[Federal Register Volume 68, Number 15 (Thursday, January 23, 2003)]
[Notices]
[Pages 3293-3299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1528]


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DEPARTMENT OF TRANSPORTATION

Office of the Secretary


Termination of Review Under 49 U.S.C. 41720 of Delta/Northwest/
Continental Agreements

AGENCY: Office of the Secretary, Department of Transportation.

ACTION: Termination of review of joint venture agreements.

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SUMMARY: As required by 49 U.S.C. 41720, Delta Air Lines, Northwest 
Airlines, and Continental Airlines submitted code-sharing and frequent-
flyer program reciprocity agreements to the Department for review. 
After analyzing the agreements and conducting an extensive informal 
investigation, the Department has determined that the agreements, if 
implemented as presented by the three airlines, could result in a 
significant adverse impact on airline competition, unless the airlines 
formally accept and abide by certain conditions that are intended to 
limit the likelihood of competitive harm. If the airlines choose to 
implement the agreements without accepting those conditions, the 
Department will direct its Aviation Enforcement office to institute a 
formal enforcement proceeding regarding the matter.

FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General 
Counsel, 400 Seventh St. SW., Washington, DC 20590, (202) 366-4731.

SUPPLEMENTARY INFORMATION: On August 23, 2002, as required by 49 U.S.C. 
47120, Delta, Northwest, and Continental (``the Alliance Carriers'') 
submitted code-sharing and frequent-flyer program reciprocity 
agreements to us for review. That statute requires such agreements 
between major U.S. airlines to be submitted to us more than 30 days 
before they are implemented. We may extend that waiting period by up to 
150 days for code-sharing agreements and 60 days for other types of 
agreements. The airline parties to a joint venture agreement may 
implement the agreement without obtaining our approval once the waiting 
period has expired.
    Our authority to extend the waiting period enables us to conduct an 
informal investigation and make a preliminary determination as to 
whether the agreement may unreasonably reduce competition and therefore 
constitute an unfair method of competition that would violate 49 U.S.C. 
41712, formerly section 411 of the Federal Aviation Act.\1\ If we 
determine that an agreement violates section 411, we may bar the 
airlines from implementing it. Unfair methods of competition include 
airline agreements and other practices that violate the antitrust laws 
or antitrust principles. See United Air Lines v. CAB, 766 F.2d 1101 
(7th Cir. 1985). A complaint that an airline practice is an unfair 
method of competition would be resolved after a hearing before an 
administrative law judge.
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    \1\ This notice will refer to the section as section 411, its 
traditional name.
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    Rather than institute a formal enforcement proceeding, we may also 
ask the airline parties to make changes to their agreement to address 
our concerns about the agreement's impact

[[Page 3294]]

on airline competition. In an earlier case, we obtained the airline 
parties' agreement to make such changes in their agreement. In this 
case, we have proposed conditions to the three airlines that would 
alleviate our immediate competitive concerns with their proposed 
alliance. If the Alliance Carriers formally accept these conditions, we 
would not now need to institute a formal enforcement proceeding to 
determine whether the airlines' agreements violate section 411.
    The Department's Investigation. With particular attention to our 
statutory responsibilities under 49 U.S.C. 40101, we reviewed the 
agreements as presented to us under our governing statutes to analyze 
their likely impact on airline competition if fully implemented. We 
have given outside parties the opportunity to review unredacted copies 
of the agreements and to submit comments based on that review and other 
information available to such commenters. 67 FR 69804 (November 19, 
2002). We received written comments from a number of parties, including 
other U.S. airlines, civic parties, and the American Antitrust 
Institute. We have reviewed the comments, along with material obtained 
by us from the three airlines, we have met with the three Alliance 
Carriers and with parties opposed to their alliance, and we have 
analyzed the proposed alliance's potential impact on the basis of that 
material and the data presently available to us.
    The proposed agreements, and their potential effects, are unusually 
complex. To allow sufficient time to complete our analysis, we extended 
the waiting period as to the code-sharing agreement for a total of 120 
days, and we extended the waiting period for the frequent flyer 
agreement for 60 days. 67 FR 59328 (September 20, 2002); 67 FR 64960 
(October 22, 2002); 67 FR 69804 (November 19, 2002); 67 FR 78036 
(December 20, 2002). The airlines have not implemented either of those 
agreements.
    In our meetings with the Alliance Carriers, we advised them that 
the agreements as presented to us raised serious competitive issues. We 
explained that this proposed alliance presents more serious competitive 
concerns than did the United/US Airways alliance, which we allowed to 
take effect subject to conditions imposed independently by the 
Department of Justice, in carrying out its separate statutory authority 
responsibilities to enforce the antitrust laws. This proposed alliance 
is fundamentally different from that presented to us by United/US 
Airways, because of the much greater overlap between the route systems 
of these three airlines and their possession of a substantially larger 
share (approximately 35 percent) of the national airline market. We 
invited them to propose ways that they could alleviate our concerns. We 
reviewed their proposals and concluded that they were not adequate. We 
therefore presented specific comments to the three airlines that were 
intended to address our primary competitive concerns while preserving 
the alliance's principal benefits for the traveling public and the 
airlines. We have had lengthy further discussions with the airlines 
about the terms of proposed conditions and have considered their 
concerns. If the Alliance Carriers formally accept and agree to abide 
by the conditions set forth herein, we would not seek to block their 
implementation of their alliance agreements at this time.
    The conditions we have developed are intended to lessen the 
likelihood of unlawful collusion, to prevent the three airlines from 
hoarding airport facilities at their hubs and to make underutilized 
facilities available to competitors, to address the three airlines' 
potentially dominant combined market share at many cities and the 
resulting detrimental effect on entry by competitors and therefore on 
consumers, and to prevent anti-competitive practices involving joint 
marketing. We have developed these conditions in furtherance of our 
statutory responsibilities under 49 U.S.C. 40101 and our authority 
under section 411 to prevent unfair methods of competition in the 
airline industry and on the basis of our analysis of the alliance's 
potential impact on airline competition. Our conditions, designed to 
address this Department's present concerns under our unique statutory 
scheme, are in addition to, and independent of, any conditions that may 
be required by the Department of Justice, pursuant to its separate and 
distinct statutory authority to enforce the antitrust laws, and its own 
independent review of the proposed alliance's competitive effects.
    Public Policy Background. In carrying out our responsibilities in 
this matter, we are mindful that Congress has mandated that the 
Department ``shall consider'' the factors enumerated in section 40101. 
For purposes of this proceeding, a number of these factors are 
particularly relevant. We must analyze the potential effects of the 
Alliance Carriers' proposal in the context of the express statutory 
goals, among others, of

    (9) preventing unfair, deceptive, predatory, or anticompetitive 
practices in air transportation,
    (10) avoiding unreasonable industry concentration, excessive 
market domination, monopoly powers, and other conditions that would 
tend to allow at least one air carrier * * * unreasonably to 
increase prices, reduce services, or exclude competition in air 
transportation, and
    (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.\2\

    \2\ 49 U.S.C. 40101(a). Congress added these goals to the 
statutory statement of public policy goals when it enacted the 
Airline Deregulation Act of 1978, P.L. 95-504, 92 Stat. 1705, 1707 
(1978). The statute's public policy goals provide the context for 
our enforcement of the prohibition against unfair methods of 
competition in the airline industry. Pan American World Airways v. 
United States, 371 U.S. 296, 307-309 (1963).
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    Consistent with these provisions, Congress has charged us with a 
responsibility to review anti-competitive conduct in the airline 
industry. This Department's authority under section 411 to prohibit 
airlines from engaging in unfair methods of competition was intended to 
supplement, but in no way to supplant or interfere with, the Justice 
Department's authority to enforce the antitrust laws. As the Supreme 
Court has stated, ``[S]ection 411 * * * was designed to bolster and 
strengthen antitrust enforcement.'' Pan American World Airways v. 
United States, 371 U.S. 296, 307 (1963).
    When Congress deregulated the airline industry in 1978, Congress 
retained the pre-existing authority of our predecessor agency, the 
Civil Aeronautics Board, to prevent unfair competition in the airline 
industry. The Airline Deregulation Act did not reduce or modify the 
Board's authority to prohibit unfair methods of competition. Similarly, 
when Congress enacted the Civil Aeronautics Board Sunset Act of 1984, 
Public Law 98-443, 98 Stat. 1703, it reaffirmed its intent that 
deregulation must be coupled with the authority to prevent 
anticompetitive conduct. Section 3 of that statute transferred to this 
Department the Board's authority to prohibit unfair methods of 
competition in the airline industry. Congress explained that 
maintaining that authority was both necessary and consistent with 
airline deregulation, H.R. Rep. No. 98-793, 98th Cong., 2d Sess. (1984) 
at 4-5:

    There is also a strong need to preserve the Board's authority 
under Section 411 to ensure fair competition in air transportation * 
* *. Although the airline industry has been deregulated, this does 
not mean that there are no limits to competitive practices.

[[Page 3295]]

As is the case with all industry, carriers must not engage in 
practices which would destroy the framework under which fair 
competition operates. Air carriers are prohibited, as are firms in 
other industries, from practices which are inconsistent with the 
antitrust laws or the somewhat broader prohibitions of Section 411 
of the Federal Aviation Act (corresponding to Section 5 of the 
Federal Trade Commission Act) against unfair competitive practices.

    Subsequently, Congress expressly determined that this Department 
should implement special procedures to ensure that the potential anti-
competitive effects of code-share agreements and other joint venture 
agreements between major airlines are thoroughly analyzed before the 
agreements may go into effect. Congress implemented that determination 
by enacting 49 U.S.C. 47120. Congress enacted section 47120 after 
several announcements of proposed code-share arrangements between major 
U.S. airlines, including the existing arrangement between Northwest and 
Continental.\3\
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    \3\ Because Northwest and Continental implemented their code-
share proposal before the enactment of 49 U.S.C. 47120, the Justice 
Department reviewed that agreement pursuant to its authority to 
enforce the antitrust laws. That Department determined that it would 
not challenge the code-share arrangement if the two airlines 
complied with certain conditions, but challenged Northwest's 
simultaneous acquisition of the major block of Continental voting 
stock.
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    The Airlines' Proposed Relationship. The proposed Delta/
Continental/Northwest alliance is a comprehensive marketing arrangement 
that would involve code-sharing, frequent flyer reciprocity, and 
reciprocal access to airport lounges. The alliance agreements have a 
ten-year term. Each airline would put its code on each of its partners' 
flights to the extent possible given the limited number of available 
flight numbers. The airline operating the flight would obtain the 
revenue paid by the passenger. Members of each airline's frequent flyer 
program could earn award miles and use them on flights operated by the 
other two airlines. Members of each partner's airport lounge program 
will have access to the other two airlines' airport lounges. The three 
airlines would engage in joint marketing programs whereby they would 
make joint contract proposals to corporate customers to the extent 
allowed by the antitrust laws and create joint travel agency incentive 
commission programs.
    The three airlines have vigorously asserted that their alliance 
will benefit consumers by providing on-line services to travellers in 
markets that now have no on-line service and improved access to 
frequent flyer programs and airport lounges. They contend that each of 
them will independently set its own fares and schedules. They assert 
that they will engage in some discussions on subjects such as flight 
arrival times, gate locations, and certain other service features in 
order to provide ``more seamless service.'' Delta, Continental, and 
Northwest also contend that they have structured their alliance so that 
they will continue to compete independently. That contention is based 
primarily on the fact that the ticket price paid by a traveller would 
go to the operating airline, even if the passenger bought the ticket 
from a marketing airline. Since the marketing airline does not share in 
the ticket revenue, that airline assertedly should have an incentive to 
operate its own flights. In addition, their agreements would not 
authorize any discussions prohibited by the antitrust laws.
    Our Authority under Section 411. Our review of this proposed 
alliance has been conducted under this Department's unique statutory 
scheme. Under our governing statutes, any determination that the 
agreements should be prohibited would be based on a finding that they 
constituted an unfair method of competition. Section 411 authorizes us 
to prohibit conduct that does not violate the Sherman Act. See, e.g., 
Pan American World Airways v. United States, 371 U.S. 296, 303-308 
(1963). As discussed above, our statutory authority under section 411 
must be exercised in the context of the mandates to protect the public 
interest enumerated in 49 U.S.C. 40101.
    The leading case on the scope of our authority under section 411 is 
United Air Lines v. CAB, 766 F.2d 1107 (7th Cir. 1985) (Posner, J.). 
This Department inherited from the CAB the same statutory provision 
that was at issue in that case. In United Air Lines, the Court affirmed 
the Board's computer reservations system rules notwithstanding the 
absence of any finding that the systems' practices violated the 
antitrust laws. The Court held that the Board could nonetheless 
regulate CRS practices, because the Board ``can forbid anticompetitive 
practices before they become serious enough to violate the Sherman 
Act.'' United Air Lines, 766 F.2d at 1114.
    Competition Analysis. In reviewing the agreements between Delta, 
Continental, and Northwest, we are mindful that their joint venture 
relationship will not be the equivalent of a merger, that they do not 
now intend to significantly integrate their operations, and that each 
airline has represented that it will independently establish its fare 
levels and capacity levels in its city-pair markets. We note as well 
that the fares paid by passengers on flights operated under the code-
share arrangement will go to the airline operating the flight, even if 
the passenger bought the ticket under the other airline's code. This 
should give each airline some incentive to compete with its partner by 
operating its own flights.
    Nonetheless, based on all the facts presented to us, our 
independent knowledge of and long experience with the airline industry, 
and our detailed analysis under our governing statute, the Delta/
Continental/Northwest alliance presents serious competitive concerns. 
It is substantially different from previous alliances between U.S. 
airlines, both in terms of the combined size of the three partners and 
the extent of overlap between their route systems.
    First, in contrast to earlier alliances, the Delta/Continental/
Northwest alliance involves three airlines that together have a large 
share of the national market. Northwest and Continental together have a 
national market share of 18 percent as measured by domestic revenue 
passenger miles, and Delta has 17 percent of the national market. The 
proposed three-airline alliance would therefore have a national market 
share of 35 percent. In contrast, the largest of the previous 
alliances, United/US Airways, resulted in a combined market share of 23 
percent, and that share may be expected to decline if the two airlines' 
financial difficulties ultimately lead to a shrinkage of their route 
systems.
    More significantly, both the existing Continental/Northwest 
alliance and the recent United/US Airways alliance involved airlines 
whose route systems overlapped relatively little. In 2001, Continental 
and Northwest overlapped in 558 markets, accounting for 6.5 million 
annual passengers. The United/US Airways alliance involved 543 
overlapping markets accounting for 15.1 million annual passengers. 
United has a largely east-west route system, while US Airways has a 
largely north-south route system along the East Coast. In dramatic 
contrast, the three alliance partners' services overlap in 3,214 
markets accounting for approximately 58 million annual passengers.
    Thus, the Delta/Continental/Northwest alliance is not an end-to-end 
alliance, unlike most of the other domestic and international alliances 
reviewed by us, which typically have expanded the network of each 
alliance partner. Contrary to the three airlines' representations 
regarding new on-line service, Delta's code-share with Continental 
would give Delta access to only eleven domestic airports not now

[[Page 3296]]

served by Delta, all of which are small. While Delta's code-share with 
Northwest would give Delta access to significantly more domestic 
airports, it appears that the total number of new on-line markets 
created by the alliance would still account for only 89,530 annual 
passengers, far less than one-tenth of one percent of all domestic 
passengers. Thus, the value of the alliance for the partners would come 
from capturing passengers now traveling on other airlines, rather than 
the stimulation of traffic in new ``online'' markets. As a result, the 
proposed alliance would not provide substantial network extension 
benefits, unlike other domestic alliances.
    It also appears that the Delta/Continental/Northwest alliance would 
create neither substantial operating efficiencies nor substantial cost 
reductions for the three airlines. The alliance instead would benefit 
the three partners by increasing their ability to attract passengers 
away from competing airlines. Their ability to take passengers away 
from competing airlines would in part result from their improved 
service, such as an increased ability for travellers to earn frequent 
flyer awards, and, in part, from the significant advantages created 
when an airline (or airline alliance) dominates a city.
    We recognize that the alliance could benefit a number of 
travellers. Travellers in some markets will have a greater choice of 
flights, and the members of the three airlines' frequent flyer programs 
will gain a greater ability to earn and use frequent flyer awards. Some 
markets, albeit very small markets, that now have no on-line service 
could, if the Alliance Carriers choose to code-share in those markets, 
obtain such service. In analyzing the three carriers' proposal, we must 
weigh the potential benefits of the alliance against its potential 
anti-competitive effects. The conditions set forth herein, while not 
preventing the airlines from implementing their alliance, would attempt 
to ensure that the alliance provides the benefits that its partners 
promised to the public. The conditions would attempt to limit the anti-
competitive harm that could result from the alliance without 
interfering with the partners' ability to code-share in most markets, 
to offer reciprocity to each airline's frequent flyer and airport 
lounge program members, and to engage in joint marketing efforts in 
most cities.
    In analyzing the alliance's potential impact on airline 
competition, we have considered the data available to us regarding the 
Continental/Northwest alliance, which the three airlines contend has 
caused no discernible competitive harm. We presently believe that that 
experience does not provide a valid basis for comparison. It appears 
that the Delta/Continental/Northwest alliance would create far fewer 
new on-line service opportunities, involve much more overlapping 
service, and pose a greater danger of collusion than did the 
Continental/Northwest alliance.
    Our decision to allow United and US Airways to proceed with their 
alliance is not inconsistent in any way with our present view that the 
Delta/Continental/Northwest alliance presents serious competitive 
issues. We expressed reservations about the United/US Airways alliance, 
even though United and US Airways have a significantly smaller share of 
the national market and their route systems overlap much less than do 
the route systems of Delta and the existing Northwest/Continental 
alliance. We allowed United and US Airways to go forward, without 
imposing conditions additional to those imposed by the Justice 
Department, based on the airlines' representations that they would 
continue to compete independently, our analysis of the likelihood that 
the alliance would reduce competition, and our analysis of the 
potential public benefits of the alliance. 67 FR 62846 (October 8, 
2002). Importantly, we did not find that the United/US Airways alliance 
would not reduce competition. Instead, we stated: ``At the present 
time, the material we have reviewed is not sufficient for us to 
conclude that an enforcement proceeding under 49 U.S.C. 41712 would be 
warranted.'' 67 FR 62847.
    In sum, based on the information provided to us, we presently 
believe that the Delta/Continental/Northwest alliance proposal raises 
several serious competitive issues. Consumer access to low fares and 
adequate service cannot be assured without adequate competition. The 
goal of maintaining competition requires (i) that the partners continue 
competing with each other to the maximum extent possible and (ii) that 
unaffiliated airlines continue serving the three partners' markets or 
can enter those markets without artificial barriers.
    Our concerns with this alliance proposal flow directly from our 
responsibilities under our unique statutory scheme. We do not seek to 
protect favored airlines. Competition works when individual competitors 
find ways to improve their lot relative to others, thus forcing others 
to respond. The end result is more efficient airlines, better service, 
lower fares, and economic growth. Here, however, multiple carriers 
would join forces in many different ways, making it extremely 
difficult, it appears, for other carriers to respond effectively, and 
thus forcing those competing carriers to exit some markets. Unaligned 
carriers could be particularly vulnerable to the unprecedented market 
power of the Delta/Continental/Northwest alliance, and many could be 
weakened or cease to exist. Accordingly, we have a number of specific 
concerns with the alliance, which we would attempt to address through 
the conditions described below. We would, of course, monitor the 
alliance's effects on competition, and would retain the power to take 
further action if necessary.
    Potential Collusion. First, the alliance agreements authorize a 
wide range of discussions between the partners, since the three 
airlines intend to make their services as seamless as possible. Given 
the broad nature of the discussions that will be required to implement 
the alliance, we are concerned that the communications among the 
carriers may lead to collusion, either tacit or explicit, on such 
matters as fares and service levels, notwithstanding the partners' 
representation that they would remain independent competitors. The 
face-to-face oral discussions of scheduling, use of facilities, and 
joint pricing proposals to corporate travel departments and travel 
agencies would provide new opportunities to exchange information that 
could facilitate tacit collusion to restrain competition. In addition, 
the airlines' stated goal of harmonizing their service standards, which 
would strengthen the alliance's ``brand,'' seems likely to dampen the 
partners' interests in competing with each other on service factors, 
such as terms of their frequent flyer programs. In order to develop a 
multi-carrier ``on-line'' seamless service alliance, the partners may 
reduce the differences in their respective service features; consumers 
typically use differences in service features, such as frequent flyer 
program terms, to choose between airlines. Collusion, whether explicit 
or tacit, harms consumers, because it reduces or eliminates competition 
and enables firms to charge higher prices or offer poorer service than 
they would in a competitive market.
    Increased Market Presence. The three airlines plan to take 
advantage of their combined presence at the cities they serve by code-
sharing, offering frequent flyer program reciprocity, and making joint 
offers to corporate customers and travel agencies. This would extend 
the same types of competitive advantages possessed by the dominant 
airline in a city to a number of spoke cities, and this may 
substantially undermine the ability of competing airlines to maintain

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service in, or enter, markets served by the alliance partners. That 
potential harm would result primarily from the combination of the three 
airlines' increased market presence and the consequent marketing 
advantages created by their dominance of many markets, rather than 
because the alliance will enable the partners to offer substantially 
better service. Historical evidence and analysis support the conclusion 
that an airline that has a large market share at a city typically has 
substantial competitive advantages over other airlines that the latter 
often cannot offset, even by offering lower fares and attractive 
service features. An airline's possession of a dominant market share in 
a city, accordingly, will give it some ability to charge 
supracompetitive fares and to reduce service. See, e.g., U.S. 
Department of Transportation, Findings and Conclusions on the Economic, 
Policy, and Legal Issues, Enforcement Policy Regarding Unfair 
Exclusionary Conduct in the Air Transportation Industry (January 17, 
2001) at 22-26. This is particularly true at airline hubs, including 
the hubs operated by the three airlines. The three airlines' proposed 
alliance would enable them to extend these hub advantages to spoke 
cities, which could deter new entry and may cause existing competitors 
to end their services in some markets. The resulting reduction in 
competition may lead to higher fares and poorer service.
    We recognize that the alliance proposed by Delta, Continental, and 
Northwest would not give any single airline a dominant market share and 
that the three airlines represent that they will continue to compete 
independently on fares, capacity, and scheduling. Nonetheless, we 
believe that at many cities the alliance's impact on the prospects of 
entry by competing airlines would be substantially equivalent to the 
impact that a single airline's dominance would have at that city. 
Indeed, the documents provided to us confirm that the three airlines 
seek through the alliance to increase their collective market share in 
ways that would undermine the competitive position of other airlines. 
They intend to offer joint corporate discount contracts, joint travel 
agency incentive programs, and, from the traveller's perspective, 
combine their frequent flyer programs. Their proposed code-sharing 
would also increase their dominance through the simple fact of 
multiplying the apparent number of flights offered by each of them. In 
these respects, the three airlines seek to secure the same competitive 
advantages of a dominant market share that would accrue to them through 
a merger.
    Joint Marketing. As noted, the three airlines plan to offer 
corporate customers joint contracts and to offer travel agencies joint 
incentive programs. In general, the airline that offers the broadest 
range of services will be the most attractive bidder for a 
corporation's business, and the airline that operates the most service 
at a city will offer the most attractive incentive program to travel 
agencies in that city. An airline that dominates a city typically 
structures its corporate contracts and travel agency incentive programs 
in ways that leverage its existing dominant market share to gain an 
even larger share of the business of the corporate accounts and the 
bookings of the travel agencies. See e.g. General Accounting Office, 
``Airline Deregulation: Barriers to Entry Continue to Limit Competition 
in Several Key Domestic Markets'' (October 1996) at 15-19; U.S. 
Department of Transportation, Findings and Conclusions on the Economic, 
Policy, and Legal Issues, Enforcement Policy Regarding Unfair 
Exclusionary Conduct in the Air Transportation Industry (January 17, 
2001) at 23-24. If the proposed alliance is implemented, these three 
airlines could do the same. The partners' joint marketing plans 
threaten competition in two respects. First, if they make joint offers, 
they are less likely to compete individually for corporate customers 
and travel agency patronage. Second, they could leverage their combined 
market share in ways that preclude any effective competition from 
unaffiliated airlines. For example, the Alliance Carriers could offer a 
corporate customer discounts on Northwest's transpacific services only 
if the customer booked most of its domestic travel on a particular 
domestic route on Delta rather than on a competing airline. The tying 
of the partners' services in this way could make it extremely difficult 
for other airlines, especially those that do not have a worldwide 
network like that operated by the proposed alliance, to compete.
    Airport Facilities. The alliance partners have represented that 
they plan to consolidate their operations at airports when doing so 
would be feasible, a step which could free a number of gates for use by 
others. Opposing parties have expressed a concern that the Alliance 
Carriers would not make underutilized gates available to competitors 
and would instead ``hoard'' gates at airports where other facilities 
for new service are not obtainable. Airlines cannot enter new markets 
or increase service in existing markets if they cannot obtain access to 
the necessary airport facilities. Facilities are presently unobtainable 
at a number of important airports, such as Boston. The alliance 
partners may have an incentive and the ability to ``hoard'' their 
existing facilities or terminate their competitors' use of subleased 
facilities at airports where gates are otherwise unobtainable to reduce 
competition. Such actions could worsen a situation that already exists, 
resulting ultimately in higher fares and less service for consumers.
    CRS Displays. If the Alliance Carriers fully implemented their 
proposed code-sharing agreement, each of their flights could be listed 
three times in the displays offered to travel agents by most of the 
computer reservations systems (``CRSs''). Multiple listings of the same 
number of physical flights would move many of the services offered by 
other airlines to later CRS display screens, with the likely result 
that many travel agents would not find and book those services. The 
multiple listings of the same physical flights under the codes of all 
three partners could thus, by itself, have the effect of reducing the 
number of bookings obtained by competitors from travel agents using a 
CRS, without any actual improvement in capacity or reduction in price. 
In some markets, that phenomenon could undermine a competitor's ability 
to maintain any service at all. Similar concerns have caused us to 
consider, in a presently pending proceeding, amending our CRS rules to 
limit the number of times any flight can be displayed under different 
airline codes. 67 FR 69366, 69396-69397 (November 15, 2002). The 
European Union's CRS rules allow a single service to be displayed under 
no more than two codes, even if more than two airlines sell seats on 
the service under their codes. 67 FR 69397.
    Proposed Conditions. Utilizing all of the information presently 
available to us, we have conducted an independent analysis of the 
proposed alliance under our unique statutory authority. As noted 
earlier, as a result of that analysis, we presently believe that unless 
the Alliance Carriers formally accept and agree to certain conditions, 
the proposed alliance poses a serious danger to competition. The 
conditions discussed herein would not affect the operation of the 
existing Northwest/Continental alliance. We have developed them, after 
careful and thorough consideration of all of the relevant issues, in an 
attempt to alleviate the competitive concerns raised by the Delta/
Continental/Northwest alliance without the need for

[[Page 3298]]

formal enforcement action. We would not now take enforcement action 
against the three airlines' implementation of the alliance if they 
formally agreed to the conditions. If the three airlines do not 
promptly notify us of their agreement to accept the conditions set 
forth herein, we will direct our Aviation Enforcement office to 
institute a formal enforcement proceeding to determine whether the 
airlines' agreements constitute unfair methods of competition in 
violation of section 411 and, if so, what remedies would be required.
    We have developed six conditions, after considering the three 
airlines' responses to our stated concerns. For convenience, our 
conditions are set forth below, along with a short summary of the basis 
for each of them:

    1. The following condition is intended to reduce the possibility 
of collusion that would be inconsistent with 49 U.S.C. 40101 or 
unlawful under 49 U.S.C. 41712:
    Steering Committee: The Alliance Carriers shall not establish 
the Steering Committee as defined in Section 10.1 of the Marketing 
Agreement.\4\ The Alliance Carriers shall not coordinate or agree 
upon pricing, scheduling (except for minor schedule adjustments to 
existing schedules to improve connectivity), capacity, route entry 
or exit, revenue/inventory management, frequent flyer terms, or upon 
any other matter as to which an agreement among competitors would be 
inconsistent with 49 U.S.C. 40101 or unlawful under 49 U.S.C. 41712. 
To ensure compliance with those sections, counsel shall monitor any 
communications concerning the above-specified topics. Monitoring by 
counsel shall not confer attorney-client privilege upon such 
communications. The Alliance Carriers shall maintain written records 
of all such communications among themselves regarding the Marketing 
Agreement and shall retain them until one year after the Marketing 
Agreement's termination.
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    \4\ For the purposes of these conditions, the term ``Marketing 
Agreement'' includes all of the exhibits to the Marketing Agreement.
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    2. The following condition is intended to implement the Alliance 
Carriers' agreement to release ``Surplus Gates'' and reduce the 
possibility that the Marketing Agreement will impede competition due 
to ``hoarding'' underutilized facilities at certain congested 
airports:
    Airport Facilities: The Alliance Carriers agree that due to co-
location the following gates, along with related facilities 
(including overnight positions), shall be released to the airport 
sponsor upon its request for lease to domestic non-Alliance Carriers 
or for common use: (a) Four gates at IAH, (b) two gates at DTW, (c) 
five gates at CVG, and (d) two gates at DFW. Additionally, if the 
Alliance Carriers choose to implement any provision of the Marketing 
Agreement at any of the hub airports \5\ of any Alliance Carrier or 
Boston (BOS), each Alliance Carrier agrees to maintain records of 
daily gate usage at those airports and to retain those records until 
one year after the termination of the Marketing Agreement. 
Notwithstanding any lease provision to the contrary, the Alliance 
Carriers further agree to release, within sixty (60) days of request 
by an airport sponsor at an airport that does not have a gate 
available for use on reasonable and competitive terms, any 
underutilized leased gate, along with related facilities (including 
overnight positions) but excluding gates used only for international 
flights, for use by a domestic non-Alliance Carrier or for common-
use. A gate is underutilized if it is used less than an average of 
six turns per day during any two consecutive calendar months. 
Subleases to non-Alliance Carriers shall not be cancelled to release 
gates under this condition. No Alliance Carrier shall be required to 
release an underutilized leased gate pursuant to this condition if 
it will be required to continue to pay rentals or charges to the 
airport sponsor for the gate. This condition shall not apply if a 
gate is underutilized due to an event of force majeure.\6\
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    \5\ For the purposes of this condition, ``hub airports'' are 
defined as Atlanta (ATL), Cincinnati (CVG), Cleveland (CLE), Dallas/
Ft. Worth (DFW), Detroit (DTW), Houston (IAH), Memphis (MEM), 
Minneapolis/St. Paul (MSP), Newark (EWR), and Salt Lake City (SLC).
    \6\ For the purposes of this agreement, an ``event of force 
majeure'' is defined as follows: Acts of God; fire; damage to or 
destruction of aircraft or other flight equipment; riots or civil 
commotion; strikes, lockouts or labor disputes (whether resulting 
from disputes between the carrier and its employees or between other 
parties); U.S. military or airlift emergency or substantially 
expanded U.S. military airlift requirements as determined by the 
U.S. government; activation of the U.S. Civil Reserve Air Fleet; war 
or hazards or dangers incident to a state of war; acts of terrorism; 
or any other acts, matters or things, whether or not of a similar 
nature, which are beyond the control of the carrier and which shall 
directly or indirectly, prevent, delay, interrupt, or otherwise 
adversely affect the furnishing, operation or performance of a 
carrier; provided, however, that the carrier so affected shall take 
all commercially reasonable steps to cure such nonperformance or 
delay.
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    3. The following condition is intended to ensure that the 
Alliance Carriers implement their representations of consumer 
benefits due to on-line service expansion:
    Codesharing: As referenced in the Marketing Agreement, Domestic, 
Canadian, and Caribbean codesharing shall be limited to six hundred 
fifty (650) flights per two-carrier combination for a total of 
twenty-six hundred (2,600) flights. Not less than twenty-five 
percent (25%) of each marketing carrier's new codeshare flights must 
be to or from airports the carrier and its regional affiliates 
either did not directly serve or served with no more than three 
daily roundtrip flights as of August 2002. An additional thirty-five 
percent (35%) of each marketing carrier's new codeshare flights must 
either meet the above requirement or be to or from small hub and 
non-hub airports.\7\ Beginning one year after the commencement of 
codeshare operations, any Alliance Carrier may request review of 
this condition. The Department will exercise its best efforts to 
complete the review within sixty (60) days following receipt from 
the Alliance Carriers of the information necessary to complete its 
review. Any request for modification shall not constitute a new 
agreement for the purposes of 49 U.S.C. 41720.
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    \7\ For the purposes of this notice, ``small hub'' and ``non-
hub'' airports are defined by the Airport Activity Statistics 
published by the Department of Transportation, Bureau of 
Transportation Statistics.
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    4. The following condition is intended to encourage continued 
independent competition and reduce the possibility of joint 
marketing arrangements that reduce competition:
    Joint Corporate and Travel Agency Contracts: If the Alliance 
Carriers wish to offer joint bids to corporations or travel 
agencies, the corporation or travel agency shall be given the option 
of dealing with each Alliance Carrier separately or of receiving a 
joint bid from two or more of the Alliance Carriers. Only after the 
corporation or travel agency has requested a joint bid in writing 
shall such a bid be developed and submitted. In addition, the 
Alliance Carriers shall not offer a joint bid to any corporation or 
travel agency that has a principal place of business or headquarters 
in a city \8\ where all three carriers (themselves or through 
regional affiliates) operate scheduled service and their combined 
market share \9\ exceeds fifty percent as of the August prior to the 
offering of the joint bid. In any joint bid, the Alliance Carriers 
shall not make the contractual discounted fares or commissions 
dependent on satisfaction of minimum purchase or booking 
requirements, whether based on threshold or percentage, for specific 
domestic markets or for domestic services offered by one of the 
Alliance Carriers. This condition shall not apply to joint bids 
involving only Northwest and Continental.
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    \8\ For the purposes of this agreement, ``city'' is defined as a 
primary metropolitan statistical area.
    \9\ For the purposes of this agreement, ``market share'' is 
determined by scheduled departing seats on domestic flights.
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    5. The following condition is designed to limit the potential 
anti-competitive effects of multiple listings of one service under 
different codes, i.e. CRS ``screen clutter,'' while that issue is 
under active review in the Department's CRS rulemaking proceeding. 
At the conclusion of the proceeding, the same CRS rules applicable 
to all other codeshare arrangements would be applicable to this 
codeshare agreement as well:
    CRS Displays: In the current CRS rulemaking the Department is 
soliciting comments on whether it should limit the number of times 
that codeshare services are displayed (67 FR 69396-97). The European 
Union CRS rules limit the number of codes displayed on a flight and 
CRSs operating in EU member states must comply with that limit. The 
Alliance Carriers shall make a good faith request in writing to each 
CRS that the CRS, during the pendency of the CRS rulemaking, not 
display an Alliance Carrier's service under more than two codes in 
any integrated display offered by the CRS. The requests and any 
responses thereto shall be submitted to the Department by the 
Alliance Carriers.
    6. The following condition is intended to limit the duration of 
the potential anti-competitive effects of the exclusivity clauses of 
the Marketing Agreement to its proposed term:

[[Page 3299]]

    Exclusivity Provisions: After the termination of the Marketing 
Agreement, no Alliance Carrier shall attempt to enforce any 
provision of the Marketing Agreement that would restrict any other 
Alliance Carrier from entering into an international or domestic 
marketing relationship with any other carrier.

    Conclusion. If we are notified promptly that the three carriers 
agree to implement the alliance subject to the conditions set forth 
above, we would not now institute an enforcement case under our 
governing statute. Given our strong concern that the agreements could 
have anti-competitive results, however, we would continue to monitor 
closely the implementation of the agreements. We, of course, reserve 
the right, if we obtain evidence that leads us to believe that the 
joint venture is adversely affecting competition, to refer the matter 
for enforcement action. Further, if the three airlines at any time 
decide that they will no longer comply with a formal agreement 
accepting our conditions, they will have created a new agreement that 
must be submitted to us under 49 U.S.C. 41720, subject to all of the 
provisions of the statute, including the prescribed waiting period. 
Under our established interpretation of 49 U.S.C. 47120, the same will 
be true if they materially modify the terms of the agreements submitted 
by them on August 23.

    Issued in Washington, DC on January 17, 2003.
Read C. Van de Water,
Assistant Secretary for Aviation and International Affairs.
[FR Doc. 03-1528 Filed 1-17-03; 2:20 pm]
BILLING CODE 4910-62-P