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Review Under 49 U.S.C. 41720 of United/US Airways Agreements

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Office of the Secretary, Department of Transportation.


Notice ending waiting period.


United Air Lines and U.S. Airways have submitted agreements to the Department for review under 49 U.S.C. 41720. That statute requires certain types of agreements between major U.S. passenger airlines to be submitted to the Department at least thirty days before the agreements' proposed effective date and allows the Department to extend the waiting period for any such agreements. The Department has completed its review of the United/US Airways agreements and has determined to end the waiting period for the agreements. The Department has concluded that the competitive issues presented by the agreements do not presently require further investigation. In reaching this conclusion, the Department is relying on the terms of the agreements, the data provided in response to our requests, and the two airlines' acceptance of restrictions imposed by the Justice Department that are intended to limit the possibility of anti-competitive conduct.

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

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On July 25 United and U.S. Airways submitted code-share and frequent flyer program reciprocity agreements to us for review under 49 U.S.C. 41720. After informally reviewing the agreements, we find that no formal investigation of the agreements is warranted at this time, and we have determined that we should end the waiting period. The two airlines have agreed to restrictions proposed by the Justice Department that are intended to limit the possibility of anti-competitive behavior, and each airline has represented to us that it will continue to compete independently on fares and service levels. To ensure that they abide by those representations, we will monitor closely their conduct in implementing the agreements.

Under 49 U.S.C. 41720, certain kinds of joint venture agreements among major U.S. passenger airlines must be submitted to us at least thirty days before their proposed implementation date. We may extend the waiting period by 150 days with respect to a code-sharing agreement and by sixty days for the other types of agreements covered by the advance-filing requirement. At the end of the waiting period (either the thirty-day period or any extended period implemented by us), the parties may implement their agreement.

The statute does not require the parties to obtain our approval before they implement an agreement. Blocking them from implementing their agreement would normally require our issuance of an order under 49 U.S.C. 41712 (formerly section 411 of the Federal Aviation Act) in a formal enforcement proceeding that determined that the agreement's implementation would be an unfair method of competition and thus a violation of that section. Our review of all agreements submitted under 49 U.S.C. 41720 has been informal. It is analogous to the review of major mergers and acquisitions conducted by the Justice Department and the Federal Trade Commission under the Hart-Scott-Rodino Act, 15 U.S.C. 18a, since we consider whether we should institute a formal proceeding for determining whether an agreement would violate section 41712.

While our review of the United/US Airways agreements has been informal, we established an opportunity for other parties to review redacted copies of the United/US Airways agreements and to submit comments due to the public interest in the agreements. 67 FR 50745 (August 5, 2002). We have carefully considered the comments filed on the agreements as well as the agreements themselves and other information Start Printed Page 62847provided to us by the parties. We have also consulted with the Justice Department, which has been reviewing the agreements under its responsibility to enforce the antitrust laws. Of course, our authority under 49 U.S.C. 41712 to prohibit unfair methods of competition is somewhat broader than the Justice Department's authority to enforce the antitrust laws. See, e.g., United Air Lines v. CAB, 766 F.2d 1107 (7th Cir. 1985). We extended the waiting period twice in order to conduct a comprehensive review of the agreements. 67 FR 54525 (August 22, 2002); 67 FR 59328 (September 20, 2002).

We have determined to end the waiting period for the United/US Airways agreements and take no action at this time to prevent the airlines from beginning to implement the agreements. 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 is warranted. However, we have a number of concerns about the United/US Airways agreements and the relationship being created by them. The two airlines together will have an industry market share of 23 percent, as measured by domestic revenue-passenger-miles (“RPMs”). In contrast, the largest airline, American, has a 17 percent market share. United has a 14 percent share, while U.S. Airways has a 9 percent share. U.S. Airways has also been the primary airline in the Northeast. We have a concern that the joint venture relationship being created by United and U.S. Airways may lead to lessening of competition between the two airlines in some markets. On the other hand, the joint venture will provide service benefits for a number of travellers and may increase competition in other markets, if United and U.S. Airways have strong incentives to compete with each other. While there is considerable overlap between the United and U.S. Airways route networks, the code-share arrangement will enable United and U.S. Airways to offer more integrated connecting services in markets not now served by either airline, which will benefit consumers traveling in those markets.

Legally and practically, the airlines' joint venture relationship will not be the equivalent of a merger, there will not be a significant integration of the airlines' operations, and each airline has represented that it will independently establish its fare levels and capacity levels in its city-pair markets. In addition, 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 (the airline operating the flight is the operating carrier, while the other airline is the marketing carrier). This should give each airline an incentive to compete with its partner by operating its own flights, since it will obtain passenger revenues only when it is the operating carrier.

After examining the United/US Airways agreements, the Justice Department has determined that it will not challenge those agreements under the antitrust laws if United and U.S. Airways accept certain restrictions on their joint venture. The two airlines have accepted those restrictions, as set forth in a letter agreement with the Justice Department. These restrictions primarily bar the airlines from code-sharing on certain nonstop routes and engaging in certain pricing conduct that could provide a vehicle for signaling and collusion. The two airlines have also agreed with the Justice Department that each airline will independently establish the terms and conditions for its frequent flyer program. The terms of the parties' agreements, with restrictions set forth in the airlines' agreement with the Justice Department, appear at this time to address our immediate concerns with competition by United and U.S. Airways. In reaching our conclusion, we are expressly relying on the airlines' representations to us and on their strict compliance with the terms of their agreement with the Department of Justice.

Under the agreement with the Justice Department, United and U.S. Airways will not code-share on local traffic on routes where both offer nonstop service, including their hub-to-hub routes (Philadelphia-Los Angeles, for example). They will not code-share on local traffic on nonstop services operated to the same endpoint from either Dulles International Airport or Reagan Washington National Airport, except for Washington, DC-LaGuardia/Boston flights. On routes served by only one of the two airlines, the marketing carrier's fares must be the same as the operating carrier's fares. On routes served by both airlines where both have comparable service (connecting service, for example), each airline's fares for flights operated by the other airline must be the same as the fares for its own flights or the fares established by the airline operating the flights. The marketing airline thus must charge either the same fares as the operating airline or the fares charged by the marketing airline for its own flights. On routes where one airline offers nonstop service and the other airline offers connecting service, the latter airline's fares for the nonstop service must be the same as the operating carrier's fares. Finally, United and U.S. Airways must continue to act independently in establishing the terms and conditions of their frequent flyer programs and in bidding on corporate contracts, although when consistent with the antitrust laws they may offer customers the option of a joint bid.

As noted, we have considered the comments submitted on the agreements. While many of them support the United/US Airways joint venture, several of the comments argue that the joint venture will be anti-competitive and that we should institute a formal proceeding to investigate its competitive effects. At this time we are not persuaded that the joint venture or the agreements would, on their face, violate 49 U.S.C. 41712. We have not yet seen evidence that the agreements will unreasonably restrict either airline's incentives and ability to compete independently or would be likely to result in collusion on fares or service levels.

Given our strong concern that the agreements not have anti-competitive results, however, we intend to monitor closely their implementation by United and U.S. Airways. If we obtain evidence that the airlines' implementation of their joint venture is having an adverse impact on competition, we may take action under 49 U.S.C. 41712 at that time. Furthermore, if United and U.S. Airways at any future time decide that they will no longer comply with the restrictions agreed upon with the Justice Department, they will have created a new agreement which must be submitted to us under 49 U.S.C. 41720 and which therefore cannot be implemented until the end of a new waiting period. The same will be true if they materially modify the terms of the agreements submitted by them on July 25. Under our established interpretation of 49 U.S.C. 41720, airlines that significantly modify a joint venture agreement must submit the modified agreement to us under that statute.

We are continuing to examine the similar agreements submitted by Delta, Continental, and Northwest, which were filed one month after United and U.S. Airways submitted their agreements. 67 FR 56340 (September 3, 2002).

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Issued in Washington, DC, on October 2, 2002.

Read C. Van de Water,

Assistant Secretary for Aviation and International Affairs.

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[FR Doc. 02-25523 Filed 10-7-02; 8:45 am]