Order 2011

- 6

- 9 Served: June 10, 2011

UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation

on the 10 th Day of June , 201 1

Docket DOT

- OST

- 2009

- 0155

FINAL ORDER

I. S UMMARY

By this Order, the Department of Transportation grants approval of, and antitrust immunity for, Delta Air Lines and the Virgin Australia C arriers 1 , together referred to as the “Joint Applicants” or “applicants,” to form an alliance and coordinate flights between t he United States and Australia

. Our action here is subject to the terms and conditions proposed in Order 2011

- 5

- 8 and reiterated below

.

II. B ACKGROUND

The a pplicants filed a joint application on July 9, 2009

, requesting approval of, and a grant of antitrust immunity for , commercial alliance agreements in the U.S.

- Australia market and certain behind and beyond points in North America and t he South Pacific

. 2

1 Virgin Australia, V Australia, Pacific Blue Airlines (NZ), and Pacific Blue Airlines (Aust).
2 Joint Application at 5 (July 9, 2009). In their July 9, 2009 filing, the applicants sought approval of, and antitrust immunity for, the following agreements: (i) Bilateral alliance cooperation agreements between Delta, on the one hand, and Virgin Australia, V Australia, Pacific Blue Airlines (NZ), and Pacific Blue Airlines (Aust), on the other hand; (ii) A multilateral alliance coordination agreement among the Joint Applicants; (iii) A multilateral joint venture agreement among the Joint Applicants; and (iv) Any existing and future implementing agreements in Joint Application of:

DELTA AIR LINES, INC. VIRGIN AUSTRALIA PTY LTD d/b/a VIRGIN AUSTRALIA; V IRGIN AUSTRALIA INTERNATIONAL AIRLINES PTY LTD d/b/a V AUSTRALIA PACIFIC BLUE AIRLINES (NZ) LTD ; and PACIFIC BLUE AIRLINES (AUST) PTY LTD

Under 49 U.S.C. §§ 41308

- 41309 for A pproval of and A ntitrust I mmunity for A lliance A greements2 The Department issued Show Cause Order 2010

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- 4 on September 8, 2010, tentatively denying the application primarily because the applicants’ failed to show that the proposed alliance would deliver sufficient public benefits to justify a grant of antitrust immunity. T he applican ts responded to Order 2010

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- 4 on October 13, 2010 propos ing changes to their agreements. 3 The Department issued Interim Order 2010

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- 22 o n November 19, 2010 requesting further documentation from the applicants

. 4

On May 10, 2011, the Department issued its second S how C ause O rder, Order 2011

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- 8, this time tentatively approv ing th e application because the applicants had sufficiently addressed the Department’s concerns outlined in Order 2010

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- 4 and provided all necessary follow

- up documentation requested in Order 2010

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- 22. In the second Show Cause Order, the Department found that t he applicants had clarified that the V irgin Australia Carriers had restructured and now operate with one management structure. Also, on April 18, 2011 the Virgin Australia Carriers completed the update of their reservation system allowing fully automated codesharing across the Delta and Virgi n Australia network s

. 5 In addition, the applicants expanded the scope of their joint venture to include more points beyond the gateway cities , including destinations in Canada, Mexico, and New Zealand . Finally, the applicants submitted market data that r eflect more favorable conditions for immunized cooperation than those that existed last year

, and they have committed to maintain their existing capaci ty in the market for two years from the date of this Order.

III. R ESPONSIVE P LEADINGS

Mr. Hubert Horan filed Comments on the Second Show Cause Order on June 1, 2011. The Reply of the Joint Applicants was filed on June 3, 2011. 6 Mr. Horan filed a Reply to the Reply of the Joint Applicants on June 6, 2011. 7

IV. D ECISION

The Department has decided to gr ant final approval of the application of Delta and the Virgin Australia Carriers to form an immunized alliance. The Department has concluded that, with the changes made to their alliance agreements as well as new evidence and commitments specifically desi gned to address the concerns expressed in the September 10, 2010 Show Cause Order, the immunized alliance will generate substantial public benefits not otherwise obtainable. In addition, we find that the proposed transaction is unlikely to have any signif icant deleterious effect on competition in the U.S.

- Australia market. Three carrier groups, each with its own

furtherance of the foregoing agreements and any transaction undertaken pursuant to any of the foregoing agreements.
3 Joint Applicants’ Response to Show Cause Order 2010

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- 4 (October 13, 2010).
4 Interim Order 2010

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- 22 at 2 (November 19, 2010).
5 Letter from Alexander Van der Bellen, Managing Director and Associate General Counsel for Delta, to Dorothy Beard, Chief of DOT Dockets (April 18, 2011).

6 We will address the Joint Applicants’ comments below.

7 Mr. Horan’s June 6, 2011 submission did not include a motion for leave to file and was unauthorized. See 14 CFR § 302.6(b). We accept the pleading but note that it does not raise any new issues.3 alliance, in a long

- haul market, are likely to continue to operate in a competitive environment that benefits the traveling and shipping public.

The Department reached its final decision by applying the decisional standards set forth in 49 U.S.C. §§ 41308 and 41309 to the particular facts of this case. We are adopting the findings and conclusions of Show Cause Order 2011

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- 8 without modification.

We found nothing in the submissions of Mr. Horan that would persuade us to reach a different result. Mr. Horan alleges in his June 1, 2011 filing that the Department’s tentative decision is fundamentally inconsistent with the findings of its competitive analysis and argues that the Department must impose conditions consistent with that competitive analysis. 8 First, Mr. Horan states that the two

- year capacity agreement “improperly allows t he applicants to reduce capacity in ways that would harm consumers if there are any ‘external events beyond the Parties’ control that materially affect the demand for or the cost of providing transpacific air service.’” 9 Mr. Horan misunderstands the condi tions that would allow the applicants to reduce capacity below their stated commitment. It is not , as he asserts, an “open ended loophole” nor a “self

- granted ‘right’ to cut flying” while retaining the benefits of antitrust immunity. 10 The applicants ’ capa city commitment will be met if , on an annual basis, Delta operates 656 transpacific segments and Virgin Australia operates 1,260 transpacific segments. If the applicants expect their annual service levels to drop below the levels specified in their capaci ty agreement as a result of certain force majeure events, the applicants must seek prior approval from DOT. 11

Second, Mr. Horan claims that the agreement “improperly defines ‘capacity’ in terms of flight departures instead of available seat miles/kilomet ers (or seat departures).” H owever, we find h is concern that the applicants could downgauge aircraft in the market “causing far greater harm to consumers” 12 is without merit. Since b oth applicants currently operate Boeing 777 aircraft in the market and ha ve few other aircraft types that can be deployed on these ultra long

haul routes

, t he effect on capacity of requiring available seat miles/kilometers (or seat departures) versus a certain number of flights would be marginal in this case

.
Third, Mr. Horan states that allowing the applicants 18 months to implement their joint venture is both inconsistent with the proximate benefits standard and “with the commitment to maintain capacity levels for 24 months from the time of the Final Order.” 13

8 Comments on Second Show Cause Order, June 1, 2011. Mr. Horan also submitted comments on Order 2010

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- 4 on October 12, 2010, arguing that the Department’s findings should be rejected because it failed to accept the applicants’ benefit claims at face value and therefore imposed a benefits standard that was different from those used in other immunity cases . October 12, 2010. We disagree on both issue s

. In several recent cases, we imposed this 18

- month requirement for joint venture integration. We do not see an adequate basis in this case to deviate from our precedent and note that the Department has, throughout this case, required the applicants to make changes in their

9 Comments on Second Show Cause Order at 3, June 1, 2011.
10 Comments on Second Show Cause Order at 3, June 1, 2011.
11 Letter from Alexander Van der Bellen, Managing Director and Associate General Counsel for Delta, to Dorothy Beard, Chief of DOT Dockets (April 15, 2011).
12 Comments on Second Show Cause Order at 3 and 4, June 1, 2011.
13 Comments on Second Show Cause Order at 5, June 1, 2011.4 joint venture that are intended to speed up the realization of public benefits

. With respect to capacity, t he two

- year capacity commitment required by the Department begins at the time immunity is granted

. Both carriers have been serving the U.S.

- Australia market concurrently for nearly two years, and an additional two

- year capacity commitment will provide additional consumer protection.

Finally

, Mr. Horan question s the Department’s public benefits analy sis. 14 The Department has, in other antitrust immunity cases, found that alliances increase capacity over the long

- term and reduce fares due to , among other factors, the elimination of double marginalization

– both of which are substantial public benefit s

. 15 The capacity commitment required by the Department in this case ensures that any fluctuating conditions particular to the U.S.

- Australia market will not erode the public benefits resulting from this alliance

.

In their reply to Mr. Horan , t he applicants state that “Mr. Horan’s criticisms of the Department’s Order and proposed conditions are without merit.” 16 The applicants point out that Mr. Horan argued, in his October 12, 2010 filing, that “DOT must accept the Delta

- Virgin application on the ground tha t it produces sufficient public benefits under section 41208(b) to justify a grant of antitrust immunity” 17 and now claims , with what the Department considers a much improved alliance agreement for consumers, that benefits have not been adequately demonstra ted

.
The applicants also argue that “[c]ompetition in the U.S.

- Australia and U.S.

- South Pacific market is now more robust than ever.” 18 They note that Qantas has shifted its San Francisco flight to Dallas/Ft. Worth providing far more connecting opportunities for oneworld passengers at American’s largest hub. The applicants also state that United/Continental announced Houston

- Auckland nonstop s ervice once 787 aircraft begin arriving into their fleet in 2012. In addition, the applicants point out that “United, already the largest hub carrier at Los Angeles, has been further strengthened by its recent merger with Continental.” 19

14 Mr. Horan has previously raised similar arguments in other proceedings involving applica tions for antitrust immunity. See, e.g. oneworld, Docket OST

- 2008

- 0252, Show Cause Order 2010

- 2

- 8 at 9 (February 13, 2010), Final Order 2010

- 7

- 8 at 5, 8, 11, 12 (July 20, 2010); U.S. Japan Alliance Case, Docket DOT

- OST

- 2010

- 0059, Show Cause Order 2010

- 10

- 4 at 4, 18 (October 6, 2010).
15 Double marginalization, also called multiple mark

- ups, occurs when two airlines have basic interline or code share arrangements to handle multiple segments but are unwilling to cooperatively price the combined itinerary for the consumer. Thus, for example, Airline A is not willing to accept a cooperative price for the segment it operates because it risks losing revenue to Airline B, which might operate the longer, more profitable segment in the itinerary. The consumer is ult imately not offered the most competitive fare or optimal routing. However, in a “metal

- neutral” sales environment, with revenue

- or benefit

- sharing, the airlines can balance risks and benefits for the benefit of the consumer and alliance as a whole. The ai rlines are willing to cooperatively price itineraries because they share the same incentive to make the sale and share the revenues. See generally W. Tom Whalen, A panel data analysis of code

- sharing, antitrust immunity, and open skies treaties in internat ional aviation markets

, Review of Industrial Organization , 30(1), pp.39

- 61 (2007).
16 Reply of the Joint Applicants at 2 (June 3, 2011).
17 Comments on Show Cause Order 2010

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- 4 (October 12, 2010); Reply of the Joint Applicants at 2 (June 3, 2011).
18 Reply of the Joint Applicants at 2 (June 3, 2011).
19 Reply of the Joint Applicants at 2 (June 3, 2011).5 Finally

, the appl icants declare that Mr. Horan “fundamentally misreads the Joint Applicant’s capacity commitment agreement

, ” 20 in that t he applicants must seek prior approval from the Department if they intend to deviate from the terms of their capacity commitment.

We agree with the applicants that the concerns raised by Mr. Horan do not justify changing the tentative findings made in Order 2011

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- 8 or reaching a different conclusion on the merits of this application.

A CCORDINGLY :

1. We approve and grant antitrust immun ity to the Alliance Agreements 21 between and among Delta Air Lines, Inc. (including its direct and indirect wholly owned subsidiaries)

, Virgin Australia Airlines Pty Ltd d/b/a Virgin Australia , Virgin Australia International Airlines Pty Ltd d/b/a V Austral ia, Pacific Blue Airlines (NZ) Ltd, and Pacific Blue Airlines (Aust) Pty Ltd (all parties together referred to as the “Joint Applicants”), insofar as such agreements relate to foreign air transportation. Subject to the other terms and conditions described in the ordering paragraphs below, the approval and grant of antitrust immunity shall remain in effect indefinitely, subject to Ordering Paragraph 9

, provided that the Joint Applicants:

a. S ubmit for prior approval subsequent subsidiary agreements implement ing their Alliance A greements ; 22

b. R esubmit the Alliance Agreements before five years from the date of issuance of this Order ; and

c. Obtain prior approval if they choose to operate or hold out service under a

common name or use common brands.

2. We determine th at, as a condition of obtaining the authority herein , that the Joint Applicants must operate at least their existing capacity in the U.S.

- Australia market,

as defined and measured by paragraph 4 of the Amended and Restated Mutual Capacity Commitment Agreement dated April 15, 2011 , for a period of at least two years from the date of issuance of this Order

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20 Reply of the Joint Applicants at 3 (June 3, 2011).
21 The Alliance A greements shall mean those agreements referred to on page 2, footnote 3 of the Joi nt Application, submitted on July 9, 2009, as well as amendments and restatements submitted on January 31, 2011 and April 15, 2011. See Letter from Alexander van der Bellen, Counsel for Delta, to Dorothy Beard, Chief of DOT Dockets (April 15, 2011) (placi ng the Amended and Restated Mutual Capacity Commitment Agreement and other commercial agreements on the public record).
22 Regarding this requirement, we do not expect the applicants to provide the Department with minor technical understandings that are nec essary to implement fully their day

- to

- day operations but that have no additional substantive significance. We do, however, expect and direct them to provide the Department with unredacted copies of all contractual instruments that implement or materially alter, modify, or amend the cooperation agreements, joint ventures, or confidentiality/antitrust guidelines. All documents shall be submitted to the Director of the Office of Aviation Analysis.
23 During the term of the Amended and Restated Mutual Capacit y Commitment Agreement, we expect the Joint Applicants to provide a full accounting of their compliance with the capacity commitments as part of the annual6 3. We direct the Joint Applicants to file the following evidence within 10 days of the date on which they execute and implement their Joint Venture Agreement:

a. Verified statement(s) attesting that the Joint Venture Agreement has been executed and implemented , submitted in Docket DOT

- OST

- 2009

- 0155 ; and

b. A copy of the complete executed Joint Venture Agreement with appendices, submitted t o the Director of the Office of Aviation Analysis.

We determine that, unless the Joint Applicants make the filings described in this Ordering P aragraph within eighteen months of the issuance of this Order , the authority granted will expire and the grant o f antitrust immunity will no longer be effective

.

4. We direct the Joint Applicants to submit annual progress reports beginning one year from the date of issuance of this O rder, and continuing each year thereafter while their respective Alliance Agreements a re effective

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5. We direct the Joint Applicants to withdraw, or to remain withdrawn, from participation in any International Air Transport Association tariff coordination activities that discuss any proposed through fares, rates, or charges applicable betw een the United States and any countries whose airlines have been or are subsequently granted antitrust immunity, or renewal thereof, to participate in similar alliance act ivities with a U.S. airline(s).

6. We delegate to the Director of the Office of Interna tional Aviation the authority to determine the applicability of the directive set forth in Ordering Paragraph 5 as to specific prices, markets, and tariff coordination activities, consistent with the scope and purpose of the con dition, as previously descri bed.

7. We direct Virgin Australia Airlines Pty Ltd d/b/a Virgin Australia , Virgin Australia International Airlines Pty Ltd d/b/a V Australia, Pacific Blue Airlines (NZ) Ltd, and Pacific Blue Airlines (Aust) Pty Ltd to report full

- itinerary Origin

- Destinati on Survey of Airline Passenger Traffic on a quarterly basis for all passenger itiner aries that include a U.S. point. 25

progress reports described in Ordering Paragraph 4. As explained in Section VI of this Order, we f urther request that the Joint Applicants provide the Office of Aviation Analysis with an informal update on status of compliance within 30 days of the sixth and eighteen month anniversary date of issuance of a final order in this case.
24 We expect the Join t Applicants to deliver the progress report to the Director of the Office of Aviation Analysis by the close of business on the anniversary date of this order . If that date falls on a weekend or federal holiday, the Joint Applicants may deliver the report by the close of business on the following business day.
25 We expect applicants to report the O& D data beginning with the first full quarter following the date of the issuance of a final order. Detailed instructions are available from the Department’s Office of Airline Information at the Bureau of Transportation Statistics. We treat the foreign air lines’ O&D data as confidential, do not allow U.S. airlines any access to the data, and do not allow foreign airlines any access to U.S. airline O&D Survey data. We use these data only for internal analytical purposes.7 8. We defer action on all motions for confidential treatment submitted in this docket to date.

9. We may amend, modify, or revoke this authority at any time without hearing

.

10. We will serve this Order on all parties on the service list in this docket.

By:

SUSAN L. KURLAND Assistant Secretary for Aviation and International Affairs

(SEAL)

An electronic version of this document is a vailable at: http://www.regulations.gov