, these types of agreements should be approved until the government actually allows cross-border mergers. Since that won’t happen for a long time, this is the best bet that airlines have to help control capacity and become profitable. If the biggest concern is that two domestic competitors are cooperating, then that’s a more valid one. While this agreement doesn’t include domestic routes, it certainly could be expected that there is a risk of some collaboration as a part of the normal interactions on international routes.

I’m curious to see how the DOT responds.