BEFORE THE 

DEPARTMENT OF TRANSPORTATION 

WASHINGTON, D.C. 

-------------------------------------------- 

Joint Application of: : 

 : 

 AMERICAN AIRLINES, INC. : 

 BRITISH AIRWAYS PLC : 

 FINNAIR OYJ : 

 IBERIA LÍNEAS AÉREAS DE ESPAÑA, S.A. : DOT-OST-2008-0252 

 ROYAL JORDANIAN AIRLINES : 

 : 

under 49 U.S.C. §§ 41308 and 41309 for : 

approval of and antitrust immunity for : 

alliance agreements : 

-------------------------------------------- 

[PUBLIC] JOINT APPLICANTS’ ANSWER TO THE DEPARTMENT OF JUSTICE’S 

MOTION FOR LEAVE AND COMMENTS 

Communications with respect to this document should be sent to: 

For American Airlines: For British Airways: For Iberia: 

WILLIAM K. RIS, JR. 

Senior Vice President – 

 Government Affairs 

American Airlines, Inc. 

1101 17th Street, N.W. 

Washington, DC 20036 

VIRASB VAHIDI 

Senior Vice President – 

 Planning 

American Airlines, Inc. 

P.O. Box 619616, MD 5628 

DFW Airport, TX 75261 

KENJI HASHIMOTO 

Vice President – 

 Strategic Alliances 

American Airlines, Inc. 

P.O. Box 619616, MD 5635 

DFW Airport, TX 75261 

CARL B. NELSON, JR. 

Associate General Counsel 

American Airlines, Inc. 

1101 17th Street, N.W. 

Washington, DC 20036 

R. BRUCE WARK 

Associate General Counsel 

JEFFREY A. OGAR 

Senior Attorney 

American Airlines, Inc. 

P.O. Box 619616, MD 5675 

DFW Airport, TX 75261 

(817) 967-3478 

jeff.ogar@aa.com 

TOM KING 

Executive Vice President - 

 External Relations 

British Airways Plc 

Rue de la Science 

B-1040 Brussels, Belgium 

PAUL C. JASINSKI 

General Counsel, Americas 

JAMES B. BLANEY 

Senior Counsel, Americas 

British Airways Plc 

75-20 Astoria Boulevard 

Jackson Heights, NY 11370 

(347) 418-4250 

paul.jasinski@ba.com 

DARYL A. LIBOW 

Sullivan & Cromwell LLP 

1701 Pennsylvania Ave., N.W. 

Washington, DC 20006 

(202) 956-7500 

libowd@sullcrom.com 

DON H. HAINBACH 

Garofalo Goerlich Hainbach PC 

1200 New Hampshire Ave., N.W. 

Washington, DC 20036 

(202) 776-3970 

dhainbach@ggh-airlaw.com 

ELVIRA HERRERO 

Senior Vice President - 

 Int’l Relations & Alliances 

Iberia Líneas Aéreas de 

 España, S.A. 

Velazquez, 130 

28006 Madrid, Spain 

WILLIAM KARAS 

CAROL GOSAIN 

Steptoe & Johnson LLP 

1330 Connecticut Ave., N.W. 

Washington, DC 20036 

(202) 429-6223 

wkaras@steptoe.com 

For Finnair: 

SAMI SARELIUS 

Vice President & 

 General Counsel 

Finnair Oyj 

Tietotie 11 A 

FI-01053, Finland 

+358 (9) 818-4070 

sami.sarelius@finnair.fi 

For Royal Jordanian: 

MICHAEL J. HOLLAND 

Condon & Forsyth LLP 

7 Times Square 

New York, NY 10036 

(212) 490-9100 

mholland@condonlaw.com 

January 11, 2010 
TABLE OF CONTENTS 

INTRODUCTION ...................................................... 2 

I. DOJ HAS FAILED TO MEET ITS BURDEN OF PROVING THAT 

THE PROPOSED ALLIANCE WOULD HARM COMPETITION ................ 11 

A. DOJ Has The Burden Of Proving The Proposed 

Alliance Would Harm Competition ........................... 11 

B. DOJ Has Failed To Meet Its Burden Of Proving 

Competitive Harm ........................................... 12 

1. Connecting Service Imposes An Effective 

Constraint On O&Ds With Nonstop Flights .......... 12 

2. The Proposed Alliance Will Not Create 

Six “Highly Concentrated Markets” ................ 14 

 a. New York-London ................................ 15 

b. Chicago-London ................................ 17 

c. Boston-London ................................ 18 

d. Miami-London ................................ 19 

e. Dallas/Fort Worth-London ..................... 19 

 f. Miami-Madrid ................................ 20 

3. DOJ Fails To Prove That Significant Fare 

Increases Would Result From The 

Proposed Alliance ................................ 21 

a. DOJ’s Fare Study – Even If Correct – Would 

Reliably Predict Harm On Just One City-Pair, 

Not Six ...................................... 21 

b. DOJ’s Comments Fail To Recognize The 

Fundamental Difference Between A Change 

In Capacity And A Change In The Number 

Of Competitors ................................ 22 

c. DOJ’s Description Of Yield Management Strategy 

Is Fundamentally Flawed ..................... 23 

 
- ii –

CONFIDENTIAL VERSION 

d. DOJ’s Arguments Regarding New Entry 

Ignore Reality ................................ 25 

i. There Is No Hub Barrier To Entry .......... 25 

ii. Heathrow Slots Have Not Proven To Be 

A Barrier To Entry ..................... 26 

iii. DOJ’s Attempt To Dismiss The 19 New 

U.S.-Heathrow Frequencies Only Proves 

The Competitiveness Of London Routes ..... 28 

4. DOJ Fails To Effectively Rebut Compass/ 

Lexecon’s Findings ................................ 30 

II. THE DEPARTMENT HAS CONSISTENTLY HELD THAT ANTITRUST IMMUNITY 

IS REQUIRED TO ACHIEVE THE FULL PUBLIC BENEFITS OF 

ALLIANCE INTEGRATION ........................................... 32 

A. DOJ’s Claims Regarding Network Benefits Are 

Fundamentally Wrong ...................................... 33 

 1. DOJ Misuses American’s Forecasting Data .......... 33 

2. The Department Has Rejected DOJ’s Arguments 

Regarding SkyTeam’s Three-Coupon Itineraries ..... 35 

3. DOJ’s Study Of Alliance Fares Is Deeply Flawed ..... 36 

B. DOJ’s Claims Regarding New Nonstop Service Were 

Previously Rejected ...................................... 38 

C. The Department Does Not Share DOJ’s Lack of Concern 

Regarding Interalliance Competition ..................... 39 

D. DOJ’s Speculation That The Joint Applicants Would Move 

Forward Without Full Immunity Has No Basis In Fact ..... 43 

III. DOJ’S PROPOSED REMEDIES ARE BOTH UNNECESSARY AND UNWORKABLE ..... 45 

A. Carve-Outs ................................................. 45 

1. Impact On Capacity ................................ 46 

 2. Impact On Yield Management ........................... 47 

 3. Impact On Scheduling ................................ 50 

B. Slot Divestitures ...................................... 51 

CONCLUSION ........................................................... 52 
BEFORE THE 

DEPARTMENT OF TRANSPORTATION 

WASHINGTON, D.C. 

-------------------------------------------- 

Joint Application of: : 

 : 

 AMERICAN AIRLINES, INC. : 

 BRITISH AIRWAYS PLC : 

 FINNAIR OYJ : 

 IBERIA LÍNEAS AÉREAS DE ESPAÑA, S.A. : DOT-OST-2008-0252 

 ROYAL JORDANIAN AIRLINES : 

 : 

under 49 U.S.C. §§ 41308 and 41309 for : 

approval of and antitrust immunity for : 

alliance agreements : 

-------------------------------------------- 

[PUBLIC] JOINT APPLICANTS’ ANSWER TO THE DEPARTMENT OF JUSTICE’S MOTION FOR 

LEAVE AND COMMENTS 

Pursuant to Order 2009-12-16, the Joint Applicants submit their answer 

to the Department of Justice’s comments.1

 DOJ’s comments add no new 

evidence to the record, and the arguments it advances have already been 

rebutted by the Joint Applicants in this docket and rejected by the 

Department in the Star II docket (DOT-OST-2008-0234). As the Joint 

Applicants have demonstrated, the proposed alliance is necessary to create 

interalliance competition with the already deeply integrated Star and 

SkyTeam alliances, and U.S.-EU Open Skies has facilitated new entry at 

Heathrow that will prevent any competitive harm on overlap routes. The 

Department should proceed to issue an Order to Show Cause approving the 

Joint Application without further delay.2

                                                           

1

 DOJ filed its comments nearly seven months after the Department’s comment 

period, and nearly two months after the statutory deadline for a final 

decision in this case (October 31) had passed. 

2

 The Department has asked whether the Joint Applicants “would object to a 

limited public disclosure by the Department of aggregate market shares . . . 

from the MIDT data set that was submitted” (Order 2009-12-16, p. 2). We 

have no objection to the results of analyses performed using that data being 

included in the public record. However, the raw data files should continue 

to receive confidential treatment. 
- 2 –

PUBLIC VERSION 

INTRODUCTION 

The Joint Applicants initiated this proceeding in August 2008, hoping 

to achieve regulatory equity with the much larger and more integrated Star 

and SkyTeam alliances. The Department deemed the record complete in March 

2009, after the Joint Applicants provided an unprecedented level of data and 

documents supporting the proposed alliance. After having 17 months to 

review the application, and full access to the most extensive record in the 

history of antitrust immunity proceedings, DOJ has failed to demonstrate 

that the proposed alliance would harm competition. 

► DOJ HAS FAILED TO PROVE HARM TO COMPETITION

DOJ has not met the burden of proof under 49 U.S.C. § 41309(c)(2). 

The Department has already rejected many of DOJ’s arguments regarding the 

relevant market and the nature of international airline competition. For 

example, DOJ persists in excluding connecting service from the relevant 

market, despite the fact that as recently as July 2009 the Department had 

rejected that argument. Likewise, DOJ attempts to use the HerfindahlHirschman Index (“HHI”) standards from its Horizontal Merger Guidelines

despite the fact that leading economists and academics have long recognized 

that the DOJ’s HHI merger thresholds (as opposed to comparisons of relative 

HHI) do not work in the context of certain industries. Air transportation 

is one such industry. In reality, the six overlap routes cited by DOJ are 

some of the most competitive across the Atlantic – with just one 2-to-1 

overlap that is less concentrated than comparable routes in the Star I and 

SkyTeam II alliances to which DOJ did not object. 

 
- 3 –

PUBLIC VERSION 

DOJ also restates the fare study it introduced last year in the Star 

II docket, and adds a response to the criticism that Compass/Lexecon 

submitted on September 8, 2009. DOJ’s rebuttal of Compass/Lexecon suffers 

from the same basic problem that undermined DOJ’s original fare study – 

failure to control for the necessary variables. Yet even if DOJ’s fare 

study were accepted on its face, it provides no statistically significant 

evidence sufficient to meet DOJ’s burden of proving potential harm on any 

route other than Dallas/Fort Worth-London (a small local O&D that enjoys its 

current level of service precisely because of the alliance between American 

and British Airways). DOJ even includes a 5-to-4 route – New York-London – 

that is one of the most competitive in the world, justifying its argument by 

dismissing competition from the world’s largest airline (Delta, which has a 

larger presence at JFK than American) and New York’s largest hub carrier 

(Continental, which controls 80% of the slots at Newark). 

DOJ also persists in the myth that entry at Heathrow by new and 

existing competitors is not possible. Despite the fact that the secondary 

market and intra-alliance transfers have led to 48 daily slot-pairs changing 

hands at Heathrow over the past two years, DOJ argues that new entrants 

could only obtain slots by regulatory fiat. In 2001, DOJ expressed doubts 

that intra-alliance transfers would occur – an argument proven wrong by both 

Star and SkyTeam. In 2001, DOJ pointed to the fact that Virgin had only 

been able to obtain three daily slot-pairs since 1996 as evidence that the 

secondary market does not work. Today, Virgin leases three daily slot-pairs 

to Aer Lingus because it cannot fully utilize its Heathrow slot holdings. 

DOJ discounts new entry by five carriers that occurred on the first day of 

U.S.-EU Open Skies because most had previously flown their routes to 

Gatwick, but the issue is whether Heathrow slots can be obtained, not why. 
- 4 –

PUBLIC VERSION 

Moreover, DOJ – which has always argued that Heathrow and Gatwick are 

separate relevant markets – cannot have it both ways. If Gatwick is not a 

substitute for Heathrow, then the shifts of service are new entry in the 

relevant market. If, on the other hand, the shifts from Gatwick are not 

viewed as new entry, that can only be because the two airports are in the 

same relevant market. Given that slots at Gatwick are even easier to obtain 

on the secondary market than Heathrow slots, there would be no need for 

remedies at all if the two airports are in fact substitutes. 

In reality, there is no evidence that the proposed alliance would harm 

consumers on the nonstop overlap routes. New York-London is highly 

competitive and consumers will still have four strong nonstop options in 

addition to the potential for new entry on a route with the largest local 

traffic base across the Atlantic. Chicago-London will still have three 

competing options, including the Star Alliance’s hub-to-hub operation. 

Boston-London will still have two competing options, with potential new 

entry by both Star (US Airways) and SkyTeam (Delta), each with larger Boston 

operations than American and a history of operating the route from Boston to 

Gatwick. Miami-London is predominantly flown by leisure passengers, and 

will have more competition at Heathrow after the alliance is approved today 

than it did in 2001 when DOJ found no need for a remedy on the route. 

Dallas/Fort Worth-London is an extremely small local O&D, and those 

customers will benefit from the added capacity that a fully integrated joint 

venture will facilitate. Finally, Miami-Madrid is a small and predominantly 

leisure O&D city-pair that will have nonstop competition from SkyTeam (Air 

Europa) and which has no slot barriers to entry at all. DOJ has failed to 

meet its burden, and as such the proposed alliance should be approved. 

 
- 5 –

PUBLIC VERSION 

► DOJ HAS FAILED TO REBUT THE JOINT APPLICANTS’ SHOWING OF 

PUBLIC BENEFITS 

Even if DOJ had met its burden of proving competitive harm, the Joint 

Applicants have provided more evidence of consumer benefits than has any 

other alliance in prior proceedings. DOJ claims that the Joint Applicants 

“downplay” their incentive to cooperate absent antitrust immunity, ignoring 

the fact that oneworld remains the least integrated of the branded alliances 

precisely because the legal risk of antitrust litigation and the commercial 

risk of diversion has kept American and British Airways from cooperating at 

the same level as United/Lufthansa, Delta/Air France, or Northwest/KLM. In 

an attempt to rebut the plain fact that oneworld is the least integrated of 

the three global alliances, DOJ cites oneworld’s website as though it 

contradicts the alliance’s lack of full behind/beyond codesharing, and the 

transatlantic frequent flyer gap. 

DOJ misuses data from American’s IFS forecasting model which American 

provided in response to a Civil Investigative Demand but cautioned DOJ 

against using in a manner it was “not designed for.” DOJ also selectively 

cites the results of the IFS forecast. DOJ points to the IFS data as 

showing limited benefits on behind/beyond routes (despite the fact that the 

data pull assumed unchanged schedules, while the Joint Applicants will 

retime their entire networks to maximize connectivity). Nonetheless, the 

IFS model predicted lower fares on the nonstop overlap routes – 

demonstrating that even if the model is to be credited, it shows improved 

efficiency and no harm to competition. 

 
- 6 –

PUBLIC VERSION 

The Compass/Lexecon results that DOJ does not challenge are by 

themselves sufficient to support approval of the proposed alliance. DOJ’s 

criticisms of Compass/Lexecon’s other results are without merit. For 

example, DOJ also attacked some of the conclusions in Compass/Lexecon’s fare 

study, pointing instead to DOJ’s own findings that antitrust immunity does 

not lead to lower fares on connecting itineraries. However, DOJ’s study 

fails to control for the actual marketing carrier – a control that is 

necessary in this case in order to obtain an accurate result. As 

Compass/Lexecon explains in Exhibit 1, DOJ’s counter-intuitive results 

disappear once individual carrier identities are controlled for in the 

regressions. Both Compass/Lexecon and The Brattle Group demonstrate that 

DOJ’s study of connecting fares reaches the wrong results because of 

incorrect methodology. When done properly, both groups of economists find 

that codesharing and antitrust immunity lead to lower fares than traditional 

interline connections.3

In addition, DOJ denies that new nonstop service will be a public 

benefit of the proposed alliance, claiming that such service does not depend 

on antitrust immunity. Yet that ignores the fact that American only 

launched Dallas/Fort Worth-Madrid service – an extremely thin local route – 

in anticipation of the proposed alliance. Although the launch was planned 

solely by American, absent antitrust immunity with its transatlantic 

partners the route lacks long-term viability. 

[REDACTED] 

                                                           

3

 Moreover, DOJ’s entire study is based on historically inaccurate 

definitions of immunized, codeshare, and interline itineraries. For 

example, DOJ would define PIT-(CO)-EWR-(CO*/VS)-LHR as an interline 

itinerary, even though all segments are sold under the CO code as a part of 

the Continental/Virgin Atlantic codeshare alliance. Conversely, it appears 

that DOJ would define AUS-(AA)-DFW-(BA)-LHR as a codeshare flight simply 

because the two airlines are a part of oneworld – ignoring the fact that the 

itinerary is sold with two marketing carrier codes. 
- 7 –

PUBLIC VERSION 

[REDACTED] 

 Moreover, the Department has already 

held against DOJ on this point, having determined new nonstop service to be 

a public benefit in Star I (DOT-OST-2005-22922). 

Likewise, the Department has rejected DOJ’s arguments regarding 

interalliance competition. It is disappointing that DOJ continues to 

dismiss the importance of competition between the three branded global 

alliances as “overstate[d].” While DOJ makes vague claims about interviews 

with corporate travel managers, and cites internal documents out of context, 

the reality is that consumers are increasingly demanding an alliance 

product. This fact has been consistently found by the Department in prior 

proceedings, and confirmed both in the data (the Compass/Lexecon study) and 

in the marketplace (Star’s and SkyTeam’s increasing market shares on behind 

and beyond routes). In citing a 2002 study of alliances conducted by 

oneworld, DOJ disregards the fact that the study was being referenced in the 

context of a 2008 follow-up which found interalliance competition to be 

increasingly important, and concluded that oneworld had fallen behind 

because it had not aggressively marketed its alliance brand to the same 

extent as the more integrated Star and SkyTeam.

 
- 8 –

PUBLIC VERSION 

► DOJ’S SUGGESTED REMEDIES ARE INAPPROPRIATE IN THIS CASE

DOJ suggests two types of remedies for the Department to consider – 

slot divestitures and carve-outs. Yet DOJ fails to explain why slot 

remedies are necessary given the existence of a secondary market that 

regularly facilitates new entry on U.S.-UK and other long-haul routes. The 

most likely new entrants – Virgin, Star and SkyTeam – have ample access to 

slots, and Virgin is even leasing surplus Heathrow slots for short-haul 

flights. Divesting slots without requiring compensation would be nothing 

more than a value transfer from the smallest alliance to its larger 

competitors. Worse yet, DOJ suggests that a slot remedy might not be 

earmarked to one of the six routes DOJ’s comments identify, meaning that the 

“remedy” for competition on Boston-London could be to give Heathrow slots to 

Delta for additional Detroit service (where it faces no nonstop 

competition). 

Alternatively, DOJ endorses the use of carve-out remedies, but fails 

to demonstrate why they are necessary, or how a fully integrated joint 

venture can operate effectively with carve-outs in place. Unlike the 

limited carve-outs in other cases (such as American/Lan Chile/Lan Peru, DOTOST-2004-19964), DOJ proposes, as one alternative, full carve-outs on 

nonstop overlap routes, not simply ones limited to non-discounted 

unrestricted economy and premium fares. In any event, DOJ itself calls the 

evidence on the usefulness of carve-outs “inconclusive” in 2001, and has 

provided no new evidence to explain why they should be imposed on a fully 

integrated joint venture today. The Department rejected the use of carveouts in a fully integrated joint venture in Star II and SkyTeam II, and 

should do the same in this case. 

 
- 9 –

PUBLIC VERSION 

Carve-outs would negatively impact the Joint Applicants’ incentive to 

increase capacity on hub-to-hub routes – precisely the opposite of the 

desired result. In an effort to rebut the Joint Applicants’ evidence that a 

metal neutral joint venture will lead to an increase capacity on hub-to-hub 

routes, DOJ argues that the Joint Applicants would already prefer allocating 

aircraft to short-haul and out-of-scope long-haul flying. However, DOJ 

ignores two simple yet important facts. First, the majority of 

transatlantic flights will be operated with wide-body aircraft, while the 

majority of short-haul flights are operated with narrow-body equipment. 

Thus British Airways would not choose between allocating a Boeing 747 to 

JFK-London and London-Paris. Second, since the JBA’s revenue sharing 

payments to each carrier will be based on capacity, opting to cede JBA 

flying to other partners would reduce the carrier’s share of all JBA 

revenue. While DOJ suggests that carve-outs do not impact capacity growth 

in immunized alliances, the facts show that Delta/Air France grew on routes 

without carve-outs after receiving ATI (up to 29%), and reduced capacity on 

routes with carve-outs (up to 12%) (Exhibit 3). 

 
- 10 –

PUBLIC VERSION 

DOJ also denies that carve-outs would result in inefficient yield 

management. While DOJ uses terms like “fare class mapping,” its argument 

demonstrates a lack of understanding about the issue. DOJ presents a 

hypothetical that compares yield management decisions on a behind-gateway 

domestic segment (Atlanta-Miami), rather than the transatlantic segment that 

would be subject to a carve-out. Even if the hypothetical were relevant, it 

oversimplifies the analysis by ignoring network revenue contribution and the 

actual revenue sharing provisions of the JBA. Thus DOJ mistakenly believes 

that American would prefer selling a seat to a local Atlanta-Miami passenger 

(which would generate $XXXX in revenue) than to a passenger connecting on to 

Heathrow (which would generate $XXXX in revenue even after the revenue 

share). The proper analysis was accepted by the Department in Star II, and 

applies with equal force here (Order 2009-7-10, pp. 19-20). 

Finally, DOJ denies that carve-outs would result in sub-optimal 

scheduling on routes with multiple frequencies. However, the evidence DOJ 

cites supports the Joint Applicants’ argument. Prior to the immunized 

American/Swiss revenue sharing agreement on JFK-Zurich, both airlines 

operated JFK departures in the peak 1700 departure hour. With revenue 

sharing, American moved its departure to the 2100 hour, creating more 

connecting opportunities and greater overall revenue for the joint venture. 

When Lufthansa acquired Swiss, thus terminating the revenue share, American 

returned to a 1700 hour departure. DOJ cites Swiss’ subsequent decision to 

launch its own 2100 departure as evidence that revenue sharing was 

unnecessary, but ignores the fact that by operating both frequencies Swiss 

integrated its operations and internalized the pro-competitive efficiencies 

for Swiss that the American/Swiss joint venture had previously achieved.
- 11 –

PUBLIC VERSION 

I. DOJ HAS FAILED TO MEET ITS BURDEN OF PROVING THAT THE PROPOSED 

ALLIANCE WOULD HARM COMPETITION 

It is unfortunate that DOJ’s focus in alliance proceedings continues 

to be limited to competition in nonstop overlap O&D city-pairs. Alliances 

have been a tool for U.S. airlines to create international growth 

opportunities with their partners and to provide better service with the 

potential for lower prices for consumers. The connecting O&Ds that 

alliances serve may be individually small, but collectively account for the 

majority of transatlantic traffic. The passengers served and revenue 

generated by U.S. carriers from their international operations is essential 

to their maintenance of strong domestic networks at their hubs. Scores of 

small communities would be at risk of seeing service reduced – or eliminated 

– if onboard international traffic flows (DPIJ) were to significantly 

decline. 

A. DOJ Has The Burden Of Proving The Proposed Alliance Would Harm 

Competition 

DOJ claims that “[t]he burden is on Applicants to justify their need 

for authority to engage in conduct that will likely restrict competition” 

(p. 7). But this is an inaccurate description of the process set out in 49 

U.S.C. § 41309 for adjudicating applications for antitrust immunity. DOJ 

cites to subsection (b) of the statute (p. 7 n.26), but omits any mention of 

subsection (c) regarding the burden of proof: 

“In a proceeding before the [Department] applying 

standards under subsection (b)(1) of this section, a 

party opposing an agreement, request, modification, or 

cancellation has the burden of proving that it 

substantially reduces or eliminates competition and 

that less anticompetitive alternatives are available. 

The party defending the agreement, request, 

modification, or cancellation has the burden of 

proving the transportation need or public benefits” 

(49 U.S.C. § 41309(c)(2), emphasis added). 
- 12 –

PUBLIC VERSION 

This provision of 49 U.S.C. § 41309 could not be clearer – DOJ bears 

the burden of proving both: (a) a reduction in competition; and (b) the 

existence of less anticompetitive alternatives. DOJ avoids any mention of 

this subsection because it has failed to make a case for either element. 

Rather, DOJ’s comments rely entirely on arguments that the Department has 

previously rejected in Star II and other dockets (See, e.g., Order 2009-7-

10, DOT-OST-2008-0234, 7/10/09, pp. 14, 16-17). 

B. DOJ Has Failed To Meet Its Burden Of Proving Competitive Harm 

1. Connecting Service Imposes An Effective Constraint On O&Ds 

With Nonstop Flights 

DOJ argues that “[i]n transatlantic routes covered by the Joint 

Application, nonstop service is a separate product from connect service,” 

claiming that “[a] variety of evidence supports this conclusion” (p. 9). 

DOJ made this same argument in the Star II docket (DOJ Comments, DOT-OST2008-0234, 6/26/09, p. 49), where the Department rejected the notion that 

connecting service does not discipline nonstop pricing: 

“We thus are not persuaded to limit our analysis to 

nonstop service, given that connecting services can 

discipline prices on nonstop routes for a significant 

percentage of nonstop passengers. As American points 

out, ‘DOJ’s claim that connecting itineraries do not 

compete with nonstop flights is directly contradicted 

by empirical evidence’” (Order 2009-7-10, p. 17). 

Moreover, the Department found that had DOJ included a broader sample of 

markets in its study, it would have shown that “over one-third of the 

passengers in [transatlantic] markets used connecting service” (Order 2009-

7-10, p. 17). 

 
- 13 –

PUBLIC VERSION 

DOJ argues that “empirical analyses show that the number of nonstop 

carriers competing in a market has a significant impact on the average fares 

paid by consumers” (p. 9, citing Appendix A). But this does not prove that 

connecting carriers do not also have an impact on average fares. In fact, 

there are numerous examples of connecting fares impacting nonstop prices on 

transatlantic routes for both premium and economy traffic:

 Premium Traffic: On April 19, 2008, United reduced first and 

business class fares by between $200 and $400 on connecting 

London itineraries to/from Boston, Dallas/Fort Worth, Miami and 

New York. American matched each of these fare actions three days 

later, despite having nonstop service on these routes.

 Economy Traffic: On November 12, 2008, United reduced sale fares 

in economy class on connecting London itineraries to/from 

Dallas/Fort Worth, Miami, Phoenix and Seattle, as well as Madrid 

to/from Miami and New York. The nonstop carriers matched these 

fare actions within nine days.

DOJ also cites the Joint Applicants’ “internal models” (referred to as 

“quality of service index” or “QSI” modeling) as “commonly assum[ing] that 

an airline’s share of travel between cities will be higher if it offers 

nonstop service than if it offers connecting service” (p. 9). But these 

models are used for forecasting domestic routes where the time penalty for 

connecting service is far more significant than it is for long-haul 

transatlantic routes. Moreover, the fact that a nonstop carrier would 

obtain a higher share of O&D traffic is hardly evidence that connecting 

service is not a meaningful alternative for nonstop service. The issue is 

substitutability – not merely preference. Given these facts (along with the 

reasons American previously cited in both this docket and Star II), there is 

no basis for departing from the precedent set less than six months ago in 

Order 2009-7-10. 

 
- 14 –

PUBLIC VERSION 

2. The Proposed Alliance Will Not Create Six “Highly 

Concentrated Markets” 

DOJ claims that six O&D city-pairs4

 will become “highly concentrated” 

once the proposed alliance is approved: New York-London, Chicago-London, 

Boston-London, Miami-London, Dallas/Fort Worth-London, and Miami-Madrid (p. 

11). DOJ uses the Herfindahl-Hirschman Index (“HHI”) to define these citypairs as being “highly concentrated” under DOJ’s Horizontal Merger 

Guidelines, but ignores the fact that even the most competitive O&D citypairs exceed the threshold HHI of 1,800 without any grants of antitrust 

immunity.5

 Given questions about using HHI as anything other than a measure 

of relative concentration in international air transportation cases, it is 

not surprising that DOJ did not cite to the HHI merger thresholds in other 

cases where it submitted comments (such as Star II and the U.S.-UK Alliance 

Case). Moreover, DOJ’s merger thresholds are meant to “provide only the 

starting point for” analysis” (DOJ/FTC Horizontal Merger Guidelines, § 2.0). 

Thus DOJ provides no reason for the Department to depart from its long-held 

view that measures of HHI like concentration are “not conclusive” in the 

airline industry because most individual city pairs have “high levels of 

concentration” (Order 96-5-12, DOT-OST-1996-1116, 5/9/96, p. 18). 

 

                                                           

4

 In previous comments, the Joint Applicants have disputed DOJ’s undue 

reliance on nonstop O&D city-pairs as the relevant market in alliance cases, 

and we incorporate those here by reference. See, e.g., Joint Applicants’ 

Supplemental Comments, 9/8/09, p. 13; see also AA Response, DOT-OST-2008-

0234, 7/6/09, pp. 10-11. 

5

 In fact, the average HHI on a U.S. city-pair is approximately 4,000. See, 

e.g., Dresner, Win and Windle (1996). 
- 15 –

PUBLIC VERSION 

For example, New York-Paris (about which DOJ expressed no concern when 

SkyTeam sought antitrust immunity in 2000, 2004 or 2007) has a non-ATI HHI 

of approximately 1,900, which nearly doubles (to approximately 3,400) with 

ATI for SkyTeam. Nor did DOJ express any concern with antitrust immunity on 

the New York-Frankfurt route when United and Lufthansa first sought immunity 

in 1996, despite an HHI of nearly 7,000. In fact, a city-pair with five 

competitors, each having just 20% of the traffic, would have an HHI of 

2,000, even though such a route is extremely competitive in context of the 

airline industry (which is consistent with DOJ’s own fare study, which 

showed no harm on 5-to-4 routes). Thus, while HHI may be useful for 

comparing relative changes in concentration on a city-pair or in broader 

network markets, the use of DOJ’s HHI thresholds as a litmus test in the 

airline industry would prohibit almost any transaction. In reality, there 

are no competitive concerns on any of the six city-pairs DOJ has discussed, 

as demonstrated below. 

 a. New York-London 

New York-London is one of the world’s most competitive aviation 

corridors (notwithstanding DOJ’s attempt to paint it as “highly 

concentrated” by using the HHI index). It is served by five different 

carriers offering daily nonstop service, and has historically attracted nonhub point-to-point entry by Fifth Freedom operators (such as Air India and 

Kuwait Airways) and low-cost carriers (such as Eos, MaxJet and Silverjet). 

DOJ’s own fare study shows that there are no competition concerns on O&D 

city-pairs going from five competitors to four (Appendix A). 

 
- 16 –

PUBLIC VERSION 

Moreover, Star has true alliance hubs on both ends of the route 

(Continental at Newark, bmi at Heathrow), and SkyTeam’s Delta has a 

significant JFK operation (with 34% of the slots) and intends to turn New 

York into one of its major hubs as well through acquisition of US Airways’ 

LaGuardia slot holdings. By comparison, oneworld’s New York presence is 

smaller than either Star (with more than 80% of Newark slots) or SkyTeam, as 

American has just 18% of JFK slots (and the rest of oneworld holds a de

minimis number). There is no basis for DOJ or the Department to conclude 

that oneworld would have any potential market power in New York. 

DOJ claims that Continental lags “far behind” with just “4%” of 

nonstop business traffic between New York and London, citing MIDT data from 

the last three quarters of 2008 (p. 13 n.39).6

 DOJ concludes that “[t]his 

deficit is likely due to the fact that neither Delta nor Continental offers 

as many flights as the others, particularly at times business passengers 

prefer” (p. 13).7

 However, DOJ’s speculation is incorrect, as 

Continental’s premium MIDT booking share for 2008 was 6% - equal to its 

share of premium seats.8

 Moreover, the Joint Applicants have already 

demonstrated that both Continental and Delta have New York-Heathrow arrivals 

 

                                                           

6

 DOJ’s argument is undermined by its own comments from 2001, in which it 

held that “three or four flights” could sustain New York-London service – at 

a time when American offered seven daily nonstops (DOJ Comments, DOT-OST2001-11029, 12/17/01, p. 44). Today, American is down to just five nonstops 

in the summer, and four in the winter. Thus, it is difficult to see how 

Delta or Continental lacks the size to compete effectively on the route. 

7

 In fact, BA puts just 66% of its JFK-Heathrow flights in DOJ’s peak 

departure window (1800-2200). That is the same as Continental (66%), and 

less than Delta (100%). Just 60% of American’s and Virgin’s flights depart 

between 1800 and 2200. 

8

 By comparison, both American and British Airways had lower premium booking 

shares (50% and 16%) than premium seat shares (52% and 17%). 
- 17 –

PUBLIC VERSION 

in two of the four peak hours, compared to just three each for British 

Airways, Virgin and American (Joint Applicants’ Consolidated Reply, 5/28/09, 

pp. 32-33).9

 In addition, Continental benefits from its codeshare agreement 

with Virgin, which adds to Star’s pattern of service.10 In any event, 

Continental’s premium booking share is largely a function of the aircraft it 

chooses to operate (including two narrow-body 757s with just 16 premium 

seats). 

b. Chicago-London 

DOJ argues that on Chicago-London, the proposed alliance “would reduce 

the number of nonstop competitors from three to two for part of the year and 

from four to three for the other part,” noting that Virgin “only offers 

seasonal service” (pp. 12-13). Yet Virgin’s service has not historically 

been seasonal, and if competitive conditions warrant its return to the route 

in winter 2010-11, Virgin has both the slots and the aircraft to do so.11 

Even in the brief period after 2007 when Virgin returned to Chicago (before 

the global economic crisis led it to withdraw temporarily), it was able to 

regain a 13.4% share of local O&D bookings (Joint Application, Exhibit JA27). 

                                                           

9

 While DOJ focuses on the number of frequencies offered by the Joint 

Applicants, it ignores the fact that there is little competitive advantage 

gained from wingtip flying. For example, AA 100 arrives at LHR from JFK at 

0625 and AA 104 arrives at 0655. BA 112 arrives from JFK at 0625, while BA 

184 arrives at 0650. DOJ provides no evidence proving that multiple 

arrivals in the same hour create a frequency advantage on long-haul flights, 

or that adding American’s incremental flights to the British Airways service 

creates any additional barrier to entry. Thus even if DOJ were correct that 

British Airways currently has a frequency advantage, there is no evidence 

that it would be enhanced by adding American’s schedule. 

10 Inexplicably, DOJ does not include the Continental/Virgin alliance as a 

“codeshare.” See infra, p. 36. 

11 Virgin’s decision was driven by an overall cost-cutting program resulting 

from a reduction in demand worldwide. See Kevin Done, Virgin Atlantic to 

Cut Flights and Jobs, Financial Times, 7/2/09). Moreover, both American and 

British Airways also reduced their frequencies on this route. 
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PUBLIC VERSION 

Even if the proposed alliance were to raise fares, resulting in unmet 

demand for Chicago-London service, both United and Virgin could increase 

their capacity by upgauging aircraft. Virgin could shift from an Airbus 

A340 to a Boeing 747, while United could use Boeing 747 equipment (374 

seats) rather than the much smaller Boeing 767 (183 seats) it flies today 

(Joint Applicants’ Consolidated Reply, 5/28/09, pp. 52-53). Clearly, both 

new entry and capacity expansion are possible on the route, calling into 

question why DOJ has included Chicago-London as a city-pair of concern.

c. Boston-London 

DOJ notes that American and British Airways are two of the three 

nonstop competitors on this route (p. 12). Yet DOJ ignores the fact that 

both Delta and US Airways have a larger Boston presence than American and 

have historically served the route, and could choose to re-enter if 

warranted by the competitive conditions. In 2001, DOJ itself stated that 

both carriers “have significant operations at Boston, and hence they have 

the type of ‘presence’ that would give them the incentive and ability to 

attract corporate business to LHR services” (DOJ Comments, DOT-OST-2001-

11029, 12/17/01, p. 44). 

Both Delta (the world’s largest airline) and US Airways (a member of 

Star) have access to Heathrow slots through intra-alliance transfer or the 

secondary market. Accordingly, these two potential new entrants have both 

the ability as well as the incentive to discipline prices on the BostonLondon route. Lufthansa itself could also enter the route, having acquired 

bmi (and its Heathrow slots). Lufthansa has an equity stake in (and a 

codeshare agreement with) JetBlue, which has 60 daily departures from Boston 

to large U.S. markets, allowing Lufthansa to connect traffic through Boston 

as well.
- 19 –

PUBLIC VERSION 

d. Miami-London 

DOJ states that American and British Airways are two of the three 

nonstop competitors on this route (p. 12). Yet in 2001, DOJ pointed out 

that “[b]usiness traffic is a relatively smaller percentage of this leisureoriented market . . .” (DOJ Comments, DOT-OST-2001-11029, 12/17/01, pp. 31-

32). At that time, DOJ argued against a slot remedy for Miami-London, 

finding that any anticompetitive effects would be offset by new entry (Id. 

at 31, 45). Since then, Virgin has shifted its Miami service from Gatwick 

to Heathrow, and now has a 27% booking share of local Miami-London traffic. 

Thus it is difficult to see how DOJ could argue for a remedy on this route 

today, which is more competitive now than it was eight years ago. 

DOJ viewed bmi as a viable new entrant in 2001, with “both the 

endpoint presence and the LHR facilities needed to make it a plausible entry 

candidate” (Id. at 45). With Lufthansa’s acquisition of bmi in 2009, DOJ’s 

findings are even more compelling today. Moreover, connecting service is 

used by 14% O&D passengers between Miami and London. In fact, American’s 

top connecting O&D itinerary using its JFK-Heathrow service is Miami-London 

– even though American operates nonstop Miami-Heathrow service of its own. 

There is simply no basis for DOJ to conclude that the proposed alliance 

would have market power on this route.

e. Dallas/Fort Worth-London 

DOJ notes that American and British Airways operate the only nonstop 

service (p. 12). However, today more than 20% of the local O&D traffic on 

the route opts for connecting service – including 14% of premium passengers 

(2008 CAA Survey). Capacity on this route is set for flow traffic, as only 

20% of onboard passengers on the route are traveling on the local O&D (Joint 

Applicants’ Consolidated Reply, 5/28/09, p. 39). 
- 20 –

PUBLIC VERSION 

Moreover, DOJ’s concern for O&D passengers on the Dallas/Fort WorthLondon route is inconsistent with its silence regarding the antitrust 

immunity granted to Star and SkyTeam on two-to-one routes like Atlanta-Paris 

(82% SkyTeam share) and Detroit-Amsterdam (89% SkyTeam share) (Joint 

Application, 8/14/08, p. 55). As the Department held in Star II, “[t]he 

potential serious anticompetitive effects of reducing competition on [hubto-hub] routes may be offset to some extent if the affected city pairs are 

served by competing carriers on a nonstop or connecting basis (Order 2009-4-

5, DOT-OST-2008-0234, 4/5/09, p. 10, emphasis added). 

 f. Miami-Madrid 

DOJ claims that the Joint Applicants “currently offer the only daily 

nonstop service” between Miami and Madrid (p. 12, emphasis added). This 

statement ignores the entry of Air Europa – a SkyTeam member – on the route 

beginning in March 2010. Air Europa’s initial five weekly flights are 

scheduled to expand to daily service in June 2010. DOJ also disregards 

other important characteristics of the route. Miami-Madrid is 

overwhelmingly (approximately 82%) a leisure route. Approximately 21% of 

the O&D traffic opts for an itinerary other than the nonstop, which 

disciplines pricing. Moreover, the nonstop flight primarily accommodates 

flow traffic, as less than 25% of onboard traffic is local O&D. 

In addition, Star Alliance member Spanair could enter the route based 

on the strength of its Madrid hub. There is no evidence that slots are a 

barrier to entry on either end of the route, as Miami is not a slot 

controlled airport, and Madrid has available slots during the transatlantic 

arrival window (a fact DOJ concedes) (p. 18 n.51). There is no legitimate 

reason for DOJ to have included Miami-Madrid as a route of concern.
- 21 –

PUBLIC VERSION 

3. DOJ Fails To Prove That Significant Fare Increases Would 

Result From The Proposed Alliance 

a. DOJ’s Fare Study – Even If Correct – Would Reliably 

Predict Harm On Just One City-Pair, Not Six 

DOJ cites its fare study for the proposition that on a 2-to-1 route 

ATI would lead to a 15% fare increase, while on a 3-to-2 route fares would 

increase by 6.6% (pp. 14-15). While a reduction from three to two alliance 

competitors across an entire network would certainly be significant enough 

to merit concern (which would become the case if the proposed alliance were 

not approved), DOJ’s concerns are limited to handful of routes rather than 

the broader and more relevant context of network competition. 

In any event, DOJ admits that its 3-to-2 city-pair findings are not 

statistically significant, and does not even try to argue that competitive 

harm would result if there are three or more post-transaction competitors 

(Appendix A, Table 1). Accordingly, even if DOJ’s fare study were 

accurate,12 it would still potentially satisfy DOJ’s burden of proof on just 

a single route – Dallas/Fort Worth-London – not the six it has chosen to 

include. The Department’s Star II decision reflects this fact as well 

(Order 2009-7-10, DOT-OST-2008-0234, 7/10/09, p. 18, holding that “we will 

not impose carve outs in markets [with no joint venture] that only shift 

from four to three, or from three to two, nonstop competitors, as we are not 

convinced that these pose a substantial reduction in competition”).

 

                                                           

12 Compass/Lexecon’s response to DOJ’s Appendix B is attached as Exhibit 1. 
- 22 –

PUBLIC VERSION 

For example, in order to include New York-London in its analysis, DOJ 

is forced to simply ignore the very existence of Delta and Continental in 

order to artificially transform New York-London into a three-to-two route. 

In other words, even though the route will still have four nonstop 

competitors with two or more daily operations, DOJ ignores half of them, 

including the world’s largest airline and New York’s largest hub carrier. 

DOJ applied no such filter to discount the presence of competitors with 

multiple nonstop operations in its fare study, and has no basis for ignoring 

Delta and Continental in order to reach its desired conclusion.

b. DOJ’s Comments Fail To Recognize The Fundamental 

Difference Between A Change In Capacity And A Change 

In The Number Of Competitors 

DOJ argues that The Brattle Group also found “that the number of 

nonstop competitors . . . does directly influence price” (p. 15 n.43). DOJ 

claims that “[t]he data showed that, all else equal, fares on routes served 

only by carriers in an antitrust immunized alliance are 15% higher than on 

routes served by two independent non-stop carriers” (Appendix B, pp. 1-2, 

emphasis added). Yet all else is not equal. The fare reductions resulting 

from the Joint Applicants’ new entry on transatlantic routes into SkyTeam 

hubs like Amsterdam or Frankfurt will be caused by increased capacity – not 

simply a numerical increase the in the number of competitors. Since there 

is no evidence that the Joint Applicants would have any incentive to reduce 

their capacity on any of the six routes (to the contrary, history has proven 

that alliances increase capacity even on hub-to-hub routes where they face 

no nonstop competition), DOJ has taken Brattle’s findings entirely out of 

context. 

 
- 23 –

PUBLIC VERSION 

c. DOJ’s Description Of Yield Management Strategy Is 

Fundamentally Flawed 

The Joint Applicants have already demonstrated that they will have “no 

ability or incentive to raise local fares” given their plans to increase – 

not reduce – capacity (Joint Applicants’ Supplemental Comments, 9/8/09, pp. 

4-6). DOJ’s response is to state that the Joint Applicants have “highly 

sophisticated computer systems that . . . seek to maximize yield on each 

flight, and one way to maximize yield is to restrict capacity [on] hub-tohub routes where they face little competition” (pp. 16-17). However, the 

Compass/Lexecon study examined the precise issue of whether ATI leads to 

fare increases on local nonstop overlap routes, finding that as an empirical 

matter it does not (Exhibit 1). 

DOJ does not address the declaration submitted by Don Casey, 

American’s Vice President for Revenue Management, in which he explained the 

conflict between increasing network capacity (and overall profitability) and 

simultaneously trying to raise local fares: 

“If AA were to constrict capacity in order to gain 

pricing power against local passengers, it would 

simultaneously diminish the quality of its product and 

the inventory that it has available to sell to the far 

more numerous connecting passengers. A network 

carrier cannot have it both ways – if it reduces 

flying on a route, it must withdraw large chunks of 

capacity that serve not only as inventory for local 

passengers but also as trunk capacity for connecting 

passengers on many more routes. Given that margins in 

the airline industry are notoriously thin (and all too 

often negative), the loss of even one or two 

passengers can determine whether a flight generates a 

loss or profit. Shrinking critical trunk capacity in 

order to earn supra-competitive fares from a 

relatively small subset of passengers is simply not a 

viable long-term strategy for network carriers. A 

carrier like AA must offer service that is attractive 

to both local and connecting passengers” (Casey 

Declaration, 9/8/09, pp. 5-6). 
- 24 –

PUBLIC VERSION 

Mr. Casey has more than two decades of experience working in the airline 

industry and is in charge of the “highly sophisticated” yield management 

systems that American operates. 

DOJ also fails to consider the impact that a strategy of artificially 

closing local transatlantic inventory to raise yield would have on load 

factor. Likewise, DOJ has no appreciation for the fact that it is RASM13

that drives a flight’s profitability. As local fares increase, demand will 

decrease; thus, if load factor declines, an increase in yield14 can 

nonetheless result in a decrease in both RASM and profitability. Thus, 

unless an airline could replace the lost local traffic with connecting 

traffic of a yield sufficient to offset the revenue losses, DOJ’s 

hypothetical yield management strategy would be unprofitable. Yet if unmet 

high-value demand existed on those connecting itineraries, the alliance 

would likely seek to accommodate it in addition to its local pricing 

strategy. This explains why the integrated alliance will increase capacity 

as a direct result of their improved network product. 

 

                                                           

13 RASM is revenue per available seat mile – which is driven downward by 

spoiled empty seats. 

14 Yield is revenue per revenue passenger mile, which is unaffected by load 

factor. 
- 25 –

PUBLIC VERSION 

d. DOJ’s Arguments Regarding New Entry Ignore Reality 

 i. There Is No Hub Barrier To Entry 

DOJ argues that new entry on Chicago-London, Dallas/Fort Worth-London, 

Miami-London and Miami-Madrid is unlikely because the Joint Applicants 

“would have hubs at both ends, a competitive advantage no new entrant can 

match” (p. 17). But in 2001, DOJ maintained that having a hub at either

endpoint was sufficient for a carrier to be considered a likely potential 

entrant, sometimes even “consider[ing] that carrier already in the market” 

(DOJ Comments, DOT-OST-2001-11029, 12/17/01, p. 43). In 2005, DOJ’s Deputy 

Assistant Attorney General overseeing airline competition confirmed this (J. 

Bruce McDonald, Remarks at the Regional Airline Association President’s 

Council Meeting: Antitrust for Airlines, 11/3/05). DOJ provides no evidence 

to explain its contrary conclusion here. 

Indeed, the validity of DOJ’s newly theorized entry barrier is 

contradicted by Air Europa’s launch of new nonstop Miami-Madrid service, 

which will have hub support at only one end (Madrid). On Chicago-London, 

DOJ ignores the fact that Star has hubs on both ends of the route, meaning 

that United could easily add capacity. On Miami-London, Virgin has been 

able to launch and sustain service with a hub at the Heathrow end, 

demonstrating that Star (with an even larger Heathrow hub) can do the same. 

Finally, Dallas/Fort Worth-London has eight seats for every one local 

booking (a ratio sure to increase after the proposed alliance has been 

approved), calling into question why there would be any need for new entry 

in any event (Joint Applicants’ Supplemental Comments, 9/8/09, p. 5).

 
- 26 –

PUBLIC VERSION 

ii. Heathrow Slots Have Not Proven To Be A Barrier To 

Entry 

DOJ argues that “[e]ntry is unlikely because slots at Heathrow – the 

most attractive London airport for a potential entrant – are difficult to 

obtain” (p. 18).15 DOJ thus chooses to ignore the evidence of an effective 

secondary market that has been submitted in the docket, and instead focuses 

almost exclusively on the lack of “pool” slots (pp. 21-22; but see Joint 

Applicants’ Reply To Virgin Answer, 9/28/09, Appendices A-C). DOJ quotes 

Heathrow’s slot coordinator as saying that new entrants must “accept 

commercially sub-optimal timings” (p. 21, citing ACL Response, 1/28/09, p. 

2). DOJ – like Virgin – is selectively quoting from the ACL Response by 

omitting key parts of the sentence: 

“Although past experience (e.g., with Open Skies) 

indicates that the secondary slot market is capable of 

facilitating determined new entry, it is ACL’s 

experience that new entrant airlines still need to be 

flexible about the timing of slots and accept 

commercially suboptimal timings” (ACL Response, 

1/28/09, p. 2, emphasis added on omitted text). 

 

                                                           

15 DOJ claims that “[a]ggregating London airports” does not “alter the entry 

analysis” (p. 11 n.35). Yet this defies logic – Gatwick slots are certainly 

available on the secondary market; in fact, for every shift of service from 

Heathrow to Gatwick, a slot pair at the latter was either released into the 

pool, sold to a different airline, or reallocated onto another route. The 

Joint Applicants have shown that the two airports are in the same relevant 

market regardless of perceived preferences (See, e.g., Joint Application, 

Exhibit JA-26), and DOJ has provided no empirical analysis to rebut that. 

Given the fact that DOJ – not the Joint Applicants – bears the burden of 

proving the relevant market, the Department should consider the potential 

for new entry at Gatwick in its analysis. 
- 27 –

PUBLIC VERSION 

While new entrants must be flexible (as is the case at any slot 

controlled airport), the secondary market does work and new entry is taking 

place. ACL stated that “slots for competitor services may be found within 

the incumbent carriers’ slot portfolios, from alliance partners, or from the 

secondary market more generally” (Id.). Also omitted from DOJ’s filing is 

the most important sentence from the ACL response: “The level of service 

that new entrants could expect to achieve in the next two seasons at 

Heathrow and Gatwick is primarily a function of market demand” (Id., p. 1). 

At the moment, it is a buyer’s market for Heathrow slots. Since U.S.-

EU Open Skies took effect, 48 daily Heathrow slot pairs have changed hands 

through intra-alliance trading and the secondary market, including 29 sales 

and leases for Winter 2008 and beyond – many for peak hour arrivals (Joint 

Applicants’ Reply To Virgin Answer, 9/28/09, Appendices A-C). Among other 

things: 

 Virgin Atlantic has leased out three Heathrow slots that could be 

used for transatlantic flights to Aer Lingus (which uses them for 

short-haul flights to Ireland). Virgin also withdrew service from 

the JFK-Heathrow route and reassigned those slots to launch 

additional service to Hong Kong. 



[REDACTED] 

 [REDACTED] 

 
- 28 –

PUBLIC VERSION 

DOJ’s comments largely repeat its 2001 arguments on Heathrow access, 

which cited Virgin’s inability to obtain more than three daily Heathrow slot 

pairs between 1996 and 2001 as evidence that the secondary market is not a 

practical source of new entry (DOJ Comments, DOT-OST-2001-11029, 12/17/01, 

p. 38). But by ignoring recent developments, DOJ overlooks the fact that 

Virgin has acquired so many Heathrow slots that it now leases them to other

carriers. Likewise, DOJ argued in 2001 that the lack of revenue sharing 

among alliances made it unlikely that intra-alliance transfers would take 

place (Id. at 40) – yet revenue sharing now exists within both Star and 

SkyTeam, and intra-alliance transfers are commonplace. 

iii. DOJ’s Attempt To Dismiss The 19 New U.S.-Heathrow 

Frequencies Only Proves The Competitiveness Of 

London Routes 

DOJ admits that “[d]uring the first open-skies season in the summer of 

2008, there were 19 more daily flight frequencies between the U.S. and 

Heathrow than in the summer of 2007,” with slots coming “from a variety of 

sources” (pp. 21-22). Yet DOJ tries to dismiss the significance of this new 

entry by arguing that it “merely involve[d] carriers that shifted service 

involving their hubs” (p. 22). DOJ notes the two exceptions – Northwest on 

Seattle-Heathrow and Air France on Los Angeles-Heathrow – but argues that 

“each airline abandoned its new route after less than a year,” and thus that 

“there are no examples of truly new entry into Heathrow” (Id.). 

 
- 29 –

PUBLIC VERSION 

However, the relevant question is not why a new entrant obtained a 

slot – it is whether the slot could be obtained. The fact that 17 of the 19 

slot pairs used to launch new Heathrow service were Gatwick shifts (and that 

the two new routes failed) is not evidence that Heathrow slots are 

impossible to obtain – to the contrary, five new entrants found slots for 

more than a dozen new flights immediately after U.S.-EU Open Skies took 

effect.16 Rather, the facts DOJ cites are merely evidence that Heathrow is 

not the gold mine that many incorrectly speculated it would be. ACL called 

the initial rush to acquire Heathrow slots an “exuberant market” in 2008 and 

noted that “it is probable that slot values have fallen back from [those] 

high levels” (ACL Response, 1/28/09, p. 1). Northwest and Air France failed 

on their new routes because they likely misjudged consumer demand and the 

mythical “Heathrow premium” that did not even exist under Bermuda II. Given 

the competitiveness of London routes and the lack of unmet demand for U.S.-

London travel, it only makes sense that capacity remained largely steady, 

while service shifted from Gatwick to Heathrow. 

 

                                                           

16 In 2001, DOJ sought a remedy of nine daily slot-pairs, arguing that they 

would not be available in the secondary market (DOJ Comments, DOT-OST-2001-

11029, 12/17/01, pp. 37-38, 49-50). Given the fact that more than nine were 

purchased, leased or traded within a relatively short period of time by new 

entrants, it is difficult to see how DOJ can seek any remedy in this case at 

all. 
- 30 –

PUBLIC VERSION 

DOJ cannot continue to have it both ways by suggesting that Gatwick is 

not in the same relevant market as Heathrow and arguing that switches from 

Gatwick to Heathrow are “not truly new entry” (p. 22). Nor can it claim 

that “[a]ggregating London airports” does not “alter the entry analysis” (p. 

11 n.35). If Gatwick and Heathrow are in the same relevant market, then 

slot availability at Gatwick must be considered. It is indisputable that 

Gatwick slots are available on the secondary market; in fact, for every 

shift of service to Heathrow a slot pair was released into the pool, sold to 

another airline, or reallocated onto another route. 

In sum, DOJ has fallen far short of proving that new entry is unlikely 

on the six routes it has identified. If a transaction were to create market 

power – resulting in a reduction in supply, and higher fares in turn – 

demand for new entry would be created. Given the availability of Heathrow 

slots in the secondary market – and the fact that incumbents like Virgin are 

leasing their slots to short-haul carriers (like Aer Lingus) to protect them 

from loss under the IATA slot usage rules – if there were demand for more 

capacity on a route, a new entrant would meet that new demand. 

4. DOJ Fails To Effectively Rebut Compass/Lexecon’s Findings 

DOJ’s Appendix B attempts to rebut Compass/Lexecon’s findings, which 

directly contradict the findings that DOJ presented in the Star II docket. 

In response, Compass/Lexecon notes that “what is most striking about the DOJ 

Response is the number of topics on which it ignores, agrees with, or fails 

to provide any econometric analysis to respond to fundamental points that we 

made in our initial affidavit” (Exhibit 1, p. 2). DOJ focuses primarily 

upon “implementation issues” which have “no effect on any of the 

conclusions” in Compass/Lexecon’s initial affidavit (Id., at p. 3). As 

Compass/Lexecon concludes: 
- 31 –

PUBLIC VERSION 

“In essence, DOJ continues to confound pricing 

differences across carriers with the relevant 

competitive effects of ATI, and consequently continues 

to to draw incorrect conclusions about ATI effects” 

(Id.). 

There are four key facts about which DOJ either agrees with or fails 

to rebut Compass/Lexecon: 

 That the question of whether ATI does or does not lead to higher 

nonstop fares is a separate, empirically testable question, 

distinct from the effect of the number of carriers on the route; 

 That Compass/Lexecon provides a cross-sectional alternative 

analysis that renders moot DOJ’s criticism of the route fixed 

effects methodology; 

 That consumer preference for ATI service reveals itself in 

consumer choices in the O&D Survey; and 

 That carve-outs result in higher fares and lower non-price 

benefits on connecting itineraries in an ATI alliance. 

As Compass/Lexecon notes, “[s]imply combining the conclusions from the 

studies listed above . . . demonstrates the pro-competitive nature of ATI 

and the harm from carve-outs” (Id. at p. 6). With DOJ having failed to 

satisfy its burden of proof, the Department should approve the proposed 

alliance without further delay. 

 
- 32 –

PUBLIC VERSION 

II. THE DEPARTMENT HAS CONSISTENTLY HELD THAT ANTITRUST IMMUNITY IS 

REQUIRED TO ACHIEVE THE FULL PUBLIC BENEFITS OF ALLIANCE INTEGRATION 

Even if DOJ had met its burden of proving competitive harm, the Joint 

Applicants have demonstrated that their proposed alliance will generate 

significant public benefits. DOJ claims that the Joint Applicants “assign 

undue weight” to these public benefits, and that they “downplay their 

incentives to cooperate absent immunity” (p. 22). DOJ further argues that 

the Joint Applicants “do not distinguish between the formation of an 

alliance and the granting of antitrust immunity” (Appendix B, p. 4). But 

DOJ could not be more wrong. The bilateral alliances between American, 

British Airways and Iberia were formed separately in 1992 and 1997. 

oneworld itself was created in 1999 as a brand, but effective integration 

has not been possible. What DOJ fails to appreciate is the fact that 

antitrust immunity is necessary to eliminate the diversion risks that stand 

in the way of true network integration, which cannot occur based on a 

patchwork of codesharing and reciprocal frequent flyer arrangements that 

create only limited consumer benefits. 

DOJ’s view that antitrust immunity is not required ignores the fact 

that these alliances are necessary for international network expansion 

because of the legal restrictions on ownership and control of airlines in 

the U.S. and EU. These restrictions prevent international airlines from 

merging, and immunized alliances are intended to provide the network 

extension that mergers would create. 

 
- 33 –

PUBLIC VERSION 

A. DOJ’s Claims Regarding Network Benefits Are Fundamentally Wrong 

1. DOJ Misuses American’s Forecasting Data 

According to DOJ, “American’s modeling suggests that very few gains 

from new codesharing will result from passengers carried between small (nongateway) cities in the U.S. and small (non-gateway) cities in Europe” (p. 

23). As evidence, DOJ cites American’s response to Specification 7 of its 

Civil Investigative Demand, which required American to perform an analysis 

using its Integrated Forecasting System (“IFS”). But the fact is that 

Specification 7 was fundamentally flawed, and forced American to use a tool 

for a purpose for which it is ill-suited and not intended – making the 

results completely unreliable as evidence in this proceeding. 

Specification 7 required American to assume existing schedules for the 

before and after cases. This means that the network connectivity could not 

be optimized – by definition understating the benefits of the proposed 

alliance. Moreover, American cautioned DOJ that “IFS forecasting models are 

a planning tool (and thus not designed for precise or accurate 

measurements)” (AA Response to CID 25295, 3/13/09, p. 1). American added 

that “[i]t is important to remember that IFS is a tool – its output is used 

as a part of – not a substitute for – the planning process” (Id. at 2). Yet 

despite being advised that the output from Specification 7 would have little 

or no probative value, DOJ cites the results as though they were dispositive 

on the issue (rather than simply a basis for further analysis). 

 
- 34 –

PUBLIC VERSION 

Even if the response to Specification 7 did have probative value, it 

undermines rather than supports DOJ’s argument when considered in its 

entirety. DOJ has selectively cited from American’s response in a manner 

that creates a misleading impression of the record. Specifically, while DOJ 

claims the IFS model predicts that “only about XXX% of the total additional 

passengers” are on behind/beyond routes served by alliances (p. 23), DOJ 

omits the fact that IFS also predicted lower fares on nonstop overlaps: 

“While it is important to recognize that IFS 

forecasting models are a planning tool (and thus not 

designed for precise or accurate measurements), its 

application as requested by the CID suggests that the 

proposed alliance will be more efficient in carrying 

traffic but will not harm competition. 

The estimated increases in passengers and revenue are 

generally lower for nonstop overlaps and greatest for 

flow markets where the proposed alliance will create 

the most value for consumers. At the same time, there 

is no evidence that the proposed alliance would create 

market power in the nonstop overlaps, as the forecast 

does not predict reductions of capacity with 

significant increases in price, or new traffic paying 

significantly higher average fares. In short, the 

model predicts no harm to consumers in the overlap 

markets and substantial benefit in the flow markets 

currently dominated by the Star/SkyTeam duopoly.” (AA 

Response to CID 25295, 3/13/09, pp. 1-2, emphasis 

added). 

DOJ cannot have it both ways – if DOJ chooses to rely on the IFS model to 

discount the public benefits, it must also accept the model’s showing of no 

harm to competition.17

 

                                                           

17 Despite being highly favorable to the proposed alliance, the Joint 

Applicants have never cited them to the Department precisely because they 

lack any probative value. 
- 35 –

PUBLIC VERSION 

2. The Department Has Rejected DOJ’s Arguments Regarding 

SkyTeam’s Three-Coupon Itineraries 

DOJ argues that enhancing connectivity on behind/beyond itineraries 

which involve three segments generates “little incremental value” for 

consumers (p. 24). As evidence, DOJ cites MIDT data for SkyTeam’s network, 

which shows “only 7% of all SkyTeam marketed tickets involve three segments 

of travel” (p. 24). Yet the Department approved SkyTeam’s joint venture, 

even though SkyTeam II presented overlapping immunized networks: 

“We have considered the arguments of each side. 

Circumstances have changed significantly since the 

SkyTeam I case . . . . At that time, we noted that 

the applicants had not reached any detailed agreements 

to align the conflicting economic incentives that 

inevitably occur when forming an alliance that 

combines overlapping networks. The absence of such 

agreements, we believed, impeded the realization of 

consumer benefits. 

In contrast, the Joint Applicants now supply a 

detailed joint venture agreement that integrates 

international operations to such an extent as to 

suggest metal neutrality and seamless travel across 

one joint network. The proposed alliance is likely to 

result in the introduction of new capacity and greater 

availability of discount fares across the entire joint 

network – benefits that we tentatively find to be 

substantial in the circumstances of this case . . . . 

The aligned economic incentives in the 4-way JV 

increase the likelihood that the new public benefits 

will be realized, over and above what is possible 

under the two existing alliances. Antitrust immunity 

is well suited to enable carriers to achieve 

mergerlike efficiencies and deliver benefits that 

would not otherwise be possible” (Order 2008-4-17, 

DOT-OST-2007-28644, 4/17/08, p. 15) 

DOJ’s arguments are inconsistent with the Department’s precedent, and should 

be rejected on that basis. 

 

 
- 36 –

PUBLIC VERSION 

3. DOJ’s Study Of Alliance Fares Is Deeply Flawed

DOJ’s study of alliance fares for connecting passengers appears to be 

based on a fundamental misunderstanding of what makes an itinerary online, 

codeshare, ATI, or interline: 

“A ticket is an online ticket if all of the coupons in 

the ticket are operated and marketed by a single 

airline. An ATI ticket is a ticket that lists two or 

more airlines as operating or marketing carriers and 

all of the airlines are immunized members of the same 

alliance (SkyTeam, Star, or oneworld). A code-share 

ticket is a ticket that lists two or more airlines, 

and all listed airlines are members of the same 

alliance (SkyTeam, Star, or oneworld), but at least 

one of the airlines is not an immunized alliance 

member. Lastly, a ticket is an interline ticket if it 

lists two or more carriers that are not members of the 

same alliance. These interline tickets encompass 

traditional interline tickets as well as tickets that 

derived from bilateral code-share arrangements between 

airlines not in alliances or in different alliances” 

(DOJ Comments, Appendix B, p. 20 n.12). 

While DOJ correctly defines an online itinerary, its definitions of 

codeshare, ATI and interline tickets are simply wrong. 

 Codeshare: A codeshare itinerary is one in which each segment is 

marketed by a single carrier, but there is more than one operating 

carrier. Thus DOJ’s definition misses the mark in two ways. First, 

it includes any itinerary “that lists two or more airlines” (Id.), 

irrespective of whether there is a single marketing carrier. Thus 

AUS-(AA)-DFW-(BA)-LHR would be incorrectly defined as a codeshare 

under DOJ’s definition. Second, DOJ’s definition is limited to 

tickets on which “all listed airlines are members of the same 

alliance (SkyTeam, Star, or oneworld).” However, there are many 

codeshare agreements that exist outside the scope of one of the 

three globally branded alliances. For example, Continental and 

Virgin have an extensive codesharing alliance, even though Virgin is 

not in a branded alliance. Yet DOJ’s definition would exclude PIT-

(CO)-EWR-(CO*/VS)-LHR from the definition of a codeshare. 

 
- 37 –

PUBLIC VERSION 

 ATI: An ATI itinerary is either a codeshare or interline itinerary 

where there is more than one operating carrier, but all operating 

carriers have antitrust immunity with one another. DOJ’s definition 

lumps ATI codeshare and ATI interline together, even though fare 

construction for the two may be different. For example, DOJ would 

treat IAD-(UA)-FRA-(LH)-IAD the same as IAD-(UA)-FRA-(UA*/LH)-IAD, 

even though the former would be a combination of United and 

Lufthansa fares, while the latter would be sold under a single 

United fare. 

 Interline: An interline itinerary is any itinerary with more than 

one marketing carrier sold either under a single carrier’s fare 

(typically the carrier with the longest segment) or as a combination 

of local O&D fares. The interline nature of an itinerary exists 

regardless of whether the carriers are immunized or in an alliance. 

This could be further broken down into IATA Interline and Special 

Prorate Agreement (“SPA”) Interline – and the latter divided further 

still into SPA/ATI Interline and SPA/No ATI Interline, as each of 

these has a different competitive dynamic. Yet DOJ defines 

“interline” to include “tickets that derived from bilateral codeshare arrangements between airlines not in alliances” (Id.). Thus 

the PIT-(CO)-EWR-(CO*/VS)-LHR itinerary – even though it is a 

codeshare sold under a single marketing code – is defined as 

“interline” by DOJ. 

Given that, as shown above, DOJ rests its case on erroneous definitions of 

basic airline industry terms like “codeshare” and “interline,” the 

Department should give no weight to DOJ’s conclusions. 

 DOJ’s study of connecting fares for oneworld is further flawed in a 

number of ways. As The Brattle Group found:18

“DOJ is even less careful when it draws conclusions 

regarding the relative price differences between 

oneworld online and codeshare fares because many of 

the routes that DOJ relies on for this comparison 

cannot (by definition) be served by online service. As 

mentioned previously, DOJ’s data contains behindbeyond routes that are not served by online service. 

However, since these routes can be served by codeshare service, their inclusion affects the magnitude 

of the coefficient estimated for DOJ’s code-share 

variable. An appropriate analysis that compares online 

fares to code-share fares should be constrained to 

routes where online service exists” (Exhibit 2). 

                                                           

18 DOJ’s study is also flawed because it is based on the limited 

American/Finnair and American/Brussels Airlines alliances (Exhibit B). 

Brussels Airlines has never been a member of oneworld, and in fact is slated 

to join Star now that it has been acquired by Lufthansa. 
- 38 –

PUBLIC VERSION 

The Brattle Group modified DOJ’s model to address its methodological 

flaws, and found decidedly different results. Brattle found that oneworld 

carriers’ individual online fares are lower than the oneworld codeshare 

fares, suggesting that the alliance is “unable to achieve the fare 

coordination for connecting passengers through codesharing that can be 

attained under more ‘unified control,’ such as single-carrier online 

service” (Id.). When an additional modification – looking at operating 

carriers only – is added, the fare decreases are deeper, ranging between 

7.2% and 7.4%. Thus it is only DOJ’s methodology – not the fare data – that 

leads to the incorrect conclusion that non-immunized codesharing creates 

optimal consumer benefits. 

B. DOJ’s Claims Regarding New Nonstop Service Were Previously 

Rejected 

DOJ dismisses the potential for new nonstop transatlantic service as a 

public benefit, arguing that such service “does not depend on the immunized 

status of the alliance” (p. 25 n.73). As evidence, DOJ cites the fact that 

American has “considered” flying to [REDACTED] “in the 

recent past” (Id.). But the real point is that American has not launched 

such service – largely because it lacks integrated European partners that 

can help market and support the flights. 

[REDACTED] 

 
- 39 –

PUBLIC VERSION 

DOJ also cites American’s arguments in the Star I case that “simple 

codesharing and non-immunized joint marketing will support new nonstop 

service . . .” (Id.). However, American’s arguments failed to carry the 

day, as the Department approved nine-way antitrust immunity for Star in that 

case (Order 2006-12-17, DOT-OST-2005-22922), finding that: 

“The Joint Applicants claim that their proposed 

alliance will produced numerous public benefits beyond 

new online service. They cite as potential public 

benefits . . . expansion of nonstop international 

service . . . . We tentatively find, in the 

particular facts and circumstances of this case, that 

these are substantial benefits offered by Star to the 

traveling public” (Id. at 18). 

Arguments that the Department has already rejected in other proceedings can 

hardly be viewed as persuasive.

C. The Department Does Not Share DOJ’s Lack of Concern Regarding 

Interalliance Competition 

DOJ claims that the Joint Applicants “overstate the importance of 

interalliance competition to consumers” (p. 27). As evidence, DOJ points to 

the oneworld website, which “proclaims that it is already the preferred 

alliance, citing to the advanced level of cooperation among its members and 

the travel industry awards captured by the alliance” (p. 27). The fact that 

the quality of oneworld’s carriers has allowed it to survive in the face of 

the network integration being implemented by Star and SkyTeam is not 

evidence that the proposed alliance would not increase competition and 

generate public benefits. As the two other alliances implement their 

transatlantic joint ventures, absent antitrust immunity oneworld will 

continue to fall behind – notwithstanding promotional statements contained 

on a marketing website. 

 
- 40 –

PUBLIC VERSION 

DOJ also claims that “few, if any, corporate travel managers whom DOJ 

interviewed have stated a desire for increased interalliance competition” 

(p. 27). Yet no corporate customers opposed the application. To the 

contrary, when American surveyed its 40 largest corporate customers, XXX% 

called having a single alliance contract “very important,” and XXX% said it 

was at least “somewhat important.” [REDACTED] said they would seek to 

renegotiate their contracts immediately upon the JBA’s implementation, while 

just XXX% sought to maintain the status quo. Moreover, the Joint 

Applicants’ survey of corporate customers is consistent with the broad and 

unprecedented support the Joint Application has received from government 

officials, corporations, small businesses and community organizations. 

Likewise, the Joint Applicants commissioned independent firm Ipsos 

Mori to conduct a survey of their top corporate customers on each of the 

Heathrow overlap routes. This survey shows that XXX% of corporate customers 

supported the proposed alliance, while just XXX% opposed it. This survey 

found that only XXX of XXX corporate accounts considered a single alliance 

contract unimportant – while XXX% of customers with alliance deals and XXX% 

of customers without alliance deals said they found value in the ability to 

negotiate a single contract for an entire network of alliance travel. 

 
- 41 –

PUBLIC VERSION 

DOJ cites an American document which it presents as showing that 

consumers “ [REDACTED] 

 ” (p. 27 n.81, citing AA-DOT-0007977-

48034). Once again, DOJ is taking a document out of context. Although the 

document itself is from XXXX, the language DOJ quotes reflects a XXXX study

(AA-DOT-0007984). The XXXX document goes on to question “ 

 [REDACTED] ” citing the “ 

[REDACTED] 

 ” as having “ [REDACTED] ” 

(AA-DOT-0007985). In other words, the XXXX document DOJ quotes specifically 

notes that [REDACTED] . 

Nor does DOJ quote the XXXX document’s conclusion regarding the impact 

of oneworld’s decision [REDACTED] to 

 : 

[REDACTED] 

Accordingly, the document DOJ cites is hardly evidence that 

 [REDACTED] . In fact, it 

indicates the opposite – 

[REDACTED] 

 . 

 
- 42 –

PUBLIC VERSION 

Another document taken completely out of context is AA-DOT-0007981, 

which DOJ quotes as “ 

 19 

[REDACTED] 

 ” (p. 28 n.84). Yet that 

[REDACTED] 

 . The Joint Applicants remain concerned about private treble 

damage antitrust litigation – however frivolous – in the absence of an 

immunized alliance. [REDACTED] 

 , it would not prevent litigious competitors 

(like Virgin) from seeking to disrupt pro-competitive alliance network 

competition in the courts. In addition, the JBA participants have diversion 

concerns about joint corporate dealing in the absence of a revenue sharing 

agreement. 

The Department has never agreed with DOJ’s dismissal of the value 

antitrust immunity brings to consumers, holding that “[a]lliances compete 

with each other based on connecting services, seeking to minimize connecting 

times and to provide greater scheduling and other ‘alliance’ product 

features to attract passengers to their networks” (Order 2009-7-10, DOT-OST2008-0234, p. 17). Likewise, the Department has allocated routes in limited 

entry markets in order to ensure more effective interalliance competition 

(See, e.g., Order 2005-2-14, DOT-OST-2004-19077, p. 19). 

 

                                                           

19

[REDACTED] 
- 43 –

PUBLIC VERSION 

D. DOJ’s Speculation That The Joint Applicants Would Move Forward 

Without Full Immunity Has No Basis In Fact 

DOJ also speculates that absent antitrust immunity the Joint 

Applicants “likely would engage in some sort of cooperation that would 

provide nearly identical benefits to consumers as those likely to result 

from the” proposed alliance (p. 28). DOJ claims that the American/British 

Airways alliance has “evolved substantially” since the failure to obtain 

antitrust immunity in 2001 (p. 29). As support, DOJ quotes an American 

document stating that “ [REDACTED] 

 ” and that “ 

[REDACTED] 

 ” (p. 29, citing AA-DOT-0003658). Like those 

described above, this document is also taken out of context. 

On the very same page, American notes that “ 

 [REDACTED] ” (AA-DOT-003658). While it is certainly true 

that American and British Airways have tried to find ways to expand their 

cooperation without antitrust immunity, it is far from optimal. The 

document still 

 [REDACTED] (AA-DOT-0003661), and 

expresses concerns that 

[REDACTED] 

 . 

 
- 44 –

PUBLIC VERSION 

While American and British Airways have engaged in some behind/beyond 

codesharing, it is not comprehensive. The important issue in this 

proceeding is not what the Joint Applicants have accomplished despite their 

lack of antitrust immunity – it is what they can achieve only if the 

proposed alliance is approved and immunized. The Brattle Group has 

quantified the additional consumer benefits from more integrated codesharing 

– using a study authored by one of DOJ’s own economists – and found nearly 

$100 million in annual consumer benefits. DOJ does not address the other 

gaps in the non-immunized alliance, such as the lack of transatlantic 

codesharing, fully reciprocal frequent flyer programs, combinable fares, or 

joint corporate dealing. Just because American, British Airways and Iberia 

have been able to survive by implementing incremental cooperation without 

immunity does not mean consumers would not enjoy significant additional 

consumer benefits from a fully integrated joint venture capable of competing 

with those the Department has approved and immunized for Star and SkyTeam. 

DOJ has failed to rebut the Joint Applicants’ evidence of public benefits, 

and the Department should approve the proposed alliance. 

 
- 45 –

PUBLIC VERSION 

III. DOJ’S PROPOSED REMEDIES ARE BOTH UNNECESSARY AND UNWORKABLE 

A. Carve-Outs 

DOJ asserts that carve-outs “are relatively easy to administer and 

preserve the incentives of the current market participants to compete” (p. 

31). Yet carve-outs have significant administrative costs. Mr. Casey’s 

declaration shows that a second real-time database would be needed to 

balance competing yield management priorities created by a carve-out (Casey 

Affidavit, 9/8/09, ¶ 31). Additionally, there is still no evidence that 

carve-outs are necessary or effective. In 2001, DOJ called the evidence on 

carve-outs “inconclusive” (DOJ Comments, DOT-OST-2001-11029, 12/17/01, p. 

51). Eight years later, DOJ has submitted no new studies or evidence on 

this issue. While American does not dispute that carve-outs on full-fare 

traffic might be workable in the absence of an integrated network, DOJ 

ignores the shift – required by the Department in SkyTeam II – toward metal 

neutrality, which would be severely undermined by carve-outs. 

According to DOJ, the issue is whether carve-outs “destroy[] 

Applicants’ incentives to” work together (p. 32). But the question is not 

whether carve-outs are a complete bar to coordination – it is the cost they 

impose on consumers by reducing the efficiencies the JBA will generate. As 

the Department has repeatedly held, carve-outs would stifle the efficiencies 

generated by metal neutral joint ventures (See Order 2009-7-10, p. 12; Order 

2008-4-17, DOT-OST-2007-28644, p. 10). DOJ’s unsupported belief is hardly 

enough to meet the statutory burden of proof in 49 U.S.C. § 41309(c)(2). 

 

 
- 46 –

PUBLIC VERSION 

1. Impact On Capacity 

DOJ asserts that carve-outs would not reduce the incentives of an 

alliance to increase capacity on hub-to-hub routes. DOJ claims the Joint 

Applicants “would not have identical interests because they remain separate 

entities that do not share revenues on domestic travel or international 

travel involving parts of the world not covered by the joint venture” (p. 

32). DOJ’s arguments reveal a fundamental misunderstanding of both 

operational reality and the Joint Business Agreement. The majority of the 

Joint Applicants’ transatlantic flights are operated with wide-body 

aircraft, such as the Boeing 777. In contrast, the majority of the Joint 

Applicants’ domestic/intra-EU flying is operated with narrow-body aircraft, 

such as the Boeing MD-80. Moreover, even where wide-body aircraft are used 

for domestic routes, that is generally done during times the aircraft would 

not be operating on international routes, and/or to reposition the aircraft 

for their next international segment. The fact that the Joint Applicants do 

not share revenue on domestic/intra-EU O&D traffic has no relevance to the 

capacity that would be allocated for flights within the JBA’s scope. 

DOJ also ignores the fact that the Joint Applicants’ revenue sharing 

formula is based on the capacity each of them operates within the JBA. Thus 

if one carrier were to forego a transatlantic flight in favor of a route 

outside the JBA’s scope, it would lose the revenue not just from the 

foregone flight, but also a share of all the revenue generated by the JBA. 

The language cited by DOJ regarding the JBA’s governing principles about how 

 
- 47 –

PUBLIC VERSION 

“ [REDACTED] ” (p. 32 n.92, citing AA-DOT-0008559) 

concerns revenue management, not capacity planning, and thus proves 

nothing.20 DOJ does not rebut the fact that by carving out local traffic 

from the JBA, the Joint Applicants would have less incentive to optimize 

capacity on the route, unlike, for example, Northwest/KLM on routes like 

Detroit-Amsterdam (where it faces no nonstop competition, has no carve-outs, 

yet still operates nearly quadruple the number of seats per local passenger 

than American and British Airways do on Dallas/Fort Worth-London). 

2. Impact On Yield Management 

DOJ claims that carve-outs would not create inefficient yield 

management incentives in a metal neutral joint venture. However, the 

example DOJ sets forth is both irrelevant and inaccurate. As DOJ puts it: 

“Suppose, for example, that American is considering 

how to allocate a seat on an Atlanta-Miami flight 

after the alliance is approved. American could give 

the seat to a local passenger on Atlanta-Miami, to a 

connecting passenger traveling Atlanta-Miami-Buenos 

Aires, or to an Atlanta-Miami-London passenger (whose 

fare it would share with British Airways). In the 

first two cases, American keeps all the revenue 

because these American routes are outside the 

alliance. If American evaluated the seats based on 

what it would earn on that seat given its agreements, 

it could easily rank the alliance passenger last 

because most of the revenue from the transatlantic leg 

is shared, whereas American keeps 100% of the revenue 

otherwise” (p. 33). 

 

                                                           

20 If anything, the fact that each carrier will continue to manage the 

inventory on its own flights proves the case made in subsection 2, below, 

regarding yield management. Because each carrier would have both the 

incentive and the ability to allocate more seats for local traffic (which 

would be excluded from the revenue share), and less for connecting traffic 

(which is what drives capacity on the hub-to-hub routes), carve-outs would 

lead to a sub-optimal competitive result. 
- 48 –

PUBLIC VERSION 

DOJ has raised an irrelevant hypothetical. The issue with carve-outs 

is not the yield management of a domestic segment (such as Atlanta-Miami), 

but of the transatlantic segment (such as Miami-London). The carve-out 

would apply to local traffic on the Miami-London route in DOJ’s example, and 

it is on that route that the carve-out would cause inefficient yield 

management incentives. However, the transatlantic city-pair is not a part 

of DOJ’s hypothetical. Rather, DOJ focuses on three Atlanta based 

itineraries - none of which would be impacted by a carve-out. Thus it is 

unclear how DOJ’s example is in any way related to the issue of carve-outs 

on transatlantic segments. 

In any event, DOJ’s hypothetical is simplistic and inaccurate. The 

three city-pairs cited are Atlanta-Miami, Atlanta-London and Atlanta-Buenos 

Aires (Id.). DOJ speculates that American “could easily rank the alliance 

passenger last because most of the revenue from the transatlantic leg is 

shared, whereas American keeps 100% of the revenue otherwise” (Id.). But it 

is difficult to see why American would prefer selling the last seat on 

Atlanta-Miami to a local premium passenger, rather than a connecting 

passenger to London: 

Itinerary J Fare Segment Prorate21

 AA Revenue22

ATL-MIA $910 ATL-MIA $910 $XXXXX

ATL-MIA-LHR $6,407 ATL-MIA $759 

MIA-LHR $5,648 

$XXXXX

 

                                                           

21 Assumes straight-rate prorate based on cost-weighted miles. 

22 [REDACTED] 
- 49 –

PUBLIC VERSION 

DOJ’s analysis fails to account for the added network revenue 

associated with an international long-haul passenger, and ignores the 

inherent complexities in maximizing network revenue as opposed to yield on a 

single seat. Obviously, yield management involves balancing the ATL-MIA, 

MIA-LHR and hundreds of other segments so as to create itineraries that 

generate the maximum overall revenue. 

DOJ is correct in asserting that American would keep all of the 

revenue from Atlanta-Buenos Aires (which is out of the scope of the JBA), 

but only a portion of the revenue from Atlanta-London. However, the carveout issue impacts capacity on Miami-Heathrow, not Atlanta-Miami. The Joint 

Applicants have already demonstrated that the carve-outs would result in 

inefficient yield management on the carved-out routes (AA Supplemental 

Comments, 9/8/09, p. 14; AA Response to DOJ Comments, DOT-OST-2008-0234, 

7/6/09, DOT-OST-2008-0234, p. 12), and the Department has agreed: 

“American adds that carve outs can alter the financial 

incentives of the operating carrier, leading it to 

place more emphasis on capturing gateway-to-gateway 

passengers to the detriment of flow passengers 

(gateway-to-beyond or behind-to-gateway) . . . . We 

have consistently found that where an integrated 

‘metal-neutral’ joint venture is present, carve outs 

inhibit the realization of efficiencies and thereby 

the consumer benefits resulting from those 

efficiencies” (Order 2009-7-10, pp. 19-20). 

It would be manifestly inequitable for the Department not to apply its 

recent precedent in the Star II docket to this proceeding. 

 
- 50 –

PUBLIC VERSION 

DOJ’s proposed solution to the problem carve-outs would create is fare 

class mapping – the linking of booking classes between carriers (p. 33). 

DOJ calls fare class mapping a “simple expedient” – but there is nothing 

simple about applying it in the real world (p. 33). Fare class mapping is 

necessary on codesharing itineraries in order to ensure that a marketing 

carrier’s fares being applied on a different operating carrier’s flights 

will not result in revenue dilution.23 The example cited by American in 

Star II and the Joint Applicants in this proceeding has nothing to do with 

codesharing – it involves individual yield management decisions on 

itineraries marketed and operated by a single carrier. The Joint Applicants 

fail to see how fare class mapping solves or even addresses the inefficient 

yield management incentives that carve-outs would create. DOJ’s argument is 

simply irrelevant.

 3. Impact On Scheduling 

DOJ claims that the Joint Applicants “fail to acknowledge that 

competing carriers offer flights at about the same time because that is the 

time of peak demand from local passengers,” speculating that “[p]assengers 

benefit from having competing options at the time of day they prefer to fly” 

(p. 35). But DOJ cites nothing to support this statement beyond its own 

speculation, and ignores the fact that local passengers also benefit from 

having options as to the time of day they fly. The Department recognized 

this fact in Star II, holding that “[i]ncreased cooperation and fare 

combinability mean more schedule (time-of-day) options for business 

passengers and others who use connecting service” (Order 2009-7-10, DOT-OST2008-0234, p. 17). 

                                                           

23 For example, if Carrier A filed a low value fare, and applied it to a 

flight operated by Carrier B, it would need to map to a low value fare class 

in order to allow Carrier B to efficiently yield manage its flight. 
- 51 –

PUBLIC VERSION 

DOJ dismisses American’s experience with Swiss because “Swiss 

independently added a 9 p.m. flight at JFK to accommodate late evening 

demand from passengers seeking to connect through Zurich” (p. 35). While 

DOJ asserts that this “call[s] into question the claim that revenue sharing 

on the local traffic was necessary for the addition of the later JFK 

flight,” DOJ does not even attempt to challenge the fact that the 

profitability of American’s flight was reduced by shifting it to a 2100 

departure. Moreover, DOJ’s entire premise is undermined by the fact that 

after terminating its alliance with American, Swiss was operating both the 

early and late JFK-Zurich departures. Obviously “revenue sharing” is not 

necessary when a single carrier operates both flights. 

B. Slot Divestitures 

DOJ also suggests that the Department “could require Applicants to 

divest slots to encourage new entry” (p. 30). DOJ fails to acknowledge the 

fact that Heathrow slots are available for purchase and/or lease today – 

Star has placed Heathrow slots up for sale, SkyTeam has shifted slots away 

from U.S. service and put them to use on short-haul flights from Heathrow to 

Paris and Amsterdam, and Virgin is leasing slots to Aer Lingus for shorthaul use. Virtually every potential new entrant in the marketplace has 

access to slots today, making a slot remedy entirely unnecessary. 

The only way a slot remedy could work – assuming it were necessary to 

begin with – would be if the use of the divested slots were restricted to 

the routes where competitive harm is alleged. But unless the Department 

allowed the Joint Applicants to sell divested slots to the highest bidder, a 

slot remedy would do nothing but effectuate a value transfer from oneworld 

to its larger competitors. 

 
- 52 –

PUBLIC VERSION 

CONCLUSION 

The Joint Application will generate significant public benefits, and 

will not harm competition. On the benefits side, oneworld is currently the 

smallest branded alliance, and absent meaningful integration it will become 

increasingly marginalized as a competitive alternative to the larger and 

stronger Star and SkyTeam alliances. As for potential competitive harm, the 

overlap routes are some of the most competitive across the Atlantic, and the 

most likely to attract new entry. DOJ has failed to meet its burden of 

proof regarding harm, or to rebut the comprehensive evidence of public 

benefits satisfying the Department’s SkyTeam II and Star II precedents. The 

proposed alliance should be approved and immunized without further delay. 

 Respectfully submitted, 

 

CARL B. NELSON, JR. PAUL C. JASINSKI 

Associate General Counsel General Counsel, Americas 

R. BRUCE WARK JAMES B. BLANEY 

Associate General Counsel Senior Counsel, Americas 

JEFFREY A. OGAR British Airways plc 

Senior Attorney 

American Airlines, Inc. DARYL A. LIBOW 

 Sullivan & Cromwell LLP 

ROGER W. FONES DON H. HAINBACH 

Morrison & Foerster LLP Garafalo Goerlich Hainbach PC 

ANDREW B. STEINBERG Attorneys for British Airways 

Jones Day 

Attorneys for American Airlines 

 

WILLIAM KARAS SAMI SARELIUS 

CAROL GOSAIN Vice President & General Counsel 

Steptoe & Johnson LLP Finnair Oyj 

Attorneys for Iberia 

 

 

MICHAEL J. HOLLAND 

Condon & Forsyth LLP 

Attorneys for Royal Jordanian 

January 11, 2010 
EXHIBIT 1 
1

Competitive Effects of Airline 

Antitrust Immunity: Response of 

Robert Willig, Mark Israel, and Bryan 

Keating 

I. Introduction 

1. On June 26, 2009, the Department of Justice (“DOJ”) submitted comments on the 

Department of Transportation’s Show Cause Order regarding the Star Alliance, which 

included econometric studies that purported to make two points. First, DOJ claimed that 

its evidence showed that “a reduction in the number of competing airlines offering 

nonstop transatlantic service may result in large, statistically significant price increases,”1

which the DOJ asserted (without evidence) also implied that granting antitrust immunity 

(“ATI”) to two or more carriers providing non-stop service on the same route would lead 

to large increases in non-stop fares. Second, DOJ claimed that its evidence showed that, 

on average, connecting fares charged by alliances with antitrust immunity (“ATI”) are 

higher than connecting fares charged by non-immunized alliance members.2 Notably, 

DOJ did not present (and still has not presented) any econometric analysis of the effect of 

ATI on the service quality that an alliance can offer, nor of the effect on fares or service 

quality of carving particular routes out from immunity. 

2. On September 8, 2009, we filed an Affidavit in the current docket, in which we made a 

number of points that together demonstrated that DOJ’s econometric findings should not 

be relied upon for the formulation and support of policy towards airline alliances.3 First, 

with regard to the effect of ATI on non-stop fares, we demonstrated that if one focuses on 

the relevant question – whether, given a particular number of carriers on a route, granting 

antitrust immunity to two or more carriers leads to higher fares – uses data from more 

than a single quarter (to which DOJ needlessly limited analysis in its June 26 and its 

 

1 Comments of the Department of Justice on the Show Cause Order, Public Version, Docket OST2008-0234, June 26, 2009, p. 47 (“DOJ Star Comments”). 

2 DOJ Star Comments, p. 49. 

3 Joint Applicants’ Motion for Leave to File and Supplemental Comments, Public Version, Docket 

DOT-OST-2008-0252, September 8, 2009, Exhibit 1 (“Affidavit”). 
2

December 21 comments)4 and includes standard sufficient controls for the myriad factors 

that lead to different fares for different routes, there is no econometric evidence that 

antitrust immunity leads to any increase in fares on non-stop overlap routes. Second, 

with regard to the effect of ATI on connecting traffic, we showed that as long as one 

includes standard controls, particularly for the identity of the marketing carrier(s) setting 

prices for the ticket, the policy important result that has generally been found in the 

literature – that ATI itineraries have lower fares than code-share itineraries – is restored. 

Third, we moved beyond the topics addressed by DOJ and showed that consumers 

receive substantial non-price benefits from ATI service, as, on average, they prefer ATI 

service to code-share (or interline) service, with the extent of this preference equivalent to 

that for a substantial fare reduction. Finally, we demonstrated that carving-out particular 

segments from immunity diminishes or eliminates both the price and quality benefits 

from ATI for the connecting itineraries that flow over a carved-out segment. When 

considered together with the results demonstrating the lack of harm from ATI on nonstop routes, these carve-out results demonstrate that carve-outs are not only unnecessary 

to hold fares down, but also harm consumers by vitiating the fare and quality-of-service 

benefits that connecting passengers receive from full ATI. 

3. On December 21, 2009, DOJ presented comments in the current docket that included an 

Appendix B containing DOJ’s response to our affidavit.5 In this reply affidavit, we 

demonstrate that nothing in DOJ’s response in any way changes or diminishes any of the 

conclusions from our original affidavit. As detailed below, what is most striking about 

the DOJ response is the number of topics on which it ignores, agrees with, or fails to 

provide any econometric analysis to rebut the fundamental points that we made in our 

initial affidavit. Indeed, the econometric results of ours to which DOJ offers no 

substantive response are sufficient, on their own, to demonstrate the benefits from ATI 

and the harm from carve-outs. Where DOJ does offer responses to our findings, they 

largely take the form of detailed “implementation issues” regarding our econometric 

 

4 DOJ Star Comments, pp. 24-25 and Appendix B; Comments of the Department of Justice, 

December 21, 2009, Public Version, Docket DOT-OST-2008-0252, p. 14 and Appendix A (“DOJ oneworld 

Comments”). While DOJ did perform some analysis of panel data (as well as a cross-sectional analysis 

based on the full year of 2008) in response to our Affidavit, it continues to rely on its cross-sectional results 

based on just the third quarter of 2008 as the main results for its oneworld comments. 

5 DOJ oneworld Comments, Appendix B. 
3

models.6 Some of the implementation issues that DOJ raises are invalid as criticisms, 

while others are potentially valid points in response to which we have adjusted certain 

details of our methodology, but they all share one common feature – regardless of 

whether they are considered one at a time or in combination, they have, at most, a small 

effect on our results and no effect on any of the conclusions from our affidavit. Instead, 

as we demonstrate below, on those topics about which DOJ claims to have refuted our 

results (price effects of ATI on non-stop routes and the difference between ATI and codeshare fares for connecting traffic), the source of the difference between their findings and 

ours remains the same as it has been throughout this proceeding – DOJ’s failure to 

include important and standard controls for the identity of the carriers setting the fares 

under analysis. In essence, DOJ continues to confound pricing differences across carriers 

with the relevant competitive effects of ATI, and consequently continues to draw 

incorrect conclusions about ATI effects.

II. Despite DOJ’s Response, All of the Conclusions from Our Original Affidavit 

Still Hold 

4. In this section we discuss the three basic reasons why DOJ’s response affects none of the 

conclusions from our affidavit: 

 There are numerous fundamental topics on which DOJ agrees with, ignores, or offers 

no substantive rebuttal to the points we made in our Affidavit; 

 Whether they are considered one at a time or in combination, the various 

implementation issues raised by DOJ regarding our affidavit (which it generally 

refers to as “errors” or “mistakes” even though most reflect intentional and 

appropriate choices made when analyzing the data) have, at most, a small effect on 

our results and no effect on any of our conclusions; 

 The difference between our results and DOJ’s results (on the effect of ATI on nonstop and connecting fares) rest entirely on DOJ’s inappropriate omission of “carrier 

fixed effects” to control for the identity of the marketing carrier(s) setting prices. As 

a result, DOJ confounds pricing differences across carriers with the relevant 

competitive effects of ATI, and consequently draws incorrect conclusions about ATI 

effects. 

 

6 While DOJ generally refers to these as “errors” or “mistakes,” most of the implementation issues 

that DOJ raises reflect intentional and appropriate choices that we made in analyzing the data. 
4

We leave the detailed tables of econometric results supporting these points to Section III, 

focusing here on the main results from that analysis and their clear implications regarding 

the pro-competitive effects of ATI and the harm from carve-outs. 

A. Topics on which DOJ agrees with, ignores, or offers no substantive rebuttal to 

our evidence 

5. As noted above, there are at least four topics about which DOJ agrees with, ignores, or 

offers no substantive rebuttal to our evidence. First, DOJ now appears to agree with a 

fundamental premise of our initial affidavit – that the question of whether ATI does or 

does not lead to higher non-stop fares on overlap routes is a separate empirically testable 

question, distinct from the question of the effects on fares of the number of carriers on 

the route. In particular, while DOJ continues to assert (contrary to the real-world 

business experience that the parties detail in their filings)7 that ATI will either not lead 

to higher capacity on hub-to-hub routes or, even if capacity expands, this will not lead to 

lower fares for local traffic, it now acknowledges that the question of ATI’s effect on 

non-stop fares “can be tested empirically” in a setting that controls for the number of 

carriers and includes an additional ATI variable.8 While the DOJ setup is superficially 

different from ours (in particular, treating carriers in an ATI alliance as a single carrier 

when counting the carriers serving a route, whereas we count the number of separate 

carriers whatever the immunity relationship between them), we show below (Sections 

III-A and III-B) that the choice between setups does not matter: With proper controls in 

place, the DOJ setup provides affirmative support for our findings that granting ATI is 

not the same as an actual reduction in the number of carriers, with no empirical 

evidence that higher fares result from ATI.

6. Second, while DOJ spends substantial time asserting that it is not appropriate (for reasons 

we refute below) to study non-stop fares using panel-data analysis (in which one focuses 

“entirely on changes over time in the number of competitors on a route” by including 

“route fixed effects”),9 this discussion ignores the fact that our affidavit also presented an 

alternative “cross-sectional” analysis that confirmed the lack of ATI effects on non-stop 

 

7 Joint Applicants’ Motion for Leave to File and Supplemental Comments, Public Version, Docket 

DOT-OST-2008-0252, September 8, 2009, pp. 4-6 and Exhibit 2. 

8 DOJ oneworld Comments, Appendix B, p. 5. 

9 Id, pp. 7-8. 
5

fares.10 Hence, the source of the differences between our and DOJ’s results cannot be 

the use of panel vs. cross-sectional econometric methods. Moreover, in Section III-A, 

below, we show that our cross-sectional results continue to hold after adjusting for the 

implementation issues raised by DOJ (in its discussion of our panel analysis) that may 

also apply to our cross-sectional analysis. As such, the source of the difference in results 

must come from the fact that we use additional data (from Q1:2005-Q4:2008) in contrast 

to DOJ’s needlessly limited focus on a shorter time period (Q3:2008 or full-year 2008 in 

Table 2 of Appendix B to its December 21 Comments) and/or that we include additional 

controls for factors other than the number of carriers that cause fares to vary across 

routes. With these additional data and controls in place, DOJ’s preferred cross-sectional 

methods confirm the lack of an ATI effect on non-stop fares. 

7. Third, DOJ offers no analysis of the benefits to connecting traffic from the quality 

advantages resulting from ATI service. Our affidavit quantified the size of these benefits 

based on consumers’ revealed preference for ATI over code-share and interline flights, 

holding fares constant. In response to this, DOJ offers only misguided and inaccurate 

reasoning to assert that the size of this consumer preference (which is revealed by actual 

consumer choices in the data) is not “plausible.” In Section III-C, below, we explain why 

DOJ’s logic is faulty and show that even highly conservative measures of the size of the 

consumer preference for ATI service imply large ATI benefits, which – given the lack of 

evidence for harm from ATI on non-stop routes – demonstrate the pro-competitive 

impact of ATI even if one were (incorrectly) to assume that ATI does not lower 

connecting fares. 

8. Finally, DOJ offers no analysis to refute our finding that carving certain segments out 

from ATI leads to higher fares and lower non-price benefits on otherwise ATI connecting 

itineraries that make use of a carved-out segment. Instead, DOJ asserts incorrectly that 

this result arises from “cherry picking the data.”11 DOJ does not explain precisely what it 

means by this comment, but cherry picking implies that we searched through the 

itineraries in the data to find a set of ATI itineraries with higher fares or lower quality 

than other ATI itineraries, and then, based on this search, built our hypothesis test around 

itineraries we knew had higher fares (or lower benefits). This is completely untrue. 

 

10 See Table 5 of our original Affidavit and the surrounding discussion. Throughout this reply we 

refer to analyses that do not use route fixed effects as “cross-sectional” because they rely on cross-route 

comparisons of the number of carriers and fares, together with changes over time within routes. 

11 DOJ oneworld Comments, Appendix B, p. 31. 
6

Questions regarding the effects of imposing carve-outs are at the very heart of the issues 

in these proceedings, and far-from searching the data for a set of high-fare/low-quality 

itineraries, we implemented the most obvious test of the effect of carve-outs, by asking 

whether the presence of a carved-out segment on a connecting itinerary vitiates the price 

and/or quality benefits from ATI. We found that, in fact, itineraries using carved-out 

segments have higher fares and lower quality than other ATI itineraries, as predicted by 

the carriers in this proceeding based on their business experience.12 Standard tests for 

“statistical significance” – that fully account for the number of itineraries in the data that 

use carved-out segments and thus whether we have cut the data “exceedingly finely”13 – 

show that these results are statistically significant, meaning that there is less than a onein-twenty chance that the results would have occurred at random in the absence of a true 

effect from carve-outs.14 Thus, we followed the entirely standard statistical procedure of 

setting up an obvious hypothesis to test and testing it. The resulting finding is clear 

statistical support for the harmful effects of carve-outs. In contrast, DOJ offers nothing to 

explain or refute our finding other than a general statement that we should have included 

more controls for other segment characteristics,15 without suggesting a single important 

control let alone showing that such controls would change our results. In Section III-D, 

below, we do add such a control – a set of fixed effects for the “midpoint” airport(s) that 

the connecting itinerary flows through – and show that our results are unaffected by this 

change. 

9. Simply combining the conclusions from the studies listed above – our cross-sectional 

study of non-stop fares, our study of the quality benefits of ATI, and our studies of the 

harm from carve-outs – demonstrates the pro-competitive impact of ATI and the harm 

from carve-outs. In particular, using DOJ’s preferred cross-sectional framework with the 

inclusion of additional data and controls demonstrates the lack of empirical support for 

 

12 Joint Applicants’ Motion for Leave to File and Supplemental Comments, Public Version, Docket 

DOT-OST-2008-0252, September 8, 2009, § II. 

13 DOJ oneworld Comments, Appendix B, p. 31. 

14 Of course this one-in-twenty requirement means that if one searched enough itineraries, thus truly 

“cherry picking” the data (as DOJ appears to have done in choosing to add dummies for itineraries 

involving Chicago-Munich and San Francisco-Frankfurt, with no explanation for these choices, in its 

alternative analysis in footnote 23 of Appendix B of the DOJ oneworld Comments), one should expect to 

find some that pass the test for significance “at random” with no real underlying effect. In other words, if 

one searches enough, one can find outliers in the data. But this has nothing to do with what we did in 

directly testing the effect of carve-outs, using entirely standard and accepted statistical techniques. 

15 DOJ oneworld Comments, Appendix B, p. 31. 
7

higher non-stop fares due to the provision of antitrust immunity. This lack of harm 

contrasts with the facts that ATI does positively benefit consumers via higher quality, and 

that these quality effects are substantially negated when carve-outs are imposed. 

Nevertheless, in the following sections, we also go on to refute DOJ’s criticisms 

regarding those of our studies that it does address in a substantive way – our panel 

analysis of the effect of ATI on non-stop fares and our analysis of the effect of ATI on 

connecting fares. 

B. Lack of substantive effect on our results from “implementation issues” raised by 

DOJ 

10. DOJ raises a number of “implementation issues” with regard to our panel analysis of nonstop fares and with regard to our analysis of connecting fares. Starting with the panel 

analysis of non-stop fares, we note that, while these implementation issues include a mix 

of valid and invalid points, they have, at most, a small effect on our results and no effect 

on any of our conclusions, regardless of whether the issues are considered one at a time 

or in combination. In particular: 

 DOJ asserts (with no cited evidence or analysis) that there are not enough entry/exit 

events to estimate fare effects using a panel analysis.16 However, we see no basis for 

this assertion, as many “event studies” in other contexts are based on only a single 

event whose effect can be compared to other observations (here, routes) not 

experiencing the event. In any case, the “standard errors” of the regression estimates 

fully and correctly reflect the amount of available variation, and as shown in Section 

III-A and III-B, below, this variation is sufficient to affirmatively reject the claim that 

ATI leads to higher non-stop fares. 

 DOJ claims that our results are influenced by route-quarters in the data for which the 

only carriers are foreign, so that the limited number of tickets in the DB1B data (on 

which we and DOJ rely) make the measured average prices unreliable.17 This means 

that, for those routes, the left hand side variable in our regression – a function of 

average fare – will be “noisy” with a high variance (since the variance of the average 

fare is inversely related to the number of observations used to compute that average). 

However, as a matter of basic econometrics, a high-variance left-hand-side variable 

 

16 DOJ oneworld Comments, Appendix B, p. 8. 

17 Id, pp. 9-10. 
8

in no way biases our results.18 However, a valid implication is that because the 

average fare for some route-quarter combinations (in our regression and in DOJ’s) is 

based on a sample of more tickets than the average fare in other route-quarters 

(whether due to the foreign carrier issue or simple variation in sample size), the 

variance of our left-hand-side variable is not the same across routes, meaning that 

there is “heteroskedasticity” in the data. An econometrically appropriate reaction to 

such heteroskedasticity is to weight the regressions by the number of observations 

used to compute the average fare for each route–quarter (that is, to put more weight 

on observations with lower variance in the average fare). We do so below, and this 

modification to our estimation technique has no effect on any of our conclusions. 

 DOJ claims that our panel results are particularly sensitive to the use of a cutoff of 61 

or more flights per quarter for a carrier to be counted as serving a route.19 As we 

show in Section III-B below, our results are robust across a wide range of possible 

cutoffs, including some in which we require a relatively large change in a carrier’s 

number of operations in order to count the change as an entry or exit. 

 DOJ claims that our panel results are influenced because entry/exit events, or changes 

in ATI status, may occur mid-quarter, while we assign a fixed number of carriers and 

a fixed ATI status to the route for the full quarter. As it is described in the DOJ 

Response, this criticism appears to reflect a misunderstanding of how panel analysis 

with fixed effects works.20 This method does not just compare the quarter 

immediately before and immediately following a change in the number of carriers or 

a change in their ATI status, but rather compares all quarters on a given route with, 

for example, two active carriers to all quarters on the route with other numbers of 

active carriers, or all quarters with multiple ATI carriers on the route to all quarters 

without multiple ATI carriers. As such, the particular quarter in which the change 

occurs has relatively little impact on the results. To demonstrate this, we present 

results in Section III-B, below, that drop the quarters surrounding a change in carrier 

count or ATI status (for which the DOJ criticism would imply that our carrier count 

may be wrong). Our conclusions are unaffected. 

 

18 See Jeffrey M. Wooldridge (2002), Econometric Analysis of Cross Section and Panel Data, The 

MIT Press, § 4.4.1. 

19 DOJ oneworld Comments, Appendix B, pp. 10-12. 

20 Id, p. 13. 
9

 Finally, DOJ correctly points out two issues with the data used in our affidavit. First, 

because of DOJ’s transcription error, we did not have an accurate list of the 65 routes 

that DOJ used in its June 26 comments.21 Second, for Quarters 2-4 of 2005, we 

mistakenly excluded some routes from our dataset.22 We correct our data for both of 

these issues below, and none of our conclusions is affected.23

11. Similarly, DOJ raises a number of “implementation issues” with regard to our analysis of 

connecting fares.24 Again, regardless of whether they are considered one at a time or in 

combination, these issues have, at most, a small effect on our results and no effect on any 

of our conclusions. In particular: 

 DOJ clarifies that the study of connecting fares described in its June 26 Comments 

included a fixed effect for each route-year combination (rather than separate fixed 

effects for each route and each year).25 This was not clear to us when we wrote our 

affidavit, and we thought we were following DOJ in using separate route and year 

fixed effects. In Section III-C, below, we switch to route-year fixed effects, with no 

change to any of our conclusions.26

 DOJ suggests that our results should be based on data that include only those ATI 

and code-share tickets marketed by members of a single immune alliance, rather than 

data on all ATI and code-share tickets across all marketing carriers.27 This is a valid 

point, so we provide results in Section III-D, below, based on data that include only 

 

21 Id, fn. 1. 

22 Id, p. 15. 

23 Note that we do not change the market shares that we use as controls for the mix of carriers 

reflected in the average price, despite DOJ’s discussion of these shares on pp. 15-16. This is because, 

contrary to DOJ’s claim, we were not trying to measure the actual market shares on the route. Rather, as 

discussed more fully below, these controls were designed to capture the mix of carriers setting the prices 

observed in the DB1B data (that both we and DOJ rely on), in order to account for differences in their price 

setting practices. As such, our market shares – based on the mix of tickets in the DB1B data – are the 

appropriate variables to use as controls in a regression explaining the average fare observed in the data. 

24 We note that, as described in the parties’ comments, the definitions DOJ uses for “ATI,” 

“codeshare”, and “interline” itineraries do not follow standard industry usage. Nevertheless, we continue to 

adopt them in our analysis in order to show that, even using DOJ’s definitions, ATI fares are lower than 

codeshare fares as long as proper controls are included in the analysis. 

25 DOJ oneworld Comments, Appendix B, pp. 21-22. 

26 Note that, as DOJ points out, route-year fixed effects soak up all route-year variation, so other 

controls – such as the HHI for the route-year – cannot be included. This also means that our new model, 

using route-year fixed effects, addresses any concerns DOJ had about our HHI variable, as raised on p. 29 

of its comments. 

27 DOJ oneworld Comments, Appendix B, pp. 27-28. 
10

tickets for which all marketing carriers are in the same immune alliance. These 

results imply no change in our conclusions.28

 DOJ argues that code-share tickets should be defined to include only alliance codeshare tickets (meaning tickets where all marketing and operating carriers are in the 

same alliance, but some do not have antitrust immunity), not code-share tickets that 

reflect bilateral or other “non-alliance” code share relationships.29 While we believe 

that both types of code-share tickets are informative about the difference between 

ATI and code-share fares, we present results in Section III-D that define code-share 

tickets to include only alliance code shares (with other code share tickets classified as 

interline), with no resulting change in our conclusions. 

 DOJ indicates that its connecting analysis excludes routes from U.S. cities that are 

gateways for European airlines, while our affidavit included such routes. To 

demonstrate that this does not affect our conclusions, we have built a dataset to match 

DOJ’s (to the best of our understanding, with details provided below). As shown in 

Section III-D, running our analyses on this alternative dataset does not change any of 

our conclusions. 

C. Absence of carrier fixed effects as the explanation for differences between 

our findings and DOJ’s findings 

12. Given that the implementation issues raised by DOJ have, at most, a small effect on our 

results and no effect on any of our conclusions, the natural question is what does explain 

the difference between our findings and DOJ’s (with regard to the effect of ATI on nonstop fares and the difference in connecting fares for ATI vs. code-share service). As we 

demonstrate in the tables presented in Sections III-A through III-D, below, the single, 

common answer for both non-stop and connecting fares is that we control for the identity 

of the marketing carrier(s) setting the prices, while DOJ does not. So, apart from the 

numerous topics covered in our Affidavit for which DOJ offers effectively no rebuttal, to 

accept DOJ’s conclusions on the topics it does address would require one to reject the 

 

28 Indeed, as explained above, when we limit the data to only tickets marketed entirely by carriers in 

a single immune alliance, we find that ATI fares are below codeshare fares whether or not we include 

marketing carrier fixed effects. As such, it appears that restricting the set of marketing carriers to the 

relevant set of ATI carriers provides an additional way to control for pricing differences across different 

marketing carriers. 

29 Id, pp. 28-29. 
11

appropriate use of marketing carrier controls and instead accept analyses that mistakenly 

confound the effect of which carrier(s) set prices with the competitive effects of interest. 

13. Not surprisingly, then, DOJ spends a substantial portion of Appendix B arguing that, in 

the current context, the standard econometric practice of including carrier fixed effects, or 

otherwise controlling for the identity of the price-setter(s), is somehow improper. 

However, DOJ’s logic on this topic is fundamentally flawed for reasons it seems to 

recognize in other portions of its Appendix. Specifically, at the bottom of page 17 of 

Appendix B, DOJ clearly and correctly notes that the controls in a regression model 

should include all the things that one wants to “hold constant” when studying the 

competitive effect of interest. So the critical question to guide the decision of whether to 

include carrier controls is whether one wants to hold the identity (or mix) of carriers 

constant, in order to isolate the effect of ATI. As explained below, for both analyses of 

non-stop and connecting fares, the answer is clearly yes – it is critical to control for the 

identity of the carrier(s) setting fares to isolate the competitive effect of interest. 

Non-Stop Fares 

14. In discussing the non-stop fare results, DOJ correctly notes that, if one were studying the 

entry or exit of a specific non-stop competitor on a route, one would not want to hold 

constant that carrier’s share on the route (or, put differently, one would want to account 

for both the competitive effect from a change in the number of competitors and the effect 

of that carrier’s specific pricing practices).30 However, as we have repeatedly pointed 

out, that is not the question at hand for this proceeding. The question at hand is what 

happens when, for a particular route with a particular mix of carriers, one grants ATI to 

two more of those carriers.31 To answer this question, we certainly do want to hold the 

mix of carriers constant in order to see how ATI will affect fares given the set of carriers 

on the route. 

15. To clarify the importance of controlling for the mix of carriers on a route, consider the 

following example. Suppose hypothetically that carriers in immune alliances (“ATI 

 

30 Note that this would not be true if, instead, one wanted to measure the effect of entry or exit by a 

“typical” carrier on the route. In that case, since another “typical” carrier would not change the nature of 

the carriers on the route, one would want to hold constant the mix of carriers by route in order to isolate the 

pure competitive effect of adding or subtracting a carrier. 

31 This is true even if one asserts that the effect of ATI can be measured using the variable for the 

number of carriers (as DOJ did in its June 26 comments) – the relevant measure remains the pure 

competitive effect, holding the mix of carriers constant. 
12

carriers”) tend, on average, to have higher prices than other carriers, not because of any 

competitive effect of ATI, but rather because those carriers tend to have higher costs, 

better service quality, or other differences. Then, if the regression does not include 

controls for the mix of carriers on the route, the ATI effect will capture not only the true 

competitive effect of ATI but also the fact that there are at least two of these highcost/high-price carriers on the route. Only with carrier controls in place does the 

regression hold the mix of carriers fixed and thus isolate the competitive effect of ATI by 

comparing situations where there is or is not an overlap between members of one ATI on 

the route, More generally, whatever the correlation between the presence of multiple 

carriers in the same ATI alliance on a route and the mix of carriers serving the route, 

results generated without carrier controls necessarily confound the true effect of ATI with 

the effect of the carrier mix across routes. Hence, the difference between our non-stop 

results and DOJ’s can be explained simply – our results (showing no effect of ATI with 

carrier controls in place) isolate the true ATI effect, while DOJ’s results confound the 

true ATI effect with the effect of the mix of carriers present on routes with or without an 

ATI overlap.32 

16. In addition to ignoring the importance of controlling for differences in the carrier mix by 

route, DOJ also makes several flawed arguments against our use of carrier shares as 

controls.33 First, it argues that we should not use DB1B shares, which do not include 

foreign carriers, but rather should use some other source (such as MIDT data) that 

includes the foreign carriers as well.34 This entirely misses the point of using the carrier 

shares as controls. The point is to control for the mix of carriers whose fares make up the 

 

32 We note that the coefficients on our carrier share variables are generally large and statistically 

significant, so it is not surprising that failure to include these controls has a large effect on the results. As 

one specific example, consider UA (an immune member of the Star Alliance) and US (a member of the Star 

Alliance without immunity). Even after controlling for competitive conditions on each route, including 

whether there is an ATI overlap, US consistently has substantially lower carrier fixed effects than UA. 

Given that US does not have immunity and UA does, this is the type of pattern than can lead to biased 

conclusions about the effect of ATI overlaps if not properly controlled for. Of course, with many fixed 

effects in the data, one example does not capture the full story. The ultimate proof of the effect is in the 

results, where failure to conduct the proper “experiment,” which requires controls that hold fixed the mix of 

carriers on each route, generates the spurious appearance of higher fares due to competitive effects from 

ATI. 

33 On this point, see W. Tom Whalen (2007), “A panel data analysis of code-sharing, antitrust 

immunity, and open skies treaties in international aviation markets,” Rev Ind Organ, 30:39–61. With 

similarity to our approach, Whalen’s paper includes models of route-level fares using shares to control for 

the mix of carriers on the route. 

34 DOJ oneworld Comments, Appendix B, p. 16. 
13

average price used as the dependent variable in our regression. Since those prices are 

drawn from DB1B data, it is essential that we control for the mix of carriers reflected in 

the DB1B data, not the shares from some other data source. Second, DOJ claims that 

market shares are endogenous because “unobserved factors in the model that affect 

market shares on a route also affect prices.”35 If true, this in essence means that the 

carrier shares would “proxy” for some of those “unobservable factors,” which would 

enhance the accuracy of the findings since a goal of the analysis is to include control 

variables that reflect the impacts of such unobservable factors, so that the ATI and carrier 

count variables measure only the competitive effects of interest, holding all else equal.36 

Finally, DOJ contends that the correlation between the market shares and the carrier 

counts creates a “co-linearity” problem.37 While it is true that there may be correlation 

between our carrier share controls and the carrier counts, this is not a problem, but rather, 

as explained above, is the reason for including the carrier controls, so that the carrier 

count variables do not mistakenly pick up the effect on fares of the mix of carriers on the 

route.38

Connecting Fares 

17. For the connecting analysis, the goal is not to measure the effect of different prices set by 

different marketing carriers, but rather to measure the effect of changing the relationship 

among a fixed set of carriers (to include immunity). The need to control for the identity 

of the marketing carrier to achieve this goal is clear from DOJ’s own discussion. In 

discussing the analysis of connecting fares in its Comments, DOJ spends multiple pages 

 

35 Id, p. 16-17. 

36 We also note that this is not a situation where the regression has the price of a single carrier on the 

left-hand- side and its share on the right-hand side, which may create endogeneity due to reverse causality 

(if prices affect shares). Instead, the left-hand-side variable is the average fare on the route, and the share 

variables simply measure the mix of different carriers making up that average fare, with a separate variable 

controlling for the number of carriers (and ATI overlaps). Note that the share variables in this case always 

add up to 100, with the variation coming from the mix of carriers making up that 100 percent. 

37 DOJ oneworld Comments, Appendix B, p. 17. 

38 DOJ also notes that such correlation or co-linearity tends to increase the standard errors of the 

variables making “it appear that the results are not statistically significant.” While it is true that including 

correlated right hand side variables increases the standard errors of the associated coefficients, the 

implication that the resulting insignificance of results is somehow incorrect or illusory is nonsensical. The 

higher standard errors correctly reflect the fact that, to measure the competitive effects of interest, one can 

only rely on independent variation in the number of carriers after controlling for the mix of carriers on the 

route. If including these controls renders the carrier count or ATI coefficients statistically insignificant, this 

correctly indicates that the data do not provide support for a hypothesis that these variables affect fares after 

controlling for other relevant factors. 
14

explaining that “the average fare difference between the vast majority of code-share and 

ATI tickets sold by an alliance depends on the variables denoting the ticket type and the 

marketing carriers.”39 We agree. However, DOJ seems to miss the import of this 

statement. The fact that the fare difference depends on both ticket type and the identity 

of the marketing carrier presents a substantial econometric challenge. If (like DOJ) one 

does not include marketing-carrier fixed effects, then the measured difference between 

ATI and code-share (or other service types) fares will reflect the combination of the true 

effect of ATI (through elimination of double marginalization) and differences in the price 

setting practices of different marketing carriers.40 For example, if the carriers in immune 

alliances are also carriers that tend to set higher prices – for reasons having nothing to do 

with the effects of ATI but rather having to do with the cost, quality, or other 

characteristics of those carriers – then failure to control for the price setting marketing 

carrier may make it appear that ATI generates higher fares simply due to the identity of 

the price-setter, not to due to any effect of ATI on the prices charged by a given carrier.41 

18. The appropriate solution to this econometric challenge is not to leave out the control for 

marketing carriers and thereby settle for estimates that confound the ATI effect with the 

effect of variation in the price setting practices of different marketing carriers. Rather the 

appropriate solution is to control explicitly for the marketing carrier(s) on the ticket, and 

then to study differences in prices based on the relationships among the carriers serving 

 

39 DOJ oneworld Comments, Appendix B, p. 26-27. 

40 DOJ does include carrier fixed effects in their analysis. However, these carrier fixed effects are 

based on the U.S. carrier reporting the ticket, regardless of whether that carrier actually markets the ticket. 

(DOJ oneworld Comments, Appendix A, pp. 4-5.) Because the U.S. reporting carrier need not be the 

marketing carrier on the route, such controls do not accomplish the goal of controlling for pricing 

differences across marketing carriers, and the U.S. carrier may only operate a small portion of the route. 

For example, there is an itinerary in the data from FLL (Fort Lauderdale) to OTP (Bucharest), through CLT 

(Charlotte) and MUC (Munich). The first leg is operated by US, but marketed by LH. All subsequent legs 

are both operated and marketed by LH. In this example, the major US carrier is US, while the marketing 

carrier is LH (which, in our setup, receives the Star fixed effect, as an immunized member of the Star 

alliance). US accounts for only 11 percent of the total distance on this itinerary and does not market the 

ticket. 

41 We note that, in results described below, when we limit the analysis on connecting routes 

described to only those itineraries marketed by an ATI alliance carrier, we reach the same conclusion 

regardless of whether we do or do not include marketing carrier fixed effects. This indicates that codeshare 

fares charged by marketing carrier(s) not in an ATI alliance drive the DOJ’s results. But these non-alliance 

codeshare fares (for which there are not ATI fares set by the same marketing carrier(s) to compare to) are 

not directly relevant to the question of how immunity affects the fares charged by a given set of carriers. 

Our use of marketing carrier fixed effects controls for differences in the fares charged by carriers not in 

ATI alliances, thus addressing this problem. 
15

that itinerary. This is precisely what we do in our analysis of connecting fares.42 Our 

results demonstrate that there is sufficient variation in the data to generate statistically 

significant results in this way, and that when one properly controls for the identity of the 

marketing carrier, one restores the logical and standard result that ATI fares are 

significantly lower than code share fares. 

19. The biases created by the DOJ approach are reflected in its counterintuitive findings on 

connecting fares. In particular, DOJ consistently finds that, for connecting itineraries, 

ATI fares are significantly higher than code-share fares and often finds that even online 

fares are significantly higher than code-share fares (see Tables 4 and 6 of DOJ’s 

December 21, 2009 Comments). While DOJ has argued that immunity is not necessary 

to achieve double marginalization savings, we have seen no theory from DOJ that would 

explain why a connecting itinerary served by a set of code-share partners would have 

lower fares than the same connecting itinerary served by more-tightly integrated ATI 

partners, let alone by a single carrier providing online service.43 In contrast, our results, 

with appropriate controls in place, generate the ordering that is consistent with economic 

theory and the previous literature, with online and ATI fares lower than code-share fares, 

which are in turn lower than interline fares.44 

III. Our Substantive Econometric Results are Unaffected by DOJ’s Response 

20. In this section, we provide detailed tables supporting the conclusions described in Section 

II. In particular, for our cross-sectional results on non-stop fares (Table 5 of our original 

affidavit), we present an updated Table 5R. For our panel results on non-stop fares 

(Table 4 of our original affidavit), we present an updated Table 4R. In each case, we 

begin by showing that, regardless of whether they are considered one at a time or in 

combination, the various implementation issues raised by DOJ have, at most, a small 

 

42 As explained in our Affidavit, if the marketing carrier(s) are in an immune alliance, we include a 

fixed effect for that alliance. Otherwise, the fixed effect defines the full set of carriers marketing the ticket, 

with a unique fixed effect for each combination of carriers seen in the data. 

43 One possible explanation would be that online and ATI service is higher quality than code-share 

service, but that would also demonstrate the benefits from ATI. 

44 See, e.g., Jan Brueckner and W. Tom Whalen (2000), “The Price Effects of International 

Alliances,” Journal of Law and Economics, 43, 503-545; Jan Brueckner (2003), “International Airfares in 

the Age of Alliances,” Review of Economics and Statistics, 85, 105-118; W. Tom Whalen (2007), “A panel 

data analysis of code-sharing, antitrust immunity, and open skies treaties in international aviation markets,” 

Review of Industrial Organization, 30:39-61. 
16

effect on our results and no effect on any of our conclusions.45 Next, we show that 

changing the specification of the number of carriers to match DOJ’s specification (with 

carriers in an immune alliance counted as a single carrier), while including a dummy 

variable for the presence of two or more immunized members of the same alliance on the 

route, provides affirmative evidence that an ATI overlap is not the same as a reduction in 

the number of carriers and does not lead to higher fares. Finally, we show that only by 

excluding carrier fixed effects can we generate the DOJ result that ATI overlaps lead to 

higher non-stop fares, although, even without carrier fixed effects, the cross-sectional 

results indicate that the ATI effect is significantly different from the effect of a change in 

the number of carriers. 

21. After discussing our results on non-stop fares, we turn to our results on benefits to 

connecting traffic from ATI (and the loss of benefits when segments are carved-out from 

immunity). Because DOJ offered no substantive critique of our results on these benefits 

(contained in Table 9 in our original Affidavit), we do not present an updated Table 9. 

Rather we explain why DOJ’s arguments that our results are unreliable are without merit. 

We then present 95% confidence intervals for our estimates of consumer benefits, to 

show that even using the low end of the confidence interval, the benefit to connecting 

passengers from ATI, as well as the harm from carve-outs, is substantial. 

22. Given the lack of evidence for higher non-stop fares from ATI, along with the clear 

evidence of benefits to connecting passengers from ATI, which are substantially 

undermined if the otherwise ATI itinerary uses a carved-out segment, the case for 

granting antitrust immunity to the applicants (without imposing carve-outs) is clear 

regardless of whether ATI reduces connecting fares. Nevertheless, we also present Table 

8R as an updated version of Table 8, which contained the main results on connecting fare 

effects in our original Affidavit. In this updated table, we first show that addressing 

DOJ’s implementation issues – by using combined route-year fixed effects, including 

only “alliance” code-share itineraries as code-share with all others classified as interline, 

and modifying those data to match DOJ’s data by excluding routes from US cities that 

are gateways for European airlines – has, at most, a small effect on our results and no 

effect on our conclusions. Second, we show that, if in addition to adjusting for DOJ’s 

implementation issues, we also add additional controls for variation across segments – 

 

45 Note that these issues were generally raised by DOJ in the context of our panel model, but we 

apply the relevant comments to our cross-sectional model as well. 
17

specifically fixed effects for the “midpoint” airport(s) that the itinerary flows through – 

our conclusions are unchanged. Third, we show that if we take the additional step of 

following DOJ’s suggestion to restrict our analysis to only tickets marketed entirely by 

members of one ATI alliance, our conclusions remain unchanged. Finally, we show that 

the only change which generates the DOJ’s pattern of fares (with code-share fares below 

ATI and online fares) is to drop the marketing carrier fixed effects and thus confound the 

effect of the identity of the price-setting marketing carrier with the effect of ATI. 

A. Updated cross-sectional results on non-stop fares

23. Table 5 of our original Affidavit presented results from a cross-sectional model (i.e., 

without route fixed effects) of the effect of ATI on non-stop fares, which made five main 

changes to the DOJ specification. First, it employed additional quarters of data, from 

Q1:2005-Q4:2008, rather than the needlessly limited (Q3:2008 or all of 2008) time 

period that DOJ relies on. Second, it included only routes with three or fewer carriers 

(regardless of whether or not they are in an immune alliance) to focus attention on those 

routes most likely to show an effect from ATI overlaps on non-stop fares if one exists. 

Third, it included a more flexible “five-part spline” to control for the effect of distance on 

fares. None of these three changes seems controversial to us and we have seen no 

criticism of any of them from DOJ. The fourth change was to add a separate dummy 

variable for the presence of an ATI overlap on the route, in order to address the policyrelevant question concerning the price effect of ATI, an approach which DOJ now seems 

to have adopted.46 As noted above, DOJ’s definition of the number of carriers on a route 

is different from ours – counting carriers in an alliance as one carrier, while we count 

them as separate carriers – but as shown below, this has no effect on our conclusions. As 

such, only the final change – to include carrier controls (specifically, the share of all 

tickets in the pricing data accounted for by each carrier) – remains the subject of debate. 

However, as explained above, this change is critical if we are appropriately to separate 

the true effect of ATI from the effect of variation in the identity of carriers present on 

routes that do or do not have an ATI overlap. 

 

46 DOJ defines its ATI variable as the number of additional carriers (above its base carrier count 

which treats all firms in an ATI as a single carrier) rather than a dummy variable for the presence of an ATI 

overlap. However, this specification imposes the assumption that a third ATI carrier would have the same 

incremental effect as a second ATI carrier, for which we see no basis. So, instead, we include a dummy 

variable for the presence of an ATI overlap as a simple test of whether such an overlap has any effect on 

fares. 
18

24. Table 5R presents our original cross-sectional results as its first column and then goes on 

to present the results of a series of modifications to that specification, each of which 

addresses DOJ comments and confirms our conclusions. 

Table 5R 

Price Effects from Loss of Nonstop Competition on Transatlantic Routes

The Dependant Variable is ln(Average Fare)

Affidavit (1) (2) (3) (4)

0.0043 -0.0047 -0.0125 -0.0534** -0.0337*

(0.0220) (0.0214) (0.0174) (0.0184) (0.0138)

-0.0357 -0.0250 -0.0730**

(0.0200) (0.0167) (0.0122)

-0.0113 -0.0124 -0.0130

(0.0178) (0.0175) (0.0095)

-0.0675** -0.0941**

(0.0109) (0.0119)

-0.0122 -0.0161

(0.0097) (0.0099)

-0.0026 -0.0051 -0.0032 -0.0034 -0.0086**

(0.0035) (0.0034) (0.0023) (0.0023) (0.0023)

0.3833** 0.3457** 0.4803** 0.4775** 0.5054**

(0.0831) (0.0832) (0.0376) (0.0375) (0.0343)

0.5355** 0.5746** 0.4210** 0.4410** 0.4549**

(0.1170) (0.1163) (0.0583) (0.0590) (0.0606)

0.3946** 0.1255 0.2866** 0.2784** 0.1716**

(0.0781) (0.0743) (0.0585) (0.0584) (0.0597)

0.0899 0.1997** 0.0849* 0.0853* 0.0070

(0.0565) (0.0704) (0.0402) (0.0402) (0.0410)

-0.0299 -0.1007 0.0191 0.0087 0.1359**

(0.0792) (0.1056) (0.0304) (0.0308) (0.0272)

4.8635** 5.3756** 4.6290** 4.7032** 4.0572**

(0.4405) (0.4887) (0.2634) (0.2578) (0.1178)

Observations 781 863 863 863 863

R^2 0.691 0.693 0.846 0.846 0.789

Weighted No No Yes Yes Yes

Carrier Fixed Effects Yes Yes Yes Yes No

Route Fixed Effects No No No No No

Year-Quarter Fixed Effects Yes Yes Yes Yes Yes

Adjusts for DOJ Implementation Issues No Yes Yes Yes Yes

Sources:

 DB1B, OAG; 1Q2005-4Q2008

Notes:

Robust standard errors in parentheses

** p<0.01, * p<0.05

Data include route-quarters with 3 or fewer carriers

 Weighted regressions weight by passengers using Stata's analytic weights

---

Number of Nonstop Competitors (Carriers in 

same immunized alliance treated as one)

>= 1 ---

>= 2

>= 3

--- ---

Explanatory Variables

>= 1

>= 2

>= 3

---

Number of Nonstop Competitors (Each 

carrier counted separately)

ATI

Mean of City Populations in the Route

Constant Term

Mileage on the Route - Spline 1

Mileage on the Route - Spline 2

Mileage on the Route - Spline 3

Mileage on the Route - Spline 4

Mileage on the Route - Spline 5
19

25. In each column, the key variable to consider is the ATI dummy in the first row, which 

measures the effect of an ATI overlap on fares. In the base model from our Affidavit, we 

found that the ATI effect was almost exactly zero and clearly statistically insignificant. 

Columns (1) – (2) of the table implement the following changes, each of which confirms 

this finding: 

 Column (1) modifies our dataset by precisely matching the 65 routes used by DOJ 

and including the routes that we inadvertently omitted for Quarters 2-4 of 2005. In 

this case, the measured effect of an ATI overlap on fares actually becomes negative, 

although still very close to zero and insignificant. 

 Column (2) modifies column (1) by weighting each observation in the regression by 

the number of tickets used to compute the average fare, in order to account for the 

heteroskedasticity induced by different sample sizes on each route-quarter. The ATI 

effect remains negative and insignificant. 

Together, columns (1) and (2) show that, whether they are considered one at a time or in 

combination, the implementation issues raised by DOJ have, at most, a small effect on 

our results and no effect on our conclusions. 

26. With these changes to address the implementation issues raised by DOJ in place, Column 

(3) then adopts the DOJ method for counting carriers, with carriers in a single ATI 

counted as one.47 While DOJ makes it seem that this is a starkly different method from 

ours (see footnote 11 of Appendix B of the DOJ oneworld Comments), both methods 

actually allow for separate measurement of the effect of the number of carriers from the 

effect of their ATI status, only changing the interpretation of the ATI dummy variable. 

In our method, the carrier counts “act” as though ATI does not increase non-stop fares, so 

if it actually does, this will be reflected in a significant, positive ATI coefficient. As seen 

in our affidavit and columns (1) – (2) of Table 5R, there is no evidence for such an ATI 

effect. In contrast, in the DOJ approach, the carrier counts “act” as if ATI has the same, 

positive fare effect as a reduction in the number of carriers. If this is wrong, this will be 

 

47 We note that DOJ appears to ignore carve-outs when it counts carriers. That is, it treats immunized 

carriers in the same alliance as a single carrier even on routes that are carved out of the relevant grant of 

immunity. This approach appears to be inconsistent with DOJ’s view of carve-outs, which is that they 

preserve competition between ATI partners on specific routes. In any runs in which we count immunized 

carriers of the same alliance as one, we count those carriers separately for any routes that have been carved 

out of the ATI. 
20

reflected in a significant, negative ATI effect, to (at least partially) “undo” the fare 

increase that the carrier count variables implicitly apply to ATI overlaps. 

27. As seen in Column (3), when specifying our cross-sectional model with DOJ-style carrier 

counts, the ATI effect is, in fact, negative and significant. This provides affirmative 

evidence that observed data rejects the hypothesis embedded in the DOJ carrier counts – 

that ATI has the same effect as an actual reduction in the carrier count. Indeed the ATI 

coefficient of -0.0534 is nearly as large as (and not statistically distinguishable from) the 

measured 2:1 effect (0.0675). This means that the ATI variable nearly fully “undoes” the 

2:1 fare effect implied by the carrier counts, meaning that this DOJ-style specification 

provides affirmative support for the fact that ATI overlaps do not increase fares. 

28. Finally, Column (4) shows that when we exclude carrier controls, we obtain a result 

similar to DOJ’s, as the coefficient on the ATI variable becomes significantly smaller 

than that on the 2:1 effect. Comparing columns (3) and (4) – across which the only 

difference is the presence or absence of carrier controls – shows that it is only by 

confounding ATI effects with the carrier-mix effects that we generate the significant gap 

between the ATI coefficient and the 2:1 effect that is required for there to be a significant 

ATI effect on non-stop fares (when using DOJ-style carrier counts). However, even here, 

the ATI effect remains significant and negative, providing affirmative evidence that the 

effect of an ATI overlap is not the same as a reduction in the number of carriers. 

B. Updated panel results on non-stop fares

29. In our original Affidavit, we also included a panel version of the non-stop fare analysis, 

which just replaced the route-level controls (distance and population) with route-level 

fixed effects,48 which fully control for all time-invariant cross-route variation that might 

otherwise be confounded with ATI fare effects.49 While these more complete controls 

 

48 We allowed the route fixed effects to vary by quarter in order to control for any route-specific 

seasonal variation in economic conditions. 

49 On pp. 14-15 of the DOJ oneworld Comments, DOJ argues that failure to control for routespecific changes in economic conditions may bias our panel results. While it is theoretically possible that 

route-specific changes could coincide with the timing of entry or exit by carriers (or new ATI overlaps), 

this issue seems small compared to the corresponding issue for cross-sectional analysis – that any of the 

myriad factors that differ across routes could influence both the number of carriers on the route and the 

average fare on the route, thus biasing results. A panel analysis controls for all this cross-route variation 

via route fixed effects thus mitigating this problem. We also note that DOJ’s claim that failure to control 

for variation in economic conditions over time necessarily biases estimated fare effects down is simply 

wrong. For example, in contrast to the demand-based example that DOJ gives, suppose there is an increase 

in costs on a particular route that leads to both exit of some carriers and to higher fares (or in a crosssectional setting, that some routes are more expensive to serve and therefore have fewer carriers and higher 
21

are appealing – and panel analysis has the advantage of actually measuring the effect of 

changes in ATI status on given routes, the relevant policy question for this proceeding – 

they come at a cost of reducing the variation used to identify ATI effects (as we 

acknowledged on p. 11 of our Affidavit). Given these strengths and weaknesses of both 

panel and cross-sectional approaches, the ideal situation is for the two approaches to yield 

the same conclusion. Fortunately, that situation holds here, as both types of analysis 

demonstrate the lack of ATI effects on non-stop fares. 

30. Table 4R presents our original panel results (originally included in Table 4 of our 

Affidavit) as its first column and then goes on to present the results from a series of 

modifications to that specification, each of which confirms our conclusions, as detailed 

below. 

Table 4R 

31. As with Table 5R, in each column, the key variable to consider is the ATI dummy in the 

first row, which measures the effect of an ATI overlap on fares. In the base model from 

our Affidavit, we found that the effect of an ATI overlap on non-stop fares was almost 

exactly zero (actually slightly negative) and clearly statistically insignificant. Columns 

 fares). In that case, failure to control for the cost variation will lead to an upward bias in estimated fare 

effects. So there is no a priori way to determine the direction of any bias. 

Price Effects from Loss of Nonstop Competition on Transatlantic Routes

The Dependant Variable is ln(Average Fare)

Affidavit (1) (2) (3) (4) (5) (6) (7) (8) (9)

-0.0071 -0.0277 -0.0271 -0.0393 -0.0442 -0.0337 -0.0514 -0.0414 -0.0626** -0.0218

(0.0620) (0.0573) (0.0206) (0.0369) (0.0383) (0.0343) (0.0387) (0.0534) (0.0221) (0.0194)

-0.0537 -0.0544 -0.0452** -0.0371* -0.0564** -0.0437* -0.0126 -0.1152

(0.0278) (0.0280) (0.0153) (0.0188) (0.0187) (0.0200) (0.0585) (0.0660)

-0.0739** -0.0738** -0.0286 -0.0252 -0.0741* -0.0585 -0.0576 -0.0335

(0.0214) (0.0228) (0.0159) (0.0303) (0.0288) (0.0303) (0.0710) (0.0770)

-0.0519** -0.0503**

(0.0156) (0.0139)

-0.0255 -0.0400**

(0.0153) (0.0149)

6.3017** 7.0754** 6.6575** 6.7811** 6.8862** 6.8218** 7.3834** 7.1891** 6.6948** 6.1606**

(0.2688) (0.3421) (0.2476) (0.3459) (0.3578) (0.3395) (0.3342) (0.4124) (0.2537) (0.1019)

Observations 781 863 863 727 742 730 571 607 863 863

R^2 0.864 0.861 0.954 0.952 0.951 0.952 0.958 0.956 0.954 0.950

Threshold (Flights per Quarter) 60 60 60 60 20 40 80 70 (50) 60 60

Weighted No No Yes Yes Yes Yes Yes Yes Yes Yes

Drops Quarter of Change No No No Yes Yes Yes Yes Yes No No

Carrier Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes No

Route-Quarter Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year-Quarter Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Adjusts for DOJ Implementation Issues No Yes Yes Yes Yes Yes Yes Yes Yes Yes

Sources:

 DB1B, OAG; 1Q2005-4Q2008

Notes:

Robust standard errors in parentheses

** p<0.01, * p<0.05

Data include route-quarters with 3 or fewer carriers

 Weighted regressions weight by passengers using Stata's analytic weights

ATI

Constant Term

---

Explanatory Variables

Number of Nonstop Competitors (Each 

carrier counted separately)

>= 1 ---

>= 2

>= 3

--- --- ---

Number of Nonstop Competitors (Carriers in 

same immunized alliance treated as one)

>= 1

>= 2

>= 3

--- ---

--- --- ---
22

(1) - (2) of the table implement the following changes, each of which confirms this 

finding: 

 Column (1) modifies our dataset by precisely matching the 65 routes used by DOJ 

and including the routes that we inadvertently omitted for Quarters 2-4 of 2005. The 

estimated effect of an ATI overlap on fares remains negative and insignificant. 

 Column (2) modifies column (1) by weighting each observation in the regression by 

the number of tickets used to compute the average fare, in order to account for the 

heteroskedasicity induced by different sample sizes on each route-quarter (including 

the effect of route-quarters that have particularly small sample sizes due to the 

predominance of foreign carriers that generally do not report fares to DB1B). The 

ATI effect remains negative and insignificant. 

Because each of these changes – updating the data and weighting routes by the number of 

observations used to compute the average fare – represents a sensible advance over our 

previous model, we treat Column (2) are our “new base” model and apply all additional 

changes to this model. 

32. Columns (3) – (6) build on the new base model by addressing DOJ’s comments regarding 

how our model identifies a change in the number of carriers (or the presence of an ATI 

overlap) on the routes. 

 Column (3) addresses the DOJ criticism that our measured fare effects are biased 

downward because we specify a fixed number of carriers (and fixed ATI dummy) for 

the entire quarter, even when the variable changes mid-quarter. To deal with this, we 

drop the quarters surrounding a change in the number of carriers or in the ATI 

dummy. The estimated effect of an ATI overlap on fares becomes even more 

negative, although still insignificant. 

 Columns (4) – (6) build on column (3) by considering different cutoffs for the 

number of flights that a carrier must operate in a quarter to be counted as serving the 

route – replacing 60 with 20, 40, and 80 respectively. The measured ATI effect 

remains negative and insignificant in each case. 

 Column (7) presents an alternative approach to the issue of counting entry/exit when 

carriers move just above or below 60 flights per quarter. In this specification, we 

allow for the possibility that when there is a carrier with between 50 and 70 flights 

per quarter, it may be not entirely clear how to classify that carrier and thus there may 
23

be no clear measure of the number of carriers serving the route. So we drop routequarters with any carrier between 50 and 70 flights as “indeterminate,” which 

effectively requires a carrier to go from below 50 flights to above 70 to count as an 

entry (and vice versa to count as an exit). The estimated ATI effect remains negative 

and insignificant. 

Together, columns (1) – (7) demonstrate that, regardless of whether they are considered 

one at a time or in combination, the implementation issues raised by DOJ have, at most, a 

small effect on our results and no effect on our conclusions. 

33. Column (8) modifies our new base model by shifting to the DOJ method for counting 

carriers, with carriers in a single ATI counted as one carrier. As noted above, in this 

specification, if ATI overlaps do not actually increase fares in the same way as true 

reductions in carrier counts, this will be reflected in a significant, negative ATI effect, to 

“undo” the fare increase that the carrier count variables implicitly apply to the ATI 

overlaps. As seen in Column (8), when specifying our panel model with DOJ-style carrier 

counts, the ATI effect is, in fact, negative and significant. This provides affirmative 

evidence that observed data reject the hypothesis that an ATI overlap has the same effect 

as an actual reduction in the carrier count. Indeed, the ATI coefficient of -0.0626 is 

actually larger than (but not statistically distinguishable from) the measured 2:1 fare 

effect (0.0519). In other words, the ATI variable fully “undoes” the 2:1 fare effect 

implied by the carrier counts – meaning that this DOJ-style specification provides 

affirmative support for the fact that ATI overlaps do not increase fares

34. Finally, Column (9) shows that we can generate results similar to Table 3 from the DOJ 

oneworld Comments – including an insignificant ATI coefficient of roughly -0.02 (using 

DOJ-style carrier counts) – if we drop the carrier controls. Comparing columns (8) and 

(9), across which the only difference is the presence or absence of carrier controls, shows 

that it is only by confounding the true ATI effects with the effect of the differing mix of 

carriers by route that we can generate the DOJ results on fare increases from ATI 

overlaps. 

C. Results on quality benefits from ATI and corresponding harm from carve-outs 

35. DOJ’s only response to our quantification of the consumer benefits from higher-quality 

ATI service – as measured by the consumer preference for ATI itineraries revealed in the 

data (holding fares constant) – is to assert that our results are not “plausible.” DOJ 
24

provides no evidence in support of this assertion and no indication of what level of 

consumer benefits it would consider plausible, how it would know what was plausible, or 

why the plausible number should not be that revealed by consumer choices. Our results 

show that, in the data, after controlling for fare differences, substantially more consumers 

choose available online or ATI options than choose code-share or interline (or ATI carveout) options and that the extent of the higher online/ATI share is equivalent to that 

associated with a substantial fare reduction. 

36. DOJ also claims that the fact that, on average (with no controls), fares for online, codeshare and interline itineraries are “similar” is “sharply at odds” with our results.50 This is 

incorrect. Similar fares for the three types of service would only be at odds with our 

findings if those similar fares were not also associated with substantially higher shares for 

online and ATI service. Instead, what our model shows is that, holding fares constant, 

substantially more consumers choose online or ATI options. Indeed the presence of 

higher shares given similar prices is the fundamental basis for our conclusions. Further, 

there is nothing inconsistent about online and ATI itineraries having fares that are similar 

to fares for interline service (although somewhat lower with controls in place, as shown 

in our Affidavit and below) even though their quality is substantially higher. Instead, 

given that online and ATI itineraries both limit or eliminate double marginalization 

(lowering prices) and offer higher quality (which may lead to higher prices), there is no 

clear theoretical prediction about the relationship between these prices. However, the 

full set of empirical evidence we present shows that ATI itineraries actually have fares 

that are somewhat below code-share (or interline) itineraries, with shares that are 

substantially higher (holding fares fixed), reflecting both cost and quality advantages 

from ATI service. 

37. It is also important to note that our results show that the quality effects of ATI are 

substantially undermined when the otherwise ATI itinerary makes use of a carved-out 

segment, a point that DOJ also does not refute. 

38. Finally, to further document the clear evidence for consumer benefits from ATI, which 

are undermined by carve-outs, Table 9R presents the 95% confidence interval for the 

consumer benefits presented in our affidavit. The “point estimate” for the consumer 

benefits from ATI service relative to code-share service in our affidavit (which represents 

 

50 Id, p. 32. 
25

the size of the benefits that is “most likely” according to the estimates) was $175 (per 

one-way ticket) which is 28% of the average fare in the data. However, as for any 

statistical estimate, there is a confidence interval around this estimate. Even if one 

conservatively uses the lower bound of this interval, the benefit from ATI service relative 

to code-share service remains $94 (15% of the average fare in the data). Similarly, our 

point estimate of the benefit from full ATI service relative to carve-out service (and thus 

the harm from carve-outs) is $67 (11% of the average fare in the data), but even if one 

conservatively relies on the lower bound of the confidence interval, the harm from carveouts is $31 (5% of the average fare in the data). 

Table 9R 

D. Updated results on connecting fares 

39. Given the lack of evidence for competitive harm from ATI service and the clear evidence 

of consumer benefits from ATI and harm from carve-outs, the question of whether ATI 

service generates lower connecting fares than code-share service is of somewhat 

diminished importance. Nevertheless, as we found in our affidavit and continue to find in 

additional runs, with proper controls in place, our results demonstrate that ATI service 

has lower connecting fares than code-share service, with this advantage undermined or 

eliminated for otherwise ATI itineraries making use of a carved-out segment. 

40. Table 8R presents our results on connecting fares, with the first column replicating the 

results from our affidavit and the subsequent columns addressing various issues raised by 

DOJ. 

95% Confidence Interval

Estimate Lower Bound Upper Bound

Valuation ($) of ATI service relative to codeshare $174.57 $94.06 $255.07

Valuation ($) of ATI service relative to ATI (Carve-Out) $67.14 $30.79 $103.49

Sources:

 DB1B, OAG; 1Q2005-4Q2008

Notes:

 Confidence intervals estimated using the Delta method

Based on Table 9 of September 8, 2009 Affidavit
26

Table 8R 

41. While most of the implementation issues that DOJ raised with regard to this specification 

were intentional and appropriate choices in estimation, rather than errors, Column (1) 

modifies our analysis to adjust for these issues, in order to show that these changes have, 

at most, a small effect on our results and no effect on our conclusions. In particular, 

following DOJ’s comments, we include combined route-year fixed effects (eliminating 

the need for any route-year level control variables), include only code-shares between 

alliance partners in our code-share category (with all other code-shares classified as 

interline), and exclude routes from U.S. cities that are gateways for European airlines.51 

 

51 In building this new dataset, we have attempted to match closely the data used by DOJ in the DOJ 

Star Comments and the DOJ oneworld Comments based on the description in the DOJ oneworld 

Comments, Appendix A, p. 4. In particular, we focus on city-pairs originating in the U.S. and arriving in 

Price Effects of Service Type on Transatlantic Routes

The Dependant Variable is ln(Fare)

Affidavit (1) (2) (3) (4)

-0.0533** -0.0355** -0.0325** -0.0403** -0.0282*

(0.0061) (0.0101) (0.0112) (0.0130) (0.0112)

-0.0273** -0.0233* -0.0260* -0.0741** -0.0253*

(0.0056) (0.0110) (0.0123) (0.0146) (0.0123)

0.0131* 0.0425** 0.0627** 0.0717** -0.0135

(0.0063) (0.0131) (0.0142) (0.0239) (0.0133)

0.0384** 0.1521** 0.1447** 0.0161 0.0402**

(0.0090) (0.0159) (0.0167) (0.0254) (0.0126)

-0.1109** -0.0505** -0.0381** -0.0486** -0.0349**

(0.0045) (0.0043) (0.0057) (0.0090) (0.0057)

0.0000 -0.0000* -0.0000** -0.0000** -0.0000**

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

-0.0024

(0.0072)

0.0021

(0.0068)

0.0663**

(0.0044)

0.0000

(0.0000)

0.0000

(0.0000)

0.0000

(0.0000)

0.0015*

(0.0006)

6.3068** 7.4014** 7.4814** 7.6012** 7.2922**

(0.2281) (0.0418) (0.0508) (0.0788) (0.0530)

Observations 164539 112736 112736 60895 112736

R^2 0.042 0.015 0.018 0.011 0.018

# of Route-Years 9993 22646 22646 14281 22646

Sample All All All ATI All

Carrier Fixed Effects Marketing Carrier(s) Marketing Carrier(s) Marketing Carrier(s) Marketing Carrier(s) US Carrier

Through Airport Fixed Effects No No Yes Yes Yes

Year Fixed Effects Yes No No No No

Route Fixed Effects Yes No No No No

Route-Year Fixed Effects No Yes Yes Yes Yes

Adjusts for DOJ Implementation Issues No Yes Yes Yes Yes

Sources:

 DB1B; 2005-2008 (3rd Quarter)

Notes:

Robust standard errors in parentheses

** p<0.01, * p<0.05

Coupons and mileage are computed as passenger-weighted averages for each route-year-carrier

 Analysis limited to coach-class tickets

Interline

Codeshare

Explanatory Variables

Service Type

Online

ATI

ATI carve-out --- --- --- --- ---

Coupons

Mileage on the Route

HHI OA

HHI Interline

Open Sky

Population of US City

Income of US City

Population of EU City

Income of EU City

Constant Term
27

With these changes in place, the difference between fares for ATI itineraries and codeshare itineraries increases, thus bolstering our conclusion that ATI fares are lower than 

code-share fares. 

42. DOJ also argued that our results on ATI carve-out could be driven by the lack of other 

controls for segment level differences. While we note that the absence of important 

segment level controls could affect all of DOJ’s results as well – and that DOJ did not 

suggest any specific, omitted controls – column (2) adds controls for the “midpoint” 

airport(s) through which the itinerary flows (in addition to the changes from column 

(1)).52 This further strengthens our findings on ATI vs. code-share fares. 

43. Finally, DOJ argued that we should not include all tickets in our analysis but rather 

should include only those tickets marketed entirely by members of a single immune 

alliance. To this end, column (3) builds on the results from column (2) by including only 

tickets on which all marketers are in a single immune alliance. This substantially 

increases the measured gap between ATI and code share fares (relative to the gap in 

column (2) which is itself larger than the gap presented in our Affidavit). Columns (1) 

through (3) thus demonstrate that, regardless of whether they are considered one at a time 

or in combination, the implementation issues raised by DOJ have, at most, a small effect 

on our results and no effect on our conclusions on connecting fares. 

44. As a last step, in column (4), we demonstrate that by eliminating the control for the 

marketing carrier(s), we generate results similar to DOJ’s results, with code-share fares 

 Europe. We exclude routes originating in U.S. cities where foreign carriers operate more than 60 transAtlantic non-stop flights in a quarter and routes in which there are more than 60 nonstop flights in a 

quarter. We keep tickets representing round-trip travel with no more than six total segments and no more 

than three in either direction. We drop tickets with fares below $100, at or above $9999, or deemed “noncredible” by DOT. We also follow DOJ in dropping observations with two or more major US carriers. In 

our analysis, we focus on coach (“X”)-class tickets. As did DOJ, we define observations at the ticket level 

rather than aggregating to the route-carrier level. Overall, our dataset contains 112,736 observations 

compared to 126,520 in DOJ’s dataset. In our dataset, 68.3% of the tickets are online (compared to 67.8% 

reported by DOJ), 7.2% are non-immunized alliance tickets (compared to 7.4%), 17.9% are immunized 

alliance tickets (compared to 17.4%), and 6.5% are interline tickets (compared to 7.4%). In addition, 

relative to the data used in our Affidavit, we have also updated some of our mappings between regional 

carriers and their network-carrier partners. 

52 Specifically, we included separate fixed effects indicating whether the first midpoint airport was 

any of the following: ATL, CVG, DFW, DEN, DTW, IAD, IAH, LAX, MEM, MIA, MSP, JFK, ORD, 

PHL, SFO, AMS, CDG, FCO, FRA, LHR, LGW or MAD. We included a second set of fixed effects to 

indicate if the second through airport was any of those same airports. For, itineraries with just one through 

airport, each of the second set of fixed effects took a value of zero. 
28

statistically indistinguishable from those for either ATI or online itineraries.53 

Comparing columns (2) and (4), across which the only difference is the absence of 

controls for the marketing carrier, demonstrates that DOJ’s finding that ATI fares are not 

lower than code share fares is driven by a failure to control for pricing differences across 

different marketing carriers.54 Interestingly, however, even in this specification without 

controls for marketing carriers, otherwise ATI itineraries using carved-out segments have 

significantly higher fares than full ATI itineraries. 

Conclusion

45. DOJ’s response to our empirical work, as presented in Appendix B to its December 21 

Comments in the current docket, changes none of the conclusions presented in our 

September 8 Affidavit. Indeed, what is most striking about the DOJ Response is the 

number of topics on which it ignores, agrees with, or fails to provide any substantive 

analysis in response to fundamental points that we made. These topics include the 

appropriateness of using a separate variable to measure ATI effects (which DOJ now 

seems to accept), the fact that our Affidavit included a cross-sectional style analysis that 

confirmed our panel results on the lack of ATI effects on non-stop fares, the substantial 

consumer benefits generated by ATI service, and the undermining or elimination of 

ATI’s fare and quality benefits when carve-outs are imposed. Taken together, these 

results to which DOJ offers no substantive rebuttal are sufficient to demonstrate the 

benefits of ATI and the harm from carve-outs. Where DOJ does offer responses to our 

findings, they largely take the form of detailed data and implementation issues, many of 

which reflect intentional and appropriate choices that we made in analyzing the data. 

Some of the implementation issues that DOJ raises are invalid criticisms, while others are 

valid points in response to which we have adjusted certain details of our methodology, 

but they all share one common feature – regardless of whether they are considered one at 

a time or in combination, they have, at most, a small effect on our results and no effect on 

any of the conclusions from our affidavit. Instead, on those topics about which DOJ 

claims to have refuted our results (price effects of ATI on non-stop routes and the 

 

53 In this run, we replace the marketing carrier fixed effect with one for the “major U.S. airline 

reporting the ticket,” like DOJ used in its initial Comments. 

54 In DOJ’s December 21 Comments (pp. 22-24), DOJ presents a new model which allows the 

relative fares for ATI, online, or codeshare service to vary by the three major alliances – Star, SkyTeam, or 

oneworld. However, this new model still does not control for the identity of the marketing carrier and thus 

not-surprisingly generates results consistent with DOJ’s earlier, aggregated model – including the 

counterintuitive result that code-share fares are lower than ATI and online fares. 
29

difference between ATI and code-share fares for connecting traffic), the source of the 

difference between their findings and ours remains the same as it has been throughout 

this proceeding – DOJ’s failure to include important and standard controls for the identity 

of the marketing carriers setting the fares under analysis. Put concisely, DOJ continues to 

confound pricing differences across carriers with the relevant competitive effects of ATI 

and thus to draw incorrect conclusions about ATI effects. 
EXHIBIT 2 
page 1 of 8 

The Brattle Group 

Observations on DOJ’s Analysis of Connecting Passenger Fare Relationships 

in General and Its Analysis of oneworld in Particular1

As part of its filing in this docket, the Department of Justice (“DOJ”) provides additional 

economic analysis of airline fare data for connecting passengers,2

 which supplements its prior 

analysis submitted in the Star-Continental docket.3 DOJ concludes that airlines can achieve the 

same fare coordination benefits for connecting passengers under non-immunized code-sharing 

arrangements as they can under antitrust immunity or single-carrier online service. 

This memorandum contains some observations on inaccuracies created by DOJ’s empirical 

approach and provides additional information regarding the fares paid by passengers that are 

served online by a single oneworld carrier as compared to those who travel between the same 

origin and destination using multiple oneworld carriers. For reasons explained herein, DOJ’s 

current results are largely counter-intuitive. 

We find that, in contrast to DOJ’s results, oneworld’s code-share fares are significantly above the 

online fares of individual oneworld carriers serving the same origin and destination during the 

same time period. Thus, there is clear evidence that oneworld carriers, who do not have an 

immunized relationship with one another, face fare coordination difficulties in serving 

connecting passengers. Granting antitrust immunity would allow fare coordination to occur that 

could produce significant consumer benefits to connecting passengers. 

Brief Summary of DOJ’s Analysis of Prices for Connecting Passengers 

In Appendix B of its filing in this docket, DOJ again uses DOT DB1B data to examine fare 

differences between passengers traveling under online, code-share, ATI, and interline service.4

 

DOJ extends its earlier analysis by examining the fare differences across these service types 

within specific alliances, such as oneworld, Star, and SkyTeam. In assessing the results of its 

analysis, DOJ finds that: 

“oneworld code-share fares currently are 1.6% less than online fares offered by 

oneworld members. As online fares already incorporate any pricing efficiencies 

 

1

 These comments were prepared by James Reitzes, Daniel Gaynor, and Guillermo Sabbioni of The Brattle 

Group. 2

 See OST-2008-0252, “Comments of the Department of Justice, Appendix B: Empirical Addendum 

Response, December 21, 2009. 

3

 See Docket OST-2008-0234, Comments of the Department of Justice to the Show Cause Order, June 

26, 2009, Appendix B. The analysis in Appendix B of the Star-Continental docket is re-submitted as 

Appendix A of the DOJ filing in the current docket.

4

 DOJ Appendix B, pp. 20-30. When multiple carriers provide service to a given passenger and those 

carriers are members of the same alliance but do not have antitrust immunity with one another, DOJ refers 

to that as “code-share” service. If the carriers providing service to the passenger have antitrust immunity 

with one another, then DOJ considers that to be “ATI” service. 
page 2 of 8 

The Brattle Group 

associated with unified control, this finding undermines Applicants’ claim that they 

need ATI to reduce a double-marginalization problem in connecting fares.“5

“More generally, we find in looking at the SkyTeam alliance and the Star alliance 

that ATI has failed to deliver pricing efficiencies equivalent to ordinary codeshare 

arrangements with other non-immunized members of each alliance. We find that 

SkyTeam ATI fares are 7.2% higher than SkyTeam code-share fares, and Star ATI 

fares are 11.7% higher than Star code-share fares.”6

 

Additionally, DOJ concludes that: 

“To summarize, across the models we have estimated in this proceeding and the Star 

proceeding, code-share fares are systematically lower than each of interline and ATI 

fares on connecting routes.”7

 

From these results, DOJ effectively concludes that antitrust immunity (“ATI”) is not needed to allow 

interlining carriers to achieve the fare coordination needed to benefit connecting passengers because 

code-share (i.e., non-immunized alliance) relationships can achieve similar, if not greater, fare 

reductions. 

Some Observations on the Inaccuracies Created by DOJ’s Empirical Approach 

Putting aside that DOJ in this docket has examined only price effects and not non-price benefits 

that may arise from antitrust immunity, such as improved service quality and more convenient 

flight scheduling, DOJ’s methodological approach raises certain issues that may negatively affect 

the accuracy of its findings, particularly as they apply to oneworld. 

DOJ Mixes Different Route Types in a Manner that Confuses the Relationship 

between Online Fares and Fares for Code-Share, ATI, and Arm’s Length 

Interlining Service 

DOJ does not perform separate analyses for “behind-beyond” routes (which originate behind a 

US transatlantic gateway and terminate beyond a European transatlantic gateway) and “behindgateway” routes (which originate behind a US gateway but terminate at a European transatlantic 

gateway). On behind-gateway routes (e.g., St. Louis – London), a single carrier may offer online 

service. However, on behind-beyond routes (e.g., St. Louis – Lyon), there is no single-carrier 

online service. The nature of competition may be different on these two different types of routes, 

and the relationship between code-share, ATI, and arm’s length interline fares may consequently 

differ. 

 

5

 DOJ Appendix B, p. 23. 

6

 DOJ Appendix B, p. 24. 

7

 DOJ Appendix B, p. 24. 
page 3 of 8 

The Brattle Group 

By combining these two route types (i.e., behind-beyond and behind-gateway routes) in its 

analysis, DOJ may be obfuscating impacts that are identified by analyzing each route type 

separately. Moreover, by adding routes that have no online service, DOJ’s approach confuses 

the relationship between single-carrier online service, where the connecting fare is under 

“unified control” according to DOJ, and code share and ATI service where less fare coordination 

may occur. 

More specifically, DOJ’s approach implies that it can develop estimates of relationships between 

ATI and code-share fares by examining only a limited number of routes where there is 

significant head-to-head competition between ATI and code-share service types. Under DOJ’s 

approach, a fare relationship between ATI and code-sharing could be estimated by using routes 

where there is only (arm’s length) interline and ATI service and comparing that to routes where 

there is only interline and code-share service. Thus, DOJ’s estimation of the relationship 

between code-sharing and ATI potentially mixes the results from routes where there is head-tohead competition between particular service types (e.g., code-share and ATI) with routes where 

there is no head-to-head competition between those service types. 

DOJ’s Reported Results regarding oneworld’s Fare Relationships Are Potentially 

Misleading. 

In Table 4 of its Appendix B filing, DOJ reports evidence from its statistical analysis suggesting 

that oneworld’s ATI fares are 16.5 percent above its code-share fares. DOJ also finds that ATI 

fares exceed code-share fares for Star and SkyTeam. 

DOJ’s comparison of ATI versus code-share fares for oneworld is potentially misleading, 

because ATI as applied to oneworld only refers to the immunized AA-Finnair and (the recently 

defunct) immunized AA-SN Brussels relationships.8 While there are some city pairs that are 

served via both a oneworld code-share and a oneworld ATI arrangement, the number of 

passengers that connect to European destinations through Finnair (or SN Brussels) is quite small. 

Consequently, there are very few city pairs where there is a DB1B fare observation for an ATI 

passenger as well as a code-share passenger in the same quarter. Thus, DOJ’s analysis of codeshare and ATI fares for oneworld is not based on a comprehensive head-to-head comparison of 

passengers who use code-share and ATI service to travel from the same origin to the same 

destination. Based on the approach used by DOJ, it is difficult to make strong inferences 

regarding the relationship between code-share and ATI fares in general, and particularly within 

oneworld (as DOJ purports to do in Tables 4 and 6 of its Appendix B filing). 

DOJ is even less careful when it draws conclusions regarding the relative price differences 

between oneworld online and code-share fares because many of the routes that DOJ relies on for 

this comparison cannot (by definition) be served by online service. As mentioned previously, 

DOJ’s data contains behind-beyond routes that are not served by online service. However, since 

these routes can be served by code-share service, their inclusion affects the magnitude of the 

 

8

 The immunized relationship between AA and Swiss International Air Lines was terminated in mid-2005. 
page 4 of 8 

The Brattle Group 

coefficient estimated for DOJ’s code-share variable. An appropriate analysis that compares 

online fares to code-share fares should be constrained to routes where online service exists. 

DOJ’s Approach Produces Counter-intuitive Results 

Strangely, DOJ’s results (see Tables 4 and 6 of its Appendix B filing) indicate that code-share 

fares are below online fares for oneworld, Star, and SkyTeam, even though DOJ believes that 

“online fares already incorporate any pricing efficiencies associated with unified control.”9 

DOJ apparently hypothesizes that, all else equal, online fares should be below code-share fares,10 but 

its empirical approach produces a contradictory finding. 

This suggests that, by estimating fare relationships between various service types using combined 

data for behind-gateway and behind-beyond routes, and by not attempting to focus on routes where 

there is head-to-head competition between online service and other service types, DOJ is obtaining 

misleading results. By correcting these deficiencies, Brattle obtains very different results from those 

obtained by DOJ, particularly as they apply to oneworld. 

DOJ May Not Have Adjusted Its Results for Passenger Volume Differences across 

Itineraries 

The number of passengers that travel on different itineraries can differ markedly. 

As representative of an average air fare pertinent to a particular service type on a particular city 

pair, an average fare derived from 1 sampled passenger may contain more “noise” than an 

average fare derived from 100 sampled passengers. Ideally, a regression analysis should accord 

different weights to a fare observation based on 1 sampled passenger and one that is based on 

100 sampled passengers. Although we do not have access to DOJ’s data and programs, 

DOJ appears to treat a fare observation based upon 1 passenger as having equal weight to an 

observation based on 100 passengers. 

Brattle’s Modifications of DOJ’s Connecting Passenger Model 

To address our concerns regarding DOJ’s methodology for estimating connecting passenger fare 

relationships, we construct a model that largely replicates DOJ’s approach but-for the criticisms 

outlined above.11 Consistent with DOJ’s approach, we use DB1B fare data for the third-quarter 

of each year from 2005 to 2008. We define a route as a city pair where a passenger’s origination 

point is in the United States and its destination point is in Europe. We omit routes involving US 

and European cities where non-stop transatlantic service is offered. In addition, we remove 

routes where single-carrier online service is unavailable. This leaves us with a set of routes that 

 

9

 DOJ Appendix B, p. 23. 

10 It is conceivable that if there are quality differences across service types, online fares could exceed codeshare fares when online service is considered to be of superior quality. However, DOJ’s analysis does not 

attempt to account for quality differences across different service types. 

11 Because we do not have access to the exact data used by DOJ, we use DB1B data obtained from Database 

Products for our analysis. 
page 5 of 8 

The Brattle Group 

can be served only through connecting service, but where there is a single carrier that provides 

online service. 

In addition to removing itineraries where online service is not possible, we also consider two 

scenarios that differ in the way that service types are defined. The first approach adopts DOJ’s 

definitions for online, ATI, code-share, and interline services, using information on the operating 

and marketing carriers. A second approach defines these relationships purely based on the 

identities of the operating carriers. The use of the second approach reflects concerns over 

possible distinctions between DOJ’s approach to identifying the carriers who determine a 

particular connecting passenger’s air fare and the realities of fare-setting decisions. 

Consistent with DOJ’s approach, we use route-quarter (or itinerary-quarter) fixed effects to 

account for differences in competitive conditions that are unique to a particular route (or 

itinerary) during a particular time period. Finally, we use weighted least squares to allow for 

differences in the number of passengers that comprise an individual average fare observation for 

a particular itinerary and service type. 

Results – Initial Modification 

The results from our modification of DOJ’s approach, as contained in Table 1, contrast with 

those obtained by DOJ. Instead of finding that oneworld’s code-share fares are below its singlecarrier online fares, it now holds that the online fares of oneworld carriers are below code-share 

fares offered by oneworld carriers. Moreover, the relationship between oneworld ATI fares and 

oneworld code-share and online fares changes dramatically from DOJ’s results, such that ATI 

fares appear comparable to online fares. 

However, even this modification of DOJ’s approach includes routes where oneworld does not 

offer online service, but instead offers only code-share or ATI service. So, these results are still 

affected by the fare behavior on routes where there is no head-to-head comparison between 

oneworld online and code-share fares. 

Further Modifications of DOJ’s Approach 

While the above re-specification of DOJ’s model improves the analysis, a more appropriate 

analysis would compare oneworld’s online and code-share fares solely on routes (or itineraries) 

where both types of service is offered. This would allow for a head-to-head comparison between 

these two service types. 

In Table 2, we compare AA online fares and AA-BA code-share fares only for routes (or 

itineraries) where the DB1B database identifies passengers using both service types in the same 

quarter.12 Under this more direct comparison of online and code-share fares, we find that online 

fares are between 7.2 and 7.4 percent lower than code-share fares. 

 

12 Due to the imposed limitations on the number of route segments, the analysis essentially covers routes 

originating behind US gateway cities and terminating in London. 
page 6 of 8 

The Brattle Group 

This suggests that oneworld is unable to achieve the fare coordination for connecting passengers 

through code-sharing that can be attained under more “unified control,” such as single-carrier 

online service. To the extent that oneworld’s proposed metal-neutral joint venture attempts to 

mimic the unified control achieved by a single carrier, one would expect price reductions to arise 

for connecting passengers as a result of antitrust immunity. 
page 7 of 8 

The Brattle Group 

Table 1 

Price Differences Across Tickets based upon the Type of Service

DOJ Results Brattle Results

Service Type Defined Using Service Type Defined Using 

DOJ Definitions Operating Carriers Only

Explanatory Variables Estimate

Within Alliance, 

Estimated Fare 

Differences Relative 

to code-share Estimate

Within Alliance, 

Estimated Fare 

Differences Relative 

to Code-share Estimate

Within Alliance, 

Estimated Fare 

Differences 

Relative to Codeshare

Online -0.111 * 1.6% -0.074 0.005 * -0.9% -0.078 0.005 * -1.4%

ATI 0.026 16.5% -0.082 0.017 * -1.6% -0.076 0.018 * -1.1%

Code-share -0.127 * -- -0.065 0.007 * -- -0.064 0.007 * --

Online -0.030 * 7.2%

ATI -0.042 * 6.0%

Code-share -0.100 * --

Online -0.072 * 3.8%

ATI 0.000 11.7%

Code-share -0.110 * --

Online 0.001 0.005 2.3% -0.004 0.005 1.9%

ATI -0.008 0.005 1.4% 0.000 0.005 2.4%

Code-share -0.022 0.006 * -- -0.024 0.007 * --

Interline -- -- --

Number of Coupons -0.052 * -0.014 0.003 * -0.019 0.003 *

Mileage -0.076 ** 0.000 0.000 * 0.000 0.000 *

Number of Observations 123,522 81,561 81,561

 * Statistically significant at the 99% confidence level

** Statistically significant at the 95% confidence level

Star 

Alliance

OneWorld

Alliance

SkyTeam

Alliance

Standard Error Standard Error

Service T ype

All Other
page 8 of 8 

The Brattle Group 

Table 2 

Price Differences Across Tickets based upon the Type of Service

Route-Year Fixed Effects Itinerary-Year Fixed Effects

Explanatory Variables Estimate

Within Alliance, 

Estimated Fare 

Differences Relative 

to Code-share Estimate

Within Alliance, 

Estimated Fare 

Differences Relative 

to Code-share

AA Online -0.077 0.04 ** -7.4% -0.075 0.04 *** -7.2%

AA-BA Code-share -- -- -- -- -- --

Mileage -0.170 0.27

Number of Observations 548 421

* Statistically significant at the 99% level.

** Statistically significant at the 95% level.

*** Statistically significant at the 90% level. Service Type

Standard Error

OneWorld

Alliance

Standard Error
EXHIBIT 3 
page 1 of 5 

The Brattle Group 

Some Potentially Relevant Recent Experience with Carve Outs1

As part of its filing in this docket, the Department of Justice (“DOJ”) provides information 

regarding the performance of routes that were subject to carve-outs by the DOT.2 Specifically, 

DOJ states as follows:3

“With respect to adding new flights, the experience of other alliances operating 

with carve-outs belies the claim that carve-outs prevent the addition of new 

capacity. Since 1996, United and Lufthansa have operated in the immunized Star 

Alliance with two carved-out routes: (1) Chicago and Frankfurt and 

(2) Washington and Frankfurt. Capacity has risen 75% on the route between 

Chicago and Frankfurt and 105% on the route between Washington and Frankfurt, 

and the number of local passengers traveling on the routes has remained virtually 

unchanged.” 

“These alliance partners did not share revenues during this period, so the carrier 

operating a new flight received all the revenue from not only the local passengers 

(as would be the case with oneworld) but also the connecting passengers. 

Recognizing that it was in their mutual interest to increase capacity on the hubhub routes to capture connecting passengers, they added flights.” 

DOJ’s empirical observation regarding the growth of capacity on the carved-out ChicagoFrankfurt and Washington-Frankfurt routes is difficult to evaluate in isolation, given the general 

changes in economic conditions that affected transatlantic passenger volumes between 1996 and 

today. 

Moreover, the empirical evidence surrounding the more recent carve-outs of SkyTeam’s 

Atlanta-Paris and Cincinnati-Paris routes suggests that DOJ had drawn an erroneous conclusion 

regarding the impact of carve-outs. Since these routes were carved out in 2002,4

 SkyTeam has 

shown substantially greater increases in passenger volumes and seat capacity on its 

non-carved-out transatlantic trunk routes to Paris when compared to its carved-out transatlantic 

trunk routes (see Tables 1 through 4 below). When all carriers are considered, the results still 

show greater growth on the non-carved-out routes (see Tables 5 and 6 below), although the 

magnitude of the differential is somewhat smaller. 

In particular, Table 1 shows that between 2001 (i.e., the last pre-carve-out year) and 2008, Delta 

and Air France reduced their passenger volumes by 9.7 percent on the carved-out Paris trunk 

routes, while increasing their passenger volumes by 26.1 percent on the non-carved-out Paris 

trunk routes. Overall, seat capacity decreased by 12.4 percent on the carved-out Paris trunk 

 

1

 These comments were prepared by James Reitzes, Daniel Gaynor, and Guillermo Sabbioni of The Brattle 

Group.

2

 See OST-2008-0252, “Comments of the Department of Justice, December 21, 2009 (“DOJ Comments”). 

3

 DOJ Comments, p. 34. 

4

 See DOT Order 2002-1-6, January 18, 2002. 
page 2 of 5 

The Brattle Group 

routes and increased by 18.1 percent on the non-carved-out Paris trunk routes over the same 

period (see Table 2). If the comparison period is from 2000 to 2008 (instead of 2001 to 2008), 

the results still show substantially greater growth in passenger volume and seat capacity on the 

routes that were not carved out.5

 

Thus, the results reported by DOJ on the impact of carve-outs are misleading at best. 

Our comparison of the changes in passenger volumes and seat capacity on carved-out routes 

relative to non-carved-out routes should account for changes in supply and demand conditions 

that affect air travel in general, and thus provide a more valid basis for evaluating carve-outs.6

Lastly, it should be mentioned that the Star carve-outs (i.e., Washington-Frankfurt and ChicagoFrankfurt) apply to all passengers, while the SkyTeam carve-outs (i.e., Atlanta-Paris and 

Cincinnati-Paris) apply only to first, business, and unrestricted coach passengers. However, it is 

the desire to attract these high-margin, “time-sensitive” passengers that have a substantial impact 

on whether airlines decide to increase capacity. 

 

5

 The results are similar if we use 2007 instead of 2008. 

6

 Of course, more precise conclusions may be obtained through an econometric analysis that more formally 

considers the impact of supply and demand conditions that affect air travel in general and those on the 

specific routes of interest. 
page 3 of 5 

The Brattle Group 

Table 1 

Percentage growth in passenger volume for Delta and Air France 

 combined on carved-out and non-carved-out trunk routes, U.S - Paris

Carved-Out Non-Carved-Out Total

2000 to 2008 1.6% 22.1% 18.4%

2001 to 2008 -9.7% 26.1% 18.9%

Source: T-100 International Segment

 Trans-Atlantic flights between the U.S. and Paris

 Carved out routes include Atlanta-Paris and Cincinnati-Paris

Table 2 

Percentage growth in volume of seats available for Delta and Air France

 combined on carved-out and non-carved-out trunk routes, U.S - Paris

Carved-Out Non-Carved-Out Total

2000 to 2008 -2.2% 17.1% 13.6%

2001 to 2008 -12.4% 18.1% 12.0%

Source: T-100 International Segment

 Trans-Atlantic flights between the U.S. and Paris

 Carved out routes include Atlanta-Paris and Cincinnati-Paris
page 4 of 5 

The Brattle Group 

Table 3 

Percentage growth in passenger volume for Delta, Air France and Northwest

 combined on carved-out and non-carved-out trunk routes, U.S - Paris

Carved-Out Non-Carved-Out Total

2000 to 2008 1.6% 23.9% 20.1%

2001 to 2008 -9.7% 29.1% 21.6%

Source: T-100 International Segment

 Trans-Atlantic flights between the U.S. and Paris

 Carved out routes include Atlanta-Paris and Cincinnati-Paris

 KLM reported no passenger volume.

Table 4 

Percentage growth in volume of seats available for Delta, Air France and Northwest

 combined on carved-out and non-carved-out trunk routes, U.S - Paris

Carved-Out Non-Carved-Out Total

2000 to 2008 -2.2% 19.4% 15.6%

2001 to 2008 -12.4% 21.1% 14.7%

Source: T-100 International Segment

 Trans-Atlantic flights between the U.S. and Paris

 Carved out routes include Atlanta-Paris and Cincinnati-Paris

 KLM reported no seats available.
page 5 of 5 

The Brattle Group 

Table 5 

Percentage growth in passenger volume for all carriers

 combined on carved-out and non-carved-out trunk routes, U.S - Paris

Carved-Out Non-Carved-Out Total

2000 to 2008 1.6% 3.1% 2.9%

2001 to 2008 -9.7% 10.2% 7.9%

Source: T-100 International Segment

 Trans-Atlantic flights between the U.S. and Paris

 Carved out routes include Atlanta-Paris and Cincinnati-Paris

Table 6 

Percentage growth in volume of seats available for all carriers

 combined on carved-out and non-carved-out trunk routes, U.S - Paris

Carved-Out Non-Carved-Out Total

2000 to 2008 -2.3% 0.5% 0.2%

2001 to 2008 -12.4% 3.5% 1.6%

Source: T-100 International Segment

 Trans-Atlantic flights between the U.S. and Paris

 Carved out routes include Atlanta-Paris and Cincinnati-Paris
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 _______________________________ 

 JEFFREY A. OGAR 

January 11, 2010