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Order 2016-12-13 - Delta Air Lines and AeroMexico - Final Order - Antitrust Immunity for Alliance Agreements
Issued and Served December 14, 2016
The Joint Applicants have requested a grant of immunity from the US antitrust laws in order to allow Delta and AeroMexico to operate a joint venture between the United States and Mexico. Based on its analysis, the Department believes the proposed alliance has the potential to deliver substantial public benefits to the travelling public, including broader connectivity between the United States and Mexico, improved network coordination, reduced travel times, and improved efficiency. However, the Department also identified significant competitive issues that could prevent the public from realizing those benefits if left unchecked. Therefore, in order to ensure adequate competition in the covered market, thereby making the approval of the alliance pro-consumer, our grant of antitrust immunity is subject to a number of conditions. Among those conditions is the requirement that the Joint Applicants divest 24 slot-pairs at Mexico City’s Benito Juarez International Airport and four slot-pairs at New York City’s John F. Kennedy International Airport. We will also limit the duration of our grant of ATI to five years, among other conditions.
The Department received numerous comments from a broad range of stakeholders in response to the Department’s Show Cause Order (2016-11-2). In response to those comments, we have made adjustments to our conditions that we believe will make them more effective and strike the proper balance. The Department believes that if the remedies and conditions are adopted, the proposed alliance will not reduce competition and will provide substantial public benefits.
The Department affirms its tentative decision to require the divestment of 24 slot-pairs. As explained in the Show Cause Order, this remedy reflects the eight slot-pairs that constitute the immediate concentration of the Joint Applicants at MEX post-transaction (consistent with COFECE’s remedy), as well as 16 additional slot-pairs to provide adequate competition to ensure that public benefits from the Joint Applicants’ planned growth at MEX are realized by ensuring sufficient competitive entry. As part of their application, the Joint Applicants provided detailed plans for growing transborder services if the JV is approved. Based on the evidence in the record, these services can, and likely will, be introduced under the existing slot regime which the COFECE report deemed anticompetitive and a barrier to an essential input (i.e., MEX). In order to ensure that both the price and service benefits of the Joint Applicants’ new services are passed along to consumers, DOT seeks to foster the requisite competition by enabling new entry.
In answer to the challenge that the divestiture is contrary to Mexican law, the Department must point out that the Joint Applicants are availing themselves of US law for the purposes of obtaining antitrust immunity. The Department’s grant of such authority is within its discretion, and not something that AeroMexico is entitled to as a matter of right. The grant of such authority subject to one or more conditions is not inconsistent with US or, for that matter, Mexican law. If the Joint Applicants are unable to comply with such a condition in a manner that is consistent with Mexican law, their failure to meet the condition will result in the ATI not becoming effective. AeroMexico is not unaware that the Department may impose conditions on its US authority, as its foreign carrier permit has long been subject to numerous conditions, including one that states the Department may amend or modify those conditions.
The Department disagrees with Southwest, Interjet, and American. The Department’s remedy is focused on providing access at MEX to carriers that do not have it, and have demonstrated that they cannot achieve it otherwise, in order for them to provide competitive service, disciplining the JV. Southwest has provided no evidence to demonstrate that the competition provided by Mexican LCCs is any less vigorous or of any less quality than that provided by US LCCs. Interjet and American’s arguments that they should be eligible to receive MEX slots are misplaced. The objective of the Department’s remedy is to inject sufficient competition at MEX to discipline the dominant position of the Joint Applicants at MEX. The Department believes that the most efficient way to do this, requiring the least number of divestitures, is to link LCC and low-fare carrier networks to MEX, thereby ensuring adequate network competition. We then determined the eligibility of LCC and low-fare carriers based on their level of slot holdings at MEX, and their ability and willingness to launch competitive service in a timely fashion. By its own admission, Interjet has over 26% of the slots at MEX, more by far than any other carrier besides AeroMexico. Interjet does not need assistance to achieve competitive access at MEX; it already has it.
The Department acknowledges that for some, but not all, passengers, EWR is a substitute airport for JFK. The airports have overlapping, but not identical, catchment areas; the two airports are not perfect substitutes that can be freely interchanged. As the Department of Justice pointed out in its recent antitrust complaint against United at EWR, “Airlines do not view service at other airports as reasonable substitutes for the service offered at Newark, and thus they are unlikely to switch away from slots at Newark in response to a small but significant increase in the price of slots. Thus, slots at Newark constitute a relevant market under the antitrust laws.”
This new, even if limited, competition for a subset of consumers, as well as the fact that slot divestitures themselves have a significant monetary impact on the divesting carriers, has led the Department to lower its divestiture requirement at JFK to four slot-pairs. This number comports with AeroMexico’s existing complement of JFK slots used to serve Mexico City. We have further decided to limit to two the number of slots that must be divested in the peak-hours at JFK of 1500-2059. This will limit the loss of what are presumably the most financially and operationally valuable slots to the Joint Applicants. It will also alleviate the impact that the divestitures will have on the Joint Applicants’ trans-Atlantic hub operation at JFK.
The US-Mexico market is rapidly changing and will likely continue to do so as airlines and consumers adapt to the new liberalized marketplace. At the same time, the uncertainty surrounding the slot regime at MEX could mean that “the Department would have to carefully consider whether it could approve a new application if tendered, and, if it were to do so, whether additional divestitures would be necessary.” The competitive balance and the policies governing allocation of slots at MEX are fluid and the Department needs to retain the ability to fully reexamine the basis for granting ATI. Accordingly, the Department finalizes its decision to set a five-year time limit on its grant of ATI.
By: Jenny Rosenberg