Airline JVs In The US Are Already Receiving Greater Scrutiny

Summary

• Regulators seem poised to cast greater scrutiny on airline joint ventures.
• JetBlue cites progress in its efforts to push for better conditions in immunised JVs.
• There is no reason to think US regulators will reject pending JV applications, but new conditions are likely to be attached to their approval.
• Other governments too may be reassessing the merits of existing and proposed JVs.

North Atlantic JVs could attract more scrutiny after Brexit

The US now has more than 120 open skies agreements with countries worldwide, and one of the most visible byproducts of those partnerships is the establishment of powerful airline JVs. The immunised JVs that are the most mature - those covering the North Atlantic - have been in place for almost a decade.

During the past three to four years those agreements have been garnering more scrutiny as some smaller non-immunised competitors have argued that the scope of those JVs is uncompetitive.

As noted in the previous report, analysis conducted by CAPA shows seat capacity among the three large JVs on the North Atlantic fell slightly from 2010 to 2018, from 74.5% to 67.6%, but the total JV share, which included Virgin Atlantic's capacity since 2014, was a healthy 72.1% in 2018.

Given the still high concentration, there's little doubt - if and when Brexit takes effect - that trans-Atlantic JV agreements will come under scrutiny. And as the various reviews are undertaken it is reasonable to anticipate that generic principles will evolve. Globally, competition bodies tend to discuss between each other the principles they apply so as to seek some harmonisation of approach - although differing national legislation does force some variation.

JetBlue and Hawaiian call for more scrutiny of JVs as Hawaiian seeks immunity with JAL

The US value/hybrid airlines JetBlue and Hawaiian - each operating or planning to operate in competition with JVs - have been vocal in their contentions that immunised JVs have resulted in higher fares and decreased consumer choice.

Hawaiian has subsequently applied for antitrust immunity with Japan Airlines (JAL), and those airlines hold the position that their proposed JV would allow them to compete more effectively with Star partners ANA and United, which have their own immunised JV, and the recently launched trans- Pacific JV between SkyTeam partners Korean and Delta.

Hawaiian and JAL believe they need to join forces beyond a codeshare to compete with a planned significant capacity increase to Honolulu with the Airbus A380 by Japan's largest airline, ANA.

Japan is a key market for Hawaiian, representing 58% of the airline's international departing frequencies by country.

JetBlue, which appears to be inching closer to a trans-Atlantic launch, recently reiterated its position that JVs "need to have better conditions".

The airline highlighted that the three remedies it proposed in order for Delta and Aeromexico to gain approval for their JV, featured in the final decision issued by regulators. Those conditions were: removing exclusivity provisions, placing a time period around the JV, and the divestiture of slots at congested airports (Delta and Aeromexico had to divest slots at Mexico City Juarez International and New York JFK).

What conditions will the US DoT impose on outstanding JV applications?

It remains to be seen whether the US DoT will apply those conditions to pending JV applications including Hawaiian and JAL, Delta and WestJet, American and LATAM, and American and Qantas. Slot divestitures may not be required, but removing exclusivity provisions and requiring a three to five year review period of those tie-ups could likely be conditions in order for those airlines to gain approval for their proposed partnerships.

Qantas and American have refiled their JV application following the Obama Administration's rejection of the deal due to concerns about the two airlines' concentration in the market. The airlines are confident of gaining approval for the tie-up and have promised increased services between the US and Australia once approved.

There is little reason to believe that any of those proposed JVs would be rejected outright, but it is more difficult to predict which conditions the DoT will impose in its approval process. When the DoT approved the Delta-Korean JV in late 2017 it required the airlines to remove exclusivity clauses, and that could be a recurring theme in future approvals.

Brexit will continue to overhang decisions by all airlines for the foreseeable future

Although the US and UK are moving to a post-Brexit aviation bilateral that essentially maintains the status quo, the repercussions of Brexit and the UK Government's ability to get consensus on how to go forward could have reverberations for air travel demand.

Both Delta and United have warned that headwinds have already surfaced in the trans-Atlantic market in early 2019, and uncertainty over Brexit is one factor contributing to those challenges. The regional operator Flybmi recently ceased operations and sought creditor protection, citing Brexit uncertainty as one of the reasons for its demise.

The lack of clarity on Brexit will continue to be an overhang, and in the long term airlines may have to rethink their networks as demand patterns shift - particularly on corporate travel routes.

JVs will continue to evolve; new requirements for approval may grow stronger

There are few remaining regions where the US needs to forge open skies agreements. China is the most important market missing from the list, but broader trade issues mean that open skies is unlikely to be implemented in the near future.

The evolution of existing and future JVs will be closely watched, and for now it seems that US regulators are listening more carefully to smaller airlines advocating new conditions for antitrust approval that were absent in the past.

Other JVs not involving the US, such as ANA-Lufthansa, are also likely to feel the flow-on effects of new principles being evolved. That does not mean a one size fits all approach is likely, but as experience grows with the practical application of airline operations under JVs, certain underlying principles are likely to become universal.