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Response to Supplementary 

Comments of Hubert Horan 

Robert Willig1, Mark Israel2, Bryan Keating3, and Jonathan Orszag4

In “Supplementary Comments” filed in this docket on October 19, 2010, Hubert Horan 

claims that the findings in our October 13, 2010 report “appear highly dubious” and 

unlikely to “survive a serious, objective review.”5 He bases this claim on a series of 

economic arguments that are filled with factual errors, fundamental flaws in economic 

logic, misstatements about the foundations for our conclusions, apparent 

misunderstandings of the parties’ internal analytic tools, and incorrect citations to 

published literature. As a result, his comments are not credible at all and irrelevant to a 

reasoned analysis of the issues in this docket. 

In the interest of time, we do not attempt to catalogue every flaw in Mr. Horan’s 

comments. Rather, we point to several egregious errors, which are sufficient to 

demonstrate that the comments should be disregarded in their entirety. 

1. Mr. Horan claims that we are “proposing a totally new basis for connect market 

pricing gains that is totally inconsistent with ‘double marginalization’ based claims,” and 

that the “two approaches...are mutually exclusive; one cannot accept one approach 

without rejecting the other.”6

This claim is nonsense. Not only are the two approaches entirely consistent with one 

another; they are two legs of the same fundamental economic logic. Indeed, far from 

repudiating the standard price-reducing effects due to the elimination of double 

marginalization, we incorporate them as a core part of our quantification of benefits.7 

 

1 Professor of Economics and Public Affairs, Princeton University and Senior Consultant, Compass 

Lexecon. 

2 Senior Vice President, Compass Lexecon. 

3 Vice President, Compass Lexecon. 

4 Senior Managing Director and member of Executive Committee, Compass Lexecon. 

5 Supplementary Comments of Hubert Horan, Joint Application of Delta Air Lines, Inc.; Virgin 

Blue Airlines PTY LTD; Virgin Blue International Airlines PTY LTD d/b/a V Australia; Pacific Blue 

Airlines (NZ) LTD; and Pacific Blue Airlines (Aust) PTY LTD, Docket DOT-OST-2009-0155 (hereinafter 

“Horan Supplementary Comments”), p. 2. 

6 Horan Supplementary Comments, p. 5. 

7 Robert Willig, Mark Israel, Bryan Keating, and Jonathan Orszag, “Measuring Consumer Benefits 

from Antitrust Immunity for Delta Air Lines and Virgin Blue Carriers,” Appendix to Joint Applicants’ 

Response to Show Cause Order 2010-9-4, Joint Application of Delta Air Lines, Inc.; Virgin Blue Airlines 

PTY LTD; Virgin Blue International Airlines PTY LTD d/b/a V Australia; Pacific Blue Airlines (NZ) LTD; 
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We then go on to note that the same economic logic that implies that, following the 

provision of antitrust immunity and the creation of a metal-neutral joint venture, the 

parties will have an incentive to cut prices on formerly interline itineraries also implies 

that the parties will have an incentive to make (potentially costly) capacity, scheduling, 

and other operational decisions to enhance quality and attract more consumers. The 

underlying logic holds that through the joint venture both Delta and the Virgin Blue 

carriers will internalize all of the profits created by attracting additional passengers to the 

combined network, so that the parties’ incentives are strengthened both to lower prices 

and enhance quality in order to attract those passengers. 

Far from asking the DOT to make an either/or decision between two conflicting 

methodologies, our approach simply says that both the price-reduction and qualityenhancement components of this standard economic model (on which, as Mr. Horan 

notes, the DOT has long relied)8 should be considered as consumer benefits. Put 

differently, our approach says that, when evaluating the pricing effects of granting 

antitrust immunity, it is appropriate to consider quality-adjusted prices. There is no valid 

controversy about this approach. 

2. Mr. Horan claims that in its work on the Delta-Northwest merger, the Department of 

Justice (DOJ) “discovered that benefit claims based on QSI-models...were ‘wildly 

inconsistent’” with predictions based on the model “actually used in the carriers’ normal 

course of business.”9 

This is a complete misstatement of the DOJ’s conclusion. The model that DOJ refers to 

as “actually used in the carriers’ normal course of business” is, in fact, the carriers’ QSI 

model. Indeed, in analyzing the Delta-Northwest merger, DOJ used the QSI model 

exactly as we do here, by working from the forecasted increase in demand derived from 

the QSI model and then converting this increase in demand into an implied change in 

consumer welfare based on demand elasticity estimates from the literature.10 Hence, the 

approach that we implemented in Section II.A of our report is the same approach favored 

by DOJ in the Delta-Northwest merger, precisely because it relies on predicted demand 

shifts from the model used by Delta in the regular course of business. 

3. Mr. Horan asserts that our analysis “assumed some current Qantas and United 

passengers shifted to Delta/Virgin because it assumed all passengers have a greater 

 and Pacific Blue Airlines (Aust) PTY LTD, Docket DOT-OST-2009-0155 (hereinafter “Compass Lexecon 

Study”) , ¶¶ 6, 18-26.

8 Horan Supplementary Comments, p. 1. 

9 Id, pp. 2-3. 

10 Ken Heyer, Carl Shapiro, and Jeffrey Wilder (2009), “The Year in Review: Economics at the 

Antitrust Division, 2008-2009,” Review of Industrial Organization, 6-8. 
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preference for ‘ATI connections’ than they do for ‘codeshare non-ATI connections.’”11 

[Emphasis Added]. He implies that such demand shifts may not occur in the “real 

world.” 12

In fact, in using Delta’s QSI model, all we assumed about consumer demand is that the 

empirically based demand predictions that come out of Delta’s QSI model are reliable, as 

reflected in the fact that Delta uses the model to make regular-course-of-business 

scheduling, capacity, and other operational decisions. QSI models relate the “real world” 

observed demand for various itineraries to the characteristics of the itineraries, including 

how many online or interline connections each itinerary contains. The model finds that 

“in the real world,” on net, more passengers fly on itineraries with fewer interline (and 

correspondingly more online) connections.13 Hence, the combination of price changes 

and quality changes associated with moving from interline to online connections 

increases consumer demand for the itinerary, thus generating increased consumer 

welfare, which our original filing quantified. 

For Mr. Horan validly to claim that the predicted demand shift would not occur in the 

“real world,” he would need to demonstrate that the standard demand prediction tool that 

Delta relies on to make regular-course-of-business operational decisions somehow does 

not apply to the effect of the joint venture. Mr. Horan provides no such demonstration, 

and his claim is just baseless rhetoric. 

4. Mr. Horan makes incorrect assertions about the details of Delta’s implementation of 

the QSI model to generate predicted passenger increases from the joint venture: 

• Mr. Horan incorrectly asserts that we have not demonstrated that “the results were 

not artificially distorted” by using before and after schedules that reflected 

changes other than just ATI.14 To the contrary, to predict the effects of the 

transaction using its QSI model, Delta used exactly the same schedule for the preand post-transaction worlds. Post-transaction, Delta just treated connections 

between Delta and Virgin Blue carriers (on itineraries for which either Delta or 

Virgin Australia operated the trans-Pacific segment) as if they were online 

connections to reflect the effect of the metal-neutral joint venture.15 Similarly, in 

 

11 Supplemental Horan Comments, p. 3. 

12 Supplemental Horan Comments, p. 3. 

13 It is true that, as Mr. Horan observes, Delta’s QSI model does not separately control for price. 

This means that the model does not hold price constant when studying how itinerary characteristics affect 

demand, but rather measures the overall observed effect of these characteristics on demand, where that 

effect can come through a combination of associated price differences and quality differences. 

14 Supplemental Horan Comments, p.3. 

15 Compass Lexecon Study, ¶ 11. Under the JV scenario, Delta’s network planners also placed DL 

code on all VA flights from SYD and BNE, and placed VA code on all DL flights from LAX.
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computing benefits based on our own econometric analysis (Section II.B of the 

Compass Lexecon Study), we used the same schedule pre- and post-transaction, 

just changing Delta/Virgin Blue itineraries from “non-immune alliance” to 

“online.” 

• Mr. Horan incorrectly asserts that the measured consumer welfare gains 

“improperly conflate alleged gains from increased nonstop service and alleged 

gains from gains for connecting passengers on the existing capacity base.”16 To 

the contrary, as noted above, our welfare calculations are based on the same 

schedule pre- and post-transaction, just changing what had been Delta/Virgin 

interline connections to connections with online characteristics to reflect the joint 

venture. Hence, measured consumer benefits come entirely from the combination 

of lower prices and higher quality on connecting itineraries. Benefits flowing 

from the parties’ plans to increase capacity, add new routes, etc. are above and 

beyond the computed benefits. 

5. Mr. Horan fundamentally mischaracterizes how the econometric analyses presented in 

Section II.B of the Compass Lexecon Study use historical data to measure the effect of 

antitrust immunity on prices and quality for connecting itineraries. For example: 

• Mr. Horan claims that our study “totally ignores huge correlations” between our 

type-of-service categories (online, ATI, non-immune alliance, etc.) and other 

factors (“schedule competitiveness, frequent flyer loyalty, local market presence, 

the level of price competition”).17 

It is not clear what Mr. Horan means by this claim. If he means that, for 

itineraries on a given route, at a given point in time, and marketed by a given 

carrier, the schedule and frequent flyer benefits may be more attractive on ATI 

itineraries than on non-immune itineraries, then we agree—such ATI advantages 

are precisely the types of quality benefits from ATI service that we seek to 

measure. If, instead, he means that these characteristics vary by marketing 

carrier, route, and time-period in ways that may be correlated with the prevalence 

of ATI service, then we also agree, and this is precisely why we include “fixed 

effects” for the route, time period, and marketing carrier, which entirely control 

for any such differences. As such, our results are entirely driven by variation in 

prices and shares for a given marketing carrier's itineraries, on a given route, in a 

given time period, based on whether the specific itinerary in question is online, 

ATI, non-immune alliance, or non-alliance. 

 

16 Supplemental Horan Comments, p. 4. 

17 Id. 
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• Mr. Horan incorrectly asserts that our “regressions are largely driven by structural 

differences between the North Atlantic...and the Pacific and Latin markets” and 

that we have no basis to claim that the coefficients represent “pricing differences 

between different connections that would be observed within markets with similar 

structural/competitive conditions.”18 Once again, this assertion reflects only 

miscomprehension of our presented methodology. As noted above, because of 

our fixed effects, our results are entirely driven by variation in price and shares 

across itineraries on a given route, not on a comparison across routes with 

different competitive conditions. 

• Mr. Horan incorrectly asserts that we do not address the Show Cause Order's 

concerns that “measuring pricing shifts solely attributable to ATI is very difficult 

under conditions where other much more powerful factors (global recession, 

major recent competitive shifts) would tend to overwhelm any impacts that 

alliance pricing might have.”19 Mr. Horan again completely miscomprehends the 

design of our study that includes a full set of year-quarter fixed effects to control 

fully for any such changes (as well as fixed effects to control for any variation 

across carriers or routes). Fortunately, the data are rich enough to allow us to 

measure the pricing effects of ATI by comparing prices across itineraries 

marketed by a given carrier, on a given route, in a given time period. 

6. Mr. Horan claims as flaws several aspects of the study that actually make its benefit 

estimates quite conservative. For example: 

• Mr. Horan incorrectly claims that if consumers have strong preference for ATI 

itineraries, “Qantas-American and others will surely apply to match these 

advantages, and the ‘consumer welfare’ gains Compass Lexecon is claiming will 

be wiped out.”20 We certainly agree that, inasmuch as Delta/Virgin Blue ATI 

itineraries have lower prices and higher quality than current Delta/Virgin Blue 

interline itineraries, the joint venture may elicit competitive responses, through 

which other carriers seek to lower prices or increase quality perhaps via their own 

applications for antitrust immunity (which could be reviewed by DOT on their 

own merits). But far from what Mr. Horan views as wiping out consumer welfare 

benefits, this would increase the benefits substantially, as consumers would 

 

18 Id, pp. 4-5. 

19 Id, p. 5. 

20 Id, p. 4.
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benefit from improved quality and lower prices on multiple carriers, rather than 

on just Delta/Virgin itineraries.21 

• Mr. Horan correctly notes that our model only quantifies the increase in demand 

that the joint venture generates by attracting passengers who otherwise would 

have flown on other carriers but instead choose to switch to Delta/Virgin.22 Basic 

economic logic tells us that, in addition to the passengers who change carriers, 

there will be new passengers, who otherwise would not have flown but are 

attracted by the lower prices and improved service from the joint venture. This is 

another potentially large source of consumer benefits that our models 

conservatively omit. 

 

21 Mr. Horan’s claim is analogous to arguing that, if competitors react to one another’s lower prices 

by lowering their own prices, this wipes out the consumer welfare gains from lower prices. This is 

obviously false. 

22 Id, p. 4.
CERTIFICATE OF SERVICE

A copy of the foregoing has been served this 22nd day of October, 2010, upon the 

following persons via email: 

robert.rivkin@dot.gov 

susan.kurland@dot.gov 

susan.mcdermott@dot.gov 

christa.fornarotto@dot.gov 

bob.goldner@dot.gov 

todd.homan@dot.gov 

peter.irvine@dot.gov 

christopher.mandel@dot.gov 

UrsKR@state.gov 

Jeremy.Parkinson@infrastructure.gov.au 

sascha.vanderbellen@delta.com 

jeff.morgan@delta.com 

anita.mosner@hklaw.com 

carl.nelson@aa.com 

howard_kass@usairways.com 

benjamin.slocum@usairways.com 

hkamen@coair.com 

dan.weiss@coair.com 

jeffrey.manley@united.com 

steve.morrissey@united.com 

jhill@dlalaw.com 

horanaviation@gmail.com 

info@airlineinfo.com