Mandatory Code-sharing for Small Airports

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Mandatory Code-sharing for Small Airports Improving Access to the National Airspace System Stephen D. Van Beek, Ph.D. Small Airports Committee ACI North America 20 March 2018

Today s Agenda 1. Introduction 2. Air Service Patterns 3. Small Airport Service Challenges DOT Authority Causes The Air Carrier Variable 4. Consolidation and Global Alliances: Competition and Commitments Competition Policy Structuring Consolidation SPAs and Provisos 5. Applying the Policy and Commitments to Small Community Access Valuing Access Models of Implementation 6. Questions and Discussion Data herein courtesy of OAG On-line (accessed January 2018), except where noted. Thanks to SDG s Michele Tavani for his data and graphics work. Mandatory Code Sharing for Small Airports 2 2

2008-17 Change in Domestic Capacity at US airports (M/S/N/CS) Hub 2017/2008 (%) 2017/2008 (%) Legacy airlines M -1.3% -18.6% S -9.6% -14.6% N -6.7% -8.4% CS -17.9% -48.5% Based on 2008, 2017 Departing Seats at each airport. Hub Categorization is based on 2017 FAA data Size (2008) 2017/2008 (%) 2017/2008 (vol.) >3m -4.9% -8,822,107 2m< X <3m -16.9% -5,128,816 1m< X <2m -2.6% -888,954 0.5m< X <1m -5.3% -1,423,956 0.3m< X <0.5m 4.1% 540,833 0.1m< X <0.3m -6.2% -842,232 0.05m< X <0.1m -27.6% -1,073,935 <0.05m 3.9% 220,973 Size grouping is based on 2008 Departing Seats at each airport. Usually medium Hub >3m, Small Hubs between 2 and 1 m. While Medium Hubs faced reductions with Legacy Service, it was almost completely offset by expansion of non-legacy airlines (LCCs/ULCCs) Impact becomes greater as we move to Small/Non Hubs and especially to Commercial Services airports When we breakdown airports by size the relation between size and % decrease is less strong. Given the small volumes other factors (e.g., entry of ULCC0 shift the growth up/down and influence the average. The chosen period is also relevant. PIE (Allegiant) AZA (Allegiant) PGD (Allegiant), ECP (DL, WN), TTN (Frontier) PIE: St Petersburg AZA: Phoenix Gateway PGD: Punta Gorda ECP: NW Florida Beaches TTN: Trenton Mercer Mandatory Code Sharing for Small Airports 3

Departing movements (m) Loss of Service to Smaller Airports Correlated by Size and Most Pronounced with United and with Operations (rather than seats) 7 6 Seat share stable over decade Smaller Airports traffic to Large Hubs (by hub type) 2017 vs 2008 Movements +% 5 4 3 2 1 0 20% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20% Small -16% Non-Hubs -20% Commercial Service -69% Total Small (S, N, CS) -19% (-2% on Seats) Traffic from S-N-CS toward Large Total Legacy 2017 vs 2008 By legacy airline Traffic from Smaller to Large Hubs Total Traffic (Seats) -27% -27% -7% -14% -23% -18% Only with American has connections to Large Hubs decreased less than total airline traffic. Mandatory Code Sharing for Small Airports 4

U.S. Department of Transportation (Title 49 40101) Aviation Policy The Secretary and DOT have more authority than they are using, especially with small community access: (a) Economic Regulation. In carrying out subpart II of this part and those provisions of subpart IV applicable in carrying out subpart II, the Secretary of Transportation shall consider the following matters, among others, as being in the public interest and consistent with public convenience and necessity: [note: less relevant sections are excluded from list below] (4) the availability of a variety of adequate, economic, efficient, and low-priced services without unreasonable discrimination or unfair or deceptive practices. (6) placing maximum reliance on competitive market forces and on actual and potential competition (10) avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier unreasonably to increase prices, reduce services, or exclude competition in air transportation. (11) maintaining a complete and convenient system of continuous scheduled interstate air transportation for small communities and isolated areas with direct financial assistance from the United States Government when appropriate. (13) encouraging entry into air transportation markets by new and existing air carriers and the continued strengthening of small air carriers to ensure a more effective and competitive airline industry. (16) ensuring that consumers in all regions of the United States, including those in small communities and rural and remote areas, have access to affordable, regularly scheduled air service. Mandatory Code Sharing for Small Airports 5 5

Existing DOT Laws Informing Codesharing & Small Communities Essential Air Service (49 USC 41744): (a)in General. If the Secretary of Transportation determines that extraordinary circumstances jeopardize the reliable performance of essential air service under this subchapter from a subsidized essential air service community to and from an essential airport facility, the Secretary may require an air carrier that has more than 60 percent of the total annual enplanements at the essential airport facility to take action to enable another air carrier to provide reliable essential air service to that community. Actions required by the Secretary under this subsection may include interline agreements, ground services, subleasing of gates, and the provision of any other service or facility necessary for the performance of satisfactory essential air service to that community. SCASDP statute (49 USC 41743): (f)additional Action. Under the program established under subsection (a), the Secretary shall work with air carriers providing service to participating communities and major air carriers (as defined in section 41716(a)(2)) serving large hub airports to facilitate joint-fare arrangements consistent with normal industry practice. Mandatory Code Sharing for Small Airports 6 6

Factors Behind Small Airport Services Challenges A variety of explanations are offered airport challenges: Pilot Shortage, exacerbated by 1500 hour rule Accelerated retirement, and lack of production, of 50-seat RJs and other metal Fuel prices (recently low but up 50% in last six months) Air carrier business models Focus on international flying Decline of at-risk flying (e.g., Skywest takes the revenue risk) Scope clauses (< 86,000lb MTOW) Mergers and Consolidation (4 airlines = Sell 85% of capacity) Decline of secondary hubs and access points for spokes Focus While issues such as competitive air service into congested gateway or O&D hubs has been considered by the U.S. DOT, Department of Justice and especially the European Commission, consideration of small communities in these and related proceedings have been marginal or non-existent Mandatory Code Sharing for Small Airports 7

Recent Airline Mergers and Active Immunized Alliances US Airways-America West (2005) Delta-Northwest (2005) United-Continental (2010) SkyTeam Star Alliance Oneworld Other Delta/Air France- KLM/Alitalia/Czech /Korean United/Air Canada/ Brussels/Lufthansa/ Swiss/Austrian/SAS LOT/TAP (49 U.S.C. 41308-41309, Updated 3 January 2018) American/Lan America/Lan Peru SAS/Icelandair Skywest-Atlantic Southeast Airlines-ExpressJet Airlines (2010) Southwest-AirTran (2011) Delta/Virgin Atlantic/Air France- KLM/Alitalia United/Air New Zealand United/Asiana American/British Airways/Iberia/Finn air/royal Jordanian American/Japan Air Lines Delta/Virgin Australia American-US Airways (2014) United/All Nippon Airways (15 U.S.C. 12-27, DOT reviews mergers under section 7 of the Clayton Act to ensure merger or acquisition does not substantially lessen competition) Oneworld Transatlantic Case: Final Order (DOT-OST 2010 7-8) approved 20 July 2010 for five years. Given concerns over concentration in the transatlantic market, especially with BA and AA s presence at London-Heathrow, the order required the divestment of 4 slot pairs (2 fixed LHR-BOS and 2 flex for transatlantic services by non- Oneworld carriers) 7 frequencies per slot or 14 per pair (56 weeklies). Mandatory Code Sharing for Small Airports 8

Oneworld Decision: Monitoring Trustee and SPAs Slots: implemented successfully, helped to start new services for Delta and USAir into LHR. Monitoring Trustee: selected to monitor compliance and facilitate implementation. Steer Davies Gleave serves as the aviation expert to the monitoring trustee on this decision and with A++ (Lufthansa, Air Canada, United, Austrian, Swiss and Brussels), IAG/bmi, SkyTeam, Air France/KLM, and others. Fare Compatibility: honor flight coupons and provide one-way flights as part of round-trip airfare (50% of published fare of air carrier), can include first, business and economy fare tickets. Conditions/Special Prorate Agreements: Oneworld must provide carriers with access of up to 15 beyond/behind flights (ABQ or OSL) connecting to new entrants slot frequencies (e.g., LHR-DFW). These can be prorated by flight segment mileage or used with provisos (putting in a minimum charge for some flights, including short haul). But, they must be provided on terms at least as favorable as those to other similar deals. Requires access to seat inventory on fair terms Requires access to airport infrastructure on equivalent terms Mandatory Code Sharing for Small Airports 9

SPAs and Provisos: Permutations and Practice: Example Virgin Customer buys LHR to LIM Roundtrip Virgin Atlantic Passenger Biz Class LHR to LIM $8500 Operated by BA LHR-DFW DFW-LIM, LIM-DFW Operated by VA DFW-LHR Operated by LATAM DFW-LIM & LIM-DFW Revenue split: VA/BA LHR-DFW and DFW-LHR on mileage (59%).59 x $8500 = $5015 $2507.50 to VA/BA Revenue for LATAM on mileage (41%).41 x $8500 = $3485 Return: Virgin Atlantic Beyond: LATAM DFW-LIM pro-rated by mileage Outbound: BA This example highlights how airlines provide access, pricing and inventory control to an airline outside an alliance to improve competition at a slot-controlled airport Mandatory Code Sharing for Small Airports 10

Applying Commitments to Small Airports and Access Issues 1. Background: Commercial airlines seek approval to merge and form immunized alliances notwithstanding the competitive issues they raise. While DOT and the EC have approved many of these actions, they have placed conditions on them that the airlines agree to in order to obtain approvals. 2. Competition: With airport infrastructure limited at many of the most important global hubs, it is understandable that policymakers want to ensure competition between hubs and beyond/behind hubs to connecting airports. The EC is especially vigilant. 3. Small Airports: As with ensuring a competitive industry, the U.S. DOT has affirmative obligations to protect and promote NAS access for small communities. But, unlike with competition, there has been little (if any) linkage between mergers, alliance immunization and other forces behind consolidation with the loss of small community air service. 4. Conditionality: While airlines dislike the practice, they accept it as a price for obtaining approvals for mergers, immunized alliances and codeshares that they want. Properly applied, small airport considerations similarly would not outweigh their greater business plan goals. 5. SPAs and Provisos: These pricing and seat inventory practices accepted by IATA and used by airlines and regulators in the industry today. Together with at least as favorable requirements, they offer a possible framework for mandatory codesharing. These business practices are not tantamount to re-regulation. Mandatory Code Sharing for Small Airports 11

Mandatory Codeshare: Stimulating Demand and Resolving Pricing American: HSV-DCA 614 Miles JetBlue code added JetBlue: DCA-ALB 318 Miles Generating Demand: HSV pax obtain access to JetBlue network at Washington-DCA. Additional demand increases viability of HSV-DCA American flight, increasing load factors and/or incentivizing upgauging. Pricing and Inventory: Examples used under the guise of competition provide possible methodology, compensating American and dividing up total fare revenue. On an HSV-ALB fare, with a proration agreement, American would realize 66% of revenue (614 miles represents 66% of 931 miles). Mandatory Code Sharing for Small Airports 12

A Path Forward: Discussion What do you think? When and how could mandatory codesharing be applied? Direct Linkage: Apply as a condition for US DOT approval for regulatory actions: (1) a merger (e.g., United & JetBlue) or (2) an immunized alliance where connection to individual markets can be directly established. Indirect Linkage: Apply legislatively to a class of airports that have loss air service due to broader trends in the industry (previously approved mergers, lack of equipment, etc.). Need to establish examples of industry trends linked to individual markets and determine a threshold for application of mandatory codesharing. Assess legal authorities available to DOT and DOJ (& possibly EC) Existing Authority: EAS and SCASDP Programs Expansion/Specification of Secretary s Authority: Other initiatives? Develop specific airport cases that demonstrate value of concept Past Mergers: Review before and after air service patterns to show correlation of loss of air service with approvals enabling consolidation. Identify Candidate Airports/Classes of Airports: Data available for analysis. Agree on a strategy to implement, both in the U.S. and perhaps in Europe. Mandatory Code Sharing for Small Airports 13

Steer Davies Gleave We are a leading independent consultancy providing impartial consulting services to the transport sector. We provide strategic advice underpinned by technical excellence and expert opinion. We are an employee-owned, independent company founded in 1978. We have nearly 500 employees across 20 offices in Europe, Asia and the Americas. We work for governments, operators, financiers, regulators, developers, international agencies and other interest groups. Stephen D. Van Beek, Ph.D. Director and Head of North American Aviation stephen.vanbeek@sdgworld.net (703) 788-6878 Mandatory Codesharing for Small Airports 14