Order 2010-2-8 Served: February 13, 2010



### UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation

on the 13 th Day of February, 2010

Joint Application of:

AMERICAN AIRLINES, INC.

BRITISH AIRWAYS PLC

FINNAIR OYJ IBERIA LÍNEAS AÉREAS DE ESPAÑA, S.A.

ROYAL JORDANIAN AIRLINES

Under 49 U.S.C. §§ 41308-41309 for approval of and antitrust immunity for alliance agreements Docket DOT-OST-2008-0252

Joint Application of:

AMERICAN AIRLINES, INC.

and BRITISH AIRWAYS, PLC

Under 14 C.F.R. Part 212 and 49 U.S.C. § 40109

for amended statements of authorization Docket DOT-OST-2002-13861

SHOW CAUSE ORDER

I. S UMMARY

Pursuant to 49 U.S.C. §§ 41308 and 41309, the Depa rtment of Transporta tion is proposing to grant antitrust immunity to American Airlines , British Airways, Iber ia, Finnair, and Royal Jordanian – together referred to as the “Joint Applicants” or “applicants” – to form a global alliance subject to conditions. As members of “oneworld,” the applicants already have basic marketing agreements in place to sell each other’s products and services. If approved in a final order, the applicants woul d utilize the antitrust i mmunity to more closely coordinate international operations and launch an integrat ed joint venture in transatlan tic markets. While all five2 applicants would engage in cl ose coordination, only American Airlines, British Airways, and Iberia would participate in the joint venture initially.

The application raises a quest ion of whether the potential benefits of the applicants’ cooperation in a number of airline markets, in cluding some large markets between the United States and the United Kingdom, outweigh the potentia l competitive harm that could result from the reduction of competition on select overlap rout es, including some routes in which there is limited available capacity due to infrastructure constraints. Provided the applicants abide by certain conditions, we have tentatively concluded th at the potential benefits outweigh the potential

harm.

Above all, if approved, the proposed alliance would enhance competition around the globe by creating a viable third immunized alliance that is comparable and more competitive with the product and service offerings of Star Alliance and SkyT eam, which have already received grants of antitrust immunity and are proceeding with their own alliance plans and integrated joint

ventures. With its own immunized alliance a nd joint venture, onewor ld could provide the traveling and shipping public with a wide range of valu able benefits, including:

 Lower fares on more itineraries between city-pairs,

 Accelerated introduction of new routes,

 Additional flights on existing routes,

 Improved schedules,

 Reduced travel and connection times, and

 Product and service enhancements that can provi de full reciprocal access to their networks.

The proposed alliance, if appr oved, would also allow the al liance partners to improve efficiency, reduce costs, and strengthen their networks to better meet the demands of global customers. In the circumstances of this case, th ese benefits for the airlin es would be passed on to consumers and airline employees. The anticipat ed expansion of each partner’s network would increase the supply of air service, particularly in transatlantic markets, which would exert downward pressure on fares so that consumers w ould continue to have affordable air travel options.

We tentatively find that one immediate and tangible consumer benefit will be transatlantic code-sharing and fully reciprocal frequent-flyer programs for onewo rld customers. Transatlantic code-sharing and full frequent-flyer cooperation a llow customers of one airline to earn and redeem miles on the flights of another airline. Due to unique comme rcial issues affecting oneworld airlines, the oneworld alliance has been unable to pr ovide consumers with these benefits absent an integrated joint venture that ope rates with a grant of immunity.

While the proposed alliance could, if approved, offer a wide ra nge of benefits by creating a viable third immunized alliance, it could also potentia lly cause competitive harm in select markets. The potential harm is largely limited to fli ghts between the U.S. and London’s Heathrow International Airport (“Heathrow”) , which serves as a primary hub for oneworld. Due to limited runway capacity at Heathrow, takeoff and la nding rights – otherwise known as “slots” – are scarce. As a result, new competitive entry is di fficult. Since the proposed alliance would allow3 oneworld to control almost half of Heathrow’s available slots, making new entry even more difficult, we tentatively find that it is necessary to take precautions to ensure adequate competition

in the U.S.-Heathrow market.

Thus, to protect consumers agai nst potential harm, but to still enable the benefits of the alliance, we propose that the applicants make four slot pairs available to competitors for new U.S.- Heathrow services. This slot remedy would offs et the potential loss in competition that results from combining the international operations of American and British Airways, which currently compete in U.S.-Heathrow market s, and it would give competitor s the opportunity to introduce new services and improve their access to Heathrow . We are also proposi ng other conditions that serve the public interest and enha nce the competitive benefits of th e transaction. For example, we are proposing that the applicants change certain terms of their joint venture agreement. The changes would remove competitive constraints and en sure that the applicants deliver the promised public benefits. Additionally, we are proposing standard conditions, such as the obligation to submit traffic data and the requirement that the a pplicants implement the proposed alliance within 18 months for the antitrust immunity to remain effective.

In the tentative decision below, we analyze th e competitive issues in detail and take action on two specific requests made by the applicants: (1) a request for blanket co de-sharing authority and (2) a request for approval of, and a grant of antitrust immunity for, a series of commercial alliance agreements. To support our proposed decision to grant both requests, we make a number of tentative findings and conclusions . We direct parties to “show cause” why we should not adopt those findings and conclusions in a final order. Parties have 45 days in which to file answers and 15 days in which to submit replies.

II. B ACKGROUND

A. History

The Joint Applicants are requesting authorit y from the Department, including a grant of immunity from the antitrust laws, to operate an enhanced commerc ial airline alliance. 1 Under our established policy, the existence of an “open-sk ies” framework is a necessary predicate to our consideration of requests for antitrust immunity. 2 Open-skies international aviation agreements encourage more competitive airl ine service because market forces, not restrictive agreements, discipline the price, freq uency, capacity levels, and quality of ai rline service. We are willing to consider the instant request because the United Stat es has an “open-skies” relationship with all of the homelands of the foreign-carrier applicants in this proceeding – namely, the United Kingdom, Spain, Finland, and Jordan. 3 We note, in particular, the ex istence of the “open-skies-plus”

1 Joint Application (Aug. 14, 2008).

2 See, e.g. , Star, Docket DOT-OST-2008-0234, Order 2009-4-5 at 2 (April 7, 2009).

3 U. S.-EU Air Transport Agreement, signed April 30, 2007 (establishing an open-skies framework between the United States and the United Kingdom, Spain, and Finland, among other markets); Air Transport Agreement between the Government of the United States of America and the Government of the Hashemite Kingdom of Jordan, signed Nov. 10, 1996 (establishing an open-skies framework between the United States and Jordan).4 agreement governing air services between the United States and Europe, which has been provisionally applied since March 2008 (“the U.S.-EU Agreement).

This is the third case involving American a nd British Airways. The two founding members of the oneworld alliance have twice before sought a grant of antitrust immunity. The first case, beginning in 1997, ended when the Department terminated the proceeding after it became apparent that the United States and the United Kingdom were not reaching an open-skies agreement. 4 The second case, beginning in 2001, ended when the app licants withdrew their request because they would not accept the principal remedies proposed by the Department – the transfer of sufficient takeoff/landing rights (“slots”) at London’s Heat hrow International Airport (“Heathrow”), proposed to facilitate substantial new entry into the U.S.-London market. 5 In that case, the Department assumed that the United States and the United Kingdom woul d reach an open-skies agreement that would have allowed all of the pr oposed new services to be introduced. When the applicants voluntarily withdrew their request, however, new entry in the U.S.-Heathrow market did not occur, and several years passed before lib eralization was achieved in the context of the broader U.S.-EU Agreement.

To forge a deeper partnership and compete w ith SkyTeam and Star Alliance, the oneworld applicants have searched for ways to mitigate ri sks and balance the benefits of cooperation. This

case reflects their decision to form a “metal-neutral” joint venture, 6 premised upon revenue sharing, to accomplish that goal. By sharing ove rall revenues and agreeing to sell each other’s products and services without regard to which airline is operati ng the aircraft an d collecting the revenue, the applicants argue that the alliance as a whole can focus on developing the Joint Business and providing the customer with the best available products and services, while ensuring

that no member of the alliance is put at a disadvantage.

B. Summary of the Record

On August 14, 2008, the oneworld carri ers filed two relate d applications: one for code-share authority in Docket DOT-OST -2002-13861 and another for antitrust immunity in Docket DOTOST-2008-0252. In addition, the applicants filed a wide range of supporting materials, including documents, traffic data, pleadings, and copies of the written agreements between the airlines governing the proposed alliance (the agreements are referred to as the “Alliance Agreements”). 7

4 See American/ British Airways I, Docket DOT-OS T-97-2058, Order 99-7-2 (July 30, 1999).

5 See American/ British Airways II, Docket DOT-OST-2001-1 0387, Order 2002-1-12 (Jan. 25, 2002) (granting tentative approval to the alliance subject to the condition that the alliance surrender 16 daily slot pairs – or 224 weekly slots – among other conditions), Joint Motion to Dismiss (F eb. 13, 2002) (moving for dism issal because the prospect of reaching open skies and agreeing upon remedies was re mote), Order 2002-4-4 (Apr il 4, 2002) (dismissing the application of American and British Airways, among other things).

6 Metal neutrality is an industry term meaning that the partne rs in an alliance are indifferent as to which operates the “metal” (aircraft) when they jointly market services. With out a metal-neutral sales environment, the partners have a strong economic incentive to book passengers on their own airc raft in order to retain a larger share of the revenue for themselves, which may not be in the best interest of the consumer or the alliance as a whole. Metal neutrality may be achieved through revenue and/or comprehensive benefit sharing arrangements.

7 See Joint Application at 2-3 (Aug. 14, 2008) (enumerating the Alliance Agreements for which the applicants have sought immunity); Joint Application at 5, 10-15, 22 (describing the terms of the Alliance Agreements); Joint5 Subsequently, we granted a request to consolidat e the related dockets and issued a request for additional information to ensure a complete record. 8 Once the additional information was supplied, we provided an initia l comment period ending in May 200 9 for interested parties to submit their views on the application. 9 We also provided a suppl emental comment period, ending on January 11, 2010, to allow interested parties the opportunity to address i ssues raised in late filings. 10

1. Joint Applicants’ Filings

The Alliance Agreements submitted by the applicants would create an integrated alliance in the areas of planning, marketing, and operations. A ll five airlines plan to engage in broad code sharing, coordinate customer se rvice and ground operations, link their frequent-flyer plans, coordinate sales and corporate c ontracts, and jointly price and ma nage capacity on certain routes. Three of the airlines – American, British Airways, and Iberia – will enter into a comprehensive joint venture agreement, known as the “Joint Bu siness Agreement (“JBA” or “joint venture”). 11

Under the JBA, the participating carriers will join tly plan and manage all of their capacity and services over the North Atlantic, closely co ordinating core business operations and sharing revenues. The arrangement is designed to achieve metal neutrality so that “each carrier acts for the benefit of – and is compensated for its contribution to – the alliance as a whole.” 12 The

addition of Iberia to the alliance will, the applicants emphasize, help create a viable third alliance that can improve connections not just over Heathr ow, but also over Iberia’s much less congested

hub in Madrid. 13

The applicants make a number of arguments in support of approval of the proposed alliance: (1) the proposed alliance meets the Department’s standards for a grant of antitrust immunity because it is an integrated alliance with a metal- neutral joint venture at its core; (2) the proposed

alliance enables numerous efficiencies and va luable consumer bene fits by reducing double marginalization; 14 (3) the proposed alliance enhances inter-alliance competition and delivers

Application at Exhibit JA-1 (the Alliance Agreements); Join t Application at JA-4 (describing the relationship of the Alliance Agreements).

8 Order 2008-11-7 (Nov. 12, 2008); Order 2008-12-11 (Dec. 19, 2008).

9 Joint Applicants’ Consolidated Response to Order 2008-12-11 (March 13, 2009); Order 2009-4-15 (April 27, 2009); Order 2009-5-1 (May 1, 2009).

10 Order 2009-12-16 (Dec. 22, 2009).

11 See Joint Application at 2-3, 14-15 (Aug. 14, 2008).

12 Joint Application at 2-3, 11, 14-15 (Aug. 14, 2008).

13 Joint Application at 22-23, 29 (Aug. 14, 2008).

14 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, Airlin e A is not willing to accept a cooperativ e 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 ultimately not offered the most competitive fare or optimal routing. However, in a “metal-neutral” sales environment, with revenue- or bene fit-sharing, the airlines can balance risks and benefits for the benefit of the consumer and alliance as a whole. The airlines are willing to cooperatively price itineraries and make seats available6 genuine new benefits for consumers such as more expansive code sharing, frequent-flyer reciprocity, more competitive fare s, and new routes; and (4) the proposed alliance operates in a pro-competitive environment because, due to the open regulatory framework provided by the U.S.-EU Agreement, competition will discipline any alliance that might otherwise seek to exercise market power. In addition, the applicants argue that the proposed allian ce will not substantially reduce competition in any market, even though ther e are several markets in which the applicants’ services overlap for nonstop services . In particular, they assert that other airlines and alliances

now have full access to Heathrow. The Joint Applicants also stat e that they will not go forward with the alliance without antitrust immunity. 15

Additionally, American (and its affiliates American Eagle Airlines, Inc. and Executive Airlines, Inc. d/b/a American Eagle) and British Airways (and its affiliate BA European Ltd t/a OpenSkies Airlines) 16 are seeking to amend their existing aut hority to engage in reciprocal code sharing. They argue that this request is cons istent with the U.S.-EU Agreement and the public interest. American and British Airways expect the expanded code sharing to provide a more efficient use of capacity in the marketplace and to help maximize the range of service options available to the traveling and shipping public. 17

2. BAA/ACL Filings

The Department sent requests for information to BAA Airports Limited (“BAA”), which owns and operates Heathrow, and Airpor t Coordination Limited (“ACL”), which coordinates operations and allocates slots there. The questions and the answers provided by BAA and ACL were submitted for the public record. 18

BAA and ACL state that slots are scarce at Heathrow. Slots are allocated in accordance with EU slot regulations and IATA Wo rld Scheduling Guidelines, which allow incumbents to maintain their historical operations with grandfathering rights, subject to use-or-l ose-it rules. The remaining slots, called “pool slots,” are composed of new capacity, slots re leased or forfeited to the slot coordinator, or other una llocated capacity. New entrants are entitled to priority in the allocation of 50% of the pool slots. BAA/ACL explain that there ar e very few pool slots, and that no pool slots have been available for a llocation to new tran satlantic services.

BAA/ACL also explain that there is a secondary market for Heathrow slot s. While the market suffers from lack of liquid ity, some slots have changed hands since 2008. According to BAA/ACL, slots for competitor services may be found from incumbent car riers, from alliance partners, or from the secondary slot market gene rally. BAA/ACL state that they do not have data

because they share the same eco nomic incentive to make the sale and share the revenues. See generally Whalen, W.T. A Panel Data Analysis of Code Sharing, Antitrust Immunity, and Open Skies Treaties in International Aviation Markets, Review of Industrial Organization, 30: 39-61 (2007).

15 See Joint Application (Aug. 14, 2008); Joint Applicants’ Consolidated Reply (May 28, 2009).

16 See OpenSkies Airlines Code Share Matter, Docket DOT-OST-2008-0064, Order 2008-5-19 (May 15, 2008) (authorizing OpenSkies Airlines to display British Airways’ code on flights operated by OpenSkies Airlines to and from the United States).

17 Joint Application to Authorize Blanket Open-Skies Code Sharing at 3 (Aug. 14, 2008)

. 18 ACL/BAA Response (Jan. 28, 2009) (located at docket entries -3068 and -3069).7 on compensation paid for slots, but it is probable th at prices have fallen from the high levels paid during 2008. BAA/ACL notes that slot allocati on is based upon runway, terminal, and aircraft parking constraints. Although Heathrow has termin al and aircraft parking capacity shortfalls, the shortfalls have not prevented the co mpletion of a secondary slot trade.

3. Responsive Pleadings

Numerous parties submitted comments on the propos ed alliance. Some comments were filed initially in response to the application and others were filed as supplemental comments. No party has filed objections to the appli cation of American and British Airways for expanded code-share authority. 19

a. Initial Comments

Parties representing airports and coalitions of airports and cities support the alliance. Those parties include the Dallas-Fort Worth International Airport 20 and the City of St. Louis. 21 The parties believe that the proposed al liance is essential for oneworld to remain competit ive, and that a stronger alliance will mean mo re services, and a stronger ec onomy, in their cities.

Virgin Atlantic opposes the proposed alliance. 22 Virgin’s major arguments are (1) circumstances have not changed significantly sin ce the last American/ British Airways case, in which DOT identified significant competitive issues; (2) the proposed alliance is a grave threat to competition in several transatlantic markets in which the applicants’ services overlap; (3) competitors to the alliance cannot respond due to se vere infrastructure constraints at Heathrow airport, which is the preferre d airport for travel to London; (4) the alliance members dominate corporate contracts; (5) the propos ed alliance will not produce any consumer benefits; and (6) the competitive harm cannot be remedied.

The Allied Pilots Association (“APA”), which represents Amer ican’s pilots, opposes the joint

venture. 23 The APA believes that the provisions of the joint venture concerning revenue sharing and capacity management will reduce opportunities for American’s pilots and result in lost jobs.

Two trade associations representing travel agents do not take a position on the proposed alliance, but they express reservat ions about a grant of immunity. 24 Specifically, the Interactive

Travel Services Association and the American Society of Travel Agents (“ITSA/ASTA”) are concerned that the proposed alliance could harm travel agents and reduce price transparency for

19 We note that Spirit raised concerns regarding the gran t of antitrust immunity to code-share flights involving restricted entry markets in South America. See Answer of Spirit (May 18, 2009) . We have addressed Spirit’s concerns below in Section IV(C)(2) of this order.

20 Answer of DFW (May 18, 2009).

21 Answer of the City of St. Louis (May 18, 2009).

22 Answer of Virgin Atlantic (May 18, 2009).

23 Answer of APA (May 18, 2009).

24 Answer of ITSA/ASTA (May 18, 2009).8 consumers. Thus, ITSA/ASTA ask DOT to prevent the applicants from using a grant of immunity to negotiate jointly with travel agents.

Spirit Airlines does not take a position on the proposed alliance, but it does express concern about certain code-share operations to restricted markets in South America. 25 Spirit believes that American should not be permitted to code share with British Airways, and thereby leverage a dominant position, on restri cted routes to Bolivia, Colombia, and Venezuela.

In response to the above parties, the Joint Appl icants reiterate their pos ition that approving the proposed alliance will place the three major globa l alliances on an equa l footing and ensure adequate competition. 26 Disapproval of the proposed alliance , the Joint Applicants argue, would place oneworld’s future in jeopardy as the gap between oneworld and the other two global alliances would continue to widen. The applicants assert that Virgin Atlantic hopes to impede oneworld for its own competitive advantage. The applicants point to perceived flaws in Virgin Atlantic’s arguments, including a failure to ac knowledge changes in the competitive landscape since the 1990s and manipulation of market data to distort actual competitive effects. The applicants argue that APA’s assertions about potential job losses are based on erroneous arguments; the proposed alliance w ill actually carry more behind/ beyond traffic, according to the applicants, which will require more flights and t hus more jobs. With regard to ITSA/ASTA’s answer, the applicants contend that the Depart ment has already dismissed the same specific concerns of travel agents in prior cases. Th e applicants argue that ITSA/ASTA’s antitrust arguments are unsupported and that its proposed car ve-out remedy would disr upt the efficiencies of the joint venture.

b. Supplemental Comments

The Justice Department (“DOJ”) filed supplemental comments. 27 DOJ argues that the proposed alliance will result in competitive harm on six transatlantic routes – Boston-London, Chicago-London, Dallas/Ft. Worth-London, Miam i-London, Miami-Madrid, and New YorkLondon. Based upon an empirical model, DOJ suggest s that fares on the six transatlantic routes could materially increase. According to DOJ, nonstop competition demonstrably affects nonstop pricing, regardless of the presen ce of connecting competition.

Additionally, DOJ discount s the benefits that would flow fr om the alliance and concludes that the applicants have not shown that immunity is necessary to ach ieve whatever benefits there might be. Consequently, DOJ recommends that, “given the risk of significant competitive harm, any grant of immunity should be limited to protec t competition. Three t ypes of remedies could potentially provide that protect ion: (1) unencumbered slot di vestitures, (2) earmarked slot
divestitures, and (3) ca rve-outs from immunity.” 28

25 Answer of Spirit (May 18, 2009).

26 Joint Applicants’ Consolidated Reply (May 28, 2009).

27 DOJ Comments (Dec. 21, 2009).

28 DOJ Comments at 30 (Dec. 21, 2009).9 Virgin Atlantic agrees with DOJ that a grant of antitrust immunity could result in competitive harm, and that entry constraints at Heathrow would prohibit effective competitive discipline against oneworld’s alleged market power. However, while DOJ s uggests that slot and carve-out remedies are necessary to approve the joint vent ure, Virgin argues that the competitive harm in this case cannot be remedied, an d that DOT must simply deny th e application. If DOT does choose to grant antitrust immunity, Virgin states that the Department must consider remedies above and beyond those suggested by DOJ. 29

Also acknowledging DOJ’s allegations of pot ential competitive ha rm, ITSA/ASTA filed supplemental comments. While they did not co mment on DOJ’s recommendations for carve-outs and slot remedies, the two travel groups cited DOJ ’s arguments to support their request that DOT prevent the applicants from jointly negotiating with independent travel agents. Furthermore, ITSA/ASTA claim that granting immunity would in crease the applicants’ market power, resulting in increased transatlantic fares, and that imm unity would not produce any benefits from reduced double marginalization. 30

Mr. Hubert Horan filed supplemental comments. 31 Mr. Horan states that the Department cannot accept a study submitted by the applicants conc luding that the proposed alliance will result in $92 million in annual public benefits from coope rative pricing on connecting routes. Mr. Horan

states that the entire basis of th e applicants’ claim consists of one article plus statistical updates. Any evidence of price or capacity benefits are not due to cooper ative pricing on connecting routes but rather improved supply/demand conditions and ot her changes in the marketplace. Mr. Horan concludes that the applicants have failed to provi de sufficient evidence that the proposed alliance will lower prices.

The Joint Applicants filed their own supplemental comments on September 8 th and responded to other supplemental comments as well. 32 In the September 8 th pleading, the applicants address comments filed by DOJ in the recent Star Alliance case, arguing that DOJ’s empirical model, the same being used here, to predict price effects is fundamentally flawed because it fails to account for the increased capacity that alliances provide. Additionally, the applicants dismiss the need for carve-outs on particular routes, on the grounds that carve-outs would destroy the efficiencies of their integrated joint venture.

In their subsequent pleadings, th e applicants respond to DOJ’s fili ng in this case, as well as to other parties who filed. Overall, the applicants assert that DOJ ha s not met its burden of proof in showing that a grant of antitr ust immunity would lead to cons umer harm. Specifically, the applicants state that DOJ’s empirical model re mains flawed, that DOJ does not consider the

29 Supplemental Comments of Virgin Atlantic (Jan. 11, 2010). Virgin Atlantic also filed a late reply on January 20 th

, reiterating its assertions that there ar e barriers to entry at Heathrow and urging DOT not to consider achieving “regulatory parity” among all three a lliances operating transatlantic serv ices. We will accept the pleading.

30 Supplemental Comments of ITSA/ASTA (Jan. 11, 2010).

31 Supplemental Comments of Hubert Horan (Jan. 10, 2010). Mr. Horan’s comments, originally filed on January 10, were not properly served on parties to the case. Mr. Horan re-submitted his comments on January 31, along with a motion for leave to file, and served parties We will grant the motion and accept the pleading.

32 Joint Applicants’ Supplemental Comments (Sept. 8, 2009); Joint Applicants’ Reply to Answer of Virgin Atlantic (Sept. 28, 2009); Joint Applicants’ Answer to DOJ Comments (Jan. 11, 2010).10 competitive discipline that connec ting service would provide in the markets of concern, and that entry into Heathrow is possible through the sec ondary market for slots. Furthermore, the applicants restate the benefits of the alliance, as well as the benefits of inter-alliance competition with an immunized oneworld alliance, and claim that DOJ has failed to refute these benefits. Attached to the comments are expert exhibits by Compass/Lexicon and the Brattle Group that outline the alleged methodological flaws in DOJ’s empirical model and argumentation.

III. D ECISIONAL S TANDARDS

There are two requests pending in this consolidat ed docket: a request fo r amended authority to allow blanket code sharing and a request for a grant of antitrust immunity covering a series of alliance agreements.

We evaluate the code-share request under 14 C.F. R. Part 212. Where airlines have underlying economic authority from the Department, we will i ssue a statement of author ization to allow code sharing if we find that it is in the public interest . In determining the public interest, we consider, among other things, the extent to which the author ity sought is covered by and consistent with bilateral agreements to which the United States is a party, the extent to which a foreign applicant’s home country deals with U.S. air carriers on the basis of substantial reci procity, and whether the applicants have previously violated our code-share rules. 33

We evaluate the antitrust immunity reque st under 49 U.S.C §§ 41308-41309. We engage in a two-step analysis of foreign air transportation agreements submitted for our approval. We must first determine under § 41309 whether the agreements are adverse to the public interest because they would substantially reduce or eliminate comp etition (the “competitive analysis”). If so, we must determine whether they are nonetheless necessary to meet a serious transportation need or to achieve important public benefits. If we make that finding, we will approve the agreements, provided that these public be nefits cannot be met or achie ved by reasonably available and materially less anticompetitive alternatives; U.S. foreign policy goals are a key element of these

benefits. 34 A party opposing approval has the burden of showing that the agreement or request would substantially reduce or eliminate competiti on and that less anticompetitive alternatives are available. On the other hand, th e party seeking approval of the ag reement or request must submit evidence establishing the transpor tation need or public benefits.

If we approve the agreements under the analysis outlined above, we next decide whether to grant immunity under 49 U.S.C. § 41308. Unde r § 41308(b), Congress has given the Department the authority to exempt airlines from the antitrus t laws to the extent neces sary to allow a proposed transaction to proceed, provided that the exemption is required by the public interest. While the public interest determination under both sections 41309(b) and 41308(b) entails a comparison of anti-competitive effects and public benefits, the sta ndard in section 41308(b) (“required by” rather

33 14 C.F.R. § 212.11.

34 We discuss the public benefits findings below.11 than “not adverse to”) is higher. 35 We grant immunity if the public interest requires it and the parties to such an agreement would not otherwise go forward w ith the transaction. 36

If we determine that the transaction would substantially reduce or eliminate competition, yet meets the test for approval unde r section 41309(b)(1), then we must exempt the parties to the transaction, pursuant to 49 U.S.C. § 41308(c).

The intended commercial effects of the Allianc e Agreements are similar to those resulting from a merger of airline operations. Thus, we appl y the Clayton Act test, which is used to predict the competitive effects of a proposed merger. 37 The Clayton Act test requires us to consider whether the Alliance Agreements are likely to subs tantially reduce competition and facilitate the exercise of market power – that is, to allow the Joint Applicants to profitably charge supracompetitive prices or reduce service or quality belo w competitive levels in any relevant market. To determine whether an alliance is likely to create or enhance market power, we primarily

consider whether the alliance w ould significantly increase market concentration, whether the alliance causes potential competitive harm, and whether new entry into the market would be timely, likely, and sufficient either to deter or counteract the potential competitive harm.

Where new entry would not otherwise be suffic ient to address competitive harm, or where

there are external factors such as infrastructure constraints in the marketplace that exacerbate the competitive harm remedies may be necessary a nd appropriate to address competitive problems caused by the alliance, provided they still allow th e benefits of the alliance to be realized.

35 See United/ Lufthansa, Docket DOT-OST-96-1116, Order 96-5-12 at 2 (May 9, 1996); Star, Docket DOT-OST2008-0234, Order 2009-4-5, at 18 (April 7, 2009), quoting Northwest/KLM, Docket 46371, Order 93-1-1 at 11 (Jan. 11, 1993). See also SkyTeam I, Docket DOT-OST-2004-19214, Order 2005-12-12 at 32 (Dec. 22, 2005); Air Canada/ Austrian/ bmi/ LOT/ Lufthansa/ SAS/ Swiss/ TAP/ United, Docket DOT-OST-2005-22922, Order 2006-12-17 at 15 (Dec. 18, 2006)

. 36 See SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 17 (April 9, 2008); Air Canada/ Austrian/ bmi/ LOT/ Lufthansa/ SAS/ Swiss/ TAP/ United, Docket DOT-OST-2005-22922, Order 2006-12-17 at 8 (Dec. 18, 2006).

37 See Acquisition of Northwest/Wings Holdings, Inc., Docket 46731, Order 92-11-27 at 13; SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 5 (April 9, 2008).12 IV. T ENTATIVE D ECISION

A. Tentative Approval of Code Sharing

In this section, we consider the request by American and British Airways to expand their codesharing relationship. Their request for blanket au thority is the last piece of authority that the applicants would need to implement blanket c ode sharing under the umbrella of oneworld. The Department has already approved code-shares between American and Royal Jordanian, American and Iberia, American and Finnair , and some code-shares between American and British Airways. 38

We tentatively find that approval of the re quested authority, as conditioned, will enable American and British Airways to implement the expanded operational opportunities resulting from the U.S.-EU Agreement. Open-skies agreements with foreign countries gi ve authorized carriers from either country the ability to serve any route between the two countries they wish (with open intermediate and beyond rights). We tentatively find that the e xpanded code-share authority that American and British Airways seek is encompassed by the U.S.-EU Agreement. We also tentatively find that it is in the publ ic interest to expand the code-share authority, as it will result in new service opportunities for U.S. passengers and shippers.

Therefore, we tentatively approve the requests of American and British Airways to renew their existing statements of authorization and to amend their authority to allow blanket open-skies code sharing, subject to the conditi ons set forth in Appendix A. 39

B. Tentative Approval of the Alliance Agreements

In this section, we consider whether to a pprove the Alliance Agreements under § 41309. Our analysis involves a detailed assessment of the co mpetitive effects of the proposed alliance at the regional, country-pair, and city-pair level. We w ill also discuss, to the extent relevant to this transaction, the dynamics of comp etition between the global alliances and the potential need for remedies to address competitive concerns. A lthough we discuss some specific competitive

benefits of the alliance in this section, a more complete evaluati on of public benefits is found in

the next section.

Under the U.S.-EU Agreement, any U.S., U.K., or duly authorized EU airline may now enter the U.S.-Heathrow market, provided it can obtain sl ots. Some new entry has already occurred, as airlines have dealt with alliance partners or paid to acquire slots on the secondary market. Continental, Delta, Northwest (now a subsidiary of Delta), and US Airways – all of whom were excluded from Heathrow under the previous air se rvices agreement – have commenced services. Meanwhile, the four “incumbents” at Heathrow –American, British Airways, United, and Virgin Atlantic - have responded by intr oducing several new services of their own. While some of the new Heathrow services were formerly operated from Gatwick, another London airport, others are

38 See Order 2003-5-33 and Renewal Application filed March 23, 2005, in the instant docket. The authority remains in effect pursuant to the provisions of the Administrative Procedure Act, 5 U.S.C. § 558(c), as implemented by 14 C.F.R Part 377, pending action on its timely-filed renewal application.

39 The carriers request that their amended st atements of authorization remain in effect indefinitely. We are tentatively granting the request.13 genuinely new to the U.S.-London market because th ey involve an expansi on of capacity in an existing city pair or a new gateway. 40

Against the backdrop of a more liberalized marketplace, it is important to note that the applicants are planning broader and deeper cooper ation than ever before. The proposed alliance features broad multilateral cooperation by five ai rlines on nonstop and connecting routes, which would allow oneworld to flow traffic over multipl e hubs that are less conge sted than Heathrow and to compete more vigorously with Star Alliance and SkyTeam.

1. Market Analysis

a. Network Level

The proposed alliance involves large global air lines whose networks reach hundreds of points in the Americas, Europe, Africa, Asia, and the Middle East. However, the core focus of the alliance – integrating the services of America n, British Airways, and Iberia under the JBA – will be traffic over the Atlantic Ocean. Accordingly, our analysis will focus on competitive effects in

transatlantic markets between th e United States and Europe.

Table 1, below, provides a broad snapshot of ai rline competition in the U.S.-Europe market. As seen in the data, there are many competitors , both in the form of individual carriers and immunized alliances. In total, there are approxima tely 39 airlines operating scheduled service in

the market. 41 No single airline has a do minant share of nonstop passengers, indicating a generally competitive market.

40 “New entrants” operate new U.S.-Hea throw services from Atlanta (Delta), Cleveland (Continental that has been canceled for future seasons), Detroit (Delta/Northwest), Houston (Continental), Minneapolis (Delta), New York-EWR (Continental), New York-JFK (Delta), Philadelphia (US Airw ays). Economic and competitive factors will continue to

dictate whether services in the market are sustainable. For example, Air Fr ance canceled its daily flight from Los Angeles and Delta canceled its daily flight from Seattle. Additionally, incumbent carriers have adjusted capacity in markets that were already se rved before open skies from Gatwick and/or Heathrow, resulting in new U.S.-Heathrow services from Atlanta (British Airways), Boston (Ame rican), Dallas/Ft. Worth (American and British Airways), Denver (United), Houston (British Airways), Raleigh (American ), and Seattle (British Airways). At the same time, of course, incumbents have also reduced U.S.-Heathrow services in certain ma rkets, including Chicago (American), Detroit (British Airways canceled its only daily flight), Los Angeles (American), New York JFK (American, British Airways, and Virgin Atlantic), and Washington, DC (Virgin Atlantic). Source: OAG scheduling data for July 2007- July 2009. Cf. Table 3, DOJ Comments at 20 (Dec. 21, 2009); Figure 2, Answer of Virgin Atlantic at 11 (May 18, 2009).

41 OAG scheduling data for April 2009.14 Table 1

Onboard Share in the U.S.-EU Market 42

Pre-transaction Passengers Share Post-transaction Passengers Share

Austrian, bmi, Continental, LOT, Lufthansa, SAS, Swiss,

TAP, United/ Air New Zealand 43

(Immunized) 15,371,629 31.7% Austrian, bmi, Continental, LOT, Lufthansa, SAS, Swiss, TAP,

United/ Air New Zealand (immunized) 15,371,629 31.7%

Air France, Alitalia, Delta/ Northwest, KLM, Czech (Immunized) 14,025,416 28.9% Air France, Alitalia, Delta/ Northwest, KLM, Czech (immunized) 14,025,416 28.9%

British Airways 5,521,729 11.4% American, British Airways, Iberia, Finnair (immunized) 10,793,182 22.3%

American, Finnair (Immunized) 4,401,137 9.1% Virgin Atlant ic 3,447,329 7.1%

Virgin Atlantic 3,447,329 7.1% Other Traffic 2,645,402 5.5%

Other Traffic 2,645,402 5.5% US Airways 2,212,080 4.6%

US Airways 2,212,080 4.6%

Total 48,495,038 100% Iberia 870,316 1.8%

Total 48,495,038 100%

Source: T-100 nonstop segment da ta (“T-100 traffic data”) for 12 months ended June 2009.

The data suggest that the proposed alliance would enhance competition at the network level. The two leading competitors in the U.S.-Europe market, immunized Star Alliance (31.7%) and immunized SkyTeam (28.9%), retain their positions. In effect, the proposed alliance combines the third and fourth competitors to form a more competitive immunized oneworl d alliance, with an

initial share of 22.3% of the market. Oneworld becomes a strong third alliance competitor. This is also evident in the booking data submitted by the Joint Applicants. Those data show oneworld achieving a critical mass of traffic and becoming more competitive with SkyTeam and Star in 841 transatlantic markets, affecting almost five million passengers. 44

42 We define the U.S.-EU market to include scheduled air line operations for traffic between points in the United States and points in all 27 Member States of the Europ ean Union, plus Norway and Switzerland. In all tables, competitors are defined as having an independent airlines or groups of airlines oper ating with antitrust immunity. Competitors must have 1% market share to be listed. Th e term “market share” is s horthand for “nonstop segment passenger share” and should not be confused with the existen ce of a relevant antitrust market. The market shares of KLM, Lufthansa, and Swiss International Airlines include tr affic carried by Privatair, which operates flights for all

three airlines.

43 United and Air New Zealand operate an immunized alliance, however Air New Zealand does not have authority to engage in immunized operations with any other airlines. See United/ Air New Zealand, DOT-OST-1999-6680, Order 2001-4-2 (April 3, 2001).

44 Marketing Information Data Tapes Data (“MIDT booking data”) for YE 2Q08. The MIDT booking data was

submitted in raw format under seal in Exhibit JA-28 of the Joint Application (Aug. 14, 2 008). While the Department has worked from the raw data for its tentative findings in th is order, the majority of relevant data outputs have been15 b. Country-Pair Level

The proposed alliance affects competition in thre e country-pair markets in which the services of the applicants overlap: U.S.-U.K., U.S.-Spai n, and U.S.-France. Using T-100 traffic data, we evaluate competitive effects in each of these markets.

Table 2

Onboard Share in the U.S.-U.K. Market

Pre-transaction Passengers Share Post-transaction Passengers Share

British Airways 5,520,975 33.7% American, British Airways (immunized) 7,760,293 47.4%

Virgin Atlantic 3,447,329 21.0% Virgin Atlantic 3,447,329 21.0%

bmi, Continental,

United/Air Ne w Zealand (Immunized) 3,055,001 18.6% bmi, Continental,

United /Air New Zealand (immunized) 3,055,001 18.6%

American 2,239,318 13.7% Air France, Delta/ Northwest (Immunized) 1,407,576 8.6 %

Air France, Delta/ Northwest (Immunized) 1,407,576 8.6 % US Airways 579,227 3.5%

US Airways 579,227 3.5% Ot her Traffic 139,184 0.8%

Other Traffic 139,184 0.8%

Total 16,388,610 100% Total 16,388,610 100%

Source: T-100 traffic data for the 12 months ended June 2009.

As shown in Table 2, above, the primary change in the U.S.-U.K. market is the consolidation of American and British Airways, which results in a 47.4% post-transact ion market share for oneworld. The alliance would carry nearly half the passengers between the two countries. We believe that the competitive effect of an immu nized oneworld alliance is compounded in this market by several logi stical factors.

First, the U.S.-U.K. market is large, accounting for more than one quarter of all traffic across

the North Atlantic. 45 Second, the local market is crucial to the profitability of the routes. Approximately one half of the passengers in th e U.S.-U.K. market are local, whereas only about one third of the passengers in U.S.-Continental Europe markets are local. 46 Third, there are few

suitable hubs in between the United States and the United Kingdom. For passengers traveling to/from the east coast of the United States, conn ections at other domestic hubs are not optimal.

produced publicly in Exhibit JA-27 of the Joint Application. The Department’s analysis of the raw data resulted in nearly identical outputs as those shown in Exhibit JA-27.

45 According to MIDT booking data for YE 2Q08, the traffi c in the U.S.-U.K. market a ccounts for 26.8 percent of U.S.-E.U. traffic. The vast majority of the passenger s in the U.S.-U.K. market tr avel to/from/via London.

46 MIDT booking data for YE 2Q08.16 For the passengers traveling to/from Europe, th e evidence shows that Heathrow is uniquely situated. We agree with Virgin Atlantic’s as sessment that “[a]lthough H eathrow attracts a robust share of connecting transatlantic traffic from othe r major European hubs, the converse is not true. Very few passengers originating in London, or at H eathrow, travel to the United States via other points in Europe.” 47

Table 3 Onboard Share in the U.S.-Spain Market

Pre-transaction Passengers Share Post-transaction Passengers Share

Iberia 870,316 39.0% American, Iberia (immunized) 1,159,356 52.0%

Delta 547,431 24.6 % Delta 547,431 24.6 %

Continental 311,069 14.0% Continental 311,069 14.0%

American 289,040 13.0% US Airways 211,028 9.5%

US Airways 211,028 9.5%

Total 2,228,884 100% Total 2,228,884 100%

Source: T-100 traffic data for the 12 months ended June 2009.

Table 3, above, shows the competitive shares for the U.S.-Spain market. Similar to the U.S.- U.K. market, the pre-transaction market is charac terized by one leading carri er and several smaller competitors. Even though oneworld’s share of the market would grow to greater than 50%, the

overall structure of the market remains intact . Oneworld was, and will remain, the leading competitor. It is also important to note that tw o new entities will initiate service in the spring, namely United/ Aer Lingus and Air Europa. The ne w entry is facilitated, in part, by the available capacity at Madrid Barajas airport. 48

47 Answer of Virgin Atlantic at 8-9 (May 18, 2009).

48 See Joint Application at 28 (Aug. 14, 2008).17 Table 4

Onboard Share in the U.S.-France Market

Pre-transaction Passengers Share Post-transaction Passengers Share

Air France, Delta/ Northwest (Immunized) 4,325,183 70.1 % Air France, Delta/ Northwest (Immunized) 4,325,183 70.1 %

Continental, United (Immunized) 744,339 12.1% Continental, United (Immunized) 744,339 12.1%

American 658,382 10.7% American, OpenSkies/ L’Avion (Immunized) 739,348 12.0%

Other Traffic 361,015 5.9% Other Traffic 361,015 5.9%

OpenSkies/ L’Avion 49 80,966 1.3%

Total 6,169,885 100% Total 6,169,885 100%

Source: T-100 traffic data for the 12 months ended June 2009.

Table 4, above, shows the shares resulting in the U.S.-France market, in which American’s services overlap with those of British Airways’ subsidiary, OpenSkies. For the purpose of this analysis, OpenSkies, which operates flights between the United States and Paris Orly airport, is grouped with L’Avion, which was purchased by the British Airw ays subsidiary in July 2009. 50 A grant of immunity would not significantly alter the structure of competition between United States

and France. Oneworld’s market sh are would only increase by 1.3 per centage points, giving it a 12 percent share of the overall market.

While the T-100 traffic data from the tables abov e are a useful metric, analysis of booking data from Marketing Information Data Tapes (MIDT) more accurately shows the effects of competing

networks. 51 According to the booking da ta, the proposed alliance esta blishes oneworld as a strong third alliance competitor. It makes oneworld more competitive, and thus enhances inter-alliance competition, in eight of the top 10 markets: U.S. to Germany, Italy, France, the Netherlands, Switzerland, Ireland, Belgium, and Denmark.

Overall, the competitive change is positive in 23 of 29 markets. Only the U.S.-U.K. market experiences a reduction in competition. Five mark ets – U.S. to Spain, Poland, Finland, Slovenia, and Slovakia – experience no competitive change, ei ther because oneworld’s shares grow in a market in which it is already the clear leader or because oneworld’s shares do not increase significantly enough to give it a competitive share of traffic.

49 OpenSkies purchased L’Avion and integrated the carrier’s operation into its own in July 2009.

50 See Letter from Don H. Hainbach, Attorney for British Airw ays (Sept. 21, 2009) (submitted for the record).

51 We explained the differences in T-100 traffic data a nd MIDT booking data in the recent Star Alliance case. See Star, Docket DOT-OST-2008-0234, Order 2009-4-5 at 8-10 (April 7, 2009).18 c. City-Pair Level

The proposed alliance affects competition in numerous city-pair markets in which the applicants offer overlapping service. As explained in Section III on decisional standards, we use traditional antitrust analysis to define relevant markets and measure concen tration at the city-pair level. We then determine whether the proposed al liance will give the appl icants the ability to sustainably increase pri ces or decrease output in any rele vant market, and wh ether the proposed alliance raises competitive concerns in light of f actors such as market structure, the likelihood that competing carriers will enter the affected market s if the proposed allian ce is approved, and any

infrastructure constraints.

Defining Relevant Markets

As DOJ stated in the previous American/ British Airways case, 52 relevant markets in the airline industry are transpor tation between city pairs. Demand is sp ecific to city pa irs; if the price of travel in City Pair A increases by a signifi cant amount, consumers would not generally consider substituting travel in City Pair B.

However, the relevant market may be narrower th an just transportation between city pairs. The global airline industry is a ne twork enterprise in which the ag gregation of traffic at hubs is currently the only economical way to operate e xpensive long-range aircraft. There are often several pathways and products av ailable on the network in any gi ven city pair. A passenger may prefer – and be willing to pay more for – nonstop versus connec ting service, or service to a centrally-located airport versus other airports within the same popula tion center, or premium service versus economy service. If an airline can identify and pric e separately for these services within the same city pair, then the services may constitute a separate relevant market. 53

In this case, DOJ argues that nonstop services between the United States and Europe are

relevant markets. 54 To support its argument, DOJ cites its own empirical work suggesting that the number of airlines opera ting in a nonstop market has a significant impact on fares, and that fares on certain routes are higher for no nstop service versus connecting service. DOJ also cites the standard airline industry practice of planning routes and ca pacity based on the assumption that offering nonstop service versus co nnecting service will translate to a greater market share. Finally, DOJ asserts that many businesses dist inguish between nonstop and connecting travel, often requiring their employees to book nonstop travel unless there is a significant fare difference.

Virgin Atlantic argues that there are additional, more narrowly defined relevant markets that we must consider: nonstop serv ices to Heathrow airport. 55 Virgin Atlantic points to the lengths that some airlines have gone to move their U. S.-London services from Gatwick to Heathrow when legal barriers to entry were removed, implying that there is no viable subs titute for Heathrow. Virgin Atlantic uses booking data to suggest that ai rlines are able to charge a premium for travel to

52 American/ British Airways II, Dock et DOT-OST-2001-11029, DOJ Comments at 11-12 (Dec. 17, 2001).

53 See American/ British Airways II, Docket DOT-OST-2001 -11029, DOJ Comments at 12 (Dec. 17, 2001).

54 DOJ Comments at 9-10 (Dec. 21, 2009).

55 Answer of Virgin Atlantic at 12-19 (May 18, 2009).19 Heathrow, and it observes that Heathrow is a pref erred airport for time-sensitive travelers because

it serves as an interna tional hub with a wide array of connections and other amenities. DOJ states that the evidence in the record “suggests ” that Heathrow is a separate market. 56

In contrast, the applicants favor a broader definition. In partic ular, they deny that service to Heathrow constitutes a separate market, arguin g that London’s other airports offer competitive discipline to Heathrow se rvice and that connecting flights ar e viable in the U.S.-U.K. market. 57

We agree with DOJ and Virgin Atlantic as to market definition. Although we do not adopt Virgin Atlantic’s belief in the so-called “Heathrow premium,” 58 we do view the facts and circumstances in the record as supporting some of its conclusions. We tentatively find that the relevant markets in this case include (1) nonstop services for many travelers between the United States and Europe, and (2) nonstop services for ti me-sensitive travelers between the United States and London’s Heathrow airport.

With regard to Heathrow services, we be lieve the evidence as a whole shows that:

 Business passengers exhibit a strong preference for using H eathrow versus the other international airports in London, based larg ely upon Heathrow’s location and pattern of service. Virgin Atlantic states that

[t]here are many reasons why time-sensi tive passengers in pa rticular do not view flights operated from Gatwick as s ubstitutes for Heathrow service. The most important attraction of Heathrow to time-sensitive passengers is its convenient schedules, greater frequency of flights and its extensive range of flight connections. Passengers know thatif they miss a flight at Heathrow there is a good chance that they can catch a later flight, whereas at other London airports, a missed flight may mean an overnight wait or a journey to

Heathrow to catch an alternative. 59

The counterargument – that Gatwick and other ai rports are true substitutes for Heathrow for transatlantic service – is not compelli ng. Documents submitted by the applicants show that Heathrow is a separate market that is more convenient to business travelers and more suitable for launching long-haul services due to its hub and ground infrastructure. 60

 The preference for business passengers to use Heathrow is strong enough that many travelers will choose to fly on a connecting itinerary out of H eathrow instead of a nonstop

56 DOJ Comments at 11 (Dec. 21, 2009).

57 Joint Application at 41-46, Exhibit JA-26 (Aug. 14, 2008); Joint Applicants’ Consolidated Reply at 30-42, 46 (May 28, 2009).

58 Answer of Virgin Atlantic at 12-19 (May 18, 2009).

59 Answer of Virgin Atlantic at 17 (May 18, 2009).

60 See, e.g. , BA 02500; BA 002475-003190 at 03146-003149 and 02631-003041; AA 02883; AA 0003287.20 itinerary out of Gatwick. By a three-to-one margin, passengers in the U.S.-U.K. market

travel to/from Heathrow even when a lternative Gatwick service is available. 61

 Once the U.S.-EU Agreement took effect, removing barriers to serving Heathrow,

numerous carriers moved their transatlantic services from Gatwick to Heathrow. American, Continental, Delta, Northwest (now a subsidiary of Delta), US Airways, and British Airways have all “switched” transatlantic services from Gatwick to Heathrow in the past eighteen months. 62 For the U.S. carriers that did not have slots at Heathrow, moving there entailed a large upfront investment to purchase slots. 63 The move to Heathrow, to

the exclusion of other ai rports with capacity av ailable, strongly suggest s that Heathrow is a unique and separate market that is more attractive for business travelers and more lucrative for airlines, despite the large upfront investment required.

 Recent data regarding fares and yields in th e London market are not conclusive. Virgin Atlantic believes that British Airways commands a substantial premium for its services at
Heathrow versus Gatwick, and that fare s are generally higher from Heathrow. 64 The applicants argue that the Heathrow prem ium no longer exists, not even for business

travelers. 65 The O&D data submitted by the appli cants, which, unlike MIDT booking data or T-100 traffic data, contains detailed revenue informati on, shows that some passengers are paying more to connect to/from Heathrow th an to travel nonstop from Gatwick. In our view, variance in the data suggests that passenge rs have different util ity and price elasticity

in the overall U.S.-London market. Some are tim e-sensitive, some are airport-sensitive, and some are price-sensitive. While many passengers do favor Heathrow, and may even choose a connecting itinerary out of Heathrow instead of a nonstop itinerary out of Gatwick, the Heathrow passengers are not necessarily paying a premium. However, the effective date of the open-skies agreemen t was March 2008; thus, the data are limited.

Based on the totality of the circumstances, we tentatively find that He athrow is a separate

relevant market for time-sensitive travelers. Our tentative finding is consistent with our tentative decision in the previous American/ British Airways case. 66

Assessment of competitive effects

Having defined the relevant markets, Table 5 shows the extent to which the applicants’ services overlap in those markets.

61 According to publicly-available Origin & Destination Su rvey Data (“O&D data”) for CY2008, which only includes data submitted by U.S. carriers, 232,770 passengers travel ed in U.S.-U.K. service to/f rom Heathrow and Gatwick. More than 75% of those passengers chose Heathrow.

62 See Answer of Virgin Atlantic at 11 (May 18, 2009); DOJ Comments at 20 (Dec. 21, 2009).

63 See Answer of Virgin Atlantic at 30 (May 18, 2009).

64 Answer of Virgin Atlantic at 5, 13-16, Appendix J (May 18, 2009).

65 Joint Application at 51-52, Exhibit JA-26 (Aug. 14, 2008).

66 American/ British Airways II, Dock et DOT-OST-2001-11029, Order 2002- 1-12 at 39-43 (Jan. 25, 2002).21 Table 5 Nonstop Overlaps 67

Market Change in # of Nonstop Competitors Pretrxn Posttrxn O&D Market Shares Annual

Market

Size Each

Way Connecting Passengers on

Nonstop Flights O&D Passengers

Who

Connect

Dallas/Ft. Worth –

London 2-to-1 51.2% 82.9% Star (9.0%) 96,109 66.2% 26.7% SkyTeam (5.8%)

Miami – Madrid * 2-to-1 36.6% 83.2% SkyTeam (7.1%) 83,183 67.4% 22.1% US Airways (5.8%)

Boston – London 3-to-2 27.5% 68.4% Virgin Atlantic (22.5%) 313,035 44.5% 9.8%

Chicago – London ** 3-to-2 25.6% 51.2% Star (28.4%)
276,889 75.3% 7.3% Virgin Atlantic (13.4%)

Miami – London 3-to-2 22.5% 64.5% Virgin Atlantic (24.5%) 267,590 45.8% 18.4%

New York - Paris 4-to-3 18.1% 23.7% SkyTeam (44.8%)
639,308 52.4% 13.2% Star (23.0%) Air India (6.9%) ***

Los Angeles –

London 5-to-4 11.4% 37.7% Star (27.2%)

476,921 54.4% 12.1% Virgin Atlantic (25.3%)
SkyTeam (8.2%)

New York - London 5-to-4 17.6% 51.6% Virgin Atlantic (25.6%) 1,617,181 37.4% 3.0% Star (8.4%)
SkyTeam (6.7%)

* Air Europa begins nonstop Mi ami-Madrid service March 2010

** Virgin Atlantic reinstates nons top Chicago-London service March 2010

*** Air India no longer serves New York-Paris.

Source: MIDT Data for YE 2Q08. “Pre-trxn” refers to the shares of American/ Finnair.

Interested parties express concern about a num ber of the nonstop overlap markets. Virgin Atlantic – which focuses on the six overlaps be tween the United States and the United Kingdom 68
– argues that the degree of overlap in these markets is unacceptable. Virgin Atlantic believes that, once the proposed alliance is formed, competing car riers will not be able to match the frequency and capacity shares of American and British Airways, creating a di stinct disadvantage in their ability to compete for high-yield business traffic. 69 DOJ – which expresses concern about five of the overlaps between the United States and the United Kingdom, as well as Miami-Madrid 70

–

67 Unlike the T-100 traffic data tables, which did not include any airlines that had less than a 1% share of the market, we have used a 5% standard in this table using MIDT booking data.

68 Virgin Atlantic expresses concern about Boston-London, Chicago-London, Dallas/Ft. Worth-London, Los Angeles-London, Miami-London, and New York-London. See Answer of Virgin Atlantic at 39-58 (May 18, 2009).

69 Answer of Virgin Atlantic at 33-39 (May 18, 2009).

70 DOJ expresses concern about Boston-London, Chicago-London, Dallas/Ft. Worth-London, Miami-London, Miami-Madrid, and New York-London. See DOJ Comments at 1, 11-14 (Dec. 21, 2009).22 argues that the increases in concentration could create or enhance market power. Relying on its empirical model, DOJ predicts that markets in wh ich the number of competitors is reduced to two, or to one are likely to show price increases of 6.6% to 15% (t he so-called 3-to-2 and 2-to-1 markets). Although 5-to-4 market s are not captured by its model, DOJ is nevertheless concerned about New York-London, based on the applicants’ la rge share of business traffic on the route.

The applicants challenge DOJ’s empirical m odel, centering on perceived flaws in the methodology. In particular, the app licants assert that DOJ misclassi fies the passenger itineraries from which it draws its conclusions about price effects. The applicants explain that DOJ misunderstands the differences between online, code -share, immunized, and interline itineraries. After resting its case on erroneous classifications of these various kinds of itineraries, the applicants argue that DOJ’s conc lusions about the price effects of the oneworld alli ance should be given no weight. 71

We are concerned that DOJ may be viewing mark eting as a proxy for pric ing for a number of itineraries, when that is not the case. The key to correctly classifying itineraries for a price effects study is identifying which airline or entity is responsible for the pric ing function. In the context of an immunized alliance, an itinerary may be market ed by one carrier but priced by another. If

itineraries are not classified based on the airline or entity responsible for pricing them, conclusions about price effects are not reliable.

Further, any analysis must account for the signifi cant integration of pricing that occurs within a joint venture. Northwest-KLM, the first transatl antic alliance with an in tegrated joint venture, and the only one for which long-term data are avai lable, has been associated with lower fares, increased capacity, and greater service options for passengers. 72 The data on subsequent immunized alliances also suggest pro-consumer results, 73 even before those alliances moved towards deeper integration. 74 Past experience with immunized alliances (such as that between United/Lufthansa, Delta/Air France, and Northwes t/KLM) shows that benefits from new direct routes, increased frequencies, greater capacity on hub-to-hub and other routes linking the airlines’ networks, and associated increases in passenger vol umes may be expected to develop over time as synergies from the integrated joint venture are realized. 75 Both SkyTeam and Star are now in the process of implementing their respective joint vent ures recently approved by DOT. As a result, the price effects of these arrangeme nts on transatlantic airfares have not yet been captured in data collected by DOT, and therefore cannot be evaluated using that data.

Nevertheless, we share many of DOJ’s fundamental concerns. For example, we are particularly concerned about competitive effect s in the Boston-London market. According to MIDT booking data, Boston-London is a substantia lly large market of more than 300,000 annual

71 Joint Applicants’ Answer to DOJ Comments at 36-38 (Jan. 11, 2010).

72 Cf. Reitzes, J. & Moss, D., Airline Alliances and Systems Competition, Houston Law Review, 48: 293-332 (2008).

73 See SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 (April 9, 2008); Star, Docket DOT-OST-2008- 0234, Order 2009-4-5 (April 7, 2009).

74 Cf. Brueckner, J.K. & Proost, S., Carve-outs Under Air line Antitrust Immunity (March 2009 working paper).

75 Whalen, W.T. A Panel Data Analysis of Code Shar ing, Antitrust Immunity, and Open Skies Treaties in International Aviation Markets, Review of Industrial Organization, 30: 39-61 (2007).23 local passengers that will go from three comp etitors to two, resulting in an increase in concentration. Unique structural , geographic, and demographic fact ors raise competitive concerns in this market. Oneworld will obtain 68 percent of bookings and will open up a 41 point gap over the next largest competitor, Virgin Atlantic. Several ca rriers have exited the market in recent years, and no new carriers have entered, despite th e open-skies agreement. We believe that the proposed alliance, if not remedied, will increase th e risk and difficulty for airlines that may want to enter the market, especially if they do not have access to feeder traffic in Boston. Boston is the northeastern-most gateway to Londo n from the United States. The lack of suitable intervening

hubs between Boston and London – from which othe r airlines could comp ete with connecting flights – would leave consumers in the local market with fewer and less desirable options if prices increase or service quality decreases.

Like DOJ, the Department is also concerned that the proposed alliance will have diffuse negative effects in the remaining U.S.-U.K. ove rlap markets, as well as U.S.-U.K. markets generally. The proposed alliance combines the operations of British Airways and American, the two largest competitors in the market as measured by departures. 76 They are each other’s primary competitors in the U.S.-U.K. market. Not surp risingly, the proposed alli ance causes a share shift in many overlap markets involving London. For exam ple, whereas British Ai rways is the leading competitor in New York-London pre-transaction, w ith 34 percent of bookings, post-transaction it would achieve almost 52 percent of bookings by join ing with American. Vi rgin Atlantic retains its second-place position in the market, but instead of an eight-point gap with the first-place competitor, it would then face a 26 -point gap. In such circumstances, the Department recognizes that it could be difficult for competitor s to match the frequency, scheduling, hubbing, and capacity-share advantages of the oneworld alliance.

We tentatively conclude, however, that we should not disapprove the proposed alliance outright. The data in Table 5 show that most markets will continue to have a number of competitors even after the applicants combine their services; typically there will be a third, fourth, or fifth competitor with a substantial share of bookings. Only Dallas/Ft. Worth-London will ultimately have fewer than two competitors, and we agree with the applicants that nonstop service

in this market would be difficult to sustain in the cu rrent environment wit hout a substantial hub operation. 77 With fewer than 100,000 annual bookings , the Dallas/Ft. Worth-London market is only one-third the size of the next larges t U.S.-London overlap market, Boston-London. Additionally, travelers in the Da llas/Ft. Worth-London markets have multiple connecting options. As shown in the data, a relatively large percenta ge of passengers connect within the Dallas/Ft. Worth-London city pair.

The data also show that all of the nonstop ove rlap markets are disciplined to an extent by connecting competition. The discipline is manifested in two ways: by the number of passengers who utilize connecting serv ice in the origin and destination city pair (for example, Miami-New York-London) and by the number of passengers on nonstop flights who are connecting behind or beyond the nonstop trunk route (for example, Miami-London-Copenhagen). The mix of connecting and local passengers on these routes is important to the competitive analysis. In

76 OAG scheduling data for August 2009.

77 Joint Applicants’ Answer to DOJ Comments at 19-20 (Jan. 11, 2010); Joint Application at 55 (Aug. 14, 2008).24 Chicago-London, Los Angeles-London, Miami- London, and New York-London, at least 37 percent of passengers are using th e nonstop route as a segment on a connecting itinerary, and it is as much as 75 percent in the case of Chicago- London. In these markets, the applicants submit credible evidence in their September 8 th pleading that their true economic incentive as alliance partners is to increase capacity on the nonstop segment and maintain competitive fares for both local and connecting passengers. The incentive to increase capacity exists because the alliance must continue to add capacity on trunk routes to accommodate the large number of connecting passengers and thus to compete with other netw ork airlines. 78

2. Infrastructure Issues

Since six of the nonstop overlaps involve servi ces at Heathrow, where slots are scarce, we

must examine how infrastructure constraints aff ect competition. There is ample evidence in the

record that Heathrow is constr ained, and that the operational constraints make new entry on transatlantic routes difficult, due to the limited window of time for departures and arrivals that consumers prefer. As BAA/ACL an d other parties have indicated, He athrow operates at near full capacity. 79 The primary constraint is runway capacity. It is highl y unlikely that a prospective

new entrant would be able to secure suitable land ing or takeoff times from the ACL-administered slot pool. Thus, the prospective new entrant must hold existing Heathrow slots to trade or convert for use on transatlantic routes, or acquire th e right to slots on th e secondary market.

We note, however, that there is some scope fo r Heathrow incumbents and members of global

alliances to introduce transatlanti c services from existing holdings. For example, bmi uses 12 slots from its substantial Heathrow portfolio to fund a portion of its Heathrow -Brussels and HeathrowAmsterdam services at times that ar e suitable for transatlantic service. 80 Similarly, SkyTeam

member Air France controls slots that it could us e – and, in fact, did use at times in 2008 – for

U.S.-Heathrow service. 81

Additionally, it is possible to acquire slots on the secondary market. However, BAA/ACL notes that there is limited liquidity in the secondary market and high prices. 82 Thus, there are still barriers to entry at Heathrow, especially for we ll-timed slots that are usable for transatlantic services. Passengers traveling east bound, particularly business travel ers, who account for the bulk of the revenue, have a relatively narrow window of time for departur e and arrival due to time zone changes. 83 Flights from the eastern seaboard typical ly depart the United States in the late afternoon or early evening for an early morning arrival in London, which allows the traveler to

78 Joint Applicants’ Supplemental Comments at 5 and Declaration of Don Casey (Sept. 8, 2009).

79 Answer of Virgin Atlantic at 19-21 (May 18, 2009); ACL/BAA Response (Jan. 28, 2009).

80 Bmi operates flights to Brussels departing at 0830, 1255, 1830, and returning to Heathrow at 0740, 1145, and 2120. Bmi operates flights to Amsterdam departing at 0830, 1240, and 1820, and returning to Heathrow at 0745, 1405, and 2135. These times are suitable for Heathrow serv ices to JFK, LAX, Boston, Seattle, and Chicago, among other cities. Source: OAG scheduling data for November 2009.

81 Joint Application at 9 (Aug. 14, 2008).

82 ACL/BAA Response (Jan. 28, 2009). Sellers on the secondary market have fetched in excess of $50 million for

well-timed slots. See Figure 9, Answer of Virgin Atlantic at 30 (May 18, 2009).

83 Answer of Virgin Atlantic at 22 (May 18, 2009); Joint Applicants’ Consolidated Reply at 32-33 (May 28, 2009).25 conduct a full day of business or make a connect ion. Even though westbound departure times are more flexible, the fact is that only certain slots at Heathrow are suitable for arrivals, making slot transfers more complicated and limiting ne w entry into the U.S.-London market.

Because the scope for new entry is limited, we tentatively find that the infrastructure

constraints at Heathrow could ex acerbate the potential competi tive harm caused by the proposed alliance. If approved, an immunized one world would hold 47.2% of Heathrow slots, 84 including a large share of slots usable for transatlantic service. We believe that this factor, more than the loss of a competitor in the transatlantic market or any specific competitive effects in a city pair, poses the greatest risk of harm for consumers. Wit hout more and easier acce ss to Heathrow slots, competing carriers would find it difficult to intro duce new services to compete with an immunized

oneworld.

3. Remedies to Address Harm to Competition

Given the potential competitive harm we identifie d above, plus the risk th at the harm could be exacerbated by infrastructure constraints, we mu st determine whether there are any appropriate remedies that could mitigate the harm while stil l allowing the potential be nefits of the proposed

alliance to be realized. Interest ed parties have suggested several potential remedies, including slot divestitures, carve-outs, and mandatory interlining.

DOJ states that slot transfers could potential ly protect consumers from the anti-competitive effects of the proposed alliance. DOJ suggests that we coul d require either unencumbered slot divestitures, in which new entran ts would not be required to serv e specific routes , or earmarked slot divestitures, in whic h new entrants would be re quired to serve specific routes. In crafting the best slot remedy, DOJ indicates that we must decide what meas ure of continuing oversight is appropriate under the circumstances. Earmarked slot divestitures have the advantage of being more narrowly tailored to restore lost competiti on, but continuing oversight may be necessary if the parties to the slot transfer are engaged in an ongoing relationship, as they would be in the case of a lease agreement. DOJ cautions, however, th at an earmarked slot remedy could introduce inefficiency into the marketplace, since the di vested slots could potentially be used more productively elsewhere. 85

In addition to slot divestiture s, DOJ suggests that “carve-outs” could be appr opriate. A carveout prohibits the airlines from coordinating pr icing and capacity for a narrowly defined group of passengers, usually time-sensitive passengers or passengers in the local O&D market, who are most likely to rely upon nonstop flights and theref ore feel the effects of reduced competition.

Virgin Atlantic, while maintaining that we should deny the application outr ight, states that slot

divestitures would be esse ntial if the application were to be approved. Virgin Atlantic emphasizes that prospective new entrants must be given the opportunity to use the slots before the applicants implement the proposed alliance. 86

84 ACL/BAA Response, accompanying data (Jan. 28, 2009).

85 DOJ Comments at 30-31 (Dec. 21, 2009).

86 Answer of Virgin Atlantic at 81-82 (May 18, 2009).26 Virgin Atlantic also argues for an interline remedy. In this in stance, an interline remedy would require the applicants to accommodate connecting pa ssengers from competing carriers at specific cities, such as Chicago, by providi ng through pricing, ticketing, and bagg age, as well as access to inventory on reasonable terms. Specifically, Virgin Atlantic requests that we prevent the applicants from withdrawing from existing inte rline arrangements with non-oneworld carriers and require them to charge interline fares that are no less favorable than those they charge each

other. 87 This remedy, according to Virgin Atlantic, is necessary to allow airlin es to serve connecting passengers and compete w ith oneworld’s powerful network.

a. Slot Transfers

We tentatively find that slot tran sfers would best address the pote ntial competitive harm in this case. We tentatively determine that four slot pa irs are necessary to remedy the potential harm, divided as follows: two slot pairs earmarked fo r the Boston-London Heathrow market (the “fixed slots”) and two slot pairs to be used at any U.S. gateway for services in the U.S.-Heathrow market (the “flex slots”). Under this proposal, prospective new entrants would not be forced to compete where oneworld is strongest, such as in the Da llas/Ft. Worth-London market. Rather, they would be able to serve routes in which they have a gr eater chance of success and a greater opportunity to exert competitive discipline on the oneworld network.

This proposed approach would serve the pub lic interest because it addresses the lost competition, particularly where it is most acute, in the Boston-London market, while also addressing the diffuse network-level effects of the proposed alliance across all U.S.-London markets, such as oneworld’s superior network c overage, frequency, and ab ility to attract highyield business traffic. This approach would also improve the chances that the slot pairs will be utilized and that new capacity will be adde d to the U.S.-London market. Meanwhile, the applicants can proceed with their alliance pl ans and deliver the promised public benefits.

We recognize that more information is needed to implement the proposed remedy. We are proposing a general framework for implementation. Mindful of DOJ’s comments, urging us to avoid inefficiencies, we tentat ively determine that an implem entation mechanism should comport with the following principles:

 Airlines are not eligible recipients if they are members of the oneworld global alliance, affiliates of the applicants, or airlines in which the applicants have a substantial

financial interest.

 The fixed and flex slots must be usable fo r transatlantic service and have commercially

viable times. 88

87 Answer of Virgin Atlantic at 82 (May 18, 2009).

88 See American/ British Airways II, Docket DOT-OST-200 1-10387, Order 2002-1-2 at 52 (Jan. 25, 2002) (establishing that Heathrow slots subject to divestiture should be “usable for transatlantic services”). See also Answer of Virgin Atlantic at 22-25 (May 18, 2009) (stating that mo rning arrivals from the United States are important due to time zone constraints and the requirements of time-sens itive travelers) (May 18, 2009) ; DOJ Comments at 21 (Dec. 21, 2009) (stating that the time of day is important for arrivals from the United States).27  Given that there is some scope for airlines to adjust their portfolios once they receive slots or eventually acquire slots through ot her means, we tentatively find that the applicants need not permanently divest thei r ownership rights in the four slot pairs subject to the remedy. Thus, the applicants may el ect to lease, rather than sell, the slots, and collect limited compensation. We expect the compensation to be at such a level so as to attract prospective new entrants by lowering the barriers to entry below where they are today. We are proposing that the applicants make the slots available for a period of 10 years from the date of issuance of a final order in this case. The slots would be made available in time for recipi ents to launch servi ces in the IATA 2011

Summer Season. If slots were not used ini tially, or if they were returned to the applicants, they would remain ava ilable for the full 10-year period.

 The proposed remedy should be administered expeditiously and independently. While we intend to exercise some oversight and monitor the process, we do not seek to administer the day-to-day tasks. We tenta tively find that the app licants should appoint and pay for the services of a trus tee, who must be approved by DOT.

 To the extent possible, the administrati on and implementation should be compatible with any remedy adopted by the European Commission, which is also reviewing this matter. Both the Department and the Eu ropean Commission committed to explore compatible approaches to common matters in Annex 2 of the U.S.-EU Agreement. 89
Annex 2 was incorporated because both pa rties to the agreement recognized that incompatible approaches could frustrate the e ffective exercise of the parties’ regulatory responsibilities. In the context of this case, it is possible that incompatible implementation and administration of a slot remedy could potentially place prospective new entrants at a disadvantage, jeopardizing efforts to reduce the competitive harm that we have tentatively found in the proposed transaction.

We invite the applicants and interested pa rties to comment on a proposed implementing mechanism that comports with these principles, ach ieves the objectives set forth in this order, and

is workable.

89 Annex 2, U.S.-EU Air Transport Agreement, signed April 30, 2007.28 b. Other Remedies

We have carefully considered DOJ’s and Vi rgin Atlantic’s argu ments concerning other potential remedies. We have te ntatively decided not to impose a carve-out remedy. The recent

fundamental shift in the character of alliances – towards integrated joint ventures – has made us more skeptical about the efficacy of carve-outs, espe cially in the context of joint ventures. In the recent SkyTeam and Star cases, we did not impose any carve-outs in overlap markets in which the joint venture partners planned to cooperate and to achieve truly integrative bene fits that could be passed on to consumers. 90 We determined that the carve-out s would detract from the potential

benefits of the allian ce by introducing inefficiencies, and in some areas, impediments to procompetitive cooperation. 91 Because airlines measure profitability by flight segment – so that each segment can be sold as part of dozens of differe nt itineraries – carve-out s that are imposed on a city-pair basis disrupt the functioning of airline joint ventures and impair metal neutrality, limiting the benefits for both nonstop a nd connecting passengers.

In this case, we tentatively find that the fact s and circumstances are similar to the SkyTeam and Star cases. All the nonstop overlaps in this case are subject to joint venture cooperation and the applicants have submitted a detailed joint venture agreement that seeks to achieve truly integrative benefits. Thus, for the same reasons expressed in the earlier cases, we tentatively do

not think carve-outs ar e appropriate here.

We also tentatively decide not to impose an inte rline remedy. While Virgin Atlantic has stated that mandatory interlining is necessary in addition to slot transfers, it ha s provided little evidence that the applicants will be in a position to cause Virgin Atlantic or other carriers any specific harm. We are reluctant to get involved in the complicated contractual business rela tions of private parties

without substantial evidence on the record concerning the potential ha rm that is likely to occur and how a legal requirement to interline would be effective in preventing it.

4. Tentative Conclusions

We have carefully analyzed the impact of th e proposed alliance at th e network, country-pair, and city-pair level. On the one hand, the proposed alliance will provide a third global network that can better discipline the fares and services of fered by the Star and SkyTeam alliances. The enhanced inter-alliance competition is beneficial for consumers across many markets, in particular

the hundreds of transatlantic market s in which the applicants become more competitive as a direct

result of the alliance. Travelers in those mark ets instantly gain new competitive options. On the other hand, the proposed alliance will increase concentration in several U.S.-London markets where the applicants would be in a position to potentially levera ge substantial advantages in frequency, schedules, and access to corporate cust omers to exclude rivals. To address these potential anti-competitive effects, we have propos ed a flexible slot tran sfer remedy that would

90 SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 10 (April 9, 2009); Order 2008-5-32 at 3 (May 22, 2008). See also Star, Docket DOT-OST-2008-0234, Order 2009-7-10 at 18-21 (July 10, 2009).

91 See also Brueckner, Jan K. and Stef Proost, Carve-Outs U nder Antitrust Immunity, SSRN Working Papers (2009) (finding that carve-outs may be harmful when imposed on a joint venture alliance given the potential efficiency losses to the alliance of those carve outs).29 require the applicants to make available four sl ot pairs at Heathrow to allow competitors to

introduce new services.

Given the risk of competitive ha rm, we tentatively find that the proposed alliance must operate

within a liberalized framework that enhances co mpetition and promotes new entry regardless of national borders. The U.S.-EU Agreement – which permits entry by duly auth orized airlines on any routes between the United States and the Eu ropean Union (with open intermediate and beyond rights) – meets this objective. That landmar k aviation agreement facilitates the competitive benefits and prevents some of the potential co mpetitive harm of the proposed transaction. For example, the applicants will be ab le to better integrate their netw orks and compete with the other immunized alliances by, among other things, more flexibly deploying aircra ft and crew in new markets, and expanding th e joint venture’s operati ons in hubs dominated by other airlines. The

same liberalized conditions crea ted by the regional open-skies agreement will help to discipline oneworld and the other global alliances by making it easier for competitors and innovators to introduce new services. Without the U.S.-EU ag reement, our competitive assessment and the proposed result would have been different. 92

Provided that transatlantic markets continue to be governed by a regional open-skies agreement that promotes new entry regardless of national borders, and provided that the slot remedy is adopted, we see no persuasive basis up on which the applicants could impose and sustain supra-competitive prices or reduce service qu ality below competitive levels. Under these circumstances, we tentatively find that the propose d alliance, as conditioned, will not substantially reduce competition. Therefore, we tentatively conclude that the proposed al liance is not adverse to the public interest and s hould be approved under § 41309.

C. Tentative Grant of Antitrust Immunity

In this section, we consider whether to make a grant of antitrust immun ity to the applicants under § 41308 to implement their proposed alliance. Since we tentatively determined that the Alliance Agreements, as conditioned, would not substantially reduce co mpetition, this is a discretionary matter. It is not our policy to co nfer antitrust immunity simply on the grounds that agreements do not violate the antitrust laws. We are only willing to grant immunity if the parties to agreements would not otherwis e go forward without it, and if we find that the p ublic interest requires that we grant antitrust immunity. Our public interest examination focuses on the public benefits that will be created by the proposed allian ce and the extent to which a grant of antitrust immunity is required to r ealize those public benefits.

92 If the U.S.-EU open-skies agreement were to be suspended or scaled back, we would have to re-evaluate oneworld’s proposed immunity and authority. This is consis tent with our guidance in the recent Star and SkyTeam

cases. See Star, Docket DOT-OST-2008-0234, Order 2009-7-10 at 4, FN15 (July 10, 2009); SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-5-32 at 4 (May 22, 2008) (adopting all tentative findings and conclusions in the Show Cause Order, which directly raised the importance of a regional open-skies agreement on page 13).30 1. Benefits of the Proposed Alliance

The record centers on the ques tion of whether the proposed al liance will generate sufficient public benefits to justify a grant of immunity. Se veral interested parties argue that benefits are lacking, while the applicants attempt to show, at length, that there ar e many substantial public

benefits.

In sum, the interested parties have advanced the following arguments: DOJ argues that there

are insufficient benefits to justify a grant of immunity; APA argues that the propos ed alliance will have a detrimental effect on U.S. labor; ITSA/A STA argue that the proposed alliance will harm travel agents and consumers because the applicants will be able to negotiate jointly with travel agents and independent travel distributors; and Spirit argues the proposed alliance will distort competition in restricted markets where American a nd its partners hold a limited number of traffic rights. Additionally, Virgin Atlan tic argues that the joint venture will stifle competition and fail to generate the efficiencies claimed by the applicants . Virgin Atlantic high lights certain provisions of the joint venture agreement (the JBA) that it claims give British Airways control over pricing and capacity in U.S.-London markets. Rather th an enhancing competition, Virgin Atlantic

concludes that the alliance will allow British Ai rways to protect its market share and revenue. 93

After evaluating the arguments and informati on in the record, we tentatively find that substantial public benefits are likely to be rea lized by the proposed alli ance. The applicantsprovide a detailed account of how they will jointly manage their capacity and organize decisionmaking to take advantage of currently unexploited efficiency gains that are likely to benefit the traveling and shipping public, as well as the airlines and their employees.

Specifically, we tentatively find that the following public benefits are likely: (1) more options for travelers in numerous transatlantic city pair s, based on the applicants’ ability to closely coordinate schedules and inventory and to achiev e fare combinability; (2) lower fares resulting from the reduction in double marginalization on multi-segment itineraries; (3) volume discounting made possible when the alliance partners carry more passengers per flight a nd enjoy more efficient utilization of capacity; (4) expanded access to discounted fares resulting from coordinated inventory; (5) reduced costs th rough shared sales, marketing, distribution, procurement, fleet assignment, and frequent-flyer program manage ment; and (6) expanded opportunities to earn and redeem miles due to the airline partners’ abil ity to share risks. Additionally, we note the applicants’ intentions to introduce new nonstop services a nd facilitate long-term operational changes, product enhancements, and investment in infrastructure. 94

A grant of antitrust immunity is, we tentatively find, necessary to achieve most of these benefits, despite the concerns ra ised by some parties. We take seriously DOJ’s concerns about double marginalization effects. We understand DOJ’s point that economic studies, including the Department’s own studies of transatlantic co mpetition, do not prove that airlines can only eliminate multiple markups by engaging in activity that raises antitrust concerns. 95 Here, however,

93 See Answer of Virgin Atlantic at 72-73 (May 18, 2009).

94 Joint Application at 24-26, 33-34, Exhibit JA-13, Exhibit JA-19 at 9-10 (Aug. 14, 2008).

95 DOJ Comments at 26 (Dec. 21, 2009).31 we do not expect the elimination of multiple ma rkups to result from any anticompetitive conduct. Consistent with economic theory and the experi ence of other alliances, the proposed alliance is likely to significantly reduce fares on “interline” routes in which only on e partner operates one segment and only another part ner operates another segment. 96 The cooperation of the partners over the joint network incr eases overall traffic flows and revenue , providing each partner with the necessary incentive to avoid sel f-interested markups on a particul ar segment that they operate,

which benefits consumers and the alliance as a w hole. Many of the syne rgies of the alliance, including the ability to cooperatively price itiner aries with multiple segments, would not occur but for the Alliance Agreements.

We have considered Virgin Atlant ic’s concerns that antitrust i mmunity is not re quired because many of the public benefits of the transaction are already in place and because it is not necessary

to facilitate the introduction of new services. 97 We addressed those concerns above when we tentatively found that the proposed alliance woul d create public benefits that are directly attributable to immunity. Among ot her things, the applicants have de monstrated that they will be able to implement a broader code-share, enable full frequent flyer reciprocity, and pursue the

substantial microeconomic benefits of alliance cooperation, such as improved economies of scale, scope, and density. Through these economies they expect to be able to launch new services, such

as Dallas/Ft. Worth-Madrid. 98 While we agree with Virgin Atlant ic that antitrust immunity is not required as a legal or operati onal matter to launch new routes, 99 in some circumstances new routes are likely to be introduced more quickly wher e alliance partners have integrated and procompetitive arrangements to aggregate behind and beyond traffic and share risks. In this way, alliances such as Northwest/KLM, now part of S kyTeam, have been able to introduce and sustain a large number of frequencies between their hubs , which benefits travel ers in the local and connecting markets. 100

We recognize Virgin Atlantic’s concern that the la rge degree of overlap between American and British Airways both eliminates competition a nd limits the public benefits that are possible from the alliance. That point highlights a key que stion raised by this case: whether the potential benefits of the applican ts’ cooperation in a number of mark ets, including some large markets between the United States and the United Kingdom, outweigh the potential competitive harm that could result from the reduction of competition on select overlap routes, including some routes in which there is limited available capacity due to infrastructure constraints. Provided that the applicants abide by the conditions we have pr oposed, we tentatively fi nd that the benefits outweigh the potential harm.

96 See, e.g. , Brueckner, J.K. & Whalen. W.T., The Price Effects of International Airline Alliances, Journal of Law and Economics, 43: 503-545 (2000). See also Brueckner, J.K., International Airf ares in the Age of Alliances: The Effects of Code-Sharing and Antitrust Immunity, Review of Economics and Statistics, 85: 105-118 (2003); Whalen, W.T. A Panel Data Analysis of Code Sharing, Antitrust Immunity, and Open Skies Treaties in International Aviation Markets, Review of Industrial Organization, 30: 39-61 (2007). For an application of double marginalization to this case, see Joint Application, Exhibit JA-19, Af fidavit of the Brattle Group, (Aug. 14, 2008).

97 See Answer of Virgin Atlantic at 68-71 (May 18, 2009).

98 Joint Application at 24 (Aug. 14, 2008).

99 DOJ also made this argument. See DOJ Comments at 23-25 (Dec. 21, 2009).

100 Joint Applicants’ Supplemental Comments at 4-7, Declaration of Don Casey at 6 (Sept. 8, 2009).32 We are persuaded by two factors. First, the appl icants present for our consideration a detailed and integrated joint venture agr eement. Where applicants seek immunity to combine networks that overlap substantially, it is important for them to demonstrate that their proposed arrangement will lead to efficiency-enhancing integration. As we explained in the SkyTeam and Star cases, a “metal-neutral” joint venture allows the joint ventur e partners to share risks and rewards fairly and

it incentivizes them to offer customers the best av ailable products and serv ices, without regard to which partner owns and operates the aircraft. 101 Iberia’s inclusion in the application, and its participation in the joint venture, is important to the public benefits analysis. Unlike Heathrow, Iberia’s hub at Madrid Barajas has available capac ity. Madrid’s airport is capable of 120 aircraft movements per hour but only handles approximately 98. 102 If the joint venture is implemented properly, the participants will have the option (a nd incentive) to utilize the Madrid hub to boost

traffic and work around the constraints at He athrow, sharing in the risks and rewards.

Second, the proposed transaction facilitates a thir d strategic alliance. This too is a public benefit. Oneworld will become more compe titive in a number of markets, exerting increased competitive discipline on fares and services in t hose markets. Consumers getting a third viable option will enjoy more destinations, better conn ections, improved schedules, and better frequent flyer benefits. These benefits complement the annual surplus from price reductions and increased

traffic on current interline routes. 103

Of course, many of the public benefits discu ssed above depend upon the implementation of the joint venture. Yet the participants in the ventur e have not finalized the te rms of the JBA. They await a grant of immunity to share the competi tively sensitive information necessary to do so. Consistent with the recent SkyTeam and Star cases, we propose to limit the duration of the immunity unless and until the applicants complete their negotiations. 104 This condition will encourage the applicants to implement the joint venture and allow the cons umer benefits to be realized quickly.

101 SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 3 (April 9, 2008); Star, Docket DOT-OST2008-0234, Order 2009-4-5 at 4 (April 7, 2009).

102 Joint Application at 28 (Aug. 14, 2008).

103 See Joint Application, Exhibit JA-19, Affidavit of the Bra ttle Group at 8, (Aug. 14, 2009). We understand Mr. Horan’s critique of the applicants’ $92 million estimate of the benefits from cooperative pric ing, as well as his general skepticism that the applicants have submitted sufficient evid ence showing that public benefits will be realized by the alliance. Comments of Hubert Horan (Jan. 31, 2010). We disagree, however, with Mr. Ho ran’s total rejection of the Brueckner and Whalen models, which demonstrate the import ant principle that alliances facilitate cooperative pricing that can reduce prices and enhance join t products and services that consumers value. Mr. Horan does not recognize that antitrust immunity and the resulting integration of pl anning and pricing can fundamentally change the economics of connecting routes when each carrier participating in an itinerary shares equally in the benefits of cooperatively selling it. He correctly notes the role of airline revenue management systems, but fails to acknowledge that the purpose of these systems is to maximize revenue for the host carrier. As a result, even single-connect itineraries involving more than one carrier can have vastly different total revenue values to the host carrier, depending on which carrier operates the long-haul segment. When carriers are metal-neutral, th ey price, market, and revenue manage accordingly, opening av ailability of more seats and fares throughout the ca bin on more itineraries in a given city pair.

104 See SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 15-16 (April 9, 2008); Star, Docket DOTOST-2008-0234, Order 2009-4-5 at 19 (April 7, 2009). The a pplicants in this case have indicated that they will accept

this condition. See Joint Application at 1 (Aug. 14, 2008).33 2. Remedies to Achieve Full Public Benefits

While the proposed alliance offers substantial pub lic benefits, several parties express concerns about the ability of the alliance members to captu re a majority of the benefits for themselves, without passing them on to consumers, employees , and the public at-large. We agree with some of those concerns and tentatively conclude that some remedies are necessary to ensure adequate public benefits.

We recognize the concerns cited by Virgin At lantic concerning the st ructure of the joint venture. Certain aspects of the joint venture are inconsistent with the Department’s policy standard for granting antitrust i mmunity in cases involving large ai rlines and a substantial amount of network overlap.

In the recent SkyTeam and Star cases – which f eatured a degree of network overlap that is comparable to this case – we required the applican ts to make a strong showing that immunity is justified to achieve specific, demonstrable public benefits at the time the immunity is requested. 105 To meet this standard, the applicants submitted joint venture agreements with sufficiently detailed terms to assess the competi tive implications of the alliance and explained their plans to integrate core bus iness functions and reconcile th e network overlap that existed

between them. 106 Our analysis of public benefits turned on the extent to wh ich the partners had aligned their economic incentives and achieved metal neutrality. As the Joint Applicants in this
case have indicated, 107 the alignment of incentives and metal neutrality is necessary for the partners to promote the interests of the alliance as a whole and to generate the most valuable

consumer benefits from allian ce cooperation such as the introduc tion of new capacity, reduced fares, and more efficient use of inventory across the joint network.

We tentatively find that , without changes to the joint venture agreement, the applicants will fall short of meeting the standard. Certain of the JBA’s terms described by Virgin Atlantic, for which they have sought confidential treatment, contain competitive restraints that divide the governance of the venture among the partners and pot entially allow a single carrier to exercise control over key functional areas on behalf of the alliance. 108 The terms permit a partner to act in its own economic interest, even if it means preventing the ot hers from bringing new products and

services to market if there is a demand. Thus, the record doe s not yet show that the applicants have aligned their economic incentives and made th eir best efforts to achieve metal neutrality,

which would be in the best intere st of consumers in this case.

We need not determine that the competitive restra ints are contrary to the antitrust laws. The applicants have chosen to request a grant of imm unity before they proceed. We will not grant that

105 See SkyTeam I, Docket DOT-OST-2005-19214, Order 2005-12-12 at 34 (Dec. 22, 2005); SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 14 (April 9, 2008); Star, Docket DOT-OST-2008-0234, Order 2009-4-5 at 17-19 (April 7, 2009).

106 SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 15 (April 9, 2008); Star, Docket DOT-OST2008-0234, Order 2009-4-5 at 19 (April 7, 2009).

107 Joint Application at 8 (Aug. 14, 2008); Joint Applican ts Supplemental Comments at 19-22 (Sept. 8, 2009).

108 See Joint Application at Exhibit JA-1, page 92 (Aug. 14, 2008) (Joint Business Agreement at § 3.3, §3.3.4, §3.3.4.1, §9, and § 5.6).34 request unless and until we ar e satisfied that immunity is required by the public interest. 109 In these circumstances, we do not think that immunity is require d where the applicants have introduced competitive restraints that are not necessary to implement the joint venture or achieve the most valuable public benefits. We tentatively find, instead, that consumers will derive greater benefits from an arrangement that better promotes capacity growth over multiple hubs and better demonstrates consensus-based governance and a commit ment by the partners to act in the interest

of the alliance as a whole. 110

Therefore, as a condition of obtaining a final grant of immunity, we tentatively find that it is necessary for the applicants to make changes to the JBA to eliminate thes e concerns. We provide the applicants with additional guidance to make these changes in Appendix B. 111

We understand APA’s root concern that the alliance could threaten the jobs of U.S. labor. With the changes we are requiring to the joint vent ure agreement, we believe the applicants will be in a better position to increase overall capacity and share the growth opportunities. While it is true that the joint venture involves revenue sharing, th e joint venture partners must maintain their

networks and execute their business plans to remain profita ble under the venture. In short, we believe that American, like its pa rtners, has the incentive to increas e its flying if possible, which could provide more opportunities for its pilots and other labor groups.

We tentatively disagree with ITSA/ASTA regard ing the need to restrict the ability of the alliance partners to cooperate in the area of ma rketing and sales. ITSA/ASTA’s claim, which alleges that the Joint Applican ts would gain increased monops ony power over travel agents by virtue of the alliance, 112 closely mirrors the argument they ma de in the recent Star Alliance case. In that case, the Department considered the merits of the travel agents’ claim in detail. In the Final Order, we found that ITSA/ASTA did not meet th e burden of proving that antitrust immunity would result in anticompetitive effects. 113 Specifically, the travel agents failed to prove that the alliance would be able to exercise market power a nd harm travel agents, and ignored the fact that reductions in travel agent commissions are attri butable to structural changes in the travel

distribution market and not an in crease in immunized alliances.

Here, the facts are substantially the same. We tentatively find that ITSA/ASTA have similarly failed to provide persuasive argu ments that the Joint Applicants would be able to exercise monopsony power and have the abili ty to increase prices and reduce capacity. Ultimately, an immunized oneworld would carry 22.3 percent of pa ssengers in the broadly defined transatlantic market (see Table 1, above). Just as in the Star case , this share is not sufficient to prove that there would be any anti-competitive eff ects for travel agents or cons umers overall. Furthermore, as

elaborated in the Star Final Orde r, the ITSA/ASTA answer assumes that grants of immunity have resulted in reductions in travel agent commissions and does not consider st ructural cha nges to the travel industry.

109 See 49 U.S.C. § 41308(b).

110 Cf . Answer of Virgin Atlantic at 71-73 (May 18, 2009).

111 The appendix is available to interested parties pursuant to Rule 12 of the Department’s Rules of Practice.

112 Answer of ITSA/ASTA at 7 (May 18, 2009).

113 Star, Docket DOT-OST-2008-0234, Order 2009-7-10 at 23 (July 10, 2009).35 ITSA/ASTA also allege that a grant of antitrust immunity would result in competitive harm in U.S.-London markets by augmenting oneworld’s market power at Heathrow. 114 In our analysis of U.S.-London markets above, the Department tenta tively finds that the proposed alliance, as remedied, will not substantially reduce competition or enhance market power.

We are not persuaded by Spirit to limit the operations of th e proposed alliance in Latin America. Spirit’s request is focused on preven ting code-share arrangements in select markets where there are still restrictions on new entry du e to the lack of open-skies agreements. As we discussed in the Star show cause order, the Depa rtment’s predicate for c onsidering a request for antitrust immunity is an open-skies agreement be tween the United States and the homeland of the foreign carrier-applicant, not for every th ird-country market that may be served. 115 Spirit’s

concerns are understandable to the extent that entr y into certain market s may be difficult. However, Spirit has failed to provide the Depa rtment with persuasive evidence that competitive harm in these markets would negate the broader ne twork benefits that a grant of immunity would bring. As such, we tentatively decide not to jeopardize these benefits by limiting the points that can be served, without stronger evidence of competitive harm.

3. The Need for Antitrust Immunity

Since we have tentatively found that the propos ed alliance, as remedied, will deliver public benefits, we must now decide whet her a grant of immunity is justified. Our policy is to grant immunity if the parties to the transaction would not otherwise go forward without it, and if we find that the public interest requires that we grant it. With regard to the latter element, we have found in previous cases, and we tenta tively find here, that immunity is required by the public interest

where the benefits are subs tantial and proximate to the granting of the authority. 116

The applicants state that they will not proceed without a grant of antitrust immunity, due to the litigation risk inherent in the joining of two la rge networks and the commercial risks associated with the sharing of competitively sensitive inform ation that would be necessary to complete the negotiations for the joint venture. They argue that a grant of i mmunity is necessary to achieve many of the public benefits of the transaction, including the closi ng of the transatlantic gap (for full code sharing and frequent flyer benefits), capacity and fare benefits attributable to integration under the joint venture, and joint corporate contracting, among others. 117

Both DOJ and Virgin Atlantic challenge the applicants’ position. As discussed more fully above, DOJ and Virgin Atlantic do not believe th ere are substantial public benefits that are attributable to a grant of immunity. They believ e that whatever benefits the alliance will produce have been, or can be captured, through arms-length cooperation.

114 Answer of ITSA/ASTA at 20-23 (May 18, 2009).

115 See Star, Docket DOT-OST-2008-0234, Order 2009-4-5 at 20 (April 7, 2009).

116 See SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-4-17 at 14-16 (April 9, 2008); Star, Docket DOTOST-2008-0234, Order 2009-4-5 at 18-19 (April 7, 2009).

117 Joint Application at 18-34, 58 (Aug. 14, 2008).36 We tentatively find the applican ts’ position to be credible. Their third attempt to form an immunized alliance, made in conjunction with other partners under the oneworld umbrella, represents a deeper, more integrat ed and network-oriented approach. The efforts to integrate their entire global networks, with a focus on transatl antic markets, carry commercial risk. We tentatively find that immunity is necessary to fac ilitate the transaction and allow the partners to engage in the kind of revenue an d benefit sharing that is necessa ry to alleviate the commercial

risks and create substantia l public benefits. It is highly unlik ely that the parties would proceed with the proposed alliance absent a grant of antitrust immunity.

Based on the above public benefits analysis, we tentatively concl ude that a gran t of antitrust immunity is required by the public in terest. Therefore, we tentativ ely make a grant of immunity to the applicants to implement th e proposed alliance, subject to remedies and conditions.

D. Tentative Conditions

In this section, we summarize and explain all of the propos ed conditions and remedies.

1. Slot Transfers

In Section IV(B), we tentatively found that it is necessary for the applicants to make available four Heathrow slot pairs at times usable for tran satlantic services to offset the potential loss of competition associated with the joining of Am erican’s and British Airways’ transatlantic

networks. The slots would be made available to competitors in time for the start of the IATA

2011 Summer Season and would remain available fo r a period of 10 years from the date of

issuance of a final order in this case. In our discu ssion, we proposed to earm ark two slot pairs for

Boston-London Heathrow service and indicated that the remaining tw o slot pairs could be used on

a flexible basis for service in U.S.-Heathrow ma rkets. Making available sl ot pairs in this way would reduce barriers to entry, enhance competiti on, and give competing airlines the opportunity to launch up to four new round trip flights between the U.S. and London.

We also asked parties to comment on a pro posed implementing mechanism for the slot

transfers. In the event that a mechanism is esta blished in the final order, we would require the applicants to implement it expedi tiously as a condition of keeping the antitrust immunity. Such a condition would be important to ensure that th e potential competitive harm we identified is alleviated by the prospect of new entry. Thus, we propose to require the applicants to implement

the slot transfer mechanism within three months of the issuance of a final orde r or else the antitrust immunity will automatically expire.

2. Implementation of the Joint Venture

In Section IV(C), we tentatively found that we should not make an indefinite grant of immunity due to the risk that many of the pub lic benefits will not be realized unless the joint venture is implemented in a prompt fashion. We are proposing to require th e applicants to submit evidence that the JBA has been implemented in orde r to keep the antitrust immunity. If, within 18 months of the issuance of a final order, they have not submitted verified statements attesting to the37 full implementation of the joint venture and a c opy of the executed joint venture agreement, the antitrust immunity granted to the propos ed alliance will auto matically expire.

We also tentatively found that it is necessary for the applicants to make changes in the text of the JBA to ensure that the app licants implement the venture in such a way so as to maximize public benefits. We are providing some guidance to assist the applicants as described further in Appendix B. The applicants should re-draft certain cited provisions of the JBA. The goal is to emphasize capacity growth over multiple hubs and enable the partners to act in the interest of the alliance as a whole. We expect these changes to be made and submitted on the record prior to the

issuance of a final order.

3. Annual Reporting

The competitive issues associated with the propo sed alliance are complex. We tentatively find that it is necessary for the applicants to re port to the Department concerning commercial developments in the alliance and the degree to which the public benefits envisioned in the application are being realized. As in the rece nt SkyTeam and Star de cisions, we are proposing annual reports. 118 The reports should focus on progress made toward implementing the remedies and facilitating new entry, progress made toward achieving the al liance’s stated goals, specific actions taken to implement each of the alliance agreements (including especially joint venture agreements), present or future planned cooperati on among the alliance partners in all co re airline functions, and a discussion of the public benefits that are being realized.

4. O&D Survey Data Reporting

For many years, we have required foreign carrie rs to submit traffic data as a condition of obtaining immunity from U.S. antitrust laws. We ask those carriers to participate in the Department’s Origin-Destination Survey of Ai rline Passenger Traffic (“O&D Survey”), which requires U.S. carriers to submit traffic data in mark ets they serve singularly or jointly with foreign airlines. Without foreign carrier pa rticipation in this effort, we would receive no detailed market information for passengers traveling to or from th e United States when their entire trip is on foreign airlines, except for T-100 data for nonstop and single-plane markets. The absence of such foreign carrier data severely handicaps our ability to evaluate the competitive effects of alliances.

As in previous cases, 119 we have tentatively decided to requi re the foreign carrier applicants – British Airways, Iberia, Finnair, and Royal Jord anian – to report full-itinerary O&D Survey information for all passenger itineraries that cont ain a United States point. This duty encompasses

all traffic to third countries in which the itiner ary includes a U.S. point. Since the oneworld alliance has not relied on grants of immunity to a large extent, this is a new requirement for several of the applicants. 120

118 See Star, Docket DOT-OST-2008-0234, Final Order 2009-7-10 at 26 (July 10, 2009); SkyTeam, DOT-OST-2007- 28644, Order 2009-6-26 at 2 (June 26, 2009).

119 See, e.g., United/ Lufthansa/ Austrian/ SAS/ Swiss/ LOT/ TAP/ Air Canada, Docket DOT-OST-2005-22922, Order 2007-2-16 (Feb. 13, 2007).

120 Finnair already participates in the O&D Survey as a resu lt of our previous grant of immunity to the American/ Finnair alliance, which contained the same condition. See American/ Finnair, Docket DOT-OST-2002-12063, Order38 To prevent this reporting requirement from unfairly harming the foreign applicants’ competitive positions, we tentatively decide to gr ant confidentiality to their O&D Survey reports and special reports on code-share passengers. Currently, we grant confidential treatment to all international Origin-Destination da ta. We propose to provide these data confidential treatment because of the potentially damaging competitive im pact on U.S. airlines and the potential adverse effect upon the public interest that would result from unilateral di sclosure of these data (data covering the operations of foreign airlines that are similar to the information collected in the Passenger O&D Survey are generally not available to the Department, to U.S. airlines, or to other
U.S. interests). 121

Our regulation, 14 C.F.R. Part 241 section 19-7(d )(1), provides for disclo sure of international O&D Survey data to air carriers directly partic ipating in and contributing to the O&D Survey. While we have tentatively found it appropriate to direct the foreign carrier applicants in this proceeding to provide certain limited O&D Survey data, they are not air carriers within the meaning of Part 241. The regulat ion, 14 C.F.R. Part 241, Section 03, defines an air carrier as “[a]ny citizen of the United States who undertakes, whether directly or indi rectly or by a lease or any other arrangement, to engage in air transportation.” British Ai rways, Iberia, Finnair, and Royal Jordanian would have no access to the data filed by U.S. air carriers. Therefore, we would keep submissions confidential while maintaining the cu rrent restriction on access to U.S. air carrier O&D Survey data by foreign air carriers.

5. Withdrawal from IATA Tariff Coordination

As we have found in earlier decisions, it is contra ry to the public intere st to permit immunized alliances to participate in certain price-relate d coordination that is al ready immunized within IATA tariff coordination. We therefore tentatively decide to condition our grant of antitrust immunity by requiring the Joint Applicants to withdraw, or to remain withdrawn, from participation in any IATA tariff ac tivities that affect or discuss a ny proposed through fares, rates or charges applicable between th e United States and any countries whose airline(s) have been or are subsequently granted antitrust immunity by the Department for participation in similar alliances. Such countries include the homelands of the applicants. 122 We tentatively find that this condition is in the public inte rest for the same reasons as stated in Order 2009-4-5.

2002-7-39 (July 30, 2002). We tentatively find that Finnair should continue to report the O&D Survey information. Royal Jordanian was required to submit O&D Survey informa tion for a period of time while it had antitrust immunity with America West. This order would require Roya l Jordanian to regularly report the information.

121 We treat the foreign airlines’ O&D da ta 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 th ese data only for internal analytical

purposes. 122 This condition currently applies to prices in markets that are subject to our prior antitrust immunity orders. Those markets are U.S.-Netherlands, U.S.-Germany (Order 96-5-27 at 17), U.S.-Denmark/ Norway/ Sweden (Order 96-11-1 at 23), U.S.-Austria (Order 2001-1-19 at 16), U.S.-Chile (Order 99-9-9 at 21), U.S.-Iceland (Order 2000-10-13 at 16), U.S.-Panama (Order 2001-5-1 at 11), U. S.-New Zealand (Order 2001-4-2 at 3) , U.S.-Czech Republic/ France/ Italy (Order 2002-1-6 at 7), U.S.-Republic of Korea (Order 2002-6-18 at 14; Order 2003-5-18 at 12), U.S.-Finland (Order 2002-7-39 at 10), U.S.-Belgium (Order 2004-4-10 at 12), U.S.-Jordan (Order 2005-1-23 at 13), U.S.-Peru (Order 2005-10-8), U.S.-Poland/ Portugal/ Switzerland/ Canada (Order 2007-2-6), and U.S.-United Kingdom (Order 2007-9-39 6. CRS Issues

Consistent with recent cases, we are not propos ing any conditions regarding the management of Computer Reservations Systems (CRSs). 123 Any coordination be tween the applicants concerning the operation of separate businesses, such as CRSs, would not be transactions specifically approved or necessarily contemplated by our orders in this proceeding. While the Joint Applicants, individually or collectively, may maintain an interest in a CRS, the grant of immunity in this Order thus does not exte nd to their management of those interests. 124 On the other hand, the applicants’ allia nce relationships will likely re quire the coordination of the presentation and sale of the airlines’ own servic es in the CRSs and each airline’s operation of its internal reservations systems. Those activities will necessarily be covered by a grant of antitrust immunity.

7. Operation under a Common Name

Because implementation of the Alliance Agreements could raise important consumer issues and “holding out” questions, if th e Joint Applicants choose to operate under a common name or use “common brands,” they must seek separate approval from the Department prior to such operations. For example, it is Department polic y to consider the use of a single air carrier designator code by two or more airlines to be unfair and deceptive unless the airlines give reasonable and timely notice to passengers of the actual operator of the aircraft. 125

8. Standard Code Sharing Conditions

We are tentatively granting authority for the appli cants to engage in blanket code sharing as a part of their alliance. The sta ndard conditions for such code sh aring are provided in Appendix A.

A CCORDINGLY :

1. We direct all intere sted persons to show cause w hy we should not issue an order making final the tentative findings and conclu sions discussed herein. Objections or comments to our tentative findings and conc lusions shall be due no later than 45

12). Also, by letter dated May 8, 1996, Northwest a nd KLM indicated their willingness to limit voluntarily their participation in IATA (Dockets DOT-OST-96-1116 and DOT-OST-95-618).

123 See, e.g., SkyTeam II, Docket DOT-OST-2007-28644, Order 2008-5-32 (May 22, 2008).

124 While any antitrust immunity granted in this proceeding would not cover the activities of Amadeus or any other system in which one of the Joint Applicants has an interest, we do, of course, have the authority under 49 U.S.C. § 41712 to prohibit any system operating in the United States from engaging in un fair or deceptive practices or unfair methods of competition. The Court of Appeals has upheld our determination that we had such jurisdiction. Sabre, Inc. v. Dept. of Transportation , 429 F.3d 1113 (D.C. Cir. 2005). We also have the authority to take action against conduct by a foreign system or a forei gn airline that unreasonably discriminate s against a U.S. system. 49 U.S.C. § 41310(g).

125 See 14 C.F.R. § 399.82.40 calendar days from the service date of this Order, and answers to objections shall be

due no later than 15 cale ndar days thereafter;

2. We tentatively approve and gr ant antitrust immunity to alliance agreements between and among American Airlines, Inc. (along with its affiliates Ameri can Eagle, Inc. and Executive Airlines, Inc. d/b/a American Ea gle), British Airways PLC (along with its affiliate OpenSkies SAS), Finnair OYJ, Iber ia Líneas Aéreas de España, S.A., and Royal Jordanian Airlines, in so far as such agreements relate to foreign air transportation. 126 Without regard to other conditions described in the ordering paragraphs below, the approval and grant of antitrust immunity sha ll remain in effect indefinitely, provided that the Joint Applicants:

a. Submit for prior approval subsequent subsidiary agreements implementing their Alliance Agreements; 127

b. Resubmit the Alliance Agreements before fi ve years from the date of issuance of the final order in this case; and

c. Obtain prior approval if they choose to operate or hold out service under a common name or use common brands;

3. We tentatively renew the existing statements of authorization of American Airlines, Inc. and British Airways Plc and amend their existing authority to allow blanket reciprocal open-skies code sharing, subject to the conditions attach ed as Appendix A,

under 14 CFR Part 212 for:

a. The display of British Airways Plc’s “BA” de signator code on flights operated by American Airlines, Inc. or its affiliates between (i) points in the United States, (ii) points in the United States and points in th e European Union (either nonstop or via intermediate points in third countries), (iii ) points in the United States and points in third countries, and (iv) point s in the European Union a nd points in third countries;

and

b. The display of American Airlines, Inc.’s “AA” designator code on flights operated by British Airways Plc between (i) points in the European Union, (ii) points in the European Union and points in the United St ates (either nonstop or via intermediate

126 The alliance agreements shall mean those agreements re ferred to on page 2 and Exhibits JA-1 and JA-4, of the Joint Application filed on August 14, 2008.

127 Regarding this requirement, we do not expect the Jo int Applicants to provide the Department with minor technical understandings that are necessary 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 all unredacted contractual instruments that implement or materially alter, modify, or amend the cooperation agreements, joint ventures, or confidentiality/antitrust guidelines. For avoidance of doubt, the applicants should submit any slot transfer agreements entered into pursuant to the immunized alliance and any agreements with a trustee. All documents shall be submitted to the Director, Office of Aviation Analysis.41 points in third countries), (iii) points in the European Union and points in third countries, and (iv) points in the United States and points in third countries;

4. We tentatively determine that the Joint Appli cants shall make available four slot pairs

at London’s Heathrow Internati onal Airport, subject to an expeditious and independent process, to duly authorized ai rlines that are not affiliates of the applicants or members of oneworld, for a period of at least 10 years from the issuance of a final order, at times

that are usable for transatlantic services , for the purpose of in troducing new services

between the U.S. and London as described in this order. 128

We tentatively determine that, unless the Joint Applicants implement a mechanism to transfer the slot pairs within three months of the issuance of the final order in this case, the authority herein shall expire and th e grant of antitrust immunity shall be automatically withdrawn;

5. We tentatively direct the Join t Applicants to revise the Jo int Business Agreement as set forth in section IV(D)(2) of this order and to submit the revised agreement on the record prior to the issuance of a final order in this case;

6. We tentatively direct the Joint Applicants to file with the Director of the Office of Aviation Analysis the following as evidence that the Joint Business Agreement has been implemented:

a. Verified statement(s) in Docket OST-2008- 0252 attesting that the Joint Business Agreement has been executed and implement ed pursuant to the terms described in the Joint Application, Ex hibit JA-1 (Joint Business Agreement), and

b. A complete and unredacted copy of the Join t Business Agreement with appendices.

We tentatively determine that, unless the Joint Applicants make the filings described in this ordering paragraph within eighteen mont hs of the issuance of a final order in this case, the authority herein shall expire and the grant of antitrust immunity shall be automatically withdrawn;

7. We tentatively direct the Jo int Applicants to submit annua l progress reports to the Office of Aviation Analysis, beginning one year from the date of issuance of a final order in this case, and continuing each year thereafter while the Alliance Agreements
are effective; 129

8. We tentatively direct American Airlines , Inc., British Airways PLC, Finnair OYJ, Iberia Líneas Aéreas de España, S.A., and R oyal Jordanian Airlines to withdraw, or to

128 Section IV(B)(2) of this order indicates that 2 slot pa irs are designated for Boston -Heathrow service and 2 slot pairs are designated for flexible use in U.S.-Heathrow city pairs.

129 We expect the Joint Applicants to deliver the progress report by the close of business on the anniversary date. 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.42 remain withdrawn, from participation in a ny International Air Transport Association

tariff coordination activities th at discuss any proposed through fares, rates, or charges applicable between the United States and any countries whose airlines have been or are subsequently granted antitrust immunity, or renewal thereof, to participate in similar alliance activities with a U.S. airline(s);

9. We tentatively delegate to the Director, O ffice of International Aviation, the authority to determine the applicability of the direct ive set forth in Orderi ng Paragraph 8 as to specific prices, markets, and tariff coordinati on activities, consistent with the scope and purpose of the condition, as previously described;

10. We tentatively direct British Airways PLC, Finnair OYJ, Iberia Líneas Aéreas de España, S.A., and Royal Jordanian Airlines, to begin or to continue to report fullitinerary Origin-Destination Survey of Airline Passenger Traffic for all passenger itineraries that include a U.S. point;

11. We tentatively determine that we may ame nd, modify, or revoke this authority at any time without hearing;

12. We grant the motions of Virgin Atlantic, submitted on January 20, 2010, and Hubert Horan, submitted on January 31, 2010, for leave to file late pleadings; and

13. 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 available at: http://www.regulations.gov1 A PPENDIX A

Code-share Conditions

The statements of authorization are subject to the following conditions:

(1) The statements of authorization will remain in effect only as long as (a) American and British Airways continue to hold the necessary underl ying authority to operate the code-share services at issue, and (b) the code-share agreement providing for the c ode-share operations remains in effect;

(2) American and/or British Airways must notify the Department no later than 30 days before they begin any new code-share service under the c ode-share services authorized here . Such notice shall identify the market(s) to be served, which carrier will be operating the aircraft in th e code-share market added, and the date on which the service will begin. Such noti ces should be filed in Docket DOT-OST-2002-13861;

(3) American and/or British Airways must notify the Department immediately if the code-share agreement

under which these code-share services ar e operated is no longer in effect or if the carriers decide to cease operating all or a portion of the appr oved code-share services. Such notices should be filed in Docket

DOT-OST-2002-13861; 130

(4) The code-sharing operations c onducted under this authority must comply with 14 CFR Part 257 and with any amendments to the Department's regulati ons concerning code-share arrangements that may be adopted. Notwithstanding any provisions in the cont ract between the carriers, our approval here is expressly conditioned upon the requirements that the subj ect foreign air transportation be sold in the name of the carrier holding out such service in computer reservation systems and elsewhere; that the carrier selling such transportation (i.e., the carrier shown on the ticket) accept responsibility for the entirety of the code share journey for all obligations established in its contract of carriage with the passenger; and that the passenger liability of the opera ting carrier be unaffected;

(5) Any service provided shall be consistent with the provisions of the U.S.-EU agreement, and all applicable agreements with other foreign countries invol ved. Furthermore, (a) nothing in the award of the

blanket statement of authorization to American sh ould be construed as confe rring upon American rights (including code-share, fifth-freedom intermediate and/or beyond rights) to serve markets where U.S. carrier rights are limited unless American notifies us of its inte nt to serve such market and unless and until the Department has completed any necessary carrier selecti on procedures to determine which carrier(s) should
be authorized to exercise such rights; 131 and (b) should there be a request by any carrier to use the limitedentry route rights that are included in American’s authority by virtue of the blanket statement of authorization granted here, but that are not being used by American, the holding of such authority will not be considered as providing any preference for Ameri can in a carrier selection proceeding to determine which carrier(s) should be entitled to use the authority at issue.

(6) The authority granted here is specifically condi tioned so that neither American nor British Airways shall give any force or effect to any contractual pr ovisions between themselves that are contrary to these conditions; and

(7) We may amend, modify, or revoke the authority gr anted at any time without hearing at our discretion.

130 We expect this notificatio n to be received within 10 days of such non-effectiven ess or of such decision.

131 The notice referenced in condition (2) above may be used for this notification.1 A PPENDIX B Structural Changes to the Joint Venture

[Redacted]

[Protected from Disclosure Pursuant to 14 C.F.R. Part 302.12. Persons who have filed appropriate affidavits in this docket, according to the guidelines set forth in the Department’s August 19, 2008 Notice, may request the confidential version of this doc ument from the DOT Dockets Office at 1200 New Jersey Avenue, SE, Washington, DC 20590.]