COMMENTS ON THE SHOW CAUSE ORDER

JOINT APPLICATION OFDELTAIR LINES, INC., VIRGIN BLUE AIRLINES PTY LTD, VIRGIN BLUE

INTERNATIONAL AIRLINES PTY LTD D/B/A V AUSTRALIA, PACIFIC BLUE AIRLINES (NZ) LTD, PACIFIC BLUE

AIRLINES (AUST) PTY LTD Under 49 U.5,C. 55 41308-41309 FOR APPROVAL OF AND ANTITRUST

IMMUNITY FOR ALLIANCE AGREEMENTS

DOCKET DOT-OST-2009-0155

Hubert Horan

12 october 2010

I am filing these comments in response to the Department's Show Cause Order filed under DOT-OST2009-0155-0026 (Order 2010-9-4) which invited comments from all interested parties, and the

Department's Order 2010-9-18 whlch extended the deadline for comments to 13 October.

I have substantial expertise and interest in questions related to airline industry competition, airline

allianceconomics and airline antitrust issues. My professional background and experience is

documented in prior DOT filings in the Oneworld and US-lapan Alliance cases and a full list of

publications and biographical information is available at my website, horanaviation.com.

I am based in Phoenix, Arizona. I have no active business or financial interests with any of the parties to

this case, and am only commenting as a private citizen concerned about the issues raised by this case.

A.THE DELTA/VIRGIN SHOW CAUSE ORDER MUST BE REJECTED IN IT5 ENTIRETY BECAUSE ITS PUBLIC

BENEFITS STANDARDS ARE TOTALLY INCONSISTENT WITH THE PUBLIC BENENFITS STANDARDS USED IN

EVERY OTHER RECENT AIRLIN E ATI CASE

41. In the Show Cause Order issued on 8 September, DOT tentatively denied the Delta/Virgin application

for antitrust immunity on the grounds "that fail to show that the proposed alliance will generate

sufficient Public Benefits to justify a grant of antitrust immunity."l Reviews of antitrust immunity

applications consist of a section 41309(b) analysis of impacts on competition, and a section 41308{b)

review to determine whether the application generates sufficient Public Benefits to justify the requested

suspension of the antitrust laws. DOT denied the Delta/Virgin application solely on the basis that it failed

the section 41308(b) Public Benefits test, and the comments below are strictly limited to Public Benefits

issues. The Delta/Virgin Public Benefit claims consisted of the same four basic claims made in every

other recent airline ATI application:

n granting ATI would generate huge Public Benefits by eliminating structural barriers to

efficient interllne pricing; granting ATI would immediately lead to 17-30% reductions in

fares paid by consumers presently using non-immunized interline itineraries

n granting ATI would generate Public Benefits as applicant's increased nonstop capacity

I Joint Application Of Delta Air Lines, Inc., Virgin Blue Airlines Pty Ltd, Virgin Blue Intemational Airlines Pty Ltd

D/B/A V Austmlia, Pacific Blue Airlines (NZ) Ltd, Pacific Blue Airlines (Aust) Pty Ltd Under 49 U.S.C. $S 41308-

41309 For Approval OlAnd Antitrust Imrrunity For Alliance Agreements, DOT-OST-2009-0I 55-0026, p.l, 5, rhe

case and the applicants will be referred to as "Delta/Virgin" while recognizing that the Australia/new Zealand based

Virgin branded airlines that are pafties to this case are separate liom Virgin branded airlines in other countries.
Horan, Comments on the Delta/Virgin Show Cause Order, 12 October 2010

n granting ATI would generate a variety of "other" Public Benefits due to each alliances' ability

to offer its customers an expanded set of market, schedule and frequent flyer redemption

options, cost reductions from facilities rationalization, joint purchasing and other sources,

and each alllances' ability to better optimize revenue on its network through volume

discounting and the application of yield management tools to a broader network scope.

granting ATI would generate Public Benefits by enhancing "inter-alliance competition"

I The standards used for evaluating the Public Benefit claims in this case were completely different

from and incompatible with the standards for evaluating the Public Benefit claims in the four

other recent, major airline ATI cases-the North Atlantlc Skyteam, Star, and Oneworld cases and

the US-Japan Alliance case decision from last week .7

il the following two sections of these comments describe and compare the DOT's two

incompatible sets of Public Benefits decision standards. Sections B1/B2/C1/C2 compare the

standards used to evaluate "double margina lization" based pricing benefit claims, sections

B3/C3 compare the standards used to evaluate the nonstop capacity benefit claims,

sections B4/C4 compare the standards used to evaluate the "other" benefit claims and

sections B5/C5 compare the standards used to evaluate the "inter-alliance

com petitiveness" benefit claims.

n section D of these comments summarizes these comparisons and demonstrates that the

differences between findings are exclusively due to the different, incompatible standards

used, and are not explained by any differences in the "facts" of each case.

B. THE SKYTEAM, STAR, ONEWORLD AND JAPAN CASES FOLLOWED A SINGLE, CONSISTENT APPROACH

TO THE EVALUATION OF PUBLIC BENEFIT CLAIMS

81. In the Star, Skyteam, Oneworld and Ja pan cases, DOT clearly ruled that any ATI application

structured like the original mid-90s alliances willgenerate huge Public Benefits resulting from the

elimination of structural "double margina lization" barriers to efficient interline pricing, and that these

massive price reductions will occur automatically whenever ATI granted, and the same magnitude of

price reductions will occur regardless of market or competitive conditions

I Major "double marginalization" price cuts are central to each of these ATI cases3, and are far and

away the largest and most important Public Benefit claim in each application, accounting for 67%

'Joint Application of Alitalia-Linee Aer€e Italiane S.p.A., et.a1. for approval ofantitrust immunity (the "Skyteam"

case). DOT Docket OST-2007-28644): Joint Application of Air Canada, The ANtrian croup. British Midland

Airways Ltd., Continental Airlines. Inc., Deutsche Lufthansa AG, Polskie Linie Lotniecze Lot S.A., Scandinavran

Airlines System, Swiss International Air Lines, Ltd., TAP Air Portugal.. to Amend Order 2007-2-16 under 49

U.S.C. $S 4I 308 and 4 | 309 so as to Approve and Confer Antitrust Immunity. (the "Star/Continental" case);

American Airlines-British Airways-lberia-Finnair-Royal Jordanian Joint Application For Antitrust lmmunity (the

"Oneworld" case), Show Cause Order I 3 February 2010, DOT Docket OST-2008-0252-3390. and the "US-Japan

Alliance Case" which consolidared the separate antitnlst immunity applications ofAll Nippon Airways, Continental

Airlines. Inc.. United Air Lines, Inc and American Airlines and Japan Air Lines, DOT-OST-2010-0059

'' Skyteam Finaf Order DOT-OST -2007 -28644-0174. p.l4- 15, Continental/Star Final Order, DOT-OST-2008-0234-

0253, p.l5-16, Oneworld Show Cause Order DOT-OST-2008-0252-3390 pp.30-32, US-Japan Alliance Case Show

Cause Order, DOT-OST-20l0-0059-0180. p.l3-14

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Horan, Comments on the Delta/Virgin Show Cause Qrder,12 October 201.0

of all Public Benefits (S92 million annually) in the oneworld case.4 The basis for these claims is the

hypothesis that international airlines are incapable of establishing efficient interline prices on an

arms-length basis because of "double marginalization"-the automatic application of "double

markups" above the fares that they would set on an onl;ne itinerary. Independent airlines have no

way to prevent these double markups, and the structural barriers to efficient, revenue maximizing

fare setting that can only be overcome by merger or antitrust immunity (the functional equivalent

of merger)

I The DoT's rulings that ATI grants will always drive enormous consumer benefits is entirely based on

a 2000 paper by Brueckner and Whalen5 that argued that observed that North Atlantic price levels

fell in the mid-1990s following the original introduction of immunized alliances, and hypothesized

that these consumers gains were entirely due to the elimination of the structural barrlers that

forced airlines to set interline prices at inefficiently high levels. Brueckner and Whalen claimed

that all of the observed mid-90s consumer gains were attributed to ATI's removal of the structural

interline pricing barrier, and none of the mid-90s pricing shifts had anything to do with unique

1990s supply/demand conditions, cyclical economic factors, carrier service/productivity

improvements or any other factors6. Also integral to the "double ma rgina lization" hypothesis is

the claim that the sa me magnitude of price reduction s(I7 -30% price cuts, roughly 5200-250 per

ticket in the Oneworld case)7 would occur in any airline market following grants of antitrust

immunity at any point in the future, regardless of market or competitive conditions. Since the 90s

price cuts were strictly due to the elimination of the structural "double ma rginalization" barrier

and had nothing to do with 90s market conditions, any and every future ATI grant will lead to the

same 5200-250 consumer price cuts, regardless of market conditions. In the Star, Skyteam,

Oneworld and Japan cases, DOT fully accepted appiicant claims that ATI would create huge

"double ma rgina lization" pricing cuts solely on the basis of citations of the Brueckner/Wha len

papert and references to mid-90s North Atlantic pricing shifts. These applicants did not provide

r Oneworld Apptication DOT-OST-2008-0252-0001 p. 7. 24, exhibit JA- 13, JA- l9 Other applicants did not bother

to quantiry their Public Benefit claims, but the logic used to derive the Oneworld estimate that $92 million ofthe

total $137 million annual Public Benellts was identical to the logic underlying the "double marginalization" and

other Public Benefit ciaims in everv other case

i Brueckner, J. K. and Whalen. W. T., (2000). "The Price Effects of lnternational Airline Al liances", The Journal o/

Lqv, and Econonics v43 n2. o. 503

6 However Brueckner and Whalen provide no evidence supporting their central hypothesis that observed 90s North

Atlantic price shifts were caused by the removal ofstructural pricing barriers. Their regressions show that prices fell

during the time period when inrmunized alliances were first introduced. but none oftheir data or statistical analysis

data supports their hypothesis that the pricing benefits ofthe early alliances was totally due to the elimination of

structural barriers to efficient interline pricing. Brueckner and Whalen did not examine North Atlantic alliance

pricing under different supply/demand or competitive conditions, and made no attempto demonstrate that the

observed 90s pricing shifts could not have been caused by other factors. ' Brueckner and Whalen's statistical updates attempted to breakdown the original estimate of interline-to-allrance

regression coefficient (25%) into different inrpacts interline to-irnmunized alliance (30%) and non-immunized

codeshare to-imrnunized alliance coefficients (17%). Oneworld's estimated $92 rnillion in annual pricing benefits

was derived by simply multiplying their existing intra-alliance traffic by these coefficients. But none ofthese

updates supponed their "structural pricing" causation hypothesis or their claim that ATI would generate similar

pricins impacls under nralket condition".

" Brueckner and Whalen published flve subsequent papers that updated some ofthe statistical estinrates of I990s

North Atlantic pricing shifts, but these statistical updates are irrelevant to the antitrust claims ofapplicants citing the

'double marginalization" hypothesis. Since the later papers merely repealed the original 2000 hypothesis that the

observed shifts were entirely caused by the elimination of"double malginalization" structural barriers, without
T

Horan, Comments on the Delta/Virgin Show Cause Ordet,12 October 2010

any other evidence or cite any sourcesupporting their "double ma rgina lization" Public Benefil

claims because no other researchas found evidence of structural interline pricing barriers, and

no other analysis of the links between ATI and structural pricing barriers has ever been

published.e

ln the Star, Skyteam, Oneworld and Japan cases, DOT fully accepted applicant claims that ATI would

create huge "double ma rgina lization" pricing cuts without requiring any evidence that the claimed

17 -30o/o price cuts would actually occur u nder current competitive conditions in the applicants'

actual markets. ln these cases evidence that Continental European prices fell following the

original three ATI grants in the 1990s fully satisfies the need for evidence that ATI would drive

major price cuts in the UK and Japanese markets in 201010. 5ince the DOT fully accepts the

Brueckner/Wha len hypothesis that the pricing benefits of the original mid-90s alliances was

entirely due to the elimination of structural "double ma rginalization" barriers, and had absolutely

nothing to do with 1990's supply/dema nd/com petitive conditions or any other factors, evidence

of current supply/dema nd/com petitive conditions wou ld have no bea ring on the va lidity of the

applicants' claims. Under the Brueckner/Wha len hypothesis, fares paid by interline passengers

will f all L7-30%following any grant of ATl, regardless of whether ATI is granted during the dotcom boom, or in the midst of a major worldwide recession.

DOT affirmed its complete support for ATI Public Benefit claims based on the Brueckner/Whalen

"double ma rginalization" hypothesis in the Oneworld case by rejecting all evidence challenging

these claims out of hand. This included evidence demonstrating that the alleged structural pricing

barriers do not exist, evidence showing that the interline pricing behavior linked to "structural

barriers" was fully explained by rational, revenue-maximizing behavior, evidence showing that the

observed 90s pricing shifts were largely explained by short term productivity gains and market

dynamics that no longer exist, claims that the applicants "double ma rginalization" claims failed to

meel Horizontal Merger Guidelines requirements that Public Benefits claims must be based on

verifiable, case-specific evidence that is neither vague nor speculativetl and evidence showing

that recent ATI gra nts led to higher (not 17 -3Oo/o lowerl fa res .t' DOT dismissed this evidence with

providing any new evidence to supporthe original claim. these subsequent papers are not sources separate from the

original 2000 paper. These papers are described at Horan Comments, DOT-OST-2008-02 52-3389. pp.4-6.

' Sonre ATI applications have cited papers by other authors that cited Brueckner and Whalen without undenaking

any original analysis ofthe "double marginalization" hypothesis, and sonre applications cite papers that assume the

truth ofthe "double marginalization" and simply apply Brueckner/Whalen regression coefficients to new sets of

data. (for exanrple the Brattle affidavit in the Oneworld Application (DOT-OST-2008-0052-000I , exhibits JA- l3/ I9

the source of the S92 million "double marginalization" benefit claim). Thus the original 2000 Brueckner/Wlalen

paper remains the sole source for every "double malginalization" claim in every ATI case before the DOT.

'" US-Japan Alliance Case Show Cause Order, p. 13, Oneworld Show Cause Order, p.22

' ' Federal Trade Commission, Departnent ofJustice, Horizontal Merger Guidelines ( 1997) p.3 I

'' The evidence at Horan Comments DOT-OST-2008-02 52-3389, pp.2-21 was based on my personal experience

managing the original Northwest/KLM alliances and sevelal other major airline alliances, and my direct knowledge

ofhow the actual economics of the original Noflh Atlantic alliances and how they had changed since the mid-90s.

The Department ofJustice submitted detailed comments arguing that DOT's acceptance ofPublic Benefit claims fell

well short ofthe Horizontal Merger Cuidelines evidentiary standards DOT is obligated to follow Department of

Justice comments on the Star/Continental Show Cause Order. DOT-OST-2008 -0234-0239. Both Arnerican Airlines

(in the Star and Skyteam cases) and the Deparlment ofJustice also presented detailed analysis that contradicted

"double marginalization" claims ofautomatic $200-250 fare cuts and showed no evidence ofconsumer pricing

benefits from recent expansions ofATl grants. Robyn, J.. Reitzes.J. (2005) untitled analysis ofthe Skyteam

antitrust immunity application prepared on behalf of American Airlines DOT-OST-2004-19214, Robyn. J.,

Reitzes.J. (2006) untitled analysis ofthe Star Alliance antitrust immunjty application prepared on behalfof

I
Horan, Comments on the Delta/Virgin Show Cause Qrder,12 October 2010

the simple assertion that "the Bruckner and Whaien models demonstrate the important principle

that alliances facilitate cooperative pricing that can reduce pricing"lrand made no attempt to

refute any of the counter-evidence presented.

I ln the US-Japan case last week, the DOT further affirmed its absolute support of Public Benefit

claims based on the Brueckner /Whalen's hypothesis when it stated that "ln a review of

international airline cooperation between 1990 and 2000, Whalen found that immunized alliances

are associated with 50 percent higher passenger volumes and 16 to 2L percent lower fares that

non-immunized alliances. Other studies have pointed to fare reductions and welfare gains that

occur when cooperating ailiances eliminate or reduce two separate markups, or dou ble

ma rginalization, on lnterline routes."la The DOT also explicitly accepted Brueckner and Whalen's

analysis as an objective "independent third party study of immunized alliances"ls rejecting case

testimony challenging the objectivity of this analysis on the basis that Brueckner was a paid

consultant for United Airlines throughout the period that this analysis was conducted, and he

prepared paid testimony in support of several Star Alliance ATI applications.16

82. In the Star, Skyteam, Oneworld and Japan cases, DOT has clearly ruled that any the only condition

ATI applicants need to meet to have claims of "double margina lization" and other similar Public Benefits

accepted is that their joint venture is structured like the original mid-90s alliances; DOT acceptance of

huge Public Benefit pricing claims in these cases was not contingent on any other requirements. Any

DOT imposition of new requirements not found ln the original 90s alliances would invalidate all Public

Benefit claims based on "double ma reinalization".

I The Brueckner/Whalen hypothesis that DOT has accepted in each of these cases holds that the huge

North Atlantic pricing shifts observed in the mid-90s were completely explained by the

elimination of structural pricing barriers that occurred when immunity was granted, and was not

due to any other factors. The Brueckner/Whalen hypothesis that DOT has accepted in each of

these cases holds that the original three 1990s alllances (Northwest-KLM, Delta-Swissa ir-sa bena

and United-Lufthansa-SAS) were fully capable of realizing the huge 1990s price impacts observed

lU -3O% price cuts, roughly 5200-250 per ticket). There is nothing in the Brueckner/Whalen

hypothesis or in any testimony presented by any subsequent ATI application demonstrating that

these 17-30% price cuts could only have been achieved under certain kind of marketplace or

American Airlines DOT-OST-2005-22922; Depafiment ofJustice comments on the Oneworld Show Cause Order,

DOT-OST-2008-0252-3374, appendix A and B.

rl Oneworld Show Cause Order o. 32 '" US-Japan Alliance Case, Show Cause Order, DOT-OST-2010-0059-0180, p.13. The only "other studies" cited are

Brueckner and Whalen's subsequent statistical updates to thejr original 2000 paper.

'' Ibi.l.

"' Moorman. R. (2000) "United Tums to Academics to Show Alliances Aid Consumers",lvlation lleek and Space

Technolog,v | 53 n l4 2 October 2000 p. 56. Brueckner's paid Star Alliance advocacy includes "An Evaluation of

the Sk),team-Wings Antitrust Immunity Application" submitted in docket DOT-OST-2004- 19214 and "An

Evaluation ofthe Latest Star Alliance Application for Antitrust Immunity" submitted in docket DOT-OST 2005-

22922. Brueqkner's paid advocacy role was not disclosed in any of his joumai articles. Since Brueckner's paid

advocacy role was documented in the Oneworld case (DOT-OST-2008-0252-3389, p.5) the endorsement of

Bruckner as an "independent.hird-par1y" expert in the US-Japan case demonstrates that DOT rejects any notion

that his ongoing paid United/Star advocacy role undermines the legitimacy ofhis "double marginalization"

hvDothesis.
Horan, Comments on the Delta/Virgin Show Cause O'der,12 October 2010

implementation conditions", and as noted above the DOT has specifically rejected counter-claims

that one cannot assume that the t7-3O% price cuts observed in the 1990s will automatically occur

following ATI grants in 2010.

I Any claim that the observed 77-30% pticing benefits were contingent on any conditions that the

original three mid-90s alliances did not meet would invalidate the entire Brueckner/Wha len

hypothesis and would invalidate the DOT'S Public Benefits findings in each ofthese cases. One

cannot claim that these benefits were contingent on a global scope of alliance cooperation since

all of the original alliances were limited to a specific, non-com prehensive set of North Atlantic

markets. One cannot claim that these benefits were contingent on very long-term strategic,

contractual commitments to a specific set of alliance partners, since these alliances underwent a

variety of major strategic shifts (ongoing entry/exit among Star partners, Delta's complete

abandonment of its original partners, etc). One cannot claim that benefits were contingent on

specific types of "metal neutral" alliance administrative systems, because neither Delta or United

had such systems, and the Northwest/KLM system was quite different from the current Skyteam

system. The claims that ATI applications will generate huge Public Benefits from the elimination of

structural "double ma rginalization" barriers and the claim that these Public Benefits will only be

significant under conditions that Delta-Swissair dd not meet in 1997 are totally inconsistent and

mutually exclusive. .

83. In the Star, Skyteam, Oneworld and Japan cases, DOT has clearly ruled that an applicants'mere

intention to increase nonstoo caoacitv at some ooint in the future is sufficiento demonstrate Public

Benefits that help justify antitrust immunity

ln the US-Japan case, neither applicant made positive claims or commitments that immunity would

actually provide consumers with higher levels of US-Japan nonstop capacityl8, but the DOT ruled

that the "ATl applicants'lntentions to introduce new nonstop service" constituted a Public Benefit

justifying its grant of immunity.Ls

In the Oneworld case, the applicants stated their intention to restart Dallas-Ft. Worth-Madrid

service, and said that they would give "serious consideration tolaunching service" on other

routes20. DOT specifically rejected evidence presented by Virgin Atlantic linking Dallas-Ft.Worth

service to cyclical economic conditions, and their argument the resumption of service was not a

proximate result of immunity, and ruled that Oneworld's "applicants'lnfention to introduce new

nonstop service" was a significant Public Benefit justifying its grant of immunity.2r DOT specifically

cited capacity increases introduced by Northwest/KLM in the mid 1990s as the evidence justifying

its ruling that immunity for Oneworld would create nonstop capacity Public Benefits in 2010.22

" In all cases. these public benefits are assumed torequire the "Open Skies" bilateral conditions that the original

mid-90s North Atlantic alliances operated under. '" The Star applicants said that immunity would "strengthen our ability to maintain and expand nonstop service"

(DOT-OST-2009-0350-0001, p. l7) while AA/JL said that immunity would merely create "increased opportunities

for new or expanded transpacific routes and services" (DOT-OST-2010-0059, p.22) '' US-Japan Alliance Case, Show Cause Order, DOT-OST-2010-0059-0180, p.l3

'" Oneworld Application. DOT-OST-2008-0252-000 I, p.24-26. '' Oneworld Show Cause Order. DOT-OST-2008-0252-3390. p.30

'1 Ihid. o.31.

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Horan, Comments on the Delta/Virgin Show Cause Order, L2 October 2010

In the Star case, DOT specifically ruled that the mere "likelihood of new routes and expanded

capacity on existing routes" and that the applicants would have "a view towards growing

capacity" constituted a Public Benefitjustifying its grant of immunity.'z3

ln these cases, DOT clearly established that Public Benefits from expanded nonstop capacity would

be created irrespective of economiconditions or marketplace supply/demand conditions. In

these cases none ofthe applicants submitted any evidence that expanded nonstop capacity

would be viable under current market condltions, and DOT accepted these Public Benefit claims

without any evaluation of current market conditions. Even in the US-Japan market, where

demand conditions have been stagnant for years, large portions of existing capacity are highly

unprofitable, and where the market is facing unprecedented volatility due to the dramatic

increase in Tokyo airport capacity, DOT ruled that antitrust immunity would lead to increase

nonstop capacity that would benefit consumers, and that these Public Benefits could be assumed

without any actual analysis of marketplace conditions.

In the Oneworld case, DOT not only re.jected Virgin Atlantic's demand to reject applicant nonstop

service claims on the basis of current market evidence, but clearly established that the Oneworld

benefit claims could be accepted solely on the basis of evidence that KLM/Northwest increased

service in a different set of markets 18 years ago.2a

84. In the Star, Skyteam, Oneworld and Japan cases, DOT has clearly ruled that other (non-pricing) Public

Beneflts can be accepted on faith, wlthout any need to quantify or otherwise demonstrate that benefits

claims were neither vague, speculative or insignificant, without ca se/ma rket-specific evidence that

benefits would be the proximate result of the ATI appllcation, and without any evidence demonstrating

that immunity would create net positive benefits for the entire market

Each ATI application includes ahighly similar set of "other" Public Benefits claims including: (1) each

alliances' ability to offer its customers an expanded set of market, schedule and frequent flyer

redemption options, (2) cost reductions from facilities rationalization, joint purchasing and other

sources, and (3) each alliances' ability to better optimize revenue on its network through volume

discounting and the application of yield management tools to a broader network scope. While

"double marginalization" price reductions is far-and-away the largest source of Public Benefits in

any of these cases (67% in the Oneworld case), the DOT has emphasized the importance of these

"other" claims saying that "our decision to approve the alliance is not based solely on the theory

of cooperative pricing. lt is based on a broader set of Public Benefits that are likely to result, such

as greater options for travelers due to schedule and inventory coordination, volume discounting,

expanded access to discount fares, reduced costs, and expanded code sharing and frequent flyer

reciorocitv".2s

In each other case, DOT accepted that the validity ofthese "other" benefit was completely selfevident and thus did not require applicants to

E quantify the benefits claims, or otherwise demonstrate that they were not immaterial

E explain how consumers would realize the claimed benefit (i.e. through lower prices or

;^^-^^-^,J ^^ ^--:+.,1 Lo PdLr LY/

' Continental/Star Show Cause Order. DOT-OST-2008-0234-0193. D.18-19. ?r DOT accepted the claim that ATI would lead to increased Oneworid nonstop service because Nodhwest/KLM

had significantly expanded nonstop capacity after they received ATI in 1992. Oneworld Show Cause Order. DOTOST-2008-0252-3390. o.3 I

25 Oneworld Final Order. DOT-OST-2008-02 52-3390- D.32

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Horan, Comments on the Delta/Virgin Show Cause Order, L2 October 2010

X provide case-specific evidence showing these benefits could actually be achieved under

current market and competitive conditions

n demonstrate that benefits that the applicants' might realize (such as increased network or

frequent flyer scope) would not be offset by detriments elsewhere, demonstrating that

there would be net positive benefits for consumers across the entire market.

85. In the Oneworld and Japan cases, DOT has clearly ruled that the reducing the number of market

competitors via ATI into an oligopoly dominated by the three alliances constitutes a Public Benefit under

section 41308(b) and can help justify antitrust immunity, and ruled that improving applicant

competitiveness versus other alliances also constituted a Public Benefit under section 41308(b)

In the Skyteam case DOT argued that consumers would benefit from reduced competition because

the expanded Skyteam would be more competitive with the larger Star network, and then in the

Star case said consumers would benefit from further reductions in competition because this

would offset increased Skyteam strengths in their home market countries26

In the Public Benefits findings in the US-Japan case, DOT ruled that eliminating existing competition

between United, Continental, ANA, JAL and American via "a grant of immunity will be beneficial

by enhancing inter-alliance com petition...We believe that competition among the three alliances

is ;mportant to consumer benefits in the short and long term."2t

In the Public Benefits findings in the Oneworld case, DOT explicitly ruled that enhanced interalliance competition "is a Public Benefit" separate from its section 41309(b) competitive findings

and separate from other benefits derived from double marginalization and other sources.

"Oneworld will become more competitive in a number of markets, exerting increased competitive

discipline on fares and service in those markets. Consumers getting a third viable option will enjoy

more destinations, better connections, and improved schedules, and better frequent flyer

benefits. These benefits complementhe annual surplus from price reductions and increased

traffic on current interline routes."28 Thus DOT explicitly ruled that consumer welfare had been

damaged in recent years when American and British Airways and lberia competed independently

against the immunized Star and Skyteam alliances, and that consumer welfare would be

materially increased after the number of competitors was reduced to just three.

In both cases, DOT ruled that the Public Benefits that would be created by reducing transatlantic

and transpacificompetition to just these three immunized alliances was self-evident, and thus

immunity could be granted without quantifiable or verifiable evidence of the specific consumer

benefits that would be created in these specific cases, nor explanations of the precise form (price

reductions, capacity increases, etc) that the benefits would take. In each case the DOT'S decisions

on benefits achieved by the applicants (i.e. strengthening Skyteam relative to Star, or

strengthening Oneworld relative to Star and Skyteam) were also self-evident and did not require

quantifiable, verifiable evidence of exactly how consumers would benefit each time the applicants

were strengthened.

'" DOT used "enhancement of inter-alliance competition" as a majorjustification for its approval ofthe

Continental,/Star ATI application. but did not specifically include this within its section 4 1308(b) Public Benefits

aralysis until the later cases. See Continentallstar Show Cause Order p.10.

'' US-Japan Alliance Case. Show Cause Order, DOT-OST-20l0-0059-0180. pl4-15

'" Oneworld Show Cause Order. DOT-OST-2008-0252-3390. p.32

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Horan, Comments on the Delta/Virgin Show Cause Order, L2 October 2010

C. IN THE DELTA/VIRGIN CASE DOT USED A SECOND APPROACH TO EVALUATE PUBLIC BENEFIT CLAIMS

THAT WAS TOTALLY INCOMPATIBLE WITH THE APPROACH USED IN ALL OTHER CASES

C1. The Delta/Virgin Show Cause Order is completely inconsistent with the DOT'S rulings in the Skyteam,

Star, Oneworld and Japan cases as it completely rejects the Brueckner/Wha len "double ma rginalization"

hvpothesis that Public Benefits are created whenever ATI eliminates structural barriers to inefficient

interline pricing and insists that the potentialfor Public Benefits will vary considerably with short-term

ma rket/com oetitive conditions

Consistent with all other applications, the Delta/Virgin Public Benefits claim was fundamentally

based on the elimination of the structural interline pricing barriers that would follow a grant of

immunity. Consistent with allother applications, the Delta/Virgin Public Benefits claim was based

on the Brueckner/Wha len "double ma rginalization" hypothesis that observed 1990s alliance

benefits were entirelv due to the elimination of structural barriers that occurs whenever ATI is

granted, has since they have nothing to do with market-specific conditions similar {17-30%, 5200-

250 per ticket) fare cuts will occur whenever ATI is granted, regardless of market conditions.

The Delta/Virgin Show Cause Order is completely inconsistent with all these other cases, as it insists

that pricing benefits cannot be assumed independent of "the particular facts and circumstances

of the case."2e DOT accepted claims of huge "double marginalization" Public Benefits in every

other case without examining any evidence ofthe particular market/competitive facts ofthose

cases, because the "double margina lization" hypothesis fundamentally assumes that

market/com petitive facts have no bearing on these Public Benefits. Either ma rket/com petitive

facts are totally irrelevanto this aspect of ATI Public Benefits, or the Brueckner/Whalen "double

marginalization" hypothesis must be rejected in its entirety, and all prior DOT Public Benefits

findings are totally invalid. At least one of these two claims is totally inconsistent with the law.

The Delta/Virgin Show Cause Order claims that it is impossible to properly measure ATI pricing

benefits in a markethat has recently undergone major capacity and competitive shifts, and given

this uncertainty, immunity cannot be granted on the basis of claims that pricing benefits might

occurto. This is diametrically opposed to the US-Japan Alliance Show Cause Order, where the DOT

readiiy accepted applicant claims of "double margina lization" pricing benefits despite market

volatility several orders of magnitude greater than anything occurring in the US-Australia market.

Despite the enormous uncertainty surrounding the bankruptcy reorganization ofJapan Air Lines

(unprecedented in Japanese business history), and the sudden radical increase in Tokyo airport

capacity (that will alter competitive capacity and yields to levels never seen before) and other

volatile shifts in Asian airline competition, the DOT accepted "double marginalization" benefits

claims completely on faith, and did not require applicants to produce any evidence proving that

these "double ma rginalization" pricing benefits would occur under the partlcular facts and

circumstances of today's Japanese market.

The Delta/Virgin Show Cause Order similarly claims that it is impossible to properly measure ATI

pricing benefits in today's environment given the huge impact of the global economic recession .r1

This completely contradicts the DOT's Oneworld finding, where it explicitly accepted the

applicants claim that immunity would generate the exact same rate (17-30%) "double

T

r

:' Deha/Virgin Blue Show Cause Order'. DOT-OST-2009-0155-0026. p.5 '" lbid. p.6. I I

t' lbid p. t o
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Horan, Comments on the Delta/Virgin Show Cause Order, !2 October 2010 10

margina lization" pricing gains in the middle of the global economic recesslon as the original three

North Atlantic alliances realized in the middle of the economic boom of 90s.

C2. The Delta/Virgin Show Cause Order is completely inconsistent with allother case findings as ir

fundamentally rejects the Brueckner/Whalen "double ma rglnalization" hypothesis that public Benefits

comparable to those observed in the 1990s (17-30% pricing gains) can be generated by any immunized

alliance structured along the lines of the original 1990s alliances and claims that prlcing pubiic Benefits

can only be achieved if alliances meet structural and implementation conditions that are totally

inconsistent with the Brueckner/Whalen "double marginalization,, hypothesis

Consistent with all other applications, the Delta/Virgin Public Benefits claim uses evidence from

Brueckner and Whalen's analysis of 1990s alliance impacts to predict that an alliance structured

along the same lines as the original 1990s alliances (Northwest-KLM, Delta-swissair-sabena ano

u n ited-Luftha nsa-5AS) will achieve the same 17-30% pricing ga ins observed when those originar

ATI grants eliminated the structural barrier to efficient interline pricing. The Delta/Virgin

application is fully consistent with those gos alliances and thus its public Benefits claim is

consistent with all other granted ATI public Benefit cjaims.

The Delta/Virgin Show Cause Order is completely inconsistent with all these other cases, as it insists

that pricing beneflts cannot be realized unless Delta/Virgin meet alliance structural and

implementation requirements that none of the 90s alliances met. lf pricing public Benefits are

contingent on new, modern requirements the Brueckner/whalen "double marginalization"

hypothesis (that large benefits were possible using the management approaches of the 1990s)

must be rejected in its entirety. Either the "double marginalization" hypothesis allows one to

predict future ATI pricing impacts based on the impacts observed in the 90s or all prior DOT public

Benefits findings (based on predictions using Brueckner/Wha len coefficients, as seen in the

Oneworld case) are totally invalid. At least one of these two claims is totallv inconsistent with the

taw.

The Delta/Virgin Show Cause Order claims that pricing Public Benefits cannot be achieved unless

the alliance partners make a long-term strategic commitment to an exclusive set of partners

within a comprehensive, global network integration plan. Dor never bothers to define exactly

what strategic commitments are a prerequisite for public Benefits, provides absolutely no

evidence that Public Benefits cannot be achieved under more limited, focused alliance

arrangements. The DOT'S claim completely contradicts its Public Benefit findings in every oth€r

case, which were entirely based on alliances with more limited, focused arrangements. Dor

dismisses this application as a "tactical" arrangementhat cannot achieve public Benefits because

virgin might possibly pursue non-Delta alliance arrangements inother markets at some future

point.3'zThis cannot be true unless one acknowledges that the original Delta-swissair-sabena

alliance (where Delta had no strategicommitment)33 created no Public Benefits. DOT claims thar

Delta's other partnership arrangements, such as west coast codesharing with Alaska Airlines

would serious undermine Delta/Virgin public Benefits;34 a claim that blatantly contradicts its

previous finding that Lufthansa's partnership with Jetblue would in no wav limit the public

'- Ibid. n.6. l0 i Delta made the decision to abandon its Swissair-sabena alliance in favor ofan alternative Air France alliance rwo

l:I.,b.f91. l*]:r"ir^: finaLrciri difficulries led ro bankruprcl reorganizarion.

uella vlrsln Blue 5hou Cause Order. p.8. The Star carriers also have a huge non-immunized partnership with

USAirways that completel), overlaps their immunized,.A-+" arrangements.

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Horan, Comments on the Delta/Virgin Show Cause Order,I2 October 2010 LL

Benefits that the Continental/Star alliance would generate.ss DOT claims that Delta/Virgin cannot

create Public Benefits if Canada, Mexico and New Zealand are excluded from the alliance scope at

this point, a claim that is wholly unsubstantiated and cannot be true unless one also argues that

none of the alliances of the 1990s (which all had limited market scopes) created any Public

Benefits.

I The Delta/Virgin show Cause Order claims that pricing Public Benefits cannot be achieved unless

the alliance partners first implement a comprehensive alliance administrative/profit-sharing

system comparable to the Star Alliances' "A++" scheme. DOT cannot deny the applicants' Public

Benefits claims on this basis because the Delta/Virgin application fully meets the standards of the

1"990s alliances, when no one had "A++" type revenue sharing schemes, and only one of the three

alliances had a rudimentary "metal-neutral" administrative approach. DOT cannot rule that

significant alliance Public Benefits require specificomplex administrative tools that were not

common in the 90s without also ruling that every other Public Benefit finding based in part on the

"double margina lization" hypothesis is faise and invalid. All other cases accepted pricing Public

Benefits claim solely based on ATI'S ability to eliminate structural pricing barriers without these

complex systems.

n DOT presents absolutely no legitimate evidence that the Delta/Virgin case or the US-Australia

market have special characteristics justifying special implementation systems conditions

that not found in any transatlantic or US-Japan market or in any other ATI case. As noted

above, DOT claims that the "tactical" nature of this alliance or current US-Austraiia yield

volatility justify the imposition of special conditions is completely spurious.

C3. The Show Cause Order's rejection of Delta/Virgin claims of increased nonstop service based on

evidence that expansion would be financially problematic under current market conditions completely

violates all other case precedent holding that the merely stating the general intention of increasing

nonstop capacity at some point constituted a Public Benefit that would help.justify an ATI grant

The Delta/Virgin nonstop Public Benefits claim was completely consistent with the claims made in

all other cases but the Show Cause Order rejected it saying it had "no basis to conclude that the

proposed alliance will add significant capacity in the near future given the significant increase that

has already occurred."36 This completely contradicts the rulings in every other case where the

DOT accepted nonstop Public Benefit claims on the mere assertion that applicants might increase

service at some future point, and accepted these Public Benefit claims without any case/marketspecific evidence demonstrating that nonstop expansion would be financially viable under current

conditions. Four weeks after issuing the Delta/Virgin Show Cause Order, the DOT issued a totally

contrary ruling in the Japan case saying that the mere "opportunity" for expanded transpacific

service and the applicants'"intention" to eventually introduce new services constituted aPublic

Benefit justifying antitrust immunity3'. At least one of these two findings is totally inconsistent

with the law and must be rejected.

The Show Cause Order also rejected the Delta/Virgin nonstop Public Benefit claim because "the

applicants have not made a convincing case that antitrust immunity would enable them to

achieve consumer benefits that would not otherwise be possible."38 This imposes a standard on

I

I

" Continental/Stat Show Cause Order DOT-OST-2008-0234-0193. D. l5- l6 16 Deharvirgin Blue Show Cause Order. p.8

" USJapan Alliance Case. Show Cause Order. p.13, 15.

" Delta/Virgin Blue Show Cause Order. p.8-9
I

Horan, Comments on the Delta/Virgin Show Cause Order, 12 October 2010 12

Public Benefits findings that DOT had explicitly rejected in the Oneworld case, when it credited

the resumption of Dallas-Ft. Worth-Madrid nonstop service as a Public Benefit directly proximate

to the ATI grant, and explicitly rejected counterclaims that Oneworld had failed to make a

convincing case that this service would never have been restarted without the immunity grant.3e

At least one of these two findings is totally inconsistent with the law and must be rejected.

C4. The Delta/Virgin Show Cause Order completely violates all precedent established in the Star,

Skyteam, Oneworld and Japan cases because it rejects Public Benefit claims unless the applicants

demonstrate that they are not vague, speculative or insignificant,hat they would not occur absent the

grant of immunity and that benefits are not limited to the applicants or isolated passengers, but

represent net positive benefits across the entire market.

The Delta/Virgin "other" Public Benefits claim was completelv consistent with the "other" claims

made in all other cases but The Show Cause Order rejected them because the applicants had not

met the "high standard" of demonstrating that their "efficiency claims are valid."40 In every other

case, DOT had accepted claims of "cost savings from consolidation and activities such as joint

procurement"4l completely on faith, without any evidence demonstrating the exact source of

efficiencies, any evidence showing that the likely cost savings were large enough to fully offset the

costs of alliance implementation, any evidence that the net savings after implementation costs

were significant enough to constitute a material Public Benefit, or any evidence showing that any

comparable or recently implemented alliances had actually achieved significant savings.

The Show Cause Order also rejects these "other" Public Benefit claims because the applicants have

not demonstrated with certainty that they would constitute "large scale public benefits" accruing

to consumers across the market as a whole, as opposed to benefits that would only be realized by

the applicants.a2 This completely reverses the position DOT took in every other case where almost

every claimed Public Benefit (other than nonstop expansion and "double marginalization" driven

price cuts) was strictly limited to the applicants. Each other ATI application claims expanded

network scope, connecting opportunities and frequent flyer redemption opportunities as a Public

Benefit, aithough by definition, these claims only a pply to the scope and schedule opportunities

of the applicants' network, not the market as a whole. Adding Continental to the Star Alliance

increases the Star Alliance network, and increases options for customers who choose to only fly

within the Star Alliance network, but it reduced networks and customer options elsewhere. DOT

not only accepted all star, Skyteam, Oneworld and Japan Alliance public Benefit claims without

any evidence of net market-wide consumer benefits, but explicitly rejected Oneworld case

comments arguing that these private applicant benefits could not be accepted in a section

41308(b) Public Benefits ana lvsis.a3

C5. The Delta/Virgin Show Cause Order completely violates all precedent established in the Star,

Skyteam, Oneworld and Japan cases whereby reducing international airline competition into an

oligopoly dominated by the three alliances constitutes a major Public Benefit, and any immunity grant

that strengthens applicants relative to the other alliance groups is a major Public Benefit.

'" Oneworld Show Cause Order, DOT-OST-2008-0252-3390. p.30-31

t0 Delta/Virgin Blue Show Cause Order, p. l0 '' US-Japan Alliance Case, Show Cause Order, p.l3; every other other case includes similar wording

"' Delta/Virgin Blue Show Cause Order, p.l2

'' Horan Oneworld Comments. DOT-OST-2008-0252-3394. p.l4-16.

I
Horan, Comments on the Delta/Virgin Show Cause Order, 12 October 2010

Whereas DOT had found major Public Benefits justifying ATI in every other alliance case when

applicants increased their market share versus larger alliances, DOT suddenly rejected the

Delta/Virgin claim that combining their smaller/weaker market positions into one more

competitive with Qantas and United on the basis that enhancing competitive position did not

constitute a Public Benefit justifying ATl. In every other case DOT accepted that enhancing

applicant competitiveness would benefit consumers without requiring any evidence

demonstrating the likelihood, magnitude or tangible form such consumer benefits might take, but

suddenly rejected identical Delta/Virgin claims because they did "not provide any detailed

information in the wav of analvsis or evidence to suooort their claims."aa At least one of these two

rulings is totally inconsistent with the law.

In the Show Cause Order DOT falsely claimed that "for the first time we are being asked to grant an

antitrust exemption to help two carriers establish a better position versus incumbents in

essentially a single bilateral market that is open to competition." os In fact DOT has openly

acknowledged that it granted ATI to Skyteam to help them establish a better position versus Star's

overall transatlantic position, granted ATI to Star/Continental to help them counteracthe

merged Skyteam's increased home market dominance, and granted ATI to Oneworld to help

remedy their structural disadvantage versus Star and Skyteam. The US-Japan ATI decision was

designed to allow the weak American-JAL position to strengthen itselfversus the historically

stronger Delta and United positions, and allow the weaker Japanese hub positions at Narita to

strengthen themselves versus the Korean hub positions at Seoul. Every other ATI decision reflects

the DOT willingness to let major carriers use antitrust immunity applications to both improve their

competitive position and to reduce the total number of market competitors. DOT presented no

legitimate evidence justifying its decision to deny Delta/Virgin the exact regulatory relief that it

had granted to every other applicant.

D.THE DOT'S USE OF MULTIPLE, INCOMPATIBLE STANDARDS FOR PUBLIC BEENFITANALYSIS I ILLEGAL

AND THE DIFFE RENCES BETWEEN DELTA/VIRGIN AD ALL OTHER CASES ARE STRICTTY DUE TO THESE

INCOMPATIBLE STANDARDS, AND 15 NOT EXPLAINED OR JUSTIFIED BY ANY UNIQUE FACTS IN THE

DELTA/VIRGIN CASE

D1. The Delta/Virgin Show Cause Order must be rejected in its entirety because it reflects the DOT'S

desire to decide antitrust cases completely independently of law, precedent and evidentiary rules.

By establishing two different, conflicting and contradictory sets of Public Benefit decision

standards, DOT is willfully disobeying the law-there can only be one set of decision standards

consistent with the law, thus at least one of the two sets DOT is using is legally impermissible.

Establishing multiple, incompatible sets of decision standards allows DOT to arbitrarily and

capriciously decide antitrust cases, since it can pick and choose whatever criteria produce its

preferred decision. Establishing multiple, incompatible sets of decision standards allows DOT to

undermine the rights of airlines, consumers and other parties who will not have any transparent

rules to follow in preparing or evaluating antitrust immunity applications. These parties will have

" Delta.lvirgin Blue Show Cause Order, p.l2

" Ibid. The key issue is the restructuring ofcompetition via ATI grants in a fundamentally open market

environment. The difference between Australia (a "single bilateral market") versus Europe (historically a multiple

bilateral market) was not meaningful after the mid 90s, and was completely eliminated by the US-EU bilateral.

13

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Horan, Comments on the Delta/Virgin Show Cause Order, !2 October 2010 L4

no way to challenge or appeal DOT rulings, since the arbitrary use of multiple standards destroys

the concept of case precedent, and destroys the basic link between rulings, the law, and casespecific evidence.

I As the summary table below demonstrates, the Show Cause Order's claim that DOT's "approach to

this case is consistent with oast cases"as is willfullv false. The differences between the Public

Benefits standards in the Delta/Virgin case and the Public Benefits standards in the Skyteam, Star,

Oneworld and Japan cases is not a question of nuance or degree. There is incompatible conflict

between the two sets of standards on everv ootential source of alliance Public Benefits that

applicants in these cases have ever raised. There is incompatible conflict between the two sets of

standards in terms of evidentiary requirements, evaluatlon criteria and the economics/precedent

used to justify the standards.

PUBTIC BEN EFITS JAPAN CASE (6 October) DELTA/VIRG|N CASE (8 Septembed

Need case/ma rket

specific evidence to

prove Double

Marginalization pricing

benefits?

NO-only evidence needed is

citation of 2000 paper, and

claim that North Atlantic fares

fell in mid-90s-no case/market

data needed

YES-totally reject benefit claim

unless applicants prove potential

versus current market capacity and

yield conditions

Need to meet detailed

structura I/systems

criteria to achieve

pricing benefits?

NO-no structural/systems

criteria defined or eva luated;

assume huge benefits

automatically achieved

YES- totally reject benefit claim

because of failure to meet vague

structural/systems criteria; DOT

assumes huge barriers to benefits

unless applicants prove otherwise

Need case/market

specific evidence to

prove nonstop

benefits?

No-don't even need to firm

commitment to add servicemere "opportunity" or

"intention" sufficient; no need

to show service would be viable

YE5-totally reject benefit claim

unless applica nts prove potential

versus current market capacity and

yield conditions

Evidence needed to

prove other benefit

claims? (cost savings,

more connections)

NO-don't even need to

qua ntify benefits or show

benefits realized across entire

market

YES-totally reject unless applica nts

prove claims are not vague,

speculative, insignificant, unrelated

tO ATI

ls strengthening

competitiveness a

Public Benefit?

YES-faciiitating consolidation

to 3 alliance oligopoly fine is a

major Public Benefit;

strengthening applicants"'interalliance competition" is a major

Public Benefit

NO-improper to use ATI to help

applicants improve competitive

position; must provide evidence

proving consumers better off with

three competitors instead of four

I None ofthe other (Skyteam, Star, Oneworld and Japan) cases would have been shown to have

produced the Public Benefits needed to justify antitrust immunity under section 41308(b) if the

Delta/Virgin Public Benefit Standards had been applied in those cases. The USJapan Alliance

applicants had no evidence that "double marginalization" pricing gains would actually be realized

'" DeltalVirgin Show Cause Order. p.2; case data in the table are ffom the US-Japan Alliance Case Show Cause

Order, pp. l3-15 and Delta/Virgin Show Cause Order, p.5-12.
Horan, comments on the Delta/Virgin Show Cause oder,12 october 2010 15

under current market conditions, alleged "double marginalization" priclng gains under current

market conditions would be almost impossible to estimate given uncertainty surrounding JAL's

bankruptcy reorganization and the capacity/yield volatility that Tokyo airport expansion will

cause, nonstop service claims are not credible because future capacity growth would be entirely

attributable to runway expansion and would not be a proxlmate result of ATl, and the Japan

"inter-alliance co m petitive ness" claims were rejected out of hand in the Delta/Virgin case. DOT is

using multiple, incompatible standards so they can justify pre-determined case decisions.

I The differences between the Public Benefits standards in the Delta/Virgin case and the Public

Benefits standards in the Skyteam, Star, Oneworld and Japan cases does not reflect any "natural

evolution" of regulatory standards following the evolution of industry conditions over time. The

completely inconsistent U5-Japan and Delta/Virgin decisions were issued less than a month apart.

Last week's Japan decision was completely consistent with the North Atlantic decisions issued

over a three year period-so highly consistent that the Japan Case applicants considered them

settled law, and demanded approval because their applications had been precisely tailored to

meet those standards. "These agreements satisfy all of the relevant standards for approval and

immunity set forth in the Departments'recent decisions granting antitrust immunity."a'

D2. The Show Cause Order's claim that its rejection of the Delta/Virgin application is justified by the

unioue facts of the case-barriers to Public Benefits not found in the facts of other cases-is

willfully false and must be emphatically rejected. The alleged "barriers" to Public Benefits are just

a smokescreen tohelp conceal the use of arbitrary and capricious standards incompatible with all

other cases.

I As shown in the table below, DoT's assertion of unique "barriers" to Public Benefits in this case is

false and wholly unsubstantiated. One cannotjustify the Delta/Virgin Public Benefits findings on

the basis of case-specific "barriers" because the "barriers" in this case were not materially

different from the "barriers" in anv other case. and DOT had even evaluated whether "barriers"

might have existed in any other case. The difference between the findings in these cases is strictly

due to the use of different, incompatible decision standards, and has nothing to do with

difference on the factual record. Under the longstanding standards, all of the cases would be

found to produce the Public Benefits needed to justify immunity under section 41308(b). Under

the Delta/Virgin standards, none ofthe cases would have met the section 41308(b) Public

Benefits test.

ALLEGED BARRIER TO

DT/VA PUBLIC BENEFITS

Actual evidence of barrier to

benefits shown bv DOT?

"Barrier" logic applied equally in

other cases?

Lack of a lliance/ma rket

experience

NO-pure assertion-cited no

exam ples of other deficient

alliances or evidence of exact

experience needed for benefits

NO-United had no experience

with BM l, TP, LO, LX or their

home markets

Thin market with few

connecting options

NO-fa lse claim-Austra lia-US

market is very large,

connecting options across U5A

NO-market volume/flow criteria

never even suggested inany

other case

r7 Joint uS-Japan Alliance Application ofANA, Continental and United, DOT-OST-2009-0350-000l. p.3
Horan, Comments on the Delta/Virgin Show Cause Order, !2 October 2010

Recent entry, market

volatility precludes

benefits

NO-fa lse claim-many airline

markets much more volatile

than this

NO-Ja pa nese market much

more volatile, more strategic

changes posslble but issue totally

ignored in Japan case

Exclusion of Ca nada,

Mexico, New Zeala nd

NO-false claim-no evidence

showing how narrower scope

precludes benefits

NO-all of the original alliances

had limited scopes

4 separate compa nies with

separate syslems

NO-pure assertion NO-No problem with Star links

across many more com panies,

many more pricing systems

Other codesharing (DL-AS)

precludes benefits

NO-pure assertion No-No problem with LH/86, no

problem with conflicting COlUS

links to UA and Star

Benefits impossible if VA

might pu rsue other alliance

strategies in other markets

NO-might limit benefits but

no evidence it would preclude

benefits

NO-other airlines (Delta,

American, Swissa ir, Continenta l)

have all shifted alliance strategies

E. DOT MUST FULLY WITHDRAW THE DELTA/VIRGIN SHOW CAUSE ORDER, APPROVE THE DELTA/VIRGIN

APPLICATION, AND CLEARLY AFFIRM THAT ALL AIRLINE ANTITRUST IMMUNITY CASES WILL BE BASED ON

A SINGLE CONSISTENT 5ET OF PUBLIC BENEFITS STANDARDS

E1. DOT must formally withdraw and reject all of its Public Benefits Findings in the Delta/Virgin Show

Cause Order as it cannot apply different, conflicting and contradictory standards to different section

41308(b) Public Benefits analysis, and the Show Cause Order failed to provide any legal or evidentiary

basis for rejecting the previously established standards in favor of totally new standards

DOT must withdraw and reject its finding that Public Benefits associated with "double

ma rginalization" pricing reductions are not in any way contingent on case or market specific

competitive conditions, and withdraw and reject its ruling that pricing Public Benefit claims must

be supported by evidence particular to the facts and circumstances of each case. DOT cannot

reverse the principle that these Benefits occur automatically under any market conditions that

had been firmly established by rulings in the Skyteam, Star, Oneworld and Japan cases unless DOT

clearly demonstrates that the fundamental "double ma rginalization" claims are false or are

inconsistent with the law.

DOT must withdraw and reject its finding that alliances only create pricing Public Benefits if they

meet specified structural and implementationsystems requirements that none of the original

1990s North Atlantic alliances had met. DOT cannot reverse the principle that any alliance

structured along L990s lines (that did not take these structural/implementation approaches) will

presumptively generate pricing benefits that had been firmly established by rulings in the

Skyteam, Star, Oneworld and Japan cases unless DOT clearly demonstrates that the 1990s

alliances had in fact not created the Public Benefits claimed in these cases or demonstrates thal

this presumption of 1990s benefits is inconsistent with the law.

DOT must withdraw and reject its finding that claims of alliance nonstop capacity Public Benefits are

invalid without clear evidence that nonstop expansion would be financiallv viable under current

market conditions. DOT cannot reverse the principle that Public Benefits justifying ATI can be

lo

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Horan, Comments on the Delta/Virgin Show Cause Order, \2 October 2010 17

assumed solely on the basis of sincere applicant intentions to expand capacity in the future, a

principle that had been firmly established by rulings in the Skyteam, Star, Oneworld and Japan

cases, unless DOT clearly demonstrates that these cases had assumed nonstop Public Benefits

that had never be achieved, or demonstrates that this regulatory presumption of Public Benefits

is inconsistent with the law.

DOT must withdraw and reject its finding that other Public Benefits claims (such as increased

connecting schedule and frequent flyer benefits, cost reductions, and fare reductions due to yield

management optimization across larger networks) are unacceptable unless proven not to be

vague, speculative, insignificant, or not proximately resulting from the immunity grant, and are

unacceptable unless proven to be net positive market-wide benefits. DOT cannot reverse the

principle that these Public Benefits claims can be accepted as a justification for antitrust immunity

even if they are undocumented and unquantified, a principle that had been firmly established by

ruiings in the Skyteam, star, Oneworld and Japan cases, unless DOT clearly demonstrates that

these cases had Public Benefits claims had been entirelv false, or demonstrates that this

regulatory presumption of Public Benefits is inconsistent with the law.

DOT must withdraw and reject its finding that applicant use of ATI to improve their competitive

position does not constitute a Public Benefit justifying immunity. DOT cannot reverse the

princlple, firmly established in the Skyteam, Star, Oneworld and Japan cases, that using ATI to

reduce international competition to an oligopoly dominated by the three alliances creates Public

Benefits, and any ATI grant that enhances the competitiveness of smaller competitors within that

oligopoly creates Public Benefits. DOT cannot reverse this principle unless it demonstrates that

consumers do not benefit when international competition is restructured into a three alliance

oligopoly, or demonstrates that that this regulatory presumption of Public Benefits is inconsistent

with the law.

E2. DOT must accept the Delta/Virgin application on the grounds that it produces sufficient Public

Benefits under section 41308(b) to justify a grant of antitrust immunity, as it clearly meets all of the

standards used in the Public Benefits analysis used in the Skyteam, Star, Oneworld and Japan cases. In

granting immunity, DOT must formally reaffirm all of the standards used in the Skyteam, Star, Oneworld

and Japan cases, and clearly establish that it will use only one set of section 41308(b) standards in all

future cases, and will not deviate from existing standards without establishing aclear legal and

evidentiary basis for doing so.

DOT must reaffirm its longstanding standard that any ATI application structured along the lines of

the original 1990s North Atlantic alliances (Northwest-KLM, Delta-Swissair-Sa bena and UnitedLufthansa-SAS) will achieve major Public Benefits by eliminating structural "double

ma rginalization" barriers to efficient interline pricing, leading to 77-3O% price reductions for

consumers in those interline markets.

DOT must reaffirm its longstanding standard that ATI applicants do not need to present any casespecific evidence showing that "double ma rgina lization" based Public Benefits will be achievable

under current ma rket/competitive conditions; DOT must presume that every ATI application

structured along the lines of the original 1990s North Atlantic alliances will create these Public

Benefits because every ATI grant removes the same "double marginalization" barriers, and the

entire "double marginalization" hypothesis is fundamentally based on the claim that the

efficiencies created when those barriers are removed is totallv independent of short-term

market/competitive conditions

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Horan, Comments on the Delta/Virgin Show Cause Order, t2 October 2010 18

I DOT must reaffirm its longstanding regulatory presumption that stated applicant intentions to

increase nonstop capacity constitutes a Public Benefit justifoing immunity, and that applicants do

not have to present detailed case/market-specific evidence proving that capacity increases would

be financiallv viable under current conditions

DOT must reaffirm its longstanding regulatory presumption that applicant claims of increased

connecting schedule options, increased frequent flyer seat availability, cost savings, volume

discounting, and yield management efficiencies will be accepted as Public Benefits without the

need for applicants to present evidence demonstrating that the claims are not vague, speculative,

insignificant, orunrelated to the immunity grant, and without the need for applicants to present

evidence demonstrating that net positive benefits will be realized across the total market.

DOT must reaffirm its longstanding standard that Public Benefitshall be recognized inany case

where the application facilitates the consolidation ofinternationalviation into an oligopoly

dominated by the three alliances, and that Public Benefitshall be recognized inany case where

immunity strengthens the applicants' ability to compete with larger alliances within that

oligopoly.

Respectf ully submitted,

n / ,aal '/WIPIfthA'

Hubert Horan

12 October 2010
Horan, Comments on the Delta/Virgin Show Cause Order, 12 October 2O1O

CERTIFICATE OF SERVICE

I hereby certify that I have this date served the foregoing document on the persons identified below by causing a copy to be sent by eteitroiic mait.

carl.nelson@aa.com

howard_kass@usairways.com

benjamin.slocum@usairwavs.com

hkamen@coair.com

dan.weiss@coair.com

jeffrey.manley@united.com

steve.morrissey@united.conr

jhill@dlalaw.com

byerlyjr@state.gov

todd. ho m a n@dot. gov

peter.irvine@dot.gov

christopher. mandel@dot.gov

sacha.vanderbellen@delta.com

anita.mosner@hklaw.com

sophy.chen@hklaw.com

merren. mcarthur@virginblue.com.au

dayna.hall@virginblue.com.au

jeff. morgan@delta.com

Jill.ftacek@usdoj.gov

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Hubert Horan

12 October 2010