BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.

BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) Joint Application of ) ) AMERICAN AIRLINES, INC. ) BRITISH AIRWAYS PLC ) FINNAIR OYJ ) IBERIA LÍNEAS AÉREAS DE ESPAÑA, S.A. ) Docket No. OST-2008-0252 ROYAL JORDANIAN AIRLINES ) ) under 49 U.S.C. 41308 and 41309 for approval ) of and antitrust immunity for alliance agreements ) ) OBJECTIONS OF THE INTERACTIVE TRAVEL SERVICES ASSOCIATION AND THE AMERICAN SOCIETY OF TRAVEL AGENTS TO ORDER 2010-2-8 Communications with respect to this document should be directed to: Paul Ruden Senior Vice President, Legal and Industry Affairs. American Society of Travel Agents 1101 King Street Alexandria, VA 22314 Arthur Sackler Executive Director Interactive Travel Services Association 1156 15th St., NW Ste. 900 Washington, DC 20005 Kenneth P. Quinn Jennifer E. Trock Timothy C. Gerheim PILLSBURY WINTHROP SHAW PITTMAN LLP 2300 N Street NW Washington, DC 20037 Phone: (202) 663-8000 Fax: (202) 663-8007 Email: kquinn@pillsburylaw.com jennifer.trock@pillsburylaw.com timothy.gerheim@pillsburylaw.com March 30, 2010

BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) Joint Application of ) ) AMERICAN AIRLINES, INC. ) BRITISH AIRWAYS PLC ) FINNAIR OYJ ) IBERIA LÍNEAS AÉREAS DE ESPAÑA, S.A. ) Docket No. OST-2008-0252 ROYAL JORDANIAN AIRLINES ) ) under 49 U.S.C. 41308 and 41309 for approval ) of and antitrust immunity for alliance agreements ) ) OBJECTIONS OF THE INTERACTIVE TRAVEL SERVICES ASSOCIATION AND THE AMERICAN SOCIETY OF TRAVEL AGENTS TO ORDER 2010-2-8 The Interactive Travel Services Association ( ITSA ) and the American Society of Travel Agents ( ASTA ) jointly object to the Department of Transportation s ( Department ) Show Cause Order, 1 which if finalized without change would grant unprecedented antitrust immunity ( ATI ) to the international operations of American, British Airways, and Iberia. ATI would create particular market power in the concentrated UK and Heathrow markets, particularly important to ITSA and ASTA clients. ITSA and ASTA continue to urge the Department to impose a limited carve-out to prevent the exercise of market power by the oneworld carriers in the distribution of air travel services to protect the traveling public. ITSA s and ASTA s original filings demonstrated that the oneworld carriers would exercise market power over travel agents, which would likely result in higher prices and fewer choices for passengers. The expert report from Professor David S. Sibley, Ph.D., Professor in 1 Order to Show Cause, Order 2010-2-8 (Feb. 13, 2010) ( Show Cause Order ). 1

Economics, University of Texas at Austin, and a former Deputy Assistant Attorney General for Economics in the Antitrust Division of the U.S. Department of Justice ( DOJ ), reached the same conclusion. Prof. Sibley demonstrated empirically that the grant of ATI would harm independent travel distributors and passengers by anti-competitively reducing compensation for travel distribution, thereby reducing the provision of that service to passengers, and by reducing transparency and increasing passengers search costs, thereby leading to higher prices. The Department Show Cause Order relies on its decision in the Star case, stating that because the facts in the two cases are similar, it would not grant the carve-out requested by ITSA and ASTA. 2 However, the Department has failed to recognize the significant market concentration and entry barriers in this case. The cumulative effect of oneworld ATI upon the previously granted ATI for Star, the dual-entry barriers in significant U.S.-London markets, and the more recent oneworld and Star applications for transpacific ATI all underscore the need to preserve and enhance independent travel distribution, before world markets become balkanized by three non-competing groups of allied carriers, and fares go through the roof. The Department s tentative conclusion that extending ATI to travel distribution would not cause substantial competitive harm is not supported by substantial evidence, and the Department should not issue a Final Order without including the carve-out requested by ITSA and ASTA to protect consumers from anticompetitive harm. I. The Department s proposed blanket grant of ATI is at odds with domestic and European Commission skepticism. Governmental bodies on both sides of the Atlantic have expressed concern about broad immunity for oneworld. First, as ITSA and ASTA pointed out in connection with the Star case, the European Commission last year opened formal antitrust investigations against the mega- 2 Id. at 34. 2

alliances, including oneworld. 3 Earlier this month the oneworld carriers, attempting to remedy the competition concerns apparently identified by the EC in September, offered several Heathrow and New York JFK slots, as well as other structural remedies to limit oneworld s market power and increase new entrants ability to compete. 4 Importantly, the carriers offered to allow other eligible airlines, or travel agents, to offer combinable fares on the city pair routes oneworld would most dominate. 5 These offered remedies, which exceed what the Department proposed to require, indicate that the EC has serious concerns about the competitive effects of ATI for oneworld. More specifically, they show that ITSA s and ASTA s concerns are real and that ATI, unremedied, would cause significant harm to travel agents. Second, U.S. antitrust authorities are concerned about the Department s policy in granting ATI. The Chairman and Ranking Member of the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights wrote a letter in October 2009 to Secretary of Transportation Ray LaHood and Assistant Attorney General for the Antitrust Division Christine A. Varney urging the Department and DOJ to work closely together to reach an appropriate decision in this case. 6 The Senators also suggested that they might introduce legislation to give DOJ more authority in deciding ATI cases in the aviation industry. 7 Furthermore, DOJ filed comments in the oneworld docket, as well as the Star docket, finding that ATI would cause competitive harm and recommending slot remedies or carve-outs. 8 Its comments included 3 4 5 6 7 8 Objections of the Interactive Travel Services Association and the American Society of Travel Agents to Order 2009-4-5, OST-2008-0234, at 4 (Apr. 28, 2009). Commitments to the European Union, CASE COMP/F-1.39.596 BA/AA/IB, 1-4 (Mar. 10, 2010) ( EU Commitments ) available at http://ec.europa.eu/competition/antitrust/cases/index/by_nr_79.html#i39_596. Id. at 2.1. Charlie Leocha, Senators ask Transportation Department to heed warning on airline alliances, Consumer Traveler, Oct 22, 2009, http://www.consumertraveler.com/today/senators-ask-dot-to-heed-dojs-warning-onairline-alliances/. Id. Comments of the Department of Justice, OST-2008-0252, at 30-35 (Dec. 21, 2009). 3

extensive analysis of carve-outs, suggesting that it prefers more robust remedial measures than the Department proposed. 9 ITSA and ASTA agree with DOJ s findings that ATI would cause significant concentration in important transatlantic markets. 10 Just as DOJ recommends slot remedies to prevent this concentration from causing anticompetitive effects, ITSA and ASTA request that the Department carve out travel distribution to prevent similar anticompetitive effects upon travel agents. II. The Department s tentative decision does not meet the standard for a grant of ATI. A decision to grant ATI, at a minimum, requires the following: First, the Department must conduct a competitive analysis to determine that the agreement is not adverse to the public interest and does not violate 49 U.S.C. 41309. In doing so, it must find that the proposed transaction is, on balance, pro-competitive, pro-consumer, and consistent with our international aviation competition policy. 11 The Department s orders granting ATI should make detailed findings regarding the existence of those benefits and the likelihood that they will be realized. 12 Following the initial analysis, the Department may grant ATI if it determines that the transaction is in the public interest. [I]mmunity from the antitrust laws should be the exception, not the rule, and should only be granted upon a strong showing on the record that an agreement does not violate the antitrust laws. 13 Second, the Department must base decisions to grant antitrust immunity on substantial evidence. 14 It also must address substantive arguments raised by interested parties and not fail 9 Id. at 31-35. 10 Id. at 10-14. 11 Joint Application to Amend Order 2007-2-16, Show Cause Order, Order 2009-4-5, at 6 (Apr. 7, 2009). 12 Joint Application for Approval of and Antitrust Immunity for Alliance Agreements, Show Cause Order, Order 2005-12-12, at 34 (Dec. 22, 2005). 13 Id. at 33. 14 See Village of Bensenville v. FAA, 376 F.3d 1114, 1121 (D.C. Cir. 2004) (remanding agency decision because the agency simply accepts at face value a key finding and the agency s reasoning appears nowhere in its order). 4

to consider an important aspect of the problem as the Department has done here. 15 Here the Department failed to explain why the anticompetitive levels of competition that it acknowledged 16 would not harm travel agents even with its proposed remedies, and in relying on its Star decision it failed to consider the factual differences between the two cases. 17 III. The grant of ATI without a carve-out would cause substantial harm to travel distributors and passengers. ITSA and ASTA demonstrated in their Answer 18 that without a carve-out, ATI would cause travel distributors and consumers substantial anticompetitive harm. Contrary to the Department s assertion, 19 the facts in this case are different from those in the Star case and do not support the Department s conclusion. First, while the Department previously ignored the cumulative anticompetitive harm that ATI for both Star and oneworld would cause travel agents, 20 it must consider it here, as well as the impact of the pending Star and oneworld transpacific ATI applications. Second, the unique characteristics of the U.S.-London market and the barriers to entry at Heathrow are differentiating factors that call for a carve-out to prevent anticompetitive harm from befalling travel distributors and their customers. Finally, the Department failed to explain how the slot remedies it imposed would ameliorate the competitive harm that oneworld immunity would cause travel agents. The Department incorrectly ignored these important features of this case and therefore should not issue a Final Order without the requested carve-out for travel distribution. 15 See Motor Vehicle Mfrs. Ass n of the U.S., Inc., v. State Farm Mut. Ins. Co., 463 U.S. 29, 43 (1983) ( Normally, an agency rule would be arbitrary and capricious if the agency has... entirely failed to consider an important aspect of the problem.... ). 16 Show Cause Order at 22-23. 17 Id. at 34-35. 18 Answer of American Travel Society of Travel Agents and the Interactive Travel Services Association, OST-2008-0252 (May 18, 2009) ( ITSA/ASTA Answer ). 19 Show Cause Order at 34. 20 Joint Application to Amend Order 2007-2-16, Show Cause Order, Order 2009-7-10, at 24 (Jul. 10, 2009). 5

A. The Department failed to consider the cumulative competitive harm of immunizing oneworld together with Star and SkyTeam. Immunizing oneworld in a transatlantic market including an immunized Star, as well as SkyTeam, would bring U.S.-EU market concentration to presumptively anticompetitive levels. As the Department has repeatedly found, both the transatlantic market and the U.S.-Heathrow market are relevant markets for analysis of ATI s effect on travel distributors. 21 Based on the Department s own market data, 22 granting the oneworld application would increase the transatlantic HHI by 281 points to a final value of 2,409. 23 The antitrust authorities presume that such a large increase in concentration to such a high level facilitates market power. 24 The Department did not explain why this high concentration in that market which it acknowledged as a relevant market here 25 would not create market power and cause anticompetitive harm to travel distributors. 26 History and economic evidence confirm the presumption that ATI can create market power in the transatlantic market: As ITSA and ASTA and others have pointed out, the Brattle Group was able to demonstrate that the Department s prior grants of ATI to airline alliances reduced consumer choice and raised fares, even at moderate concentration 21 Show Cause Order at 19; U.S.-U.K. Alliance Case, Order to Show Cause,OST-2001-11029, Order 2002-1-12 at 37 (Jan 25, 2002). Markets are properly defined based on the theory of competitive harm pertinent to the inquiry. Therefore, different competitive harms can lead to different (and multiple) market definitions in the same matter. U.S. Dep't of Justice & Federal Trade Comm'n, Commentary on the Horizontal Merger Guidelines, at 12-13 (Mar. 2006) ( Merger Guidelines Commentary ). 22 Show Cause Order at 14. 23 The Department applies a merger analysis under the Clayton Act to evaluate the competitive effects of ATI. Show Cause Order at 11. That analysis includes evaluation of market concentration under the DOJ/FTC Merger Guidelines using the Herfindahl-Hirschman Index. Horizontal Merger Guidelines, U.S. Dep't of Justice & Federal Trade Comm'n, at 1.5 (Revised Apr. 8, 1997) ( Merger Guidelines ). 24 The Merger Guidelines consider a market with a post-merger HHI above 1,800 to be highly concentrated, and the Guidelines presume that a merger increasing concentration by more than 100 points and resulting an a highly concentrated market is likely to create or enhance market power or facilitate its exercise. Merger Guidelines at 1.51(c). 25 Show Cause Order at 14. 26 Id. at 34-35. 6

levels. 27 The Department wrongly concluded that oneworld s 22.3% share in the U.S.-EU market is insufficient to allow it to exert market power over travel distributors. 28 That conclusory statement based on oneworld s market share alone ignores the cumulative effect of Star and SkyTeam ATI in addition to oneworld s. The three alliances would collectively control 83% of the transatlantic market. 29 That dominance would likely cause consumers to stop seeking out transatlantic service except on alliance carriers, and it would undermine corporate users ability to manage travel costs. Not only would that devastate the independent travel distribution industry because it would allow the alliances to demand more for less from travel agents or to stop using their services altogether it would also directly harm competition by reducing competitors ability to attract customers and by making new entry more difficult. By approving the oneworld application without the requested carve-out for travel distribution, the Department would invite an unacceptably high probability of anticompetitive harm coming to independent travel distributors, and then to consumers. 30 Similarly, the Department should address the effect that the applications from both the oneworld and Star alliances requesting immunity for the transpacific operations of their American and Japanese airline members would have. 31 It should consider the consequences of 27 Answer of the American Society of Travel Agents and the Interactive Travel Services Association, OST-2008-0234, at 4-5 (Nov. 26, 2008). Unlike the Star applicants, the Joint Applicants here acknowledge the existence of the transatlantic marketplace, embracing competition on more than individual city-pairs. Joint Application of American Airlines, British Airways, Finnair, Iberia, Royal Jordanian, OST-2008-0252, at 35 (Aug. 14, 2008) ( Joint Application ). 28 Show Cause Order at 34. 29 Id. at 14. 30 See Joint Application for Approval of and Antitrust Immunity for Alliance Agreements (SkyTeam), Comments of Dep t of Justice, OST-2004-19214, at 7 (Aug. 19, 2005) (objecting to ATI request that included without limitation, programs designed to coordinate and reach agreements in the areas of sales... distribution programs, Internet distribution, travel agent programs, travel agent and GSA compensation ). 31 See Order Consolidating Proceedings, U.S.-Japan Alliance Case, Order 2010-3-10, OST-2010-0059 (Mar. 11, 2010) (consolidating requests by oneworld and Star carriers for ATI between U.S. and Japanese alliance members 7

creating the same immunized alliance tri-opoly in both transatlantic and transpacific air travel. If the same alliances enjoy ATI with respect to travel agents across both oceans, the resulting competitive harm as a whole would likely be greater than the sum of its parts. High alliance concentration into all of the major long-haul gateways to both Europe and Asia, particularly for time-sensitive business travelers, would make it extremely difficult for travel agents to find or negotiate value for their leisure and corporate customers. The Department did not dispute that eliminating travel agents cutting out the middle man would raise fares for consumers. 32 As ITSA and ASTA showed, the cost savings that result from lower commissions achieved through the exercise of monopsony power are not efficiencies but anticompetitive effects reason to deny rather than grant ATI. Professor Sibley rightly recognized that the Joint Applicants distribution costs would not disappear simply because they are not paying them to travel agents; internalizing them might in fact result in a higher administrative cost and cause a reduction in service quality. 33 The Department, on the other hand, again agreed with the applicants without analysis that shared sales and marketing would reduce costs and constitute a public benefit. 34 But, as Professor Sibley concluded based on empirical evidence, the grant of ATI could increase fares and lower travel agent compensation by approximately five to ten percent, destroying or degrading significantly the ability of travel agencies to provide the innovative, consumer-driven transparency and search engines that help consumers find the best itinerary at the lowest fares. As ITSA and ASTA argued and the Department did not address, the alliance dominance into a single docket based on similarity of issues). 32 Show Cause Order at 34-35. 33 Expert Report of Professor David S. Sibley, filed with ITSA/ASTA at 25. 34 Show Cause Order at 30. 8

in European gateways would cause particular harm to independent travel distributors. 35 Just as Star dominates the U.S.-Germany market and SkyTeam U.S.-France and -Netherlands, oneworld would dominate the U.S.-UK market. The three alliances likewise dominate transatlantic travel to and from their respective hubs in those countries, four of the most important European destinations, particularly for business travelers. 36 Travel agents (and their corporate customers) are particularly susceptible to market power in the overall transatlantic market. Independent travel agents need access to all three alliances hubs and networks to compete effectively in the travel distribution market. The Department did not consider how the dominant collective alliance position would affect travel agents, instead relying on just oneworld s transatlantic market share. 37 Granting ATI without the requested carve-out for travel distribution would cause significant competitive harm to travel agents and consumers in ways that the Department failed to address. B. The Department failed to address the high concentration in transatlantic travel to London and Heathrow in the context of oneworld immunity for travel distribution. The U.S.-London market remains concentrated and would grow highly concentrated if oneworld were immunized. According to data provided by the Joint Applicants themselves, immunizing oneworld would result in extremely high concentration in both the U.S.-London and U.S.-Heathrow markets. 38 Increasing concentration in U.S.-London markets to such highly concentrated levels raises a presumption that oneworld could exercise market power. 39 The Department agreed that ATI would create anticompetitive concentration levels in several U.S.- 35 ITSA/ASTA Answer at 19. 36 SkyTeam enjoys 64.8% market share in U.S.-CDG and 81.5% in U.S.-AMS; Star enjoys 83.2% U.S.-FRA, and oneworld enjoys 58.1% U.S.-LHR. Joint Application, Exhibit JA-24 at 2. 37 Show Cause Order at 34. 38 See Joint Application, Exhibit JA-24. Based on oneworld s share alone, U.S.-London concentration would exceed 1,900 and U.S.-Heathrow would exceed 3,300. 39 Merger Guidelines at 1.51(c). 9

London markets. 40 However, it did not explain how the remedies it proposed would alleviate the anticompetitive harm to travel distributors associated with that concentration; it merely stated that they would. 41 Because of Heathrow s unique position in the realm of transatlantic airline transportation, approving the oneworld application would cause disproportionate anticompetitive harm to independent travel distributors and their customers. The Department acknowledged that far more passengers in U.S.-UK markets are local than in U.S.-Continental Europe markets. 42 It also agreed that transatlantic passengers prefer connecting through Heathrow not only to Gatwick and other London airports but also to the Star and SkyTeam hubs in Continental Europe. 43 Specifically, the Department recognized that because of London s geographic location, transatlantic passengers from Continental hubs connect through Heathrow but transatlantic passengers from London do not connect through Continental hubs. 44 The Department similarly found that travelers flying between Europe and the east coast strongly prefer nonstop flights because connecting through other U.S. hubs is not optimal. 45 In other words, if granted ATI, oneworld would dominate a transatlantic market that is not susceptible of substitution. But it did not explain why the anticompetitive harm associated with these unique factors does not justify a carve-out to protect travel distributors. Travel between New York and London is a particularly important example. It is an extremely busy and important transatlantic market, especially for time-sensitive business travelers. oneworld dominates the New York-London market, and granting ATI to the alliance 40 Show Cause Order at 22-23. 41 Id. at 35. 42 Id. at 15. 43 Id. at 16. 44 Id. 45 Id. at 15. 10

would increase concentration by approximately 1,200 points to a highly concentrated HHI of over 3,400. 46 As discussed above, competitors cannot effectively discipline oneworld s dominance in the market by offering connecting itineraries. Travel distributors therefore have no choice but to deal with oneworld. Immunizing oneworld without the requested carve-out would give the alliance market power in the extremely important U.S.-London markets, which would cause harm to independent travel distributors and consumers. C. The Department provided no evidence to support its conclusion that its remedies would mitigate anticompetitive harm to travel distributors. The Department provided no evidence that the proposed slot remedies would successfully mitigate the harm that oneworld ATI would cause in U.S.-London city pair markets. The Department found that consolidation and immunization of oneworld would have an anticompetitive effect on individual city-pair markets to London, such as New York-London. 47 It states that four pairs of slot transfers are necessary to remedy the potential harm and would serve the public interest. 48 The Department offered no other explanation why that form of remedy or number of slots would successfully remedy the harm. 49 With respect to travel distributors, it offers no explanation at all, merely stating that as remedied no competitive harm would occur. 50 Indeed, evidence exists that the Department s remedies would not be sufficient: as noted above, to satisfy the European Commission the oneworld carriers offered more remedies than what the Department proposes. That suggests that the EC believes, and the applicants are willing to agree, that more than what the Department asked for is necessary to protect competition. Specifically, the oneworld carriers offered to make more Heathrow slots available, 46 Show Cause Order at 21. 47 Id. at 28. 48 Id. at 26. 49 Id. 50 Id. at 35. 11

and importantly, they offered slots at JFK, which are similarly difficult to acquire. 51 They also offered to allow competitors limited fare combinability, special prorate agreements, and access to their frequent flyer programs. 52 The fare combinability offer explicitly includes travel agents among those eligible to market itineraries featuring different carriers (i.e., not all oneworld) operating the outbound and return flights. 53 These remedies exceed what the Department proposes to require, and the Department has presented no evidence to suggest that its own remedies would be sufficient. As such, its remedies which it claims would prevent harm to travel agents are not supported by substantial evidence. IV. Conclusion For the reasons stated above and previously in their filings, ITSA and ASTA respectfully request that the Department carve out travel distribution from any grant of antitrust immunity in the Department s Final Order. If it grants ATI, the Department should specifically include reporting on the oneworld member airlines implementation of and compliance with antitrust protocols, including specific information on competitor collaboration for travel distribution, as part of its annual reporting requirements. 51 EU Commitments at 1.1.1 (Mar. 10, 2010). 52 Id. at 2, 4. 53 Id. at 2.1. 12

Respectfully submitted, Kenneth P. Quinn Jennifer E. Trock Timothy C. Gerheim PILLSBURY WINTHROP SHAW PITTMAN LLP 2300 N Street, N.W. Washington, D.C. 20037 Tel: (202) 663-8000 Fax: (202) 663-8007 E-mail: kquinn@pillsburylaw.com jennifer.trock@pillsburylaw.com timothy.gerheim@pillsburylaw.com Counsel for ITSA and ASTA March 30, 2010 13