OUCH: The DOT Blocks American & Qantas Partnership Expansion

In the past year American has added their first two routes to the South Pacific. Specifically, American launched flights from Los Angeles to both Sydney and Auckland. American and Qantas already had a joint venture, though American didn’t operate any of the flights across the Pacific.

Qantas-First-Lounge-Sydney-60

The intent was that American and Qantas would be expanding together under their joint venture, giving passengers more transpacific options. For example, as part of this Qantas also relaunched flights between Sydney and San Francisco, instead taking some frequencies off their Los Angeles route, since American would be filling that gap.

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While Australian authorities had already approved the expanded joint venture, the US authorities hadn’t. However, I think both airlines were rather confident it would be approved, as they’ve launched new flights that were motivated by the joint venture.

Well, the US Department of Transportation has now issued their tentative ruling, and they’re denying American and Qantas the right to expand their joint business. Here’s the beginning of the ruling:

By this order, the Department of Transportation tentatively denies the application of American Airlines, Inc. and Qantas Airways Limited. The applicants are long-standing commercial partners who are requesting approval to expand their existing partnership with an expanded joint business. Through a restated agreement, American and Qantas are seeking to jointly plan and price their services, and share revenues and costs, on routes between the United States and Australia/New Zealand. The Joint Applicants currently compete in many of these markets between the two regions today, including in the nonstop Los Angeles-Sydney market.

So, what’s the DOT’s logic for denying the expanded joint business? They’re basically concluding that the proposed alliance would substantially reduce competition and consumer choice, without producing sufficient countervailing public benefits. Here’s their longer explanation, which is interesting to read:

The Department is tentatively concluding that the proposed alliance expansion would harm competition in the US-Australasia market, in particular in the large US-Australia market. By combining the airline with the largest share of traffic in the US-Australasia market with the largest airline in the United States, the proposed alliance would reduce competition and consumer choice. Qantas is by far the largest competitor operating between the United States and Australia, and American is likely the only remaining US airline positioned to enter and expand services in a competitively significant and timely manner, given its resources and network size.

In addition to these anticompetitive effects, the Department is also concerned that the proposed alliance would not generate the public benefits identified by the Joint Applicants in their filings. For example, we tentatively find that, based upon information in the record, the proposed alliance is unlikely to grow capacity over the next five years faster than what the Department would expect based upon the historical growth rate. Additionally, many public benefits from customer service coordination could be obtained through traditional arms-length cooperation such as codesharing.

American and Qantas can try to appeal this, though my guess is that it won’t go anywhere. It’ll be interesting to see what this means for the American and Qantas transpacific route networks. I know a lot of the growth we’ve seen has been because the airlines were counting on joint venture approval, so without that happening, I’m curious how their strategy will change.

Not specific to this, but it’s nice to finally see the Department of Transportation not rubber stamping everything anymore. They’ve rejected this expanded joint venture, and apparently are also requesting Alaska and Virgin American make major concessions if they want the merger to be approved.

It would have been nice if the DOT were a bit more selective before the “big six” became the “big three,” as now it’s just too little too late. But hey, I guess they have to start somewhere.

What do you make of the DOT denying the expansion of the American & Qantas joint venture?

Comments

  1. Funny how the DOT blocks these little deals but approves the big six become the big three without issue. And I wish AA would focus their time and resources on improving their current product and performance rather than on expansion.

  2. Yeah, the next DOT administration will be very different from the current. I understand the hesitancy to expand consolidation efforts. But, I think in this case it has actually been net positive for consumers. I’d have preferred approval of this.

  3. Good decision.
    Idea to allow two competitors that control 60 percent of the market between the nations and the largest domestic operators in their respective country does not bode well for ability of competitors to offer choice to consumers.

  4. We all know that certain airlines, particularly those based in Atlanta, love their JVs more than any other business arrangement. However, I frankly have no idea how the Justice Department can declare ANY joint-venture between airlines to be immune from violations of antitrust law. These contracts are legal conspiracies to reduce competition. Period. Even if before the JV competition did not exist, adding a flight to a market within the confines of a JV by definition increases market power and furthers the monopolization of a market. Why would an airline ever operate a JV if not to obtain higher profits than what could be achieved under competition? I suppose for the DOT it’s better late than never.

  5. Looking forward to the Delta-AA merger in 2017. Excellent synergies to be had. No layoffs, better product and cheaper fares!

  6. I agree with those who say that they should just hold the appeal or re-apply after Jan 20 2017. With the Trumpkins in charge next year, it’s gonna be industry über alles.

  7. Wonder what happens to the service and food on the AA flights, AA had beefed up the offerings on these routes as part of the JV – wonder if they will fall back to (sub)standard AA levels now that its been denied.

  8. I never know how to feel about this kind of stuff. I honest feel people forget that Australian airlines have major challenges.

    Firstly you would never fly Qantas from the USA to any other part of the world (except maybe New Zealand) therefor Qantas and VA are point to point airlines only. They rely heavily on tourist and population demand which is a much smaller population then the population + tourist market of say the USA or Europe but even less then countries like U.K. And France. The Australian government is also less protectionist like the Canadian government with it allowing many airlines 5th freedom such as emirates to NZ and Singapore on their new “Capital Route”

    We rely on these airlines due to the huge distances and lack of interneal infrastructure (did you know that Australia has three different gauges of train line making it almost impossible to catch a train interstate).

    I dont think at all that this partnership would decrease seat capacity, not with the 787 demand increase and the drive from Australians for Point to point travel, mainly because we rarely get to experience this luxury.

  9. @Tony – this is specifically for joint ventures, not codeshares (and the DOT explicitly mentioned codesharing as a better way for them to do this under their eyes)

    Of course, as others mentioned, they might as well apply after January 21 when a presumably more friendly administration takes office.

  10. Love it, but with Trump running the show in 2017 you can bet a pro business attitude will prevail at all levels of government..the what is good for business is good for the people. Even even it is clearly not the case. American needs to be reined in. No one can say they are a better airline for travelers since the merger, only for Doug Parker and Wall Street.

  11. How one construes this will limit capacity failed to see 1) Qantas had the ability to increase flights from LA 2) American launched a single daily flight which Qantas could have done and 3) Qantas reinstituted service to San Francisco. That increases capacity and competition to San Francisco which previously was only serviced by United.

    We will see if the change in administration has any impact. What we do know is other carriers want to enter the Australia-US market. Singapore stated its interest which was denied by Australia.

  12. Wife and I returned from Sydney last week in Qantas First, booked with AAdvantage miles shortly before the AA award chart devaluation back in March. The irony is that it took fewer AA miles to book tickets on Qantas (quiet A380s) than on American Airlines itself. Don’t know if/when we will have enough miles to do a trip like that again, but thanks, AA (and OMAT/boardingarea/travel blogs)!

  13. @Jon- true but i feel like a JBA would make it easier to codeshare. (maybe not sure)

    Also lets not forget AA improved their premium cabin offerings on this route (and expanded it to other routes as well) to align with QF because QF fliers expect a certain standard but now that theres no incentive for QF to book people on AA metal i wonder if AA will just cut their losses and downgrade to a 2-cabin aircraft or pull out of the market altogether.

    I suspect if a new JBA doesn’t get approved we wont see routes like DFW-MEL or ORD-SYD materialize.

  14. Given the fact that Australia’s Minister for Foreign Affairs Julie Bishop signed a bilateral air services agreement with Qatar, this denial of a JV just puts AA at a disadvantage to lower costs and compete. It would be a much smaller pool of customers willing to pay the premium for direct travel.

  15. Great! Less AA products and pay Qantas fare! Seriously it is a bad deal for Australian passengers. Well done DOT!

  16. Sour grapes. Like Everything from this current administration. More Seats. Therefore greater Supply will do nothing to price fix the route.

    Is there a single economist who works in this government who isn’t directly feeding from Warren Buffett’s trough?

    These people need to take a long walk off a short pier and America need never look back.

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