Code-Share Imbroglio Shows Airlines Are Up Against a Wall
By Eric Gillin
02/01/2003 13:25
The airline industry has always been subject to government regulation, be it the tight controls imposed during the dawn of air travel or the deregulation that reversed those rules in 1978. But the airlines have never told the government that they're going to break the rules, consequences be damned.
That is, until last week, when Northwest Airlines NWAC , Delta Air Lines DAL and Continental Airlines CAL told the Department of Transportation that they would be forging ahead with their marketing alliance as planned, ignoring the DOT's mandate that the trio take steps to ensure the landscape stay competitive.
"That's their objective -- to figure out how to get in the black," said Thomas Nulty, industry veteran and retired president of Navigant International, a corporate travel management company. "What the DOT proposed to them is an obstacle to getting back to profitability. They're backed into a corner. It takes some guts, but these guys are doing what they feel they have to."
The Delta-led consortium wants to go ahead with a code-sharing agreement that would be the largest ever envisioned in the domestic market, combining the operations of the third-, fourth- and fifth-largest U.S. carriers. Under the agreement, the trio can share passengers, so that Delta can sell tickets on a Northwest flight, giving all three airlines the ability to increase profits without adding in costs.
And for an industry that's lost $16 billion over the last two years and faces a future filled with uncertainty due to a war in Iraq, any arrangement that increases operating profits is seen as a good one.
That is, unless the arrangement harms competition. This why the DOT told the carriers to leave vacant gates available for rivals, fly a quarter of all new code-share flights to underserved markets and limit the scope of the agreement to 2,400 flights a day.
Earlier, the DOT had no troubles approving a similar agreement between US Airways and UAL , parent of United Airlines, both of which are bankrupt. Unlike that duo, the Delta trio would control a third of the entire domestic air travel market; that is why the DOT is so concerned about competition.
"This just involves a larger share of the national market and could end up dominating markets if we don't preserve competition," said Bill Moseley, spokesperson for the DOT.
Desperate times call for desperate actions, so the carriers are willing to run the risk of an enforcement action from the DOT in order to improve their businesses. But in doing so, the trio may create a legal impasse that could take years to work through.
The DOT won't take the carrier's action lying down. In the coming days, the Secretary of Transportation will enforce its ruling and order the institution of a proceeding. The DOT's deputy general counsel will then oversee the development of the case, and a complaint against the carriers will be filed before an administrative law judge, who can issue a ruling. Ultimately, the recommended decision will be subject to review by the DOT, and it can be appealed by the carriers.
"We're going to move as fast as we can, but when the administrative judge takes over, he's the one who sets the schedule and uses his discretion setting the time tables on how things proceed," said Moseley. "It could be anywhere from six to 18 months, depending on how complicated the issues are."
And chances are, this issue will be complicated. Delta, Northwest and Continental say that their agreement is perfectly legal, pointing to the fact that the Department of Justice cleared them to go ahead on Jan. 17.
"This could take a while," said Kent Krause, managing partner at Speiser and Krause, an aviation law firm. "Part of the problem is the court of appeals after the DOT's administrative process. What I see as most likely is the DOT filing an injunction or another airline, like American, filing for relief based on an antitrust claim."
If an injunction is filed and the judge accepts it, then it could be years before the code-sharing agreement even makes it to the marketplace. In the meantime, Delta, Northwest and Contintental face the specter of a war in Iraq, higher fuel costs, rising debt levels, slumping travel demand and massive pension risk at the end of the year.
"I'm hoping the carriers and the DOT come to some kind of an agreement," said Michael Boult, the chief operating officer of eCLIPSE advisors, which advises corporations on their travel needs. "If not, the carrier can ill afford to spend money on long-term litigation with an uncertain end. The carriers are being pretty brazen here. Maybe they think the DOJ will support them in court."
This battle is just the beginning of a larger war. With the losses mounting and the largest carrier in the U.S., AMR AMR , parent of American, warning that it needs to find an additional $2 billion in cost cuts or else it could be grounded, the government will have a major hand in the industry's fate in 2003. Some industry veterans say this code-share fight isn't just an isolated dispute but the opening salvo in a new relationship between airlines and the government.
"There's never been anything like this before," said Nulty. "There have been a lot of great battles. Just look at the transcontinental market and how the legacy carriers used all their leverage to squash People Express and World Airways and others. Now these mature airlines are in the 15th round, and they're running out of strength. They're running out of money. They've fought the fights for 25 years, ever since deregulation, but now, they can't come out of the corner." |
