T he Committee sponsored several The Antitrust Review of the - - PDF document

Summer 2002 Issue No. 9

The Transportation Antitrust Update

Transportation Industry Committee • Section of Antitrust Law • American Bar Association

In This Issue:

The Antitrust Review of the Japan Airlines and Japan Air System Merger

by Naveen C. Rao .................................................. 2

New Competition-Related Railroad Legislation Introduced in the Senate

by Andrew B. Kolesar III..................................... 13

The Orbitz Controversy: Travelocity’s Perspective

by Andrew B. Steinberg....................................... 19

The Transportation Industry Committee WEBSITE is here: http://www.abanet.org/antitrust/committees/ industry/trans.html Our website includes pages with reports of recent developments, announcements

• f

upcoming meetings, and useful links. Back issues of this newsletter are available as well. We invite you to visit the website and provide us with your feedback.

Note from the Chair:

he Committee sponsored several successful programs this past spring. See page 31 for a brief description. The articles in this issue of our newsletter cover a range of transportation competition

• issues. Naveen C. Rao of the Federal Aviation

Administration analyzes the Japan Fair Trade Commission’s approval of the merger of Japan Airlines and Japan Air System earlier this

• year. Andrew B. Kolesar III of Slover &

Loftus provides a summary and analysis of S. 2245, the Railroad Competition, Arbitration, and Service Act of 2002, introduced by Senator Conrad Burns this past April. As the second part of a point/counterpoint exchange, Andrew B. Steinberg, formerly general counsel of Travelocity.com and currently general counsel of Church & Dwight Co., responds to the perspectives on antitrust issues relating to the Orbitz online travel service that were offered in our last issue by Gary Doernhoefer, general counsel of Orbitz, L.L.C. Special thanks go to each

• f
• ur

contributors and to our “desktop publishers,” Deborah Papineau and Cindy Eagle of Covington & Burling. I am also pleased to recognize the contributions of our Committee Vice Chairs, Denise Díaz and Carolyn Corwin, who are making significant contributions to our Committee’s activities. Trey Nicoud

T

Summer 2002 - Issue 9 The Transportation Antitrust Update 2

TRANSPORTATION INDUSTRY COMMITTEE LEADERSHIP (2002-2003) Committee Chair: ..................................Trey Nicoud Committee Vice-Chair: ......................Denise L. Díaz Committee Vice-Chair:................ Carolyn F. Corwin Council Liaison: ......................... Calvin S. Goldman

NEW MEMBERS INVITED

New members are cordially invited to join the Section

• f

Antitrust Law and the Transportation Industry Committee. Most of the Section’s programs are developed by the Committees, giving members the opportunity to plan and participate in programs that will be

• f the most value to their practices. Similarly,

the newsletters, Handbooks, and Monographs published by the Committees offer a unique chance to work on publications that will have a national distribution. At Transportation Industry Committee programs, members can meet attorneys from across the country who are also interested in transportation antitrust law.

THE ANTITRUST REVIEW OF THE JAPAN AIRLINES AND JAPAN AIR SYSTEM MERGER

Naveen C. Rao* n April 26, 2002, the Japan Fair Trade Commission (JFTC) approved the merger of Japan Airlines (JAL) and Japan Air System (JAS) in a transaction that will combine that country’s second and third largest domestic carriers.1 When the transaction is complete later this year, the resulting carrier, known as “JJ” in Japan,2 will leapfrog All Nippon Airways (ANA) and become Asia’s largest airline, with estimated annual revenues of US$17.5 billion.3 The new company will be the third largest carrier in the world after American Airlines and United Airlines in terms of revenue and sixth

• * Naveen C. Rao is an attorney in the Office of the

Chief Counsel at the Federal Aviation

• Administration. He lived in Fukuoka Prefecture

Japan for two years prior to law school and is a private pilot. The opinions expressly in this article are solely those of the author and do not represent the views of the Federal Aviation Administration. The author gratefully acknowledges the assistance he received from Rebecca Fuller and Larry Arima in preparation of this article.

1 Japanese Fair Trade Commission, Business

Consolidation by Japan Airlines Co. Ltd. and Japan Airsystem Co. Ltd. Through Establishment of a Holding Company, Apr. 26, 2002 [Available at: http://www.jftc.go.jp/e-page/press/2002/april/020426 JJ.pdf].

2 Geoffrey Thomas, ANA’s youthful state of mind,

Air Transport World, Mar. 1, 2002, at 26.

3 Sumiko Oshima and Michael Mecham, Troubled

Times Put JAL on Acquisition Path, Aviation Week & Space Technology, Nov. 19, 2001 [Available at: http://www.aviationnow.com/content/publication/aws t/20011119/avi_air.htm].

O

The Transportation Antitrust Update Summer 2002 – Issue No. 9 3

largest in terms of passengers carried.4 The merger will entail the creation of a new holding company in October 2002; actual

• perational consolidation will occur in 2004.

While these figures are impressive, the truly staggering numbers relate to the market concentration that will result from this merger. According to Transport Minister Chikage Ogi, the new carrier will account for 70% of Japan’s combined domestic and international

• traffic. There will be a virtual duopoly for air

service in Japan, with ANA and JAL-JAS holding a 97% market share of domestic traffic between them.5 In spite of these conspicuously high figures, the JFTC gave JJ the green light. The following is an analysis of the Japanese domestic airline industry and the antitrust review conducted by JFTC. Information on antitrust in Japan generally is included in

• rder to place the JFTC decision in context.

CURRENT STATE OF THE JAPANESE AIRLINE INDUSTRY Japan’s domestic airline industry currently consists primarily of three carriers: JAL, JAS, and ANA.6 ANA is currently Japan’s largest domestic carrier, with 49% of passenger air transportation services within Japan as measured by the number of passengers.7 JAL, the country’s flagship international carrier, is in second place, with 25.2% of the domestic

• 4 Id. at 1.

5 Turbulence Ahead, Asahi Shimbun, Jan. 8, 2002. 6 ANA, JAL, and JAS each have several subsidiaries

for commuter, charter, and regional services. The ANA group consists of the ANA mainline, Air Japan, Air Nippon (ANK), and Nippon Cargo Airlines. The JAL group includes the JAL mainline, Japan Asia Airways (JAA), J-Air, Japan Trans-Ocean Air (JTA), JAL ways (JAZ), and JAL Express. The JAS group consists of the JAS mainline, Japan Air Commuter (JAC), Harlequin Air, and Hokkaido Air System. Source: 2002 Japan Air Directory.

7 ANA did not begin international services until 1986

and still lags far behind JAL in international traffic.

• market. Finally JAS, primarily a domestic

carrier with a handful of international routes, has a 23% domestic market share. Even before JAL and JAS announced their intent to merge in November 2001, Japan already had a highly concentrated airline industry. During the 1990s, the Japanese government began to deregulate the domestic airline

• industry. Prior to 1997, the big three were the
• nly carriers that provided domestic service.

New entry was finally allowed in 1997, and a number of new names have taken to Japanese skies as a result: Skymark Airlines (Skymark), Hokkaido International Airlines (Air Do), Lequios Airlines, Fair Inc., Amakusa Airlines, and Iki International. These carriers operate domestically and do not carry significant amounts of traffic.8 Prior to deregulation, air fares had long been regulated by the Transport Ministry. Prior to 1995 the Transport Ministry had to approve all fares. Carriers could discount fares up to 50% upon notifying the Transport Minister, so long as the discount was not projected to reduce total revenue.9 The first step towards true fare deregulation came in September 1995, when carriers were allowed to set fares at their discretion within a range marked by a price ceiling and a price floor equivalent to 25% of the ceiling price.10 In early 1997, the government approved a Revised Deregulation Action Plan that eliminated supply and demand controls for domestic passenger air transportation in Fiscal

• 8 The combined market share of these carriers totals

about 3% of the domestic market.

9 Study Group on Government Regulations and

Competition Policy, Review

• f

Government Regulations in Domestic Air Passenger Transportation Services-Research Report by the Study Group on Government Regulations and Competition Policy, at http://www.jftc.go.jp/e-page/ report/survey/1997/970312ap.htm. See also Section 105.4 of the Civil Aeronautics Law.

10 See Section 105.4 of the Civil Aeronautics Law.

Summer 2002 - Issue 9 The Transportation Antitrust Update 4

Year 1999.11 In February 2000, Japan abolished the system of air fare approvals entirely and implemented a file-and-use system under which carriers simply inform the government of fare levels. Air fares today are set at the discretion of carriers. IMPETUS BEHIND THE JAL-JAS MERGER The Japanese economy has been in a recession for over a decade. All three of the big carriers, like their counterparts on the

• ther side of the Pacific, have struggled to cut

costs to remain profitable. The atrocities of September 11 had a tremendous effect upon airlines across the globe, and Japanese carriers were no exception. JAL had the greatest exposure to overseas turmoil. It derives 60 percent of its revenues from international flights; of these revenues, 40 percent come from flights to the United States.12 The economic slowdown in the U.S. prior to September 11 had already put pressure on

• JAL. After September 11, JAL suffered an

immediate loss

• f

20 percent

• f

its international passengers and found its expected fiscal year 2001 profit transformed into a 40-billion-yen loss. As a result, JAL missed its first dividend payment in four years.13 ANA was also impacted by September 11, but to a far lesser extent. ANA’s dominance in the domestic market insulated it from the shock that jolted JAL. JAS, the smallest of the three, had struggled through the entire decade, and the shock of September 11 did not help. JAL and JAS share a common characteristic that makes them more sensitive to economic downturns than ANA. Both JAL and JAS carry a large proportion of package tourists relative to ANA. Package tourists pay steeply

• 11 Id.

12 Oshima & Mecham, supra note 3, at 2. 13 Id.

discounted fares and therefore provide lower yield per seat than full fare passengers. The individual passengers who form the core of ANA’s customer base typically pay higher fares.14 As a result, JAL and JAS would have higher break-even load factors15 than ANA. Thus, both JAL and JAS are especially sensitive to downturns in travel and were hit hard by the economic situation, particularly after September 11. Airport constraints provided an important incentive for JAL to seek a union with JAS. JAL has long wanted to strengthen its position in the domestic market by adding flights. However capacity constraints, particularly at Tokyo Haneda Airport,16 had prevented JAL from achieving this long held ambition.17 Does this sound familiar? If adding runways is difficult in the United States, it is nearly impossible in Japan. Japan’s limited space and crowded urban centers make airport expansion very difficult. Tokyo’s Narita Airport, which opened in 1978, added its second runway in April 2002 after decades of fighting with intransigent farmers over issues of land and noise. The new runway is still a compromise; at 7,150 feet, it can accommodate only aircraft up to the size of the Boeing 767, which are not used for transpacific flights. Haneda Airport, located close to downtown Tokyo,18 currently has three runways. Japanese authorities are considering the addition of a fourth. One

• ption under consideration at Haneda is an

8,000-foot floating runway; if selected, this

• 14 Asahi Shimbun, supra note 5, at 1.

15 A break-even load factor is the percentage of seats

that must be filled for the airline to break even.

16 Tokyo is served by two airports: Narita is the

international airport, and Haneda is the domestic airport.

17 Oshima & Mecham, supra note 3, at 2. 18 Nicholas Ionides, Second Narita runway finally

• pens, Air Transport Intelligence, Apr. 17, 2002.

The Transportation Antitrust Update Summer 2002 – Issue No. 9 5

would be the first use of a floating structure for an airport.19 In the short and medium term, adding runways in numbers sufficient to meet demand is simply not possible. In the face of these constraints, JAL pursued the merger with JAS as a way to better compete with ANA in domestic markets and to insulate it from international shocks. ANTITRUST IN JAPAN Antitrust law in Japan has a relatively brief

• history. The country enacted its first antitrust

law in 1947. This law, formally known as the “Act Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade,”20 is more commonly referred to as the “Antimonopoly Law” (AMA).21 This statute, an integral part of efforts by the Allied Forces to reform Japan’s war economy, is largely based on the Sherman Act and Clayton Act.22 The AMA created the JFTC and gave the new agency very broad powers.23 The JFTC performs a role that roughly combines the functions of the U.S. Department of Justice Antitrust Division and Federal Trade Commission (FTC). Prior to the Allied occupation, free enterprise and competition were virtually

• 19 Japanese Authorities Weigh Floating Runway for

Haneda, Aviation Daily, Apr. 26, 2002, at 5.

20 Act No. 54 of Apr. 14, 1947. (English translation-

• nly Japanese version is authentic). [Available at:

http://www.jftc.go.jp/e-page/acts/amact.txt].

21 Mitsuo Matsushita, The Antimonopoly Law of

Japan, in Global Competition Policy 151-97 (Edward

• M. Graham and J. David Richardson eds., 1997).

22 Michael O. Wise, Review of Competition Law and

Policy in Japan (1999). [Available at: http://www1.oecd.org/daf/clp/country_reviews/regref jap.pdf]

23 Kenji Sanekata and Stephen Wilks, The Fair Trade

Commission and the Enforcement of Competition Policy in Japan, in Comparative Competition Policy: National Institutions in a Global Market 102-38 (G. Bruce Doern and Stephen Wilks eds., 1996).

unknown in Japan.24 From the 1920s until the Allied occupation, cartels were not only tolerated but even encouraged by the government.25 Japan’s suspicion of the free market made the AMA highly unpopular; the JFTC hardly exercised its considerable power during its first twenty years of existence.26 The suspicion of antitrust ran so deep that some of Japan’s post war industrial planners regarded the imposition of antitrust law by the Allies as a form of revenge for the war meant to hobble their country.27 The Ministry of International Trade and Industry (“MITI”) is the Japanese government’s industrial planning agency. It took the lead in establishing national economic policy in the 1950’s and early 60’s.28 MITI is often credited for its role in Japan’s rise as an economic power after World War II. MITI’s policies often encourage production and price cartel agreements and mergers,29 and the agency has a reputation for championing the interests of favored firms. As a result, MITI’s role conflicts with that of the JFTC. The JFTC has long played second fiddle to MITI.30 The conflict between JFTC and MITI was illustrated in a February 1974 criminal suit brought by JFTC against oil companies for

• utput and price fixing. The companies
• 24 Matsushita, supra note 21, at 151.

25 Wise, supra note 22, at 1. 26 Sanekata & Wilks, supra note 23, at 102. 27 Douglas E. Rosenthal and Mitsuo Matsushita,

Competition in Japan and the West: Can the Approaches Be Reconciled?, in Global Competition Policy 313-37 (Edward M. Graham and J. David Richardson eds., 1997) (citing William Chapman, Inventing Japan: An Unconventional Account of the Postwar Years, 1991).

28 Scott Morton, Antitrust Laws in Countries Other

than the United States, Section II (1997) [Available at: http://www.antitrust.org/law/International/alother.htm]

29 Id. 30 Wise, supra note 22, at 1.

Summer 2002 - Issue 9 The Transportation Antitrust Update 6

admitted to these practices but were ultimately acquitted because they were acting pursuant to MITI “administrative guidance.”31 The Tokyo High Court declared that, “[T]here was reasonable possibility that they may not have been aware of the illegality of the cartel due to faith in MITI’s administrative guidance.”32 This decision and even more permissive

• pinions have established wide latitude for

anticompetitive behavior by companies acting pursuant to administrative guidance. The JFTC reviews mergers pursuant to Section 10(1) of the AMA. This section states in relevant part, “[N]o company shall acquire

• r hold stock of any other companies where

the effect of such acquisition or holding of stock may be substantially to restrain competition in any particular field of trade, or shall acquire or hold stock of other companies through unfair trade practices.” The JFTC’s first merger case arose in 1968. In that year, Yawata Iron & Steel Co. and Fuji Iron & Steel Co., the number one and two steel companies, announced their intention to merge.33 The JFTC initially found the merger illegal because the new combined entity would have 100 percent of the market for rails for railways, 61.2 percent of the market for tin in food cans, and 56.3 percent of the market in foundry pig iron.34 After numerous hearings

• 31 Fair Trade Commission, Guidelines Concerning

Administrative Guidance under the Antimonopoly Act, Jun. 30, 1994. Administrative guidance is defined as “guidance, recommendation, or advice given by an administrative organ which requires a specific person to perform or abstain from performing a certain act in order to achieve a certain administrative objective, or an act which cannot be legally dealt with, within scope of the administrative

• rgan’s responsibilities or field of operations.”

[Available at: http://www.jftc.go.jp/e-page/guideli /administrativeGL.pdf]

32 Sanekata & Wilks, supra note 23, at 104. 33 Oct. 30, 1969, 16 KTIS 46. 34 H. Iyori and A. Uesugi, The Antimonopoly Laws

and Policies of Japan 166 (1994).

and filings, the JFTC allowed the merger with the following remedies: Fuji transferred its rail business to a competitor, managed the manufacturing until the competitor was ready to begin production, and further provided technical assistance. Yawata had to sell to another company its twenty percent share of an affiliate that manufactured tin plates for food cans. Yawata also had to sell its foundry pig iron business to its leading competitor. Finally, Fuji and Yawata agreed to provide technical assistance to two of their competitors in the sheet pile market.35 1998 MERGER REVIEW STANDARDS In December 1998, the JFTC issued guidelines for merger review that replaced a set of guidelines issued in 1980.36 The 1998 guidelines notably include, for the first time, a JFTC protocol for defining markets. The agency defines markets by looking at goods and services “‘having the same or a similar function and/or utility’”37 from the consumer

• viewpoint. The next consideration in market

definition is relevant geographic area. According to Watanabe and Tamai, the market definition criterion lacks a numeric standard such as the five-percent cross-price elasticity criterion that is a general rule in the United States.38 The second guideline focuses on substantial restraint of competition. Under the 1980 guidelines, the JFTC focused primarily on monopolies and paid little attention to “highly oligopolistic markets (collusive oligopoly).”39 The new guidelines correct this deficiency. The new guidelines list the following factors to be used in assessing anticompetitive effects:

• 35 Iyori & Uesugi, supra note 34, at 167.

36 Yasuhide Watanabe and Yuko Tamai, Japanese

Merger Notification and Enforcement Policy, 15 Antitrust 49, 51 (2001).

37 Watanabe & Tamai, supra note 36, at 52. 38 Id. 39 Id.

The Transportation Antitrust Update Summer 2002 – Issue No. 9 7

• 1. [T]he status of the parties—market share,

market rank, and premerger competition between the parties;

• 2. [M]arket

conditions—the number

• f

competitors and market concentration, new entry, importation, and exclusivity or closeness of the market; and

• 3. [O]ther factors, such as general business

power of the combined parties post- merger, competitive pressure from neighboring markets, and the efficiency of the parties post-merger.40 The JFTC does not explain how it weights each of these factors nor does it use any explicit criteria or numeric standards like the Herfindahl-Hirschman Index for determining anticompetitive impact.41 The only objective standards that JFTC provides are its “white list” criteria for mergers that would not violate merger rules.42 These criteria are:

• 1. [T]he combined market share post-merger

is 10 percent or less in a particular market;

• r
• 2. [T]he combined market share post-merger

is 25 percent or less and its ranking is second or lower in a non-oligopolistic market if barriers to entry are low.43 The lack of numeric standards leaves considerable ambiguity in the guidelines. There have been two mergers approved under the 1998 guidelines. In the first, General Electric (GE), Hitachi, and Toshiba merged their boiling water reactor (BWR) fuel

• perations. BWR fuel is a type of nuclear
• fuel. The JFTC determined the relevant

market was the “production and sales of BWR fuels throughout Japan.”44 The combined

• 40 Id.

41 Id. 42 Id. 43 Id. 44 Id.

market share

• f

the new entity is approximately 70 percent. The JFTC approved the merger largely on the following grounds:

• 1. Tokyo

Electric Power Company (TEPCO), the largest BWR fuel user, had had a competitive bid process in place since 1994 and began purchasing from foreign suppliers in 1997.

• 2. Foreign

suppliers were expected to become strong competitors in the BWR fuel market.

• 3. The users of BWR fuel had price

bargaining power and would follow TEPCO’s lead.45 The JFTC required the new entity to cooperate with new market entrants and customers upon the agency’s request. The merger of Exxon and Mobil was the second to be reviewed under the 1998

• guidelines. The JFTC determined the relevant

markets to be crude oil sales to domestic oil refineries, sales of individual oil products in Japan’s prefectures, and sale of individual oil products in the country as a whole. In its market definition analysis, the agency found that most refiners purchased crude oil abroad, the combined market share of Exxon-Mobil would be slightly above ten percent, and there are many sellers abroad. The JFTC approved the merger on the grounds that in the crude oil market there were multiple competitors (including one company with a 25 percent market share), there was vigorous retail competition that promoted wholesale competition, and imports were expected to rise.46 The agency found that in the oil products market (e.g., gasoline, kerosene, and light oil) the new merged company would rank second, with a twenty-percent market share. However,

• 45 Id. at 52-53.

46 Id.

Summer 2002 - Issue 9 The Transportation Antitrust Update 8

the JFTC again found no competition

• problems. The agency reasoned that, when

taken together, the existence of a larger competitor (presumably the same company with a 25 percent market share in the crude market mentioned above), an expected increase in imports, and dynamic market shares of the oil companies in smaller markets would cause the Exxon-Mobil merger to have a net pro-competitive effect.47 THE JFTC’S PRELIMINARY FINDINGS JAL and JAS submitted their merger plans to the JFTC for “prior informal consultation.” On March 15, 2002, the agency released its findings about the proposed merger. In conducting its analysis under the AMA, the JFTC focused only on the domestic air passenger market. It concluded that the domestic air cargo market mirrored the air passenger market, eliminating the need for a separate analysis.48 The agency did not consider international air passenger

• r

international air cargo, stating that those markets are constrained by more than one large carrier. The JFTC expressed concerns about the harm to competition that would occur as a result of the JAL-JAS merger, focusing specifically on four effects and conditions that would result from the merger.49

• 1. After the merger, it would become easier

for the big two carriers to engage in concerted fare-setting actions.

• 2. The smaller number of carriers on a

particular route would reduce the availability of “Specified Flights Discount

• 47 Id.

48 Fair Trade Commission, Business consolidation by

Japan Airlines Co. Ltd. and Japan Airsystem Co. Ltd. through establishment of a holding company – a summary, Mar. 15, 2002, at 4. [Available at: http://www.jftc.go.jp/e-page/press/2002/march/2002 0315jaljas.pdf]

49 Fair Trade Commission, supra note 48, at 1.

Fares” on that route and also decrease rates of discount.

• 3. New entry would provide only limited

competitive pressure because of the difficulty of obtaining slots at congested airports,50 limited airport facilities, and difficulty

• f

developing aircraft maintenance capabilities. The two existing new airlines, Skymark and Air Do, are unable to expand beyond certain trunk routes.

• 4. The reduction from three big carriers to

two big carriers would leave general consumers with no bargaining power, and they would be forced to pay what airlines dictate. The JFTC believed that the constraints on new entry and capacity limits reduced the prospects for price competition. It noted that, in the past, the three big airlines often “resorted to concerted fare-setting actions such as raising their Ordinary Fares (a benchmark for all air fares) to the same level,

• r setting discounted fares simultaneously, at

similar prices with almost the same terms and conditions as their competitors.”51 In April 2000, JAL, JAS, and ANA all raised their fares on all routes by 15 percent, with resulting fares almost identical among the three carriers.52 The JFTC noted that, in the effective duopoly that would result from the merger, both large carriers would have strong incentives to avoid a fare war, thus increasing the chance of concerted fare actions. The

• 50 “Congested airports” refers to Tokyo Haneda and

Osaka Itami airports, which have no slots available and together account for 70 percent of all domestic passengers traveling by air.

51 Fair Trade Commission, supra note 48, at 2. 52 Id. at 5-6. This situation presents some similarities

to the facts that led to the U.S. Justice Department’s suit against the Airline Tariff Publishing Company. See United States v. Airline Tariff Publishing (ATP) Co., 836 F. Supp. 9 (D.D.C. 1993)

The Transportation Antitrust Update Summer 2002 – Issue No. 9 9

JFTC rejected the contentions by JAL and JAS that they had no choice but to follow ANA’s pricing given the latter carrier’s power in the domestic market. The JFTC pointed to the competitive pricing by new entrants, Air Do and Skymark, on certain routes. The JFTC found no reason that JAL and JAS could not emulate the discounting of new entrants.53 The JFTC was also concerned about discount fares. The agency found that the availability and the percentage of discount on Specified Flight Discount Fares is directly proportional to the number of carriers serving a route. For instance, as of January 2002 the JFTC found that discount fares were available

• n 54.1 percent of flights on monopolized

routes, with an average discount of 12 percent. On routes served by three carriers or more, discount fares were available on 86 percent of flights, with an average discount of 26

• percent. Where four airlines operate a route,

the average discount is 38.7 percent.54 Based

• n these observations, the cause for concern is
• apparent. As a result of the merger, the

number of competitors on most routes will fall from three to two, or even two to one on some routes. The JFTC found that the reduction from three to two carriers will eliminate an important competitive constraint on the

• airlines. Currently, the JFTC assumes that

JAL, JAS, and ANA all constrain one another by being able to enter each other’s markets if fares become excessive. After the merger, one strong, potential new entrant will be eliminated from the marketplace. The JFTC also pointed to slot constraints at Tokyo Haneda and Osaka Itami, as well as the prohibition against cabotage by foreign carriers, as limitations on the effectiveness of new entry as a competitive constraint. Finally, the JFTC mentioned the limited ability of new entrants to mount an effective challenge to the

• 53 Id. at 2.

54 Id. at 11 Annex 2

large carriers, as they will be disadvantaged in terms

• f

route networks, computer reservations systems, and frequent flyer programs. Without much elaboration, the JFTC found that general consumers (individuals dealing directly with airlines) will have no bargaining power and will be inordinately harmed by concerted fare-setting actions.55 In contrast, the agency found that travel agents and other large purchasers would still retain some bargaining power THE JFTC APPROVAL JAL and JAS responded to the March 15 report by submitting a revised merger proposal

• n April 23, 2002. Under the revised plan, the

merged airline will surrender nine slots at Tokyo Haneda Airport for new entrants out of a total of 180 slots held by the two carriers. The two airlines proposed to relinquish sufficient check-in counter space, aircraft bridges, and gate facilities to new carriers. They also

• ffered

to provide heavy maintenance and ground services for the aircraft of new entrants. JAL and JAS also proposed to reduce fares by ten percent across the board and promised not to raise fares for three years. The carriers will also offer specified flight discount fares and advance purchase discount fares on all main routes the new carrier will monopolize and main routes

• n which the new carrier will compete with a

“major airline” (obviously ANA).56 The level of these discounts will be identical to the prevailing levels offered by the big three. JAL and JAS have stated that the new carrier will enter markets in which another major airline is the monopolist or increase frequencies where another major airline is dominant. The JFTC issued its approval three days after receiving this proposal.

• 55 Id. at 9.

56 Id. at 3.

Summer 2002 - Issue 9 The Transportation Antitrust Update 10

The JFTC and the Transport Ministry (Ministry) plan to take additional steps to enhance competition. Many of these steps are designed to supplement the JAL/JAS divestiture actions. The first step is the creation of “competition promotion slots” (CPS) at Haneda Airport, which will consist of the nine slots surrendered plus the creation of up to three more.57 According to the JFTC, this action will benefit carriers that have been limited to as few as six slots at Haneda Airport. The JFTC states that the Ministry will conduct a review of the slot allocation at Haneda in February 2005 pursuant to the revised Civil Aeronautics Law.58 The JFTC expects the Ministry to increase the number of CPS, thereby allowing new airlines to expand their operations and to increase competitive constraints on the major airlines.59 In addition to what has been voluntarily surrendered, the Ministry will ask the major airlines to cede additional airport facilities, such as boarding bridges, check-in counters, and parking spots, if they are required by new airlines. In a curious twist, major airlines will be allowed to take advantage of unused CPS on a temporary basis if this would enhance competition. For instance, if a major airline wants to enter a monopolized route, it may temporarily use a CPS if it cedes essential airport facilities to a new airline.60 This provision appears to create an incentive for the major airlines to cede additional airport facilities at Haneda. The Ministry will also ask major airlines to support their new competitors by providing maintenance and other unspecified services necessary for companies entering and

• perating in the air transport industry. This

proviso resembles the one adopted by the JFTC in its approval of the GE, Hitachi, and

• 57 Id. at 4.

58 Id. 59 Id. 60 Id.

Toshiba BWR fuel merger. It is also reminiscent of the agency’s action in the Yawata-Fuji steel merger, in which the merging companies had to provide technical assistance to competitors. The Ministry and JFTC could use their powers to prevent “refusal-to-deal” type situations, suggesting an expectation that the new entrant airlines could require more services than the major airlines would be willing to offer. The JFTC mentions two of the new airlines, Skymark and Air Do, each of which has six slots at Haneda. According to the JFTC, one

• f these carriers (presumably Skymark) is

preparing to expand by utilizing all of the new Haneda slots, conducting crew training in- house, and independently performing maintenance and ground services.61 Skymark expects to receive several new CPS after February 2005 and is planning accordingly. The agency found that JAL and JAS’s willingness to surrender up to three more slots should allow Skymark to expand without difficulty until the slot review and allocation in 2005, therefore providing “effective competition” until that time.62 The JFTC expects two other airlines, Skynet Asia and Lequious Airlines, to begin operations at Haneda in February 2005, using unallocated slots that are reserved for new airlines.63 According to the JFTC, after the 2005 slot review the increase in CPS and the concrete expansion plans of Skymark will create an effective competitor to the JAL/JAS and ANA

• duopoly. The agency seems to be bullish on

Skymark’s prospects, stating: “[T]he growth

• f such a new airline into a competitive carrier

capable of effectively challenging major airlines, is a highly probable outcome.” 64 The agency also states that the actions taken by

• 61 Id. at 5.

62 Id. at 6. 63 Id. at 5. It is unclear whether these slots exist now

and, if not, how they will be created.

64 Id. at 6.

The Transportation Antitrust Update Summer 2002 – Issue No. 9 11

JAL and JAS to provide facilities, along with supporting action by the Ministry, will facilitate business expansion of new airlines. The JFTC concludes that fare reductions, market entry, flight frequency increases, and the increased number of discount fares that will accompany this merger will benefit

• consumers. The agency states that it will ask

JAL and JAS to take unspecified, “necessary” steps prior to their integration. Finally, the agency states that it will continue to monitor the situation in the domestic air transport business and keep in close contact with the Transport Ministry, with the view

• f

“promoting competition in this area.”65 COMPETITIVE IMPACT OF THE MERGER It is far from clear that the measures proposed by JAL, JAS, the JFTC, and the Transport Ministry will effectively compensate for the loss of a separate competitor that carried nearly a quarter of domestic air traffic. The JFTC’s rationale in approving the merger suggests that MITI-style industrial policy has won out over antitrust policy. The JFTC seems to rely upon the expected success of Skymark Airlines to constrain the ANA and JAL/JAS duopoly. This reliance seems misplaced; Skymark, which has not posted a profit since its establishment in 1996,66 operates only two routes at present: Tokyo-Fukuoka and Tokyo-Kagoshima. Unlike its very large competitors, it has no international routes. Unlike the major carriers, it is not affiliated with a global alliance. ANA is a member of the Star Alliance, whose members include United, Lufthansa, Singapore Airlines, and ten other carriers. The new merged JAL/JAS carrier will likely

• 65 Id. at 7.

66 Daisuke Wakabayashi, Japan Air Do to seek

protection, ANA to help, Jun. 25, 2002 [Available at: http://biz.yahoo.com/rc/020625/airlines_japan_bankr uptcy_2.html].

continue JAL’s affiliation with members of the Oneworld Alliance, whose members include American Airlines, British Airways, Cathay Pacific, and five other carriers. Frequent flyer programs are one of the few significant non-price factors on which airlines may compete. In view of the domestic strength, international presence, and global alliance affiliations of ANA and JAL/JAS, any frequent flyer program that Skymark might

• ffer will attract relatively little business.

It is doubtful that the smaller airlines will be able to compete successfully on price. Thus far, the big three have matched the fares of new airlines. One of Skymark’s start-up brethren has already fallen prey to the fare pressure applied by the big three. Air Do, one

• f the new airlines that JFTC hoped would be

an effective competitor, recently filed for bankruptcy.67 It appears that the airline’s only chance of survival is a comprehensive alliance with ANA that is currently under discussion.68 If implemented, this alliance will be a de facto merger with ANA. According to Credit Suisse First Boston analyst Osuke Itazaki, “[T]here will be only two airlines offering flights to Sapporo [Air Do’s sole destination], where there were once four. This is obviously a negative for the airline industry.”69 Upon hearing of the demise of Air Do, Transport Minister Ogi mildly admonished the big three: “It’s true the bigger companies suppressed Air Do’s entry into the market. The large airline companies should reflect on their actions.”70 It appears that the JFTC’s vision of future competition is already proving to be non- viable, less than three months after the agency’s approval of the merger. On the other hand, the JFTC analysis conspicuously makes no mention of Japan’s extensive high-speed railway system as a

• 67 Id. at 1.

68 Id. 69 Id. 70 Id.

Summer 2002 - Issue 9 The Transportation Antitrust Update 12

constraint on the major airlines. This shinkansen “bullet train” system connects most of the country’s population centers, except for those in Hokkaido, Japan’s northernmost main island. Unlike Japan’s airports, which often lie far from downtown, train stations typically are in the middle of the

• city. Japanese train stations offer the further

advantage of being hubs for local bus, light rail, and subway systems. It is not clear whether Japan Railways (JR), the operator of the shinkansen, has the ability to price freely. Nonetheless, it appears that JR’s pricing should act as a constraint on the pricing of major airlines. For instance, the shinkansen presents a viable alternative to flights between Tokyo and Osaka, which lie approximately 250 miles apart. Published flight times are

• ne hour, while the shinkansen takes 2.5

hours.71 Fares for rail and air transportation

• n this route are comparable.72 Depending on

commute times to and from the airport or train station, the shinkansen could provide a competitive constraint on the airlines in this particular market. The railway alternative should have received at least a mention in the JFTC analysis. The JFTC was satisfied with a divestiture of a mere five percent of the slots held collectively by JAS and JAL at Haneda, or roughly 2.5 percent of total Haneda slots. It is inconceivable that any single airline limited to that market share could successfully compete with ANA and JAL-JAS. Even if Skymark were to receive all CPS that will be allocated prior to February 2005, it would still have

• nly eighteen slots out of an estimated total of

360 slots at Haneda. This is before the planned entry of Skynet Asia and Lequious Airlines at Haneda. Based on these numbers, it appears that the Japanese authorities have accepted a duopoly in airline markets.

• 71See www.oag.com and www.japanrail.com

72See www.expedia.com and www.japanrail.com

The proposed remedies regarding airfares and flight discounts will provide consumers with some short-term benefits; however, these measures will not assure competition in the long term. The creation of new slots in numbers sufficient to permit the creation of a viable competitor is unlikely even with an additional runway at Haneda. The only hope for true competition in the Japanese domestic market may lie in the 2005 slot review. If the Transport Ministry reallocates large numbers

• f slots away from ANA and JAL-JAS to

another carrier, then the competitive situation would at best return to the status quo. However, JAL/JAS and ANA would almost certainly oppose such a move because of their investments in aircraft and other assets that would be stranded if they lost significant numbers of slots. The JAL-JAS merger will irreparably damage the limited competition that exists in Japan today. Even with slot concessions and

• ther remedial measures, no single carrier will

be able to build the economies of scale necessary to compete effectively with ANA and JAL-JAS. It is not clear how the JFTC expects new entrant airlines such as Skynet Asia and Lequious Airlines to operate viably with such limited access to slots and other

• resources. The failure of Air Do is a harbinger.

The decision to allow the JAL-JAS merger will provide Japanese consumers with no more than a superficial version of a competitive air transport market.

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