Collusive Alliances
and Intercontinental
Competition
Hubert Horan
Airneth/European Aviation Club
Den Haag 8 December 2011
Brussels 9 December 2011
My perspective on consolidation
Consolidation via Alliance Antitrust Immunity
 Developed original NW/KL alliance network
 Also managed from European (SR/SN) side
 Shut down multiple unprofitable alliances
Consolidation via Merger
 Direct experience with economic plans, results
 Direct experience with true Cross-Border mergers
Active involvement with current consolidation
 Congressional and DOT testimony
 recent Transportation Law Journal article
Horan Airline Transactions Forum 1 March 2011 Page 2
Counter-revolution against liberal
international airline competition
 Intercontinental consolidation since 2003—biggest
structural shift in industry history--was wholly anti-competitive
 Totally dissimilar to pro-consumer ATI of mid 90s
 Unlike shorthaul/regional markets, Intercontinental sector
always competitively deficient
 Billions in anti-competitive pricing power created
 Synergy claims false; Regulatory justification fraudulent
 End of liberal, market-based competition means
industry efficiency will likely decline
 Legal protections gone; Cartelization spreading globally
 Growing threat of cross-border regulatory arbitrage
Horan Airline Transactions Forum 1 March 2011 Page 3
Issue is role of alliances in consolidation,
(not alliances per se)
Alliances
And Global
Collusive
Alliances
Not “Branded”
Alliances
(with antitrust immunity—
same competitive impact
as merger)
(no one objects to Star Alliance
frequent flyer reciprocity,
lounge sharing)
Intercontinental
(longhaul)markets—
Not regional/ shorthaul
markets—45% of global
55% of global revenue—
exclusive focus of
consolidation movement
revenue—
no calls for consolidation
Alliances driving
high concentration
Competition and Cartelization
Not original 1990s
alliance interline
codesharing links
industry structure impact
Horan Airline Transactions Forum 1 March 2011 Page 4
“Industry Consolidation” Movement: we
need fewer Intercontinental airlines
To t al Pax Airlin es, exclu d in g very sm all p ro p eller o p erat o rs
900
800
700
600
500
total industry
growth
All growth from
shorthaul
airlines
400
300
200
Intercontinental—no growth in 30 years
100
0
Regional/shorthaul sector
(45% of global revenue)
All industry growth—
intensely competitive but
no calls for consolidation
Intercontinental sector
(55% of global revenue)
always competitively deficient
due to huge entry barriers
(both political, economic)
Lets merge everyone into just
three global competitors!
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Horan Airline Transactions Forum 1 March 2011 Page 5
IC consolidation strictly North Atlantic; First
(mid 90s) phase was pro-consumer
Original mid-90s ATI did create Consumer Benefits
 Thousands of markets got online service, discount fares for the first time
DTW
ATL
AMS
ZRH
original alliance benefits
KL-NW (92) and SR-DL (95):
fully exhausted by 1999
 Alliance connections totally displaced traditional interline connections
 Consumer benefits only on North Atlantic markets; not pursued elsewhere
Original Collusive Alliances—still robust competition
1991
1993
1995
1997
1999
2001
Concent rat ion-t ot al Nort h At lant ic market (55 million annual pax)
35% 42% 42% 45% 47% 47%
t op 3 share
number of US-EU compet it ors w it h minimum depart ure share of 2%
15
15
13
13
11
11
Horan Airline Transactions Forum 1 March 2011 Page 6
Post 2003 phase: no consumer benefits;
permanent Cartel created
Two separate “consolidation” processes
Total North Atlantic
1991
Concentration-top 3 51%
# Competitors (>2%) 15
2001
mostly
market
forces
47%
11
2012
Totally
Artificial
Consolidation
 All market exits since 93 totally artificial—big carriers petitioned
government to reduce competition
26
competitors
merged into
a permanent
Cartel
Delta
Northwest
United
Continental
USAirways
American
TWA
Finnair
Austrian
assumes last 3 airlines (US,VS,EI) unable to survive as small
indepedents and join Cartel groups after approval of BA/AA
Air France
KLM
Lufthansa
British Air
Iberia
Brussels
Air Canada
Aer Lingus
Virgin
SAS
Alitalia
Swiss
LOT
TAP
CSA
Turkish
BMI
the
North
Atlantic
Cartel
98%
3
LH-led
Collusive
Alliance
AF-led
Collusive
Alliance
BA-led
Collusive
Alliance
Horan Airline Transactions Forum 1 March 2011 Page 7
Post-2003 Cartelization: biggest shift in
industry history, with more to come
Pacific:
 Unlike original 90s “Open Skies” designed to
Sham US-Japan
massively reduce competition, facilitate subsidies,
“Open Skies”
slot rules and other distortions
Delta
Northwest
United
Continental
USAirways
American
TWA
Finnair
Austrian
SAS
Alitalia
Swiss
LOT
Air France
KLM
Lufthansa
British Air
Iberia
Brussels
Air Canada
Aer Lingus
Virgin
TAP
CSA
Turkish
BMI
worldwide:
artificial market
power is key
LH-led
Collusive
Alliance
26
transAtlantic
carriers
AF-led
Collusive
Alliance
BA-led
Collusive
Alliance
26
transPacific
carriers
Delta
Northwest
United
Continental
American
Hawaiian
Cathay Pac
Air China
China East
China South
Hainan
Air Canada
Philippines
Singapore
Thai
Malaysian
JAL
ANA
Korean
Asiana
China
EVA
Qantas
Air NZ
V Australia
Air Pacific
 Cartel using its control of longhaul access to
the huge EU/US markets
Horan Airline Transactions Forum 1 March 2011 Page 8
Intercon: conditions to let the market decide
“how many airlines” don’t exist
LIBERAL COMPETITIVE CONDITIONS
CAREFULLY ENGINEERED IN MOST
DOMESTIC/SHORTHAUL MARKETS
BUT TRULY LIBERAL CONDITIONS
NEVER ESTABLISHED IN
INTERCONTINENTAL MARKETS
Pricing/market entry freedom
Pricing/market entry freedom
Access to capital markets
Access to capital markets
No artificial competitive barriers
No artificial competitive barriers
Transparent financial reporting
Transparent financial reporting
Open corporate control market
Open corporate control market
Strong antitrust rules, enforcement
Strong antitrust rules, enforcement
Efficient bankruptcy process
?
Efficient bankruptcy process
No political barriers to exit—
no carriers “Too Big To Fail”
No political barriers to exit—
no carriers “Too Big To Fail”
Objective: Maximum consumer/efficiency
gains economy-wide (not interests of specific
companies/employees)
Objective: Maximum consumer/efficiency
gains economy-wide (not interests of
specific companies/employees)
Consumers, investors decide
“how many airlines”
Governments, entrenched incumbents
decide
“how many airlines”
Horan Airline Transactions Forum 1 March 2011 Page 9
Claims of big “scope/scale synergies”
from consolidation are false
Hub City Synergy
”Scope+Scale Synergy” Mergers
but all 20 years ago
All failed—few synergies, huge costs
82—CO/TI

86—TW/OZ

86—NW/RC

87—BA/BR

89—AF/UT/IT

Also some successes
in bankruptcy cases
(HP/US, LH/LX)
79—PA/NA
85—PE/FL
86—AA/OC
87—DL/WA
87—CO/PE
87—US/PS
 88—CO/EA
 88—US/PI
 98—SR/SN
 98—KL/AZ
 00—AA/TW
 00—UA/US






Recent mergers (KL-AF, DL-NW, UA-CO) claiming
huge efficiencies not found in any previous merger
--and provided no evidence to support merger claims
Horan Airline Transactions Forum 1 March 2011 Page 10
Post-2003 Consolidation has created
huge anti-competitive market power
Form 41 Pax Revenue/Emplanement --index 1993=100
160
150
North Atlantic Passenger Fares Have Risen 3X Faster Than US
Domestic Fares since Extreme Consolidation began in 2003
140
Top 3 Concentration 03->09
total Continent 67%-> 98%
total No.Atlantic 54%-> 92%
130
120
110
100
90
ATLANTIC rev/pax
DOMESTIC rev/pax
80
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total North Atlantic
1991
2001
2010
Concent rat ion-t op 3
# Compet it ors (>2% )
51%
15
47%
11
98%
3
Horan Airline Transactions Forum 1 March 2011 Page 11
Biggest shift in industry history in less than
10 years----three key drivers
#1-EU shift from liberal to “managed” competition
purely anti-competitive 2003 KL/AF merger
 Brussels proactively driving consolidation
 Rig markets to favor “National Champions” (LH/AF), weaken
LCCs; subsidies for weak (AZ, OS, OA, LX)
 totally different merger rules for AF, FR
 US Open Skies delayed 5 years—wanted more mergers
 KL/AF: no synergies/consumer benefits; ends EU longhaul
competition, establishes Cartel; forces USA consolidation
#2—staged sequence of follow-on ATI/mergers;
DOT willingness to disobey law, use fraudulent evidence
#3—huge “Consolidation is Inevitable” PR campaign
Horan Airline Transactions Forum 1 March 2011 Page 12
All ATI Consumer Benefits findings based on
willful DOT regulatory fraud
“Double Marginalization”—ATI automatically reduces fares 15-25%
--sole basis of $90 million annual Oneworld consumer benefits claim
 Falsely claims that physical barriers force interline carriers to always set
fares $200-300 higher than online/ATI connecting fares
 Falsely claims that ATI always and automatically cut connecting fares
$200-300 regardless of market/competitive conditions
 “Double Marginalization” violates laws of supply and demand
 False “rule” that reducing competition always reduces prices designed to
nullify both the law and rules of evidence
 Every ATI application automatically justified; no need for case-specific evidence
 False claims fabricated by one UAL consultant in one paper;
DOT claims “rule” justified by multiple, independent researchers
 based on regression of 1990s data that is totally unrelated to the pricing claim
 No evidence of any pricing benefits from any ATI grant since 90s
 No actual consumer pricing evidence submitted in any recent ATI case
 DOT uses fraudulent “rule” as basis for rejecting evidence of higher prices
Horan Airline Transactions Forum 1 March 2011 Page 13
All recent Star/Skyteam/Oneworld ATI
depended on DOT’s disregard for the law
 DOT disobeyed Clayton Act requirement for market power test
 No ATI decision had any of the pricing data, entry barrier or market contestability
evidence needed to show ATI would not create market power
 DOT disobeyed legal requirement that ATI cannot be granted without proof
of “public benefits”
 Private benefits to applicant (i.e. consolidation benefits Star Alliance) used by DOT as
demonstration of “public benefits”
 DOT accepted “improved frequent flyer program” claims as proof of “public benefits”
even though frequent flyer benefits decreased
 DOT public benefits “findings” not based on any objective data or analysis; just
“copy/pasted” applicants unsubstantiated claims
 Newest DOT regulatory fraud—”metal neutrality” designed to extend
collusion to large overlapping nonstop O&Ds
 Previous ATI cases had carve-outs, given pricing risks in LHR-ORD type markets
 DOT established new “rule” based on false claim that “metal neutral” alliances cannot
function if any routes excluded
 Rule based on paper by same consultant who fabricated “Double Marginalization”
Horan Airline Transactions Forum 1 March 2011 Page 14
“Industry Consolidation movement”-successful misinformation/PR campaign
Inevitable trend towards
industry consolidation
Industry growing for decades
“Trend” just biggest Atlantic carriers
Industry consolidation driven
by market forces
All from government actions;
Capital markets not interested
Consolidation OK—lots of
competition remains
shorthaul competitive; Intercon always
stagnant/getting and worse
Consolidation justified by big
scale/scope synergies
No previous merger found synergies;
United isn’t too small to compete
ATI always drives lower
consumer fares
No verifiable evidence of any
consumer benefits since 1999
Alliances create FF and other
consumer benefits
Branded alliance benefits falsely
attributed to Collusive Alliances
There has been no independent (regulatory, media, academic)
scrutiny of these “Industry Consolidation” claims
Horan Airline Transactions Forum 1 March 2011 Page 15
Counter-revolution against liberal
international airline competition
90s: Global Liberalization
Today: Intercon Cartelization
Who determines
number of
competitors?
Consumers, investors in
the open marketplace
Governments, entrenched
incumbents via private
“backroom” discussions
Capital flows,
efficiency gains
From less-efficient to more- More-efficient at mercy of lessefficient
efficient (but Too Big To Fail)
Legal/regulatory
objective
consumer welfare, longterm industry efficiency,
“level-playing field”
Protect/enrich a handful of
private companies, especially
“national champions”
Legal/regulatory
approach
Neutral umpire enforcing
transparent rules using
objective data/evidence
Undermine law/precedent with
fraudulent evidence; opaque
rules applied arbitrarily
Role of “Open
Skies”
Facilitate new entry, reduce Facilitate reduced competition
cross-border and artificial
and regulatory arbitrage;
barriers
increased protection of weak;
Driver of airline
success
Efficiency, service quality,
network strength
Ability to capture regulators;
control of alliance access
Horan Airline Transactions Forum 1 March 2011 Page 16
Looking forward given tomorrow’s
highly illiberal environment
Continuing, artificial consolidation
--many moves unthinkable 10 years ago
 reducing trans-Pacific from 26 to 3 competitors
 BA acquiring BMI; only 4 carriers for entire USA
 crude Canadian/German anti-EK protectionism
Negative outlook for markets and industry
--stagnant competition means declining efficiency
 Competition weakens further—3 alliance competition unsustainable
 LHR-based Oneworld uncompetitive with continental duopoly
 squeeze of small alliance members and domestic LCCs
growth of cross-border regulatory arbitrage
threatens financial/consumer/safety protections
 UAL IAD-MAD precedent; Qantas offshoring; Tiger safety lapses
Horan Airline Transactions Forum 1 March 2011 Page 17
Horan Airline Transactions Forum 1 March 2011 Page 18
Horan Airline Transactions Forum 1 March 2011 Page 19
Current Branded/Collusive Alliance models
evolved 15+ years ago
Alliances categories pre-1990
Frequent Flyer partners
foreign airlines join United’s Mileage
Plus program or American’s
Aadvantage program
Narrow route-extention
codesharing
foreign airlines codeshare on US
domestic flights, providing
connecting service to points it would
(could) not otherwise serve
Route-revenue pooling with
codesharing
Pan Am/Saudia pool revenues,
profits from each other’s flights in a
specific market
No anticompetitive
risks
No anticompetitive
risks
new post-1990 Alliances
“Branded” Alliances
90-Global Excellence
97-Star
98-Oneworld
00-Skyteam
Collusive Alliances
on the North Atlantic
Obvious risks
very rare in US
markets since 70s;
but still common
outside US
92-KL-led alliance(NW)
95-SR-led alliance (DL)
97-LH-led alliance (UA)
00-AF led alliance (DL)
09-BA led alliance (AA)
Horan Airline Transactions Forum 1 March 2011 Page 20
Decades of strong, continuous
structural growth
Horan Airline Transactions Forum 1 March 2011 Page 21
Driving structural growth>
dynamic competitive “churn”
 Competitive “churn”-- active
entry and exit—
reallocation of capital from
weak to strong
 Innovation/productivity
driven by both serious threat
of failure/entry and real
opportunity to grow
 If weak carriers don’t exit,
strong incumbents, entrants
can’t grow
Churn (exit) since 1980:
77%--USA
56%--W. Europe/rest of
Western Hemisp.
40%--rest of world
Horan Airline Transactions Forum 1 March 2011 Page 22
Alliance Public Benefits: 30% of North
Atlantic seriously underserved in 1990
70% of market had good online schedules, full range of discount fares
Nonstop Big Gateway
New York to top 20 EU cities
London to top 20 US cities
JFK
ORD
ATL
One-stop Big Gateway cities
to Interior cities
top 5-6 EU cities to hundreds of
US cities (via US hubs)
top 5-6 US cities to hundreds of
EU cities (via EU hubs)
LHR
CDG
FRA
but 30% of market had poor service and very few discount fares
USA Interior cities to EU Interior cities
(i.e. St. Louis-Brussels, Milwaukee-Munich)
no online or coordinated schedules; passengers forced to
change airlines and terminals; only highest fares available
previous solution (PA/TW hubs in Europe) had failed
Horan Airline Transactions Forum 1 March 2011 Page 23
UK and Continental Europe markets---very
different competitive dynamic
UK/Ireland-USA market
15 million pax
pure nonstop market
LON
not served via European hubs;
80% is London traffic
DTW
ORD
EWR
CVG
SFO
JFK
PHL
IAD
AMS
BRU
PAR
DFW
LAX
ATL
IAH
FRA
ZRH MUC
MAD
MIA
CPH
MXP
FCO
Continental
Europe—USA
40 million pax
pure hub market
London no longer seriously
competes for US-Europe
connecting traffic
Continental Hubs don’t
serve London/Dublin traffic
Horan Airline Transactions Forum 1 March 2011 Page 24
Huge risk to consumers with Cartel, 95%+
concentration in place
Rapidly
Increasing
Concentration
Healthy, Profitable
Competition,
concentration
even with Alliances
1995
1997
1999
2001
Permanent
Cartel
with huge
entry barriers
after 2004
2003
2005
2007
2009
Concent rat ion levels of US-Cont inent al Europe market (40 million annual pax)
top 3 share
47%
55%
56%
61%
67%
85%
88%
97%
Concent rat ion levels of t ot al Nort h At lant ic market (55 million annual pax)
top 3 share
42%
45%
47%
47%
54%
68%
66%
97%
number of t ot al Nort h At lant ic compet it ors wit h minimum depart ure share of 2%
13
Risks to
Consumers
13
11
very low
11
9
7
Serious
6
3
HUGE
Horan Airline Transactions Forum 1 March 2011 Page 25
North Atlantic competitors,concentration and
departure shares 1991-2008
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
19 91
19 93
19 95
top2 23.8% top2 31.1% top2 29.0%
top 3 34.6% top 3 42.3% top 3 42.4%
top4 44.0% top4 50.2% top4 51.3%
CA% 0.0% CA% 0.0% CA%
7.3%
num ber of com pet it ors w it h m inim um
0.5%
24
0.5%
25
0.5%
22
2%
15
2%
15
2%
13
5%
6
5%
6
5%
7
19 91
19 93
19 95
BA 12.0%
DL 16.5%
DL 14.5%
PA 11.8%
AA 14.6%
AA 14.4%
TW 10.7%
BA 11.2%
BA 13.4%
AA 9.4%
UA 7.9%
UA 9.0%
LH 8.7%
LH 6.5%
KL 7.3%
DL 6.4%
TW 5.8%
LH 5.9%
AF 4.9%
AF 4.1%
TW 5.1%
KL 4.3%
KL 3.9%
AF 4.3%
SR 3.5%
NW 3.7%
VS 3.5%
SK 3.4%
CO 3.4%
CO 3.0%
NW 3.3%
SR 2.7%
AZ 2.8%
UA 2.6%
SK 2.5%
SR 2.5%
AZ 2.4%
AZ 2.5%
SK 2.0%
CO 2.2%
VS 2.5%
SN 1.7%
VS 2.2%
US 2.3%
EI 1.3%
IB 1.8%
IB 1.5%
IB 1.2%
SN 1.7%
SN 1.0%
US 1.1%
US 1.2%
EI 0.9%
LO 0.8%
EI 1.1%
SU 0.8%
SU 0.8%
LO 0.8%
LO 0.7%
OS 0.8%
TP 0.7%
OS 0.7%
OK 0.8%
SU 0.7%
OK 0.7%
AY 0.6%
AY 0.6%
TP 0.7%
TP 0.5%
JU 0.5%
AY 0.6%
OA 0.4%
OA 0.4%
OA 0.5%
MA 0.4%
OS 0.4%
TK 0.4%
TK 0.3%
OK 0.4%
NG 0.2%
RO 0.3%
19 97
19 99
top2 31.5% top2 34.6%
top 3 45.0% top 3 47.5%
top4 53.2% top4 59.1%
CA% 25.6% CA% 42.0%
depart ure share of :
0.5%
19
0.5%
19
2%
13
2%
11
5%
6
5%
6
19 97
19 99
SR 17.9%
SR 17.3%
BA 13.5%
LH 17.3%
AA 13.5%
BA 12.9%
UA 8.2%
AA 11.7%
KL 7.7%
KL 7.4%
LH 6.1%
CO 6.3%
AF 4.4%
AF 4.6%
CO 3.9%
VS 4.3%
VS 3.9%
US 3.3%
TW 3.6%
TW 2.4%
AZ 2.9%
AZ 2.0%
US 2.8%
EI 1.7%
SK 2.1%
IB 1.4%
EI 1.7%
SU 1.1%
IB 1.2%
LO 0.9%
LO 1.1%
OK 0.8%
SU 1.0%
MP 0.8%
OK 0.9%
TP 0.6%
TP 0.5%
TK 0.5%
AY 0.5%
AY 0.4%
TK 0.4%
OA 0.3%
AI 0.4%
MA 0.3%
OA 0.4%
H2 0.3%
MA 0.3%
RO 0.2%
UX 0.2%
JK 0.2%
RO 0.2%
FF 0.2%
FF 0.2%
UX 0.1%
20
top2
top 3
top4
CA%
01
36.1%
47.3%
58.0%
43.6%
20
top2
top 3
top4
CA%
03
41.0%
54.0%
65.2%
48.6%
20
top2
top 3
top4
CA%
05
55.6%
67.9%
79.4%
55.6%
20
top2
top 3
top4
CA%
06
54.1%
66.2%
77.6%
54.1%
20
top2
top 3
top4
CA%
07
54.2%
65.8%
76.5%
54.2%
20
top2
top 3
top4
CA%
0.5%
2%
5%
20
SR
LH
BA
AA
KL
CO
AF
VS
US
AZ
EI
IB
TW
LO
OK
SU
TK
MP
TP
OA
AY
JK
MA
UX
RO
H2
18
0.5%
14
0.5%
9
0.5%
9
0.5%
9
0.5%
11
2%
9
2%
7
2%
6
2%
6
2%
7
5%
6
5%
5
5%
5
5%
5
5%
01
20 03
20 05
20 06
20 07
20
18.1%
LH 20.7%
AF 28.7%
AF 28.4%
AF 28.3%
AF
18.0%
AF 20.3%
LH 26.8%
LH 25.6%
LH 25.9%
LH
11.2%
BA 12.9%
BA 12.3%
BA 12.2%
BA 11.6%
BA
10.8%
AA 11.2%
AA 11.5%
AA 11.4%
CO 10.7%
CO
7.5%
KL 7.6%
CO 8.4%
CO 10.1%
AA 10.4%
AA
6.6%
CO 7.2%
VS 4.8%
VS 4.7%
VS 4.9%
VS
5.6%
VS 4.6%
EI 2.0%
EI 2.0%
EI 1.8%
EI
4.5%
US 4.5%
IB 1.5%
IB 1.3%
IB 1.4%
IB
4.2%
SR 2.8%
SU 0.7%
SU 0.6%
SU 0.5%
SU
2.6%
EI 1.9%
TK 0.5%
MP 0.5%
E0 0.5%
E0
2.0%
IB 1.6%
MP 0.4%
TK 0.4%
TK 0.4%
MY
1.6%
LO 0.9%
AY 0.3%
OA 0.3%
MY 0.4%
GJ
1.2%
SU 0.7%
OA 0.3%
AY 0.3%
MP 0.4%
OA
0.9%
TK 0.5%
MA 0.2%
MA 0.2%
GJ 0.3%
AY
0.8%
TP 0.4%
VV 0.2%
E0 0.2%
OA 0.3%
MA
0.7%
MP 0.4%
A7 0.0%
MY 0.2%
AY 0.2%
VV
0.6%
AY 0.3%
VV 0.2%
MA 0.2%
Y2
0.6%
OA 0.3%
A7 0.1%
VV 0.2%
A0
0.5%
MA 0.2%
GJ 0.1%
A0 0.1%
Y7
0.4%
RO 0.2%
Y7 0.1%
0.3%
VV 0.0%
A7 0.1%
0.3%
A7 0.0%
0.3%
0.2%
KL indicates Collusive Alliance group
0.1%
CA% total Collusive Alliance departure share
0.0%
USDOT Form 41 T100 data
for 12 months ending 2nd Q of year shown
Horan Airline Transactions Forum 1 March 2011 Page 26
08
55.5%
67.2%
78.1%
55.5%
9
6
5
08
28.9%
26.6%
11.7%
10.8%
10.5%
5.0%
1.8%
1.4%
0.6%
0.5%
0.4%
0.3%
0.3%
0.2%
0.2%
0.2%
0.2%
0.1%
0.1%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Liberal competition drove decades of
profitable industry growth
Objectives of Airline Deregulation and US Open Skies treaties
pressure from
Liberal Airline
Competition
Innovation/productivity gains
continuously improve
industry capital allocation—
better airlines prosper/grow
bad airlines shrink/exit market
Consumers:
More service
at lower fares
Industry:
Profits, capital
for growth
LIBERAL AIRLINE COMPETITION—ECONOMIC REQUIREMENTS
Pricing/market entry freedom
Transparent financial reporting
Access to capital markets
Strong antitrust rules, enforcement
No artificial competitive barriers
Efficient bankruptcy process
Open corporate control market
No political barriers to exit
LIBERAL AIRLINE COMPETITION—POLITICAL REQUIREMENTS
Let Consumers/Capital Markets pick winners (level-playing field)
Focus on Maximum Gains Economy-Wide (not favored companies)
Horan Airline Transactions Forum 1 March 2011 Page 27
Consolidation: recent, artificial, and not
driven by market competitiveness
 In 21 of the 22 cases competition reduced artificially--petitioning
governments for approval to merge or join a collusive alliance
 Consolidation used to protect small/weak airlines
competitive
exit of
Large/Medium
North Atlantic
carriers
since 1993
PA
NW
DL
SN
OS
UA
SK
BD
TW
AZ
OK
US
KL
SR-LX
LO
TP
TK
CO
AA
VS
IB
AY
1993
1993
1995
1995
1995
1997
1997
2001
2002
2002
2002
2004
2004
2005
2005
2005
2008
2009
2009
2009
2009
2009
m arket f orces
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
joined KL, t hen AF-led collusive alliance
joined SR, t hen AF-led collusive alliance
joined SR-led collusive alliance
joined SR, t hen LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
acquired by AA
joined AF-led collusive alliance
joined AF-led collusive alliance
joined LH-led collusive alliance
acquired by AF
joined LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
pet it ioned t o join LH-led collusive alliance
pet it ioned t o join BA-led collusive alliance
considering joining LH-led collusive alliance
pet it ioned t o join BA-led collusive alliance
pet it ioned t o join BA-led collusive alliance
Horan Airline Transactions Forum 1 March 2011 Page 28
Consolidation: recent, artificial, and not
driven by market competitiveness
 21 of the 22 large/medium carriers that stopped competing
independently did so artificially--by petitioning governments for
approval to merge or join a collusive alliance
 since 93 only very small carriers were forced to exit by market competition
competitive exit-Large/Medium carriers
PA
NW
DL
SN
OS
UA
SK
BD
TW
AZ
OK
US
KL
SR-LX
LO
TP
TK
CO
AA
VS
IB
AY
1993
1993
1995
1995
1995
1997
1997
2001
2002
2002
2002
2004
2004
2005
2005
2005
2008
2009
2009
2009
2009
2009
market f orces
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
art if icial
joined KL, t hen AF-led collusive alliance
joined SR, t hen AF-led collusive alliance
joined SR-led collusive alliance
joined SR, t hen LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
acquired by AA
joined AF-led collusive alliance
joined AF-led collusive alliance
joined LH-led collusive alliance
acquired by AF
joined LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
joined LH-led collusive alliance
pet it ioned t o join LH-led collusive alliance
pet it ioned t o join BA-led collusive alliance
considering joining LH-led collusive alliance
pet it ioned t o join BA-led collusive alliance
pet it ioned t o join BA-led collusive alliance
exit of very small competitors
JU
UT
NG
6U
UN
TZ
H2
JK
UX
FF
RO
A7
MA
MP
E0
MY
A0
Y7
1992
1994
1995
2000
2000
2000
2001
2002
2002
2002
2004
2007
2008
2008
2008
2008
2008
2008
market f orces
art if icial-acquired by AF
art if icial--joined SR/LH-led alliances
market f orces
market f orces
market f orces
market f orces
market f orces
market f orces
market f orces
market f orces
market f orces
market f orces
art if icial-acquired by AF
market f orces
market f orces
art if icial-acquired by BA
market f orces
Horan Airline Transactions Forum 1 March 2011 Page 29
Almost every merger since deregulation has
been a dismal financial failure
80: Pan Am/National
1-Post Dereg
FAILURE—largely liquidated
82: Texas Intl/Continental
1-Post Dereg
FAILURE—quickly bankrupt
85: Southwest/Muse
2-Quasi-BK
Profitable—cheap acquisition
85: People Exp/Frontier
4-Synergy/Scope
FAILURE—soon bankrupt
86: TWA/Ozark
1-Post Dereg
Profitable—Restructured STL
86: Northwest/Republic
1-Post Dereg
Profitable—Restructured DTW/MSP
86: American/Aircal
4-Synergy/Scope
FAILURE—totally liquidated
87: Continental/PE/NY/FL
4-Synergy/Scope
FAILURE—soon bankrupt
87: Delta/Western
4-Synergy/Scope
FAILURE—largely liquidated
87: Continental/Eastern
4-Synergy/Scope
FAILURE—soon bankrupt
88: USAir/PSA
4-Synergy/Scope
FAILURE—largely liquidated
88: USAir/Piedmont
4-Synergy/Scope
FAILURE—soon bankrupt
94: Southwest/Morris
3-Small Acquis
Profitable—easy fit with SWA
99: American/Reno
4-Synergy/Scope
FAILURE—largely liquidated
00: American/TWA
4-Synergy/Scope
FAILURE—largely liquidated
00: United/USAir (plan)
4-Synergy/Scope
FAILURE—quickly bankrupt
05: America West/USAir
2-Quasi-BK
Jury Out—low asset cost
5 categories
of mergers:
1—Post Deregulation
Hub Restructuring
2—Bankruptcy-type
Asset restructuring
3—Small Acquisition
easily integrated
4—Cost Synergies/
Network Scope
5—Anti-Competitive;
exploit dominance,
entry barriers
Horan Airline Transactions Forum 1 March 2011 Page 30
Anti-competitive impacts confirmed by
preliminary 2010 pricing data
160
Form 41 Pax Revenue/Emplanement--index 1999=100
150
140
Artificial Market Power on North Atlantic
drove rapid 2010 price recovery not seen
in Domestic or Other International markets
DOMESTIC rev/pax
130
ATLANTIC rev/pax
INTexclATL rev/pax
120
110
100
90
80
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
post 2004 market power defied laws of supply and demand
Domestic fares +15% because seats only + 1%
Atlantic fares +46% despite seats +45%
Horan Airline Transactions Forum 1 March 2011 Page 31
Post-2003 consolidation required
gutting all key antitrust tests
Two Tests—Central to all Competition Law
 Does consolidation increase risks of sustainable anticompetitive market power?
 Are markets contestable? Entry barriers large?
 Does consolidation create significant, market-wide
consumer benefits (lower prices/increased output)?
 Clearly large enough to offset competitive risks?
Need objective, verifiable evidence to meet tests
 Evidence must be significant, market-wide
 Evidence must be market/case specific and linked to
competitive advantage in these markets
 Evidence of comparable benefits in similar cases
Horan Airline Transactions Forum 1 March 2011 Page 32
Horan Airline Transactions Forum 1 March 2011 Page 33