2

UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY

WASHINGTON, D.C.

Issued by the Department of Transportation

on the 27th day of January, 2005

Joint Application of
AMERICA WEST AIRLINES, INC.
and
ROYAL JORDANIAN AIRLINES
under 49 U.S.C. §§ 41308 and 41309 for approval of and antitrust immunity for a Commercial Cooperation Agreement / DocketOST-2004-18613

ORDER GRANTING APPROVAL AND ANTITRUST IMMUNITY

FOR A COMMERCIAL COOPERATION AGREEMENT

By this Order, we grant final approval of and antitrust immunity for a Commercial Cooperation Agreement between America West Airlines, Inc. (“America West”) and Royal Jordanian Airlines (“Royal Jordanian”) (collectively, the “Joint Applicants”) under 49 U.S.C. §§ 41308 and 41309. The Department’s action is subject to conditions, as explained further in this Order.

On November 10, 1996, the Governments of the United States and the Hashemite Kingdom of Jordan (“Jordan”) reached an open skies aviation agreement that promised substantial benefits to consumers and communities in both countries. A predicate for the Department’s approval and grant of antitrust immunity for the Joint Applicants’ proposed Commercial Cooperation Agreement is the open skies agreement. The agreement with Jordan allows U.S. airlines to serve any point in Jordan (and open intermediate and beyond rights) from any point in the United States and allows airlines of Jordan to do the same. Each of the open skies agreements entered into by the United States has encouraged more competitive service, since market forces, not restrictive agreements, have disciplined the price and quality of airline service.

I.  Background

A.  Proposed Arrangement

The essential elements of the Joint Applicants’ proposed arrangement include reciprocal codesharing of flights, through check-in, special prorate arrangements for passengers, and joint sales and marketing programs.[1] To implement the Commercial Cooperation Agreement, the Joint Applicants have entered, or will soon enter, a Frequent Flyer Participation Agreement[2], an Airport Lounge Access Agreement, a TCN Code Share Agreement, and an Interline Reduced Rate Agreement.[3] In summary, while the partners state that each airline will retain its separate identity, brand, ownership, and control,[4] the underlying objective of the proposed arrangement is to enable the companies to plan and coordinate their respective services as if there had been an operational merger between them.

B.  The Joint Application

1.  History

On July 12, 2004, the Joint Applicants applied for approval of and antitrust immunity for their Commercial Cooperation Agreement effective July 1, 2004.[5] Also on July 12, 2004, the Joint Applicants filed a joint motion under 14 C.F.R. 302.12 (“Rule 12”), seeking confidential treatment for supporting documents.[6]

On August 6, 2004, we granted immediate interim access to all documents covered by the Rule 12 motion to counsel and outside experts for interested parties who file appropriate affidavits with the Department in advance.[7] We also suspended the procedural schedule pending our determination of the completeness of the record of the case.

On September 17, 2004, we finished our initial review and determined that the application was substantially complete.[8] We required answers to the application be filed no later than 21 calendar days from September 17, and that replies be filed no later than 7 business days after the last day for filing an answer. We received no answers or replies.

2.  Overview

On July 12, 2004, the Joint Applicants filed for approval of and antitrust immunity for (1) a Commercial Cooperation Agreement (Exhibit JA-1), and (2) all agreements between the applicants that implement any part of the Commercial Cooperation Agreement or are entered into by the applicants under the Commercial Cooperation Agreement (hereafter collectively the “Cooperation Agreement”). According to the Joint Applicants, the Cooperation Agreement preserves independent corporate and national identities,[9] conforms with U.S. international aviation policy,[10] and offers new online service between America West’s hubs and Jordan.[11] The Joint Applicants seek immunity spanning all facets of their Cooperation Agreement[12] for a period of at least five years.[13]

The Cooperation Agreement submitted to the Department in this proceeding involves coordination in such areas as codesharing; revenue allocation; pricing, inventory and yield management; scheduling; marketing and product development; frequent flyer program; sales and expenses; airports and ground handling services; cargo marketing, sales, distribution, and pricing; cost reduction; and information systems.[14] This level of coordination, according to the Joint Applicants, will allow the Joint Applicants to generate significant efficiencies and provide enhanced and more competitive online services between Jordan and the U.S.[15] The Cooperation Agreement contains no proposed exchange of equity or other forms of cross-ownership, but with antitrust immunity, the Joint Applicants will operate as if they were a merged entity.[16]

In support of their application, the Joint Applicants advance numerous arguments. First, the Joint Applicants argue that the Cooperation Agreement clearly meets the Department’s public interest standard because it will enhance competition and improve consumer choice.[17] The Joint Applicants state that the public benefits that arise from the Cooperation Agreement closely mirror those of other alliances. They assert that the alliance should generate at least equivalent service improvements and concomitant price reductions for service to the Middle East, compared to the improved service to the Middle East by European partners that was generated by alliances with U.S. carriers.[18]

Second, the Joint Applicants assert that these consumer benefits and efficiencies cannot be realized, or will not be realized to any significant degree, absent antitrust immunity.[19] The necessary coordination of prices, schedules, and sales and marketing activities subject each carrier to potential antitrust liability, and thus the Joint Applicants declare that they will not proceed without a grant of immunity.[20]

Third, the Joint Applicants argue that their alliance does not substantially reduce or eliminate competition in any relevant market, but rather will bring enhanced competition and efficiency to the global market.[21] Because America West does not operate transatlantic flights and Royal Jordanian does not operate to any of the U.S. beyond gateway cities served by America West, the Joint Applicants state that the proposed alliance presents no competitive issue.

The Joint Applicants cite the Department’s statement that, where a U.S. and foreign carrier do not operate “competitive services in the relevant transatlantic market,” the proposed alliance presents “no significant competitive issue.”[22] The Joint Applicants cite data indicating that, in the U.S.-Middle East market, traffic from Jordan comprised 8.5 percent of total traffic. Seventy percent of the traffic carried by Royal Jordanian in this market is between the U.S. and Jordan and 30 percent is between other parts of the Middle East and the U.S.[23] While Royal Jordanian controls a significant portion of the U.S.-Jordan traffic, the Joint Applicants assert that competition from one-stop connecting service between the U.S. and Jordan is robust, with ten other carriers providing service from their gateways.[24] They also point out that U.S. carriers are free to initiate competing service pursuant to the open skies agreement. They claim that nothing in the proposed alliance changes the competitive structure of the U.S.-Jordan market, because Amman (“AMM”) is not a congested facility and no meaningful barriers exist to entry into the U.S.-AMM market with respect to either direct or indirect flights.

The Joint Applicants also note that America West is one of the only major U.S. carriers that is not a member of a global alliance, while Royal Jordanian is an unaligned foreign carrier. Furthermore, the Joint Applicants indicate that no international alliances involving a U.S. low-fare carrier have been approved or immunized by the Department. Approval of the proposed alliance will, according to the Joint Applicants, “uniquely enhance competition in the global market by establishing an historic and important foothold for a low-fare carrier in the international marketplace.”[25] The Joint Applicants assert that, together, they will help generate competition against dominant global alliances by increasing the geographic coverage of both airlines. Furthermore, the Joint Applicants state that the alliance will establish an important foothold for low-fare carrier competition in the global market and enhance U.S. domestic competition by supporting America West’s presence in the Midwest and on the East Coast.

Fourth, the Joint Applicants believe that the proposed America West/Royal Jordanian alliance will constitute an historic and important step towards achieving that result. The Joint Applicants refer to the strong relationship between the U.S. and Jordan. They note that the open skies agreement between the U.S. and Jordan was the thirteenth such agreement (of 60 plus agreements today) and the first between the U.S. and a non-European country. Finally, the Joint Applications note that Secretary Mineta has stated that “the Department … will seek to further strengthen U.S. transportation ties with Jordan.”[26] The Joint Applicants believe that approval of and immunization for the America West/Royal Jordanian alliance will do just that.[27]

Fifth, the Joint Applicants cite Order 2004-4-10 (American Airlines/SN Brussels (2004)) to support their assertion that the Cooperation Agreement meets the standards used by the Department to approve an alliance agreement. In looking at past precedent, the Joint Applicants acknowledge that the Department has included conditions on grants of immunity. The Joint Applicants propose to accept conditions on their immunity in compliance with Department policy on International Air Transport Association (“IATA”) tariff coordination, Origin & Destination (“O&D”) survey data reporting, Computer Reservation Systems (CRS), and use of common brand names. Specifically, the Joint Applicants indicate their willingness to agree that immunity will not extend to their participation in certain IATA tariff coordination activities, management of interests in individual CRSs, or use of common service or brand names. They also indicate their willingness for Royal Jordanian to submit full itinerary O&D survey data on the understanding that such data will be handled on a confidential basis.

C. Responsive Pleadings

No responsive pleadings were filed in this proceeding.

II. Decision

We find that approving and granting antitrust immunity to the Cooperation Agreement between the Joint Applicants under §§ 41308 and 41309 is in the public interest, subject to conditions, and that the agreement is not likely to substantially reduce competition in any market. In this Order, the Department requires, as a condition of approval and immunity, that the Joint Applicants (1) withdraw from all IATA tariff conference activities relating to through prices between the United States and Jordan, as well as between the United States and the homelands of foreign airlines participating with U.S. airlines in other immunized alliances; (2) file all subsidiary and subsequent agreements with the Department for prior approval; and (3) resubmit for review their Cooperation Agreement within five years of the issuance of this Order. We find that it is in the public interest to further require Royal Jordanian to report full-itinerary O&D Survey data for all passengers to and from the United States (similar to the O&D Survey data reported by U.S. airlines and by its partner America West). To prevent this reporting requirement from having negative consequences on Royal Jordanian, we have decided to grant confidentiality to the Royal Jordanian Origin-Destination reports and special reports on code-share passengers.

Our decision in this case rests on an examination of the impact of the proposed alliance on the competition and the public interest in the relevant markets. Antitrust immunity allows the partner airlines to engage in price and service coordination while avoiding the potential risk of antitrust liability.[28] We will consider granting antitrust immunity if our evaluation finds the proposed transaction, on balance, to be pro-competitive, pro-consumer, and consistent with our international aviation competition policy. A determination as to whether a particular transaction is consistent with the public interest is made only on a case-by-case basis, in light of the specific facts and circumstances affecting that case.

Here we have conducted a full examination of the merits of the Joint Application. We have assessed the impact of the Cooperation Agreement on competition and overall public interest in light of the facts and circumstances that are likely to affect the outcome of this case. To facilitate our examination, the Joint Applicants have provided the record with detailed evidence similar to that which we have required in previous antitrust immunity cases. We have also determined that the proposed alliance presents no significant competitive issues requiring further consideration. Interested parties had the opportunity to comment on the record and the merits of the Joint Application. No answers were filed. We therefore will dispense with the issuance of an Order to Show Cause and issue a Final Order granting this unopposed application.

III. Decisional Standards under 49 U.S.C. Sections 41308 and 41309

The Department employs a two-step process to review alliance agreements. First, under 49 U.S.C. § 41309, the Department must determine, among other things, that an inter-carrier agreement is not adverse to the public interest and not in violation of the statute before granting approval.[29] The Department cannot approve an inter-carrier agreement that substantially reduces or eliminates competition unless the agreement is necessary to meet a serious transportation need or to achieve important public benefits, if that need or those benefits cannot be met or achieved by reasonably available alternatives that are materially less anticompetitive.[30] The public benefits include, among others, international comity and foreign policy considerations.[31]

Any party opposing the agreement or request has the burden of proving that it substantially reduces or eliminates competition and that less anticompetitive measures are available.[32] On the other hand, the party defending the agreement or request has the burden of proving the transportation need or public benefits.[33]

Second, under 49 U.S.C. § 41308, the Department has the discretion to exempt a legal person affected by an agreement under section 41309 from the operations of the antitrust laws “to the extent necessary to allow the person to proceed with the transaction,” provided that the Department determines that the exemption is required by the public interest. It is not our policy to confer antitrust immunity simply on the grounds that an agreement does not violate the antitrust laws. We are willing to make exceptions, however, and thus grant immunity, if the parties to such an agreement would not otherwise go forward without it, and we find that the public interest requires that we grant antitrust immunity.