August 22 , 2011

Mr. Todd Homan

Director, Office of Aviation Analysis

Department of Transportation

1200 New Jersey Avenue

, SE
Washington, DC 20590

Re: AA/QF Joint B usiness Agreement, DOT

- OST

- 2011

- 0111

Dear Mr

. Homan:

Attached i s a copy of the Australian Competition & Consumer

Commission (ACCC) draft d etermination issued August 22, 2011 regarding

the American/Qantas Joint Business Agreement and the parties’

Applications for Authorisation . As you are aware, previously, on June

9, 2011

, the ACCC granted interim authorization. The draft

determination proposes authorization of the J oint B usiness A greement

in the ACCC final determination, finding numerous pro

- competitive

benefits and no public detriment given the l ack of competition between

the p a rties.

Respectfully submitted,

JAMES K. KALEIGH
Antitrust Attorney

American Airlines

P.O. Box 619616 , MD 5675

DFW Airport, TX 75261

james.kaleigh@aa.com

( 817) 967

- 3478

cc: Peter Irvine

Grady Stone

Docket Branch Service ListDRAFT DETERMINATION A91265 & A91266 ii 

## Summary

The ACCC proposes to grant authorisation for a Join t Business Agreement between Qantas and American Airlines for five years.

On 12 May 2011, Qantas and American Airlines lodged applications for authorisation of a Joint Business Agreement (JBA). Under the JBA, the airlin es will coordinate operations on services

between Australia/New Zealand and the United States (the trans-Pacific routes), and on their respective services which support the trans-Pacific routes.

The applicants propose to coordinate all business o perations, including flying operations, pricing and revenue management, scheduling, cargo, passenge r sales and marketing, airport services and frequent flyer programs.

The ACCC considers that the JBA is likely to result in new and improved products and services, (including improved schedules and connectivity, a g reater choice of connection and stop-over options, and the possibility of new and improved ro utes) and enhanced value added services (including reciprocal lounge access, equivalent fre quent flyer privileges and improved check-in procedures). The ACCC also considers that the JBA w ill provide the applicants with an incentive to offer new fare products, which may res ult in lower fares on many trans-Pacific

routes.

Qantas and American Airlines do not directly compet e on any routes, and the information currently available suggests that they are unlikely to directly compete in the future. In light of this, the ACCC considers that the JBA is unlikel y to result in any public detriment.

Therefore, the ACCC proposes to grant authorisation to the applicants for the JBA for five

years.

On 9 June 2011, the ACCC granted interim authorisat ion, allowing the parties to

commence the JBA while it considers the substantive applications for authorisation.

The ACCC will now seek further submissions from the applicants and interested parties in relation to this draft determination, prior to maki ng a final decision. The applicant and interested parties may also request a conference be held to ma ke oral submissions on the draft

determination.DRAFT DETERMINATION A91265 & A91266 iii 

## Contents

1. THE APPLICATIONS FOR AUTHORISATION ................. .......................................... 1

Interim authorisation ..............................

................................................... ............................. 2

2. BACKGROUND TO THE APPLICATION ...................... ............................................... 3

T HE APPLICANTS

................................................... ................................................... ................... 3 Qantas.............................................

................................................... ..................................... 3

American Airlines ..................................

................................................... ............................. 3

T HE JBA ................................................

................................................... .................................. 4

T HE AVIATION INDUSTRY

................................................... ................................................... ...... 6

3. SUBMISSIONS RECEIVED BY THE ACCC................... ............................................... 8

4. ACCC EVALUATION ....................................

................................................... ............... 10

T HE MARKET

................................................... ................................................... ....................... 10

T HE COUNTERFACTUAL

................................................... ................................................... ....... 13

P UBLIC BENEFIT

................................................... ................................................... .................. 14 New and improved products and services.............

................................................... ............ 15 New fare products and lower fares..................

................................................... .................. 16

Increased tourism ..................................

................................................... ............................ 20 Streamlined corporate travel procurement ...........

................................................... ............. 21 A stronger frequent flyer proposition..............

................................................... .................. 21 ACCC conclusion on public benefits.................

................................................... ............... 22

P UBLIC DETRIMENT

................................................... ................................................... ............. 22 International air passenger transport services .....

................................................... .............. 23 International air freight transport services .......

................................................... ................. 23 The sale of air transport services.................

................................................... ...................... 24 Australian domestic air passenger transport service s.................................................. ......... 24 ACCC conclusion on public detriments...............

................................................... ............. 24

B ALANCE OF PUBLIC BENEFIT AND DETRIMENT

................................................... ...................... 24

L ENGTH OF AUTHORISATION

................................................... .................................................. 2 5

V ARIATIONS TO THE PROPOSED CONDUCT

................................................... .............................. 25

5. DRAFT DETERMINATION................................

................................................... ......... 26

T HE APPLICATION

................................................... ................................................... ................ 26

T HE NET PUBLIC BENEFIT TEST

................................................... ............................................... 26

C ONDUCT FOR WHICH THE ACCC PROPOSES TO GRANT AUTHORISATION ................................. 27

I NTERIM AUTHORISATION

................................................... ................................................... .... 27

F URTHER SUBMISSIONS

................................................... ................................................... ....... 27

A TTACHMENT A

— THE AUTHORISATION PROCESS

................................................... ................ 28

A TTACHMENT B

— CHRONOLOGY OF ACCC ASSESSMENT FOR APPLICATIONS A91265 &

A91266.............................................

................................................... ..................................... 29

A TTACHMENT C

— THE TESTS FOR AUTHORISATION AND OTHER RELEVANT PROVISIONS OF THE
A CT

................................................... ................................................... ..................................... 30DRAFT DETERMINATION A91265 & A91266 iv 

## List of abbreviations

ACCC Australian Competition and Consumer Commission

The Act The Competition and Consumer Act 2010

The applicants Qantas Airways Limited & American Ai rlines Inc.

Codeshare

The applicants’

Codeshare Agreement Code sharing refers to arrangements involving the a ssignment of one airline’s designator code to a flight operat ed by another

airline.

The applicants currently sell tickets on each other s’ services under a free-sale Codeshare Agreement dated 23 Sept ember

2004.

Free sale A type of code share where the marketing carrier effectively only pays for the seats it sells

Interline agreement Interlining involves the carria ge of passengers and/or freight between two points using more than one airline unde r an arrangement which typically involves baggage check through and the honouring of tickets between airlines

Load factor Load factors measure the percentage of seats filled on an aircraft on any given route. This is derived from d ividing the number of passengers travelled by the number of sea ts
available

Sector A sector is a non-stop flight leg between tw o points (excluding technical stops where no passengers or c argo are picked up or dropped off)

The Tribunal The Australian Competition TribunalDRAFT DETERMINATION A91265 & A91266 1 

## 1. The applications for authorisation

1.1. On 12 May 2011, Qantas Airways Limited (Qantas) & A merican Airlines Inc. (American Airlines) (together, the applicants) lodg ed applications for authorisation

A91265 & A91266 with the ACCC.

1.2. Authorisation is a transparent process where the AC CC may grant immunity from legal action for conduct that might otherwise breach the Competition and Consumer Act

2010 (the Act). The ACCC may ‘authorise’ businesses to engage in anti-competitive conduct where it is satisfied that the public benef it from the conduct outweighs any public detriment. The ACCC conducts a public consu ltation process when it receives an application for authorisation, inviting interest ed parties to lodge submissions outlining whether they support the application or n ot. Further information about the authorisation process is contained in Attachment A . A chronology of the significant dates in the ACCC’s consideration of these applicat ions is contained in Attachment B

.

1.3. Application A91265 was made under subsections 88(1) and 88(1A) of the Act to:

 make and give effect to a contract, arrangement or understanding, a provision of which is or may be an exclusionary provision within the meaning of section 45 of

the Act

 make and give effect to a provision of a contact, a rrangement or understanding, a provision of which is, or may be, a cartel provisio n and which is also, or may also be, an exclusionary provision within the meaning of section 45 of that Act.

1.4. Application A91266 was made under subsections 88(1) and 88(1A) of the Act to:

 make and give effect to a contract or arrangement, or arrive at an understanding, a provision of which would have the purpose, or would have or might have the effect, of substantially lessening competition with in the meaning of section 45 of

the Act

 make and give effect to a contract or arrangement, or arrive at an understanding a provision of which would be, or might be, a cartel provision (other than a provision which would also be, or might also be, an exclusion ary provision within the meaning of section 45 of that Act).

1.5. In particular, Qantas and American Airlines have so ught authorisation to make and give effect to a Joint Business Agreement (JBA). Under t he JBA, they would coordinate operations on international air passenger transport services between Australia/New Zealand and the United States (the trans-Pacific ro utes), and on extensive Qantas and American Airlines services which support the trans- Pacific routes. The applicants have sought authorisation for five years.

1.6. Qantas will operate trans-Pacific services and conn ecting services in Australia and to New Zealand on behalf of the proposed JBA. American Airlines will operate connecting services in the United States, Canada an d Mexico, and provide sales support

for the trans-Pacific routes.DRAFT DETERMINATION A91265 & A91266 2 Interim authorisation

1.7. On 9 June 2011, the ACCC granted interim authorisat ion to allow the parties to commence the proposed JBA while the ACCC considers the substantive authorisation. Interim authorisation will remain in place until th e ACCC’s final determination comes

into effect or until the ACCC decides to revoke int erim authorisation.DRAFT DETERMINATION A91265 & A91266 3 

## 2. Background to the application

The applicants

Qantas 1

2.1. Qantas was incorporated in Queensland in 1920 and i s Australia's largest domestic and international airline. The Qantas Group employs app roximately 32,500 people and offers services across a network covering 182 desti nations in 44 countries - 59 in Australia and 123 in other countries (including tho se covered by code share partners).

2.2. As at 1 September 2010, Qantas operated a fleet of 252 aircraft. Qantas also operates airline related businesses which include airport su pport services, catering, freight operations, loyalty programs, defence support servi ces and engineering.

2.3. Qantas operates flights using the following brands:

 Qantas: a full-service airline offering domestic an d international services

 Jetstar: a low fare airline offering domestic and i nternational services

 QantasLink: a full-service regional domestic airlin e.

2.4. Qantas also has interests in Jetstar Asia and Valua ir (both Singapore-based airlines, of which Qantas owns 49%), Jetstar Pacific (a Vietnam- based airline of which Qantas owns 27%) and Air Pacific (a Fiji based airline of which Qantas owns 46%).

2.5. Domestically, Qantas (including QantasLink and Jets tar) operates over 5,600 flights each week. These flights serve 59 city and regional destinations in all states and mainland territories. Internationally, Qantas (incl uding Jetstar) operates more than 970 flights each week, of which approximately 630 are Q antas flights and 340 are Jetstar flights.

2.6. For the financial year ended 30 June 2010, Qantas r eported revenue of A$13.8 billion and a profit before tax of A$178 million.

American Airlines 2

2.7. American Airlines, the principal subsidiary of AMR Corporation, was founded in 1934. As at 31 December 2010, American Airlines provided services to approximately 160 destinations throughout North America, the Caribbea n, Latin America, Europe and Asia. The majority of American Airlines flights ope rate to or from five major United States cities: Dallas/Fort Worth, Chicago O’Hare, M iami, New York City and Los Angeles.

1 The majority of information under this sub-heading is sourced from:

- Qantas and American Airlines, Submission in support of applications for authoris ation , 11 May 2011

- Qantas, Annual report 2010

2 The majority of information under this sub-heading is sourced from:

- Qantas and American Airlines, Submission in support of applications for authoris ation , 11 May 2011

- AMR Corporation, Annual report 2010.DRAFT DETERMINATION A91265 & A91266 4 2.8. AMR Eagle Holding Corporation is a wholly owned sub sidiary of AMR Corporation and owns two airlines, American Eagle Airline, Inc. and Executive Airlines, Inc, collectively known as American Eagle. Established in 1984, American Eagle is American Airlines’ regional affiliate. As at 31 Dec ember 2010, American Eagle operated approximately 1,500 daily departures servi ng over 175 destinations in North America, Mexico and the Caribbean.

2.9. American Airlines also operates airline related bus inesses:

 AAdvantage: a travel awards/frequent flyer program

 AA Vacations: a holiday business offering flights, accommodation, ground transportation and activities

 American Airlines Cargo: providing cargo capacity t o major cities in the United States, Europe, Canada, Mexico, the Caribbean, Lati n America and Asia using the cargo holds of its passenger fleet.

2.10. For the 2010 financial year (to December), American Airlines reported revenue of US$22.2 billion and a loss before tax of US$506 mil lion.

The applicants’ other alliances

2.11. Both Qantas and American Airlines are part of the o neworld marketing alliance, which

links the networks of its member airlines to facili tate global passenger travel, and also links the members’ frequent flyer programs and acce ss to lounge facilities. Other members include British Airways, Cathay Pacific, Fi nnair, LAN Airlines, Iberia, Japan Airlines (JAL), Malev Hungarian Airlines, Mexicana, Royal Jordanian and S7 Airlines.

2.12. Qantas and British Airways have a Joint Services Ag reement, most recently authorised by the ACCC on 31 March 2010. American Airlines has been granted antitrust immunity by the United States Department of Transpo rtation (US DOT) for an integrated alliance with British Airways, Iberia, F innair and Royal Jordanian, and by the European Union’s Directorate General Competitio n for a joint business agreement with British Airways and Iberia in respect of their European Union to North America operations. Additionally, an integrated alliance be tween American Airlines and Japan Airlines covering their trans-Pacific services betw een North America and Asia has recently been approved by the US DOT and the releva nt Japanese regulatory

authorities.



### The JBA

2.13. The applicants currently sell tickets on each other s’ services under a free sale Codeshare Agreement dated 23 September 2004. Since American Airlines ceased operations on the trans-Pacific routes in 1992, it has placed its code on a number of services within Qantas’ trans-Pacific and domestic Australian and New ZealandDRAFT DETERMINATION A91265 & A91266 5 network. Qantas places its code on American Airline s domestic services within the United States, and also on services between the Uni ted States and Canada/Mexico. 3

2.14. The JBA will supersede the existing Codeshare Agree ment. The JBA involves the coordination of operations on certain designated ro utes (the JB Services), including:

 trans-Pacific routes;

- Brisbane – Los Angeles and Dallas/Fort Worth

- Sydney – Los Angeles, New York (JFK), Dallas/Fort W orth and Honolulu

- Melbourne – Los Angeles

- Auckland – Los Angeles

 and ‘behind and beyond’ codeshare routes 4

.

2.15. Qantas will operate trans-Pacific services and conn ecting services in Australia and on

the trans-Tasman on behalf of the JBA. American Air lines will operate connecting services in the United States, Canada and Mexico an d provide sales support for the

Trans-Pacific Routes.

2.16. Qantas and American Airlines (and their related bod ies corporate) may coordinate the following under the JBA:

 flying operations

 codesharing

 interlining

 pricing and revenue management

 scheduling (including frequencies and connection re quirements)

 cargo

 passenger sales and marketing

 holiday/vacation products and packages

 frequent flyer programs

 distribution

 customer rebates, incentives and discounts

3 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011.

4 For a complete list of existing routes see: Qantas and American Airlines, Submission in support of applications for

authorisation , 11 May 2011, Appendix E - The JB Services.DRAFT DETERMINATION A91265 & A91266 6  agency arrangements (including coordinating agency commissions, rebates, incentives and discounts)

 ground handling

 airport services

 co-branded joint offices

 corporate dealing and

 joint procurement.

2.17. For example, the applicants propose to:

 establish a Joint Management Committee to conduct t he JBA and govern the activities of the applicants on the JB Services

 develop new fare products and promotions and conduc t integrated marketing campaigns drawing on the marketing presence of both carriers in their respective

home markets and

 establish joint management and planning of ground p roducts and services, including; coordinating the use of airport faciliti es by expanding reciprocal airport lounge access, developing joint lounges at certain airports and streamlining checkin facilities.



### The aviation industry

International aviation regulation

2.18. The international airline industry is highly regula ted. The 1944 Convention on

International Civil Aviation established the principle that each country has exc lusive sovereignty over its airspace. This principle conti nues to guide the regulatory framework today.

2.19. International air transport cannot occur unless it is specifically authorised pursuant to a government to government bilateral air services agr eement (ASA).

2.20. An ASA specifies the terms and conditions of airlin e activity between two countries. An ASA may indicate the destinations that can be se rved in a particular country, the permitted frequencies per week and any rights to op erate via or beyond to third countries. Typically, the rights granted under an A SA can only be exercised by designated carriers of the countries that are parti es to them.

2.21. An Open Skies Agreement is one form of ASA between two countries. In essence, it is an agreement which provides minimal (or no) restric tions on the ability of the airlines of two countries to operate services between countr ies.DRAFT DETERMINATION A91265 & A91266 7 Australia/United States Open Skies Agreement

2.22. On 14 February 2008, Australia and the United State s concluded the Open Skies Agreement (OSA), allowing all Australian and Americ an owned carriers to provide

unlimited direct services between the two countries . Air New Zealand can provide unlimited direct services by combining rights estab lished under the United States/New Zealand and Australia/New Zealand open skies arrang ements.

2.23. Under the OSA, the carriage of traffic over domesti c sectors is reserved for national carriers. The agreement only allows the beyond carr iage of genuine international traffic between international gateways (for example, Qantas ’ own trans-Pacific passengers between Los Angeles and New York). 5 This means international airlines depend on commercial arrangements with domestic carriers in o rder to offer behind or beyond international gateway markets.

5 Air Transport Agreement between the Government of the United States and the Government of Australia, 1944, Annex I, section 1.DRAFT DETERMINATION A91265 & A91266 8 

## 3. Submissions received by the ACCC

3.1. The ACCC tests the claims made by the applicant in support of an application for authorisation through an open and transparent publi c consultation process. To this end the ACCC aims to consult extensively with intereste d parties that may be affected by the proposed conduct to provide them with the oppor tunity to comment on the application.

3.2. Broadly, Qantas and American Airlines submit that t hey can achieve the following public benefits by working together under the JBA:

 improved product and services including new routes, additional frequencies, improved schedules, enhanced connectivity and bette r ground product and services

 new fare products and lower fares to more destinati ons through a revision of fare zones, the introduction of a ‘Walkabout Pass’ and p rovision for preferential availability ensuring more availability for discoun ted fares across a broader travel period

 increased tourism though increased passenger traffi c and a focus on strategic joint promotion

 streamlined corporate travel procurement and

 a stronger frequent flyer proposition.

3.3. The ACCC sought submissions from approximately 90 i nterested parties potentially affected by the application, including competitors, airports, travel agents, government departments, regulators and tourism and industry gr oups. The ACCC received submissions from Sydney Airport, Brisbane Airport a nd Virgin Australia.

3.4. Sydney Airport considers the proposed JBA will resu lt in a number of public benefits, which will be seen across the broader economy and t he Australian tourism industry from an improvement in their travel experience. Syd ney Airport considers airline passengers will benefit from an improvement in thei r travel experience, particularly outbound international passengers as they will be a ble to purchase online journeys

across international and United States networks off ered by American Airlines.

3.5. Brisbane Airport supports the application, noting t he potential public benefits, including improved tourism from the United States, and also noting that there is no lessening of competition on the trans-Pacific route

.

3.6. Virgin Australia opposed the granting of interim au thorisation to the JBA, but did not directly comment on whether final authorisation sho uld be granted. Virgin Australia queried whether the commercial imperatives on which the application for interim authorisation was based were still applicable; whet her Qantas would still continue to

offer the Dallas/Fort Worth services even if it did not obtain interim authorisation for the alliance; and how the applicants would unwind t he alliance if final authorisation were not granted.DRAFT DETERMINATION A91265 & A91266 9 3.7. The applicants only responded directly to Virgin Au stralia’s submission. The applicants submitted that the commercial imperatives for seeki ng interim authorisation were applicable as the critical launch period for a new service extends into subsequent months; the expansion to daily Dallas/Fort Worth se rvices would be unlikely without the JSA; and unwinding the alliance will present li ttle difficulty given American Airlines does not operate on the trans-Pacific.

3.8. The views of the applicants and interested parties are outlined in the ACCC’s evaluation of the JBA in Chapter 4 of this determin ation. Copies of public submissions may be obtained from the ACCC’s website (www.accc.g ov.au/AuthorisationsRegister) and by following the links to this matter.DRAFT DETERMINATION A91265 & A91266 10 

## 4. ACCC evaluation

4.1. The ACCC’s evaluation of the JBA is in accordance w ith tests found in:

 section 90(8) of the Act which states that the ACCC shall not authorise a proposed exclusionary provision of a contract, arrangement o r understanding, unless it is satisfied in all the circumstances that the propose d provision would result or be likely to result in such a benefit to the public th at the proposed contract, arrangement or understanding should be authorised.

 sections 90(6) and 90(7) of the Act which state tha t the ACCC shall not authorise a provision of a proposed contract, arrangement or un derstanding, other than an exclusionary provision, unless it is satisfied in a ll the circumstances that:

- the provision of the proposed contract, arrangement or understanding in the case of section 90(6) would result, or be likely to result, or in the case of section 90(7) has resulted or is likely to result, in a benefit to the public and

- that benefit, in the case of section 90(6) would ou tweigh the detriment to the public constituted by any lessening of competition that would result, or be likely to result, if the proposed contract or arran gement was made and the provision was given effect to, or in the case of se ction 90(7) has resulted or is likely to result from giving effect to the provisio n.

 sections 90(5A) and 90(5B) of the Act which state t hat the ACCC shall not authorise a provision of a proposed contract, arran gement or understanding that is or may be a cartel provision, unless it is satisfie d in all the circumstances that:

- the provision, in the case of section 90(5A) would result, or be likely to result, or in the case of section 90(5B) has resulted or is likely to result, in a benefit to the public and

- that benefit, in the case of section 90(5A) would o utweigh the detriment to the public constituted by any lessening of competition that would result, or be likely to result, if the proposed contract or arran gement were made or given effect to, or in the case of section 90(5B) outweig hs or would outweigh the detriment to the public constituted by any lessenin g of competition that has resulted or is likely to result from giving effect to the provision.

4.2. For more information about the tests for authorisat ion and relevant provisions of the Act, please see Attachment C

.



### The market

4.3. The first step in assessing the effect of the condu ct for which authorisation is sought is to consider the relevant markets affected by that c onduct.

4.4. Previously, the ACCC has considered the impact of a viation alliance agreements on competition in the following markets:DRAFT DETERMINATION A91265 & A91266 11  international air passenger transport services, wit h regard to particular geographic and product segments

 international air freight transport services

 the sale of air passenger transport services and

 Australian domestic air passenger transport service s.

4.5. The applicants note that the ACCC draws the data fo r the analysis of these markets from the Australian Bureau of Statistics (ABS). The applicants consider that this data

distorts the market definition because it is collec ted on the basis of ‘purpose of travel’ rather than actual class travelled, and it would ar guably be more accurate to characterise the market in terms of a premium segme nt and an economy segment reflecting cabin of travel rather than purpose of t ravel. Nevertheless, for the purposes of this matter, the applicants have provided informati on based on the markets previously identified by the ACCC.

International air passenger transport services

4.6. As set out above, the JBA provides for coordinated commercial arrangements between Qantas and American Airlines in respect of air pass enger services on the trans-Pacific routes and all ‘behind and beyond’ routes; includin g Qantas’ international services between Australia and New Zealand, and American Air lines domestic United States

network and international services between the Unit ed States and Canada and Mexico.

4.7. The applicants currently do not operate any overlap ping direct services 6 . Given the current international aviation regulatory environme nt, and absent any stated intention of

American Airlines to enter the trans-Pacific market , the ACCC considers that the applicants are unlikely to offer any competing serv ices in the future.

Product dimension

4.8. The ACCC has previously identified separate product markets for leisure and business passenger services on long haul routes, including i n its 2009 determination in relation to the alliance between Virgin Blue and Delta Air L ines on trans-Pacific routes. 7

4.9. This approach is based on the view that there are l imitations in demand and supply side substitutability which make it appropriate to disti nguish between more price sensitive

6 The ACCC recognises that Qantas and American Airl ines could be said to be operating competing servic es for those passengers who may choose to travel indirectl y between an Australian gateway city and Dallas/For t Worth or New York City. Specifically, a passenger travelling from Sydney – Dallas/Fort Worth could fly directly with Qantas, or indirectly with Qantas on the Sydney – L os Angeles segment and with American Airlines on th e Los Angeles – Dallas/Fort Worth segment. Similarly, a p assenger travelling from Sydney – New York City has the option to fly on Qantas services for the entire jou rney, or fly the Sydney – Los Angeles segment with Qantas and the Los Angeles – New York City segment with Americ an Airlines.

7 ACCC, Determination for applications A91195 & A911 96 lodged by Qantas & British Airways (2010); ACCC, Determination for applications A91227 & A9122 8 lodged by Virgin Blue & Air New Zealand (2010); ACCC, Determination for applications A91151-2 & A91 172-3 lodged by Virgin Blue & Delta Air Lines (2009 ); ACCC, Determination for applications A91097 & A9109 8 lodged by Air New Zealand and Air Canada (2009).DRAFT DETERMINATION A91265 & A91266 12 (leisure) passengers and more time sensitive (busin ess) passengers, in particular on long-haul routes.

4.10. The ACCC understands that leisure travellers are re latively more price sensitive and relatively less concerned about factors such as tra vel time, flexibility, connectivity, convenience and comfort when compared to business p assengers. Notwithstanding the applicants’ submissions, the ACCC considers that, p articularly on long haul routes, these sensitivities generally apply regardless of w hich cabin a business or leisure passenger chooses to travel in.

4.11. The ACCC considers that in the market for internati onal air passenger transport services, adopting a narrow or broad product market is not likely to alter the assessment in this case, since the applicants do not currently offer any competing services.

Geographic dimension

4.12. The ACCC has previously considered both a city-pair s/point-to-point approach and a regional approach in defining the geographic scope of the market for international air passenger transport services. 8

4.13. The ACCC notes that adopting a point-to-point or re gional market is not likely to alter the assessment in this case, since the applicants c urrently do not operate any overlapping direct services.

4.14. In light of this, the ACCC considers that the servi ces to be provided under the JBA give some guidance on the relevant geographic market. Th e ACCC considers that this indicates the relevant geographic market is the pro vision of international air transport services for passengers travelling between Australi a and the United States, and on extensive ‘behind and beyond’ services across both their networks to the extent they support the trans-Pacific services.

International air freight transport services

4.15. No information has been provided which suggests tha t the ACCC should depart from the view adopted in previous analysis that differen t types of freight represent different freight segments rather than different markets. The availability of indirect route options suggests that the geographic dimension is unlikely to be narrower than a regional

market.

4.16. The ACCC considers that for the purposes of assessi ng the impact of the JBA with regard to the provision of air freight transport se rvices, it is appropriate to consider a market for air freight transport services on a regi onal basis, that is, between Australia

and the United States.

8 ACCC, Determination for applications A91195 & A9119 6 lodged by Qantas and British Airways (2010); ACCC, Determination for applications A91227 & A9122 8 lodged by Virgin Blue & Air New Zealand (2010); ACCC, Determination for applications A91151-2 & A91 172-3 lodged by Virgin Blue & Delta Air Lines (2009 ).DRAFT DETERMINATION A91265 & A91266 13 The sale of air passenger transport services

4.17. In previous determinations in respect of aviation a lliances, the ACCC has recognised a separate market for the sale of air passenger trans port services, which includes tickets sold directly by airlines to travellers as well as those sold through indirect channels such as travel agents.

4.18. Similarly to the market for international air freig ht transport, no information has been provided which suggests that the ACCC should depart from this view.

Australian domestic air passenger transport service s

4.19. The ACCC has previously recognised that an internat ional aviation alliance could affect competition in the market for domestic air p assenger transport services by directing domestic on-carriage or feeder traffic to a particular carrier, at the expense of the competitive position of other domestic carriers

.

4.20. The ACCC notes that the JBA could have such an effe ct, by directing American Airlines’ United States originating passengers on t o Qantas’ trans-Pacific services and then to onward domestic connections with Qantas.

4.21. The ACCC has not received any information which sug gests that it should depart from a consideration of the impact of the JBA on domesti c air passenger transport services. Therefore, the ACCC considers it relevant to consid er the impact of the JBA on the market for domestic air transport services for pass engers travelling within Australia

Conclusion on relevant areas of competition

4.22. For the purpose of assessing this application, on t he basis of the issues outlined above the ACCC considers the relevant areas of competitio n for the purpose of assessing the impact of the JBA are:

 international air passenger transport services betw een Australia and the United States, between Australia and Canada or Mexico via the United States, and between

the United States and New Zealand via Australia

 international air freight transport services betwee n Australia and the United States

 the sale of air passenger transport services and

 domestic air passenger transport services in Austra lia.



### The counterfactual

4.23. The ACCC applies the ‘future with-and-without test’ established by the Tribunal to identify and weigh the public benefit and public de triment generated by conduct for which authorisation has been sought. 9

9 Australian Performing Rights Association (1999) ATPR 41-701 at 42,936. See also for exampl e: Australian Association of Pathology Practices Incorporated (2004) ATPR 41-985 at 48,556; Re Media Council of

Australia (No.2) (1987) ATPR 40-774 at 48,419.DRAFT DETERMINATION A91265 & A91266 14 4.24. Under this test, the ACCC compares the public benef it and anti-competitive detriment generated by arrangements in the future if the auth orisation is granted with those generated if the authorisation is not granted. Thi s requires the ACCC to predict how

the relevant markets will react if authorisation is not granted. This prediction is

referred to as the ‘counterfactual’.

4.25. The applicants submit that without authorisation th ey would:

 continue to act independently in marketing and sale s while offering an inferior network, schedule and capacity and frequent flyer o ffering and a less efficient procurement process compared to what they would be able to offer as a joint

business.

 be unable to realise the benefits and efficiencies of integration and would be disadvantaged compared to the Virgin/Delta alliance (recently granted anti-trust immunity in the United States) and the United/Air N ew Zealand alliance (both are members of the Star Alliance).

4.26. In their submission in support of interim authorisa tion, the applicants stated that without the ability to cooperate, the current frequ ency of the new Dallas/Fort Worth services may not be sustainable, and expansion to d aily services would be unlikely. 10

4.27. The ACCC did not receive any other submissions on t he likely counterfactual.

4.28. The ACCC considers that without authorisation:

 The parties would continue to operate non-overlappi ng direct services under their existing free sale Codeshare Agreement

 American Airlines would continue to place its code on a number of services within Qantas’ trans-Pacific, Australian and New Zealand n etwork, and Qantas would continue to place its code on American Airlines’ do mestic services within the United States, and also on services between the Uni ted States and Canada/Mexico.

 Qantas will continue to operate some services betwe en Sydney and Dallas/Fort Worth with fewer frequencies than anticipated under the Alliance.



### Public benefit

4.29. Public benefit is not defined in the Act. However, the Tribunal has stated that the term should be given its widest possible meaning. In pa rticular, it includes:

...anything of value to the community generally, any contribution to the aims pursued by society including as one of its principle elements ... the ac hievement of the economic goals of efficiency and progress. 11

10 Qantas and American Airlines, Submission in support of application for interim au thorisation , 2 June 2011.

11 Re 7-Eleven Stores (1994) ATPR 41-357 at 42,677. See also Queensland Co-operative Milling Association Ltd (1976) ATPR 40-012 at 17,242.DRAFT DETERMINATION A91265 & A91266 15 4.30. The applicants submits that the JBA, will deliver p ublic benefits, including:

 new and improved products and services

 new fare products and lower fares

 increased tourism

 streamlined corporate travel procurement and

 a stronger frequent flyer proposition.

4.31. The ACCC’s assessment of the likely public benefits of the JBA follows.

New and improved products and services

4.32. The applicants submit that the JBA will enable the addition of new routes, increased frequencies, improved schedules, enhanced connectiv ity and better ground products

and services.

4.33. Dallas/Fort Worth is the major hub of American Airl ines, where it operates (with American Eagle) approximately 750 flights to 186 de stinations worldwide. The applicants note that Qantas’ new Sydney – Dallas/Fo rt Worth services are supported by

28 codeshare destinations from Dallas/Fort Worth to a wide range of major cities across the United States, Canada and Mexico.

4.34. The applicants consider that the JBA provides a joi nt platform for the applicants to ensure the viability of the new Dallas/Fort Worth s ervices and increase these services to a daily frequency as soon as possible.

4.35. The applicants submit that the JBA will also provid e them with an incentive and opportunity to explore the expansion of their codes hare network and launch new transPacific routes and connections. They note that unde r their existing codeshare relationship, the addition of new codeshare destina tions is limited by the perception that administrative costs may outweigh any benefit of in creased traffic. The applicants consider that the detailed sharing of market inform ation under the JBA will lead to improved demand forecasting, prompt identification of market opportunities and enhanced ability to cater for growth through the ad dition of routes and frequencies.

4.36. By way of example, the applicants note that initial response to the Dallas/Fort Worth service indicates Vancouver, Calgary and Toronto ar e high demand ‘beyond’

destinations. At the moment these destinations invo lve relatively long connection times. The applicants submit that the JBA would pro vide the opportunity to reduce transit times by the better coordination of schedul es.

4.37. Finally, the applicants submit that an integrated m anagement and planning structure

allowed under the JBA will enable a coordinated str ategy to improve ground products and service for passengers through the expansion of reciprocal lounge access and improved check-in processes.DRAFT DETERMINATION A91265 & A91266 16 4.38. The ACCC recognises that when airlines providing co mplementary services act independently, the effect that each airline has on the demand for the other airline’s services is not taken into account by either party in planning network products and services. The consequence of this ‘externality’ 12 can include less convenient or more time consuming connections and/or lower levels of p rovision of ground services such as airport lounges and check-in services.

4.39. For instance, air travel from Adelaide to Chicago r equires a domestic segment in Australia (Adelaide – Melbourne), an international segment (say, Melbourne – Los Angeles) and a domestic segment in the Unites State s (Los Angeles – Chicago). The carriers operating these segments provide complemen tary services. A change in scheduling of a carrier operating one segment, say Melbourne – Los Angeles, can affect the demand for travel on the connecting domestic se gments. However, as independent airlines, Qantas will not take into consideration a ny change in demand for American Airlines’ services in making decisions about produc ts and services on its segments. Similarly, American Airlines will not take into acc ount the effect of changes to products and services on its Los Angeles – Chicago segment on the demand for Qantas’ Adelaide – Melbourne and Melbourne – Los Angeles se gments.

4.40. The ACCC accepts that cooperation agreements can pr ovide a means to address this externality or inefficiency by enabling airlines to share the benefits of an increase in demand across complementary segments. Typically, th ese cooperation agreements involve the ability to jointly set schedules and fa res, and often some revenue sharing

mechanism between the airlines.

4.41. The ACCC considers that the applicants are likely t o have the incentive under the JBA to optimise their joint network offering. To the ex tent that the JBA facilitates this network optimisation, the ACCC considers that it is likely to result in public benefit by providing consumers with improved schedules and con nectivity, a greater choice of connection and stop-over options, and the possibili ty of new and improved routes.

4.42. Additionally, the ACCC considers that the JBA is li kely to provide the applicants with strong incentives to offer ground services to each others’ customers on an equal basis. The ACCC accepts that this is likely to result in p ublic benefit by providing consumers with expanded reciprocal lounge access (which will be of benefit to business passengers in particular) and improved check-in pro cesses.

New fare products and lower fares

4.43. The applicants submit that the JBA will enable the development of new fare products and lower fares for passengers travelling from Aust ralia to the United States, such as a simplified zoned pricing structure and the creation of a ‘Walkabout’ multi-sector pass. The applicants submit that these initiatives will c reate tangible benefits to consumers, including:

 additional discounts to the majority of the top 20 United States destinations

12 An externality is an economic term referring to a cost or benefit that affects a third party (a party who did not agree to the action causing the cost or benefit) an d is not reflected in market prices. In the presenc e of an externality, market prices do not reflect the full costs or benefits of producing or consuming a produ ct or service. This results in an economic inefficiency or market failure.DRAFT DETERMINATION A91265 & A91266 17  offering new tactical destinations and

 a preferential availability agreement with American Airlines.

4.44. The applicants currently offer fares in the United Stated according to a geographic zone structure. Under the applicants’ proposed simplific ation of zoned pricing, the current six zones will be reduced to three, as set out in f igures 4.1 and 4.2 below.

Figure 4.1: Current six zone structure 13

13 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011, p. 28.DRAFT DETERMINATION A91265 & A91266 18 Figure 4.2: Proposed three zone structure 14

4.45. The applicants submit that the new three zone prici ng structure will:

 be simpler to manage and communicate to consumers a nd trade

 result in fare reductions for 64% of United States destinations

 allow a broader offering of discounted tactical far es to an increased number of

destinations and

 allow expanded stop-over options between gateway ci ties in the United States and

end destinations.

4.46. In their submission, the applicants illustrate the difference in fares under the six and three zone fare structure and set out the resulting fare reductions to 20 ‘popular’ United States destinations (see figures 4.3 and 4.4 below)

.

14 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011, p. 28.DRAFT DETERMINATION A91265 & A91266 19 Figure 4.3: Comparison of the six and three zon e fare structure 15

Figure 4.4: Fare reductions by city 16

15 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011, p. 29.

16 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011, p. 29.DRAFT DETERMINATION A91265 & A91266 20 4.47. The applicants consider that the joint approach to planning and pricing facilitated by

the JBA would involve common use and access to fare s, and enable them to optimise the number of discounted seats available through th e booking life of a flight as well as the strategic release of discounted inventory to dr ive volume on poor performing

routes.

4.48. The applicants submit that the JBA will allow them to introduce a ‘Walkabout Pass’ for passengers travelling to the United States from Aus tralia and New Zealand. Using the Walkabout Pass, a passenger can fly multiple sector s on the same ticket as opposed to purchasing sector fares. Currently, passengers trav elling to the United States can use a oneworld ‘Visit North America Pass’, but the applic ants submit that this product is not stop-over friendly and involves ‘add-ons’ to the Lo s Angeles tariff.

4.49. The applicants consider that the proposed Walkabout Pass would enable more effective marketing of beyond gateway multi-sector itinerarie s, under which fares would be based on mileage and tiered accordingly. They submi t that these tiered fare levels would result in lower lead-in fares. Qantas propose s to offer American Airlines access to a domestic Australia pass to boost American Airl ine’s ex-United States offering.

4.50. The applicants also consider that the JBA would ena ble them to develop and promote fare products for multi-stop itineraries across a r ange of destinations in a way not facilitated by the current oneworld multi-sector pr oducts, such as United States –

Australia via Asia or United States – Asia via Euro pe.

4.51. The ACCC considers that the JBA creates potential f or lower connecting fares between the parties and new fare products as a result of:

 better coordination of available capacity on their respective domestic sectors to realise higher load factors and

 removal or reduction of ‘double marginalisation’, w hich is a situation that occurs where suppliers of vertically related or complement ary products independently charge a price which includes a mark-up over their costs to maximise their individual profits and do not take account of the i mpact of these prices on demand

for the other airline’s services. The net result i s higher prices on connecting routes than if the two firms were to coordinate their pric ing, for example, through a cooperation agreement or alliance such as the JBA.

4.52. The ACCC considers that the JBA is likely to result in public benefit by facilitating new fare products and lower fares.

Increased tourism

4.53. The applicants submit that by drawing on the expert ise of Qantas and American Airlines in their respective home countries, and th e provision of better information to agents, the JBA will be able to achieve more effici ently and effectively the promotion

of travel to Australia.

4.54. Drawing on Qantas’ Australian expertise and infrast ructure, the applicants submit that

the JBA would allow American Airlines’ AAVacations to develop a comprehensive range of Australian and Asia Pacific land, air and integrated products and activelyDRAFT DETERMINATION A91265 & A91266 21 market this to residents of the United States and i ts own customer base. To achieve this, it is proposed that AAVacations would partner with Tour East Australia, a majority owned subsidiary of Qantas. The applicants submit:

Cooperation between Qantas and AAVacations will dri ve improved access to lower priced land inventory in Australia as a result of the increased purchasing scale. This would enable both Qantas and AAVacations to pass these savings on to consumers. In the case of AAVacations, it is estimated that these arrangements would enable it t o offer integrated holiday packages at a 5 to 15% discount to the cost of purchasing flights and land components separately. 17

4.55. AAVacations estimates that, based on its experience of conversion rates in other markets and the specific characteristics of Austral ia as a destination, the launch of Australian vacations packages could initially gener ate up to 360 additional visitors to Australia and New Zealand per month.

4.56. The ACCC has noted previously that there are a wide range of factors which influence tourism demand, including general purchasing power in source countries, the relative cost of other destinations, the total cost of visit ing Australia (land as well as air component) and the perceived quality of Australia a s a destination. 18

4.57. In this case, the ACCC considers that the JBA may s timulate tourism both by enhancing the applicants’ joint network offering an d by integrating the sales and distribution network of AAVacations and Qantas’ Tou r East Australia. The ACCC notes the applicants’ estimates of holiday package cost savings and increased visitor numbers, and considers that stimulation of tourism may be a source of some public

benefit under the JBA.

Streamlined corporate travel procurement

4.58. The applicants submit that together, they can devel op a joint strategy to better service their corporate customers by drawing on their respe ctive experience and perspective. They consider the JBA will enable them to develop j oint fare products for large corporate as well as small-to-medium enterprises, a nd provide incentives to leverage their home point-of-sale strengths to promote and d istribute these products.

4.59. The ACCC considers these public benefits have mostl y been considered by the ACCC in the three sections above: the ACCC recognises th at the JBA will provide incentives for the applicants to develop a range of new produc ts and services and offer lower fares. Therefore, this benefit claim will not be fu rther considered here.

A stronger frequent flyer proposition

4.60. The applicants submit that the JBA provides incenti ves for them to consider mutual automatic status recognition for members of both fr equent flyer programs, AAdvantage and Qantas Frequent Flyer. This means that frequent flyer members of either program will have increased opportunities to earn and/or re deem frequent flyer points and take advantage of other membership benefits when travell ing on the other airline, such as

17 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011, p. 32.

18 ACCC Determination for applications A91097 and A91 098 lodged by Air New Zealand Limited and Air Canad a, January 2009, page 23.DRAFT DETERMINATION A91265 & A91266 22 cabin upgrade offers and onboard loyalty status rec ognition. The applicants submit that

this will benefit customers and make the airlines' loyalty programs more competitive.

4.61. Qantas and American Airlines also consider that the JBA provides incentives to better leverage their respective strengths of both AAdvant age and Qantas Frequent Flyer membership bases to conduct joint marketing program s, generating more traffic for the joint network. They submit that this benefit would not be possible absent the JBA.

4.62. The ACCC acknowledges that the JBA will enable the applicants to initiate reciprocal status recognition and point accrual, which will en hance the attractiveness of both airlines’ loyalty programs. Generally speaking, the ACCC considers that the public benefits from reciprocal access to loyalty programs are likely to accrue to passengers who prefer to fly with one of the alliance members, are members of an alliance loyalty program and who value the ability to earn or use fr equent flyer points.



### ACCC conclusion on public benefits

4.63. The ACCC considers that the JBA is likely to result in public benefits in the form of:

 new and improved products and services (including i mproved schedules and connectivity, a greater choice of connection and st op-over options, and the possibility of new and improved routes) and enhance d value added services (including reciprocal lounge access, equivalent fre quent flyer privileges and improved check-in procedures).

 new fare products and lower fares

 an enhanced frequent flyer proposition and

 potentially, the stimulation of Australian tourism.



### Public detriment

4.64. Public detriment is also not defined in the Act but the Tribunal has given the concept a wide ambit, including:

...any impairment to the community generally, any har m or damage to the aims pursued by the society including as one of its principal elements the achievement of the goal of economic efficiency. 19

4.65. Qantas and American Airlines submit that the propos ed JBA will not result in any anticompetitive detriment, as they have complementary r ather than overlapping networks.

4.66. The ACCC’s assessment of whether the JBA would be l ikely to result in any public

detriment is set out below.

19 Re 7-Eleven Stores (1994) ATPR 41-357 at 42,683.DRAFT DETERMINATION A91265 & A91266 23 International air passenger transport services

4.67. The applicants submit that American Airlines passen gers represent only 2.8% of the 1,860,935 passengers carried between Australia and the United States in the financial year ending June 2010. They consider that this smal l share reflects the reality that American Airlines does not operate its own services on the trans-Pacific route, has limited sales presence and recognition in Australia , and does not actively market

Australia as a destination.

4.68. The applicants do not consider the JBA will give th em the ability or incentive to increase prices or offer diminished service as they are constrained by the other carriers operating on the trans-Pacific and the threat of en try (or re-entry) afforded by the Open Skies Agreement.

4.69. The applicants submit that the recent entry and rap id expansion of Virgin Australia and

Delta demonstrates the ease with which carriers can establish a presence on the transPacific routes. The applicants also note that over the last two years the trans-Pacific routes have been characterised by constant sale 20 activity in all cabins with a view to maintaining load factor in light of the increased c apacity on the routes and heightened price sensitivity of business and leisure traveller s.

4.70. The ACCC notes that the applicants face direct comp etition from United Airlines, the Virgin Australia/Delta alliance, and to a lesser ex tent Air New Zealand, which operates

services between Australia and the United States vi a New Zealand. In addition, the

ACCC considers that indirect carriers 21 may pose some, albeit limited, competitive constraint on the applicants.

4.71. The applicants note that the Qantas Group’s market share has declined over the last couple of years in the markets for both leisure and business passengers between Australia and the United States. They note that thi s decline can be attributed to the entry of Virgin Australia and Delta in 2009. 22

4.72. Despite Qantas’ recent decline in market share, the ACCC notes that it remains the largest player on the trans-Pacific route, with a 4 3% share of passengers (48% including Jetstar) in the year ended June 2010. 23 However, given American Airlines does not operate services on this route, the ACCC d oes not consider that the JBA will have any anti-competitive effect on these market dy namics.

International air freight transport services

4.73. The applicants note that Qantas and American Airlin es have an interline agreement in respect of the carriage of freight on the trans-Pac ific routes. The ACCC understands that the applicants do not offer any competing dire ct freight services. Based on the

20 The ACCC takes this to mean frequent discounting o f fares

21 Access to mainland United States from Australia is also available through indirect services over Asia using airlines such as Singapore Airlines and Cathay Paci fic. The ACCC notes, however, that the market share s held by such carriers are relatively small in comparison to the direct carriers.

22 For more detailed information, see Qantas and Amer ican Airlines, Submission in support of applications for

authorisation , 11 May 2011, pp. 23 - 24 and Appendices G - I.

23 Qantas and American Airlines, Submission in support of applications for authorisa tion , 11 May 2011, Appendix

GDRAFT DETERMINATION A91265 & A91266 24 information available, the ACCC does not consider t he JBA raises any significant competition concerns in the international air freig ht transport services market.

4.74. The ACCC notes that there are a number of other com petitors in the market for air freight transport services between Australia and th e United States, including major players such as Virgin Australia/Delta, United, Fed Ex, and United Parcel Services.

The sale of air transport services

4.75. The ACCC considers that the JBA is unlikely to adve rsely affect the market for the sale of air transport services given the wide range of m echanisms for ticket purchases

available to consumers. The ACCC notes that while the JBA allows the applicants to jointly market their services, there is strong comp etition in the sale of air transport services from travel agencies (online and in shop f ronts) as well as increasingly from the internet through global portals such as Zuji, E xpedia and Webjet.

Australian domestic air passenger transport service s

4.76. As noted above, an international alliance has the p otential to lessen competition in the market for domestic air passenger transport service s where the alliance directs domestic on-carriage or feeder traffic to a particular carri er (in this case, Qantas in Australia) at the expense of the competitive position of other do mestic carriers.

4.77. The ACCC notes that under the applicants’ current C odeshare Agreement, American Airlines passengers flying beyond or behind the Aus tralian gateway cities (Brisbane, Sydney, Melbourne) are placed on Qantas domestic co nnections in any event. The ACCC also notes that passengers can opt to purchase the domestic leg of their journey separately.

4.78. Therefore, the ACCC does not consider that the JBA is likely to have any significant anti-competitive effects in the Australian domestic air passenger transport services

market.



### ACCC conclusion on public detriments

4.79. The ACCC considers that the JBA is unlikely to resu lt in any anti-competitive detriment, given the applicants do not currently di rectly compete, nor are they likely to directly compete in any of the relevant markets.



### Balance of public benefit and detriment

4.80. In general, the ACCC may only grant authorisation i f it is satisfied that, in all the circumstances, the JBA is likely to result in a pub lic benefit, and that public benefit will outweigh any likely public detriment.

4.81. In the context of applying the net public benefit t est in section 90(8) 24 of the Act, the

Tribunal commented that:

24 The test at 90(8) of the Act is in essence that c onduct is likely to result in such a benefit to the public that it should be allowed to take place.DRAFT DETERMINATION A91265 & A91266 25 ... something more than a negligible benefit is requi red before the power to grant authorisation can be

exercised. 25

4.82. For the reasons outlined in this chapter the ACCC c onsiders the public benefits likely to result from the JBA are new and improved product s and services, new fare products and lower fares, stimulation of tourism and an enha nced frequent flyer proposition. The ACCC does not consider that the JBA is likely to re sult any public detriment.

4.83. Accordingly, the ACCC considers the public benefit that is likely to result from the conduct is likely to outweigh the public detriment. The ACCC is therefore satisfied that

the tests are met.



### Length of authorisation

4.84. The Act allows the ACCC to grant authorisation for a limited period of time. 26 The ACCC generally considers it appropriate to grant au thorisation for a limited period of time, so as to allow an authorisation to be reviewe d in the light of any changed

circumstances.

4.85. In this instance, Qantas and American Airlines seek authorisation for five years. The applicants submit that this period reflects the neg ligible detriment associated with the proposed JBA, and the significant public benefits t hat will be achieved.

4.86. The ACCC did not receive any interested party submi ssions in relation to the length of authorisation sought.

4.87. As indicated above, the ACCC considers that the JBA is likely to result in a number of public benefits, and there is unlikely to be any pu blic detriment. On this basis, the ACCC proposes to grant authorisation for the JBA fo r five years.



### Variations to the proposed conduct

4.88. The ACCC notes that any amendments to the JBA durin g the proposed term of this authorisation would not be covered by the proposed authorisation.

25 Re Application by Michael Jools, President of the N SW Taxi Drivers Association [2006] ACompT 5 at paragraph 22.

26 Section 91(1).DRAFT DETERMINATION A91265 & A91266 26 

## 5. Draft determination

The application

5.1. On 12 May 2011, Qantas and American Airlines lodged application for authorisation A91265 & A91266 with the Australian Competition and Consumer Commission (the ACCC).

5.2. Application A91265 was made using Form A, Schedule 1, of the Competition and Consumer Regulations 2010

. The application was made under subsection 88(1A) of

the Act to:

 make and give effect to a contract, arrangement or understanding, a provision of which is or may be an exclusionary provision within the meaning of section 45 of

the Act.

 make and give effect to a provision of a contact, a rrangement or understanding, a provision of which is, or may be, a cartel provisio n and which is also, or may also be, an exclusionary provision within the meaning of section 45 of that Act.

5.3. Application A91266 was made using Form B, Schedule 1, of the Competition and Consumer Regulations 2010

. The application was made under subsections 88(1A) a nd 88(1) of the Act to:

 make and give effect to a contract or arrangement, or arrive at an understanding, a provision of which would have the purpose, or would have or might have the effect, of substantially lessening competition with in the meaning of section 45 of

the Act.

 make and give effect to a contract or arrangement, or arrive at an understanding a provision of which would be, or might be, a cartel provision (other than a provision which would also be, or might also be, an exclusion ary provision within the meaning of section 45 of that Act).

5.4. In particular, Qantas and American Airlines seek au thorisation for a Joint Business Agreement (JBA).

5.5. Section 90A(1) requires that before determining an application for authorisation the ACCC shall prepare a draft determination.



### The net public benefit test

5.6. For the reasons outlined in Chapter 4 of this draft determination, the ACCC considers

that in all the circumstances the conduct for which authorisation is sought are likely to result in a public benefit that would outweigh the detriment to the public constituted by any lessening of competition arising from the condu ct.

5.7. The ACCC is satisfied that the conduct for which au thorisation is sought are likely to result in such a benefit to the public that the con duct should be allowed to take place.DRAFT DETERMINATION A91265 & A91266 27 5.8. The ACCC therefore proposes to grant authorisation to applications A91265 &

A91266.



### Conduct for which the ACCC proposes to grant author isation

5.9. The ACCC proposes to grant authorisation for a Join t Business Agreement between Qantas and American Airlines for five years.

5.10. Further, the proposed authorisation is in respect o f the JBA as it stands at the time authorisation is granted. Any changes to the JBA d uring the term of the proposed authorisation would not be covered by the proposed authorisation.

5.11. This draft determination is made on 22 August 2011.

5.12. The attachments to this determination are part of t he draft determination.



### Interim authorisation

5.13. At the time of lodging the application, Qantas and American Airlines requested interim authorisation to commence the JBA. The ACCC grante d interim authorisation on

9 June 2011.

5.14. Interim authorisation will remain in place until th e date the ACCC’s final determination

comes into effect or until the ACCC decides to revo ke interim authorisation.



### Further submissions

5.15. The ACCC will now seek further submissions from int erested parties. In addition, the applicant or any interested party may request that the ACCC hold a conference to discuss the draft determination, pursuant to sectio n 90A of the Act.DRAFT DETERMINATION A91265 & A91266 28 

### Attachment A — the authorisation process

The Australian Competition and Consumer Commission (the ACCC) is the independent Australian Government agency responsible for admini stering the Competition and Consumer

Act 2010 (the Act). A key objective of the Act is to preven t anti-competitive conduct, thereby encouraging competition and efficiency in business, resulting in a greater choice for consumers in price, quality and service.

The Act, however, allows the ACCC to grant immunity from legal action in certain circumstances for conduct that might otherwise rais e concerns under the competition provisions of the Act. One way in which parties may obtain im munity is to apply to the ACCC for what is

known as an ‘authorisation’.

The ACCC may ‘authorise’ businesses to engage in an ti-competitive conduct where it is satisfied that the public benefit from the conduct outweighs any public detriment.

The ACCC conducts a public consultation process whe n it receives an application for authorisation. The ACCC invites interested parties to lodge submissions outlining whether they support the application or not, and their reasons f or this.

After considering submissions, the ACCC issues a dr aft determination proposing to either grant the application or deny the application.

Once a draft determination is released, the applica nt or any interested party may request that the ACCC hold a conference. A conference provides all parties with the opportunity to put oral submissions to the ACCC in response to the draft de termination. The ACCC will also invite the applicant and interested parties to lodge written s ubmissions commenting on the draft.

The ACCC then reconsiders the application taking in to account the comments made at the conference (if one is requested) and any further su bmissions received and issues a final determination. Should the public benefit outweigh the public detriment, the ACCC may grant authorisation. If not, authorisation may be denied . However, in some cases it may still be possible to grant authorisation where conditions ca n be imposed which sufficiently increase the benefit to the public or reduce the public detrimen t.DRAFT DETERMINATION A91265 & A91266 29 

### Attachment B — chronology of ACCC assessment for ap plications

A91265 & A91266

The following table provides a chronology of signif icant dates in the consideration of the applications by Qantas and American Airlines.

DATE ACTION
12 May 2011 Application for authorisation lodged with the ACCC, including an application for interim authorisation.
27 May 2011 Closing date for submissions from interested partie s in relation to the request for interim authorisation.

8 June 2011 Closing date for submissions from interested partie s in relation to the substantive application for authorisation.

9 June 2011 The ACCC granted interim authorisation.
22 August 2011 Draft determination issued.DRAFT DETERMINATION A91265 & A91266 30 

## Attachment C — the tests for authorisation and othe r relevant provisions of the Act

Competition and Consumer Act 2010

Section 90—Determination of applications for author isations

(1) The Commission shall, in respect of an applicat ion for an authorization:

(a) make a determination in writing granting such a uthorization as it considers appropriate; or

(b) make a determination in writing dismissing the application.

(2) The Commission shall take into account any sub missions in relation to the application made to it by the applicant, by the Commonwealth, by a State or by an y other person.

Note: Alternatively, the Commission may rely on con sultations undertaken by the AEMC: see

section 90B.

(4) The Commission shall state in writing its reas ons for a determination made by it.

(5) Before making a determination in respect of an application for an authorization the Commission sh all comply with the requirements of section 90A.

Note: Alternatively, the Commission may rely on con sultations undertaken by the AEMC: see

section 90B.

(5A) The Commission must not make a determination g ranting an authorisation under subsection 88(1A) in respect of a provision of a proposed contract, arra ngement or understanding that would be, or might be , a cartel provision, unless the Commission is satisfie d in all the circumstances:

(a) that the provision would result, or be likely t o result, in a benefit to the public; and

(b) that the benefit would outweigh the detriment t o the public constituted by any lessening of competition that would result, or be likely to resu lt, if:

(i) the proposed contract or arrangement were made, or the proposed understanding were
arrived at; and

(ii) the provision were given effect to.

(5B) The Commission must not make a determination g ranting an authorisation under subsection 88(1A) in respect of a provision of a contract, arrangement o r understanding that is or may be a cartel provisio n, unless the Commission is satisfied in all the circu mstances:

(a) that the provision has resulted, or is likely t o result, in a benefit to the public; and

(b) that the benefit outweighs or would outweigh th e detriment to the public constituted by any lessening of competition that has resulted, or is l ikely to result, from giving effect to the provision.

(6) The Commission shall not make a determination granting an authorization under subsection 88(1), ( 5) or (8) in respect of a provision (not being a provisio n that is or may be an exclusionary provision) of a proposed contract, arrangement or understanding, in respect of a proposed covenant, or in respect of proposed conduct (other than conduct to which subse ction 47(6) or (7) applies), unless it is satisfied in all the circumstances that the provision of the propose d contract, arrangement or understanding, the propo sed covenant, or the proposed conduct, as the case may be, would result, or be likely to result, in a bene fit to the public and that that benefit would outweigh the detriment to the public constituted by any lesseni ng of competition that would result, or be likely to resu lt, if:

(a) the proposed contract or arrangement were made, or the proposed understanding were arrived at, and the provision concerned were given effect to;

(b) the proposed covenant were given, and were comp lied with; or

(c) the proposed conduct were engaged in;

as the case may be.DRAFT DETERMINATION A91265 & A91266 31 (7) The Commission shall not make a determination g ranting an authorization under subsection 88(1) or (5) in respect of a provision (not being a provision that is or may be an exclusionary provision) of a contra ct, arrangement or understanding or, in respect of a co venant, unless it is satisfied in all the circumsta nces that the provision of the contract, arrangement or under standing, or the covenant, as the case may be, has resulted, or is likely to result, in a benefit to t he public and that that benefit outweighs or would outweigh the detriment to the public constituted by any less ening of competition that has resulted, or is likel y to result, from giving effect to the provision or comp lying with the covenant.

(8) The Commission shall not:

(a) make a determination granting:

(i) an authorization under subsection 88(1) in resp ect of a provision of a proposed contract, arrangement or understanding that is or may be an e xclusionary provision; or

(ii) an authorization under subsection 88(7) or (7A ) in respect of proposed conduct; or

(iii) an authorization under subsection 88(8) in r espect of proposed conduct to which subsection 47(6) or (7) applies; or

(iv) an authorisation under subsection 88(8A) for proposed conduct to which section 48 applies;

unless it is satisfied in all the circumstances tha t the proposed provision or the proposed conduct would result, or be likely to result, in such a ben efit to the public that the proposed contract or arrangement should be allowed to be made, the propo sed understanding should be allowed to be arrived at, or the proposed conduct should be allow ed to take place, as the case may be; or

(b) make a determination granting an authorization under subsection 88(1) in respect of a provision of a contract, arrangement or understanding that is or may be an exclusionary provision unless it is satisfied in all the circumstances that the prov ision has resulted, or is likely to result, in such a benefit to the public that the contract, arrangemen t or understanding should be allowed to be given effect to.

(9) The Commission shall not make a determination granting an authorization under subsection 88(9) in respect of a proposed acquisition of shares in the capital of a body corporate or of assets of a perso n or in respect of the acquisition of a controlling interes t in a body corporate within the meaning of section 50A

unless it is satisfied in all the circumstances tha t the proposed acquisition would result, or be like ly to result, in such a benefit to the public that the ac quisition should be allowed to take place.

(9A) In determining what amounts to a benefit to t he public for the purposes of subsection (9):

(a) the Commission must regard the following as be nefits to the public (in addition to any other benefits to the public that may exist apart from th is paragraph):

(i) a significant increase in the real value of exp orts;

(ii) a significant substitution of domestic product s for imported goods; and

(b) without limiting the matters that may be taken into account, the Commission must take into

account all other relevant matters that relate to t he international competitiveness of any Australian industry.



### Variation in the language of the tests

There is some variation in the language in the Act, particularly between the tests in sections 90(6) and 90(8).

The Australian Competition Tribunal (the Tribunal) has found that the tests are not precisely the

same. The Tribunal has stated that the test under section 90(6) is limited to a consideration ofDRAFT DETERMINATION A91265 & A91266 32 those detriments arising from a lessening of compet ition but the test under section 90(8) is not

so limited. 27

However, the Tribunal has previously stated that re garding the test under section 90(6):

[the] fact that the only public detriment to be tak en into account is lessening of competition does no t mean that other detriments are not to be weighed in the balan ce when a judgment is being made. Something relied upon as a benefit may have a beneficial, and also a detriment al, effect on society. Such detrimental effect as it has must be

considered in order to determine the extent of its beneficial effect. 28

Consequently, when applying either test, the ACCC c an take most, if not all, public detriments likely to result from the relevant conduct into acc ount either by looking at the detriment side of the equation or when assessing the extent of the be nefits.

Given the similarity in wording between sections 90 (6) and 90(7), the ACCC considers the approach described above in relation to section 90( 6) is also applicable to section 90(7). Further, as the wording in sections 90(5A) and 90(5B) is sim ilar, this approach will also be applied in the test for conduct that may be a cartel provision.



### Conditions

The Act allows the ACCC to grant authorisation subj ect to conditions. 29



### Future and other parties

Applications to make or give effect to contracts, a rrangements or understandings that might substantially lessen competition or constitute excl usionary provisions may be expressed to

extend to:

• persons who become party to the contract, arrangeme nt or understanding at some time

in the future 30

• persons named in the authorisation as being a party or a proposed party to the contract, arrangement or understanding. 31



### Six- month time limit

A six-month time limit applies to the ACCC’s consid eration of new applications for

authorisation 32 . It does not apply to applications for revocation , revocation and substitution, or minor variation. The six-month period can be extend ed by up to a further six months in certain

circumstances.

27 Australian Association of Pathology Practices Incor porated [2004] ACompT 4; 7 April 2004. This view was supported in VFF Chicken Meat Growers’ Boycott Authorisation [2006] AcompT9 at paragraph 67.

28 Re Association of Consulting Engineers, Australia (1981) ATPR 40-2-2 at 42788. See also: Media Council

case (1978) ATPR 40-058 at 17606; and Application of Southern Cross Beverages Pty. Ltd., Cadbury Schweppes Pty Ltd and Amatil Ltd for review (1981) ATPR 40-200 at 42,763, 42766.

29 Section 91(3).

30 Section 88(10).

31 Section 88(6).

32 Section 90(10A)DRAFT DETERMINATION A91265 & A91266 33 

### Minor variation

A person to whom an authorisation has been granted (or a person on their behalf) may apply to

the ACCC for a minor variation to the authorisation

. 33 The Act limits applications for minor variation to applications for:

... a single variation that does not involve a materi al change in the effect of the authorisation. 34

When assessing applications for minor variation, th e ACCC must be satisfied that:

• the proposed variation satisfies the definition of a ‘minor variation’ and

• if the proposed variation is minor, the ACCC must a ssess whether it results in any

reduction to the net benefit of the conduct.



### Revocation; revocation and substitution

A person to whom an authorisation has been granted may request that the ACCC revoke the

authorisation. 35 The ACCC may also review an authorisation with a view to revoking it in

certain circumstances. 36

The holder of an authorisation may apply to the ACC C to revoke the authorisation and substitute a new authorisation in its place. 37 The ACCC may also review an authorisation with a v iew to revoking it and substituting a new authorisation in its place in certain circumstances. 38

33 Subsection 91A(1)

34 Subsection 87ZD(1).

35 Subsection 91B(1)

36 Subsection 91B(3)

37 Subsection 91C(1)

38 Subsection 91C(3)CERTIFICATE OF SERVICE

I hereby certify that I have this day served the foregoing document by email on the following persons:

sascha.vanderbellen@delta.com jhill@dlalaw.com

scott.mcclain@delta.com bill@mietuslaw.com

sametta.c.barnett@delta.com mgoldman@sgbdc.com kquinn@pillsbury winthrop.com rsilverberg@sgbdc.com

bkeiner@crowell.com dhainbach@ggh

- airlaw.com

esahr@eckertseamons.com mcmillin@woa.com

bruce.rabinovitz@wilmerhale.com eskraft@jamhoff.com thomas.bolling@coair.com dpdean@jamhoff.com bob.kneisley@wnco.com dkirstein@yklaw.com robert.land@jetblue.com jyoung@yklaw.com

msinick@ssd.com william.stallings@usdoj.gov cdonley@ssd.com dwight.moore@ustranscom.mil gbleopard@fedex.com john.allen@faa.gov

david.heffernan@wilmerhale.com urskr@state.gov

k evin.montgomery@polaraircargo.com recohn@hoganlovells.com jrichardson@johnlrichardson.com cjsimpson@zsrlaw.com lhalloway@crowell.com pmurphy@lopmurphy.com efaberman@wileyrein.com lachter@starpower.net

mroller@rollerbauer.com anita.mosner@hkla w.com howard.kass@usairways.com jennifer.nowak@hklaw.com benjamin.slocum@usairways.com gmurphy@crowell.com

dan.weiss@coair.com russell.bailey@alpa.org rpommer@atlasair.com

________________________________

JAMES K. KALEIGH

August 22 , 2011