Continental Gets DOT Antitrust Immunity Approval for Star Alliance Integration

The Department of Transportation has granted final approval to antitrust immunity for Continental’s entrance into the Star Alliance.

The Department of Justice had opposed the move, despite being late to the party and despite strange objections about the risk of “monopoly profits” as though they hadn’t looked at an airline balance sheet in 8 years.

Naturally, DOT had to make some face saving concessions for Justice.

The limitations, also called “carve-outs,” affect four transatlantic markets, four markets between the United States and Canada, and all markets between the United States and Beijing, China, it said.

“The Star carriers may continue to serve these routes, but they will not be covered by the grant of immunity at this time.”

In addition to clearing the way for coordinating on frequent flyer benefits, the ruling permits Continental to join Air Canada, United, and Lufthansa in “joint pricing, sales and marketing, and revenue sharing for the transatlantic routes covered by the agreement.”

Contra the Department of Justice, this is good for consumers. First, Continental miles become worth tons more in the Star Alliance. Second, preserving the financial viability of domestic carriers means more competition, not less. Third, Continental would have been an alliance-stepchild without this, all their customers benefit from alliance participation — and in the strong alliance no less.

Maybe I’m missing something here, but it feels like a big part of the premise of airline viability and ATI benefit is based on Continental’s exit from Skyteam. I thought Continental voluntarily withdrew from Skyteam with the objective of cooperating with United? If I’m wrong on that, and they had to leave, that changes things.

However, on the rest of it, I have some comments.

I don’t know that the DOJ was “late to the party” as the DOT only released their preliminary findings in April. Not to mention, the DOJ was almost in “sleep mode” since mid-September due to the election, and the new political appointments have only fallen into place during Q1 and Q2 so there hasn’t been a whole lot of time to respond.

I don’t think the concessions are “face-saving”. They are less restrictive than what the DOJ proposed, but they are along the same lines and in-line with what you would expect. While not everyone will agree with the outcomes they are pretty well outlined by DOT: for Europe and China, at least, ATI is banned on a very small number of routes where the new Joint Venture will now have exclusive access to restricted routes. I didn’t really understand the Toronto-Chicago and Toronto-San Francisco rationale. Neither did I understand the Washington-Frankfurt and Chicago-Frankfurt exemption, but competition on that route is not changed by the Continental integration. It was a *A monopoly before, and will be one after, so no change.

I also don’t agree completely with benefit to consumers.
#1 – CO miles become more valuable?

This is going to depend on the award chart. If the CO award chart is less generous than United’s (which itself isn’t cheap), it will become more costly for most customers to go somewhere via an award than it is today. If normal inventory is blocked and only premium (2x miles) inventory is available, again awards become more costly. If First Class isn’t available, then the benefits are diminished compared to what could have been.

*A has a deeper network and some excellent carriers, but I’d urge you to wait to see the award chart before you pass judgement. I’d also urge you to look at markets like NYC where current *A customers will lose out, since there are more miles competing for the same number of seats.

(2) Financial viability of the carriers and (3) Alliance Stepchild.

If Continental withdrew voluntarily from Skyteam, then I don’t agree with this point, otherwise I would agree with (3) but still not (2).

CO had ATI in SkyTeam which I am assuming they could have kept if they didn’t tie-up with United. On (2), one of the carriers has to go bust and the rumor mill has long been saying United is the one. There has been chronic overcapacity in the industry and its a money-losing industry, and there just isn’t room for this many network carriers. The niche carriers are doing better as they try to cherry-pick profitable routes, but they aren’t growing into big players. The network carriers are trying to do too much, and have historically not been sufficiently focused on profitability. You don’t need 15 flights a day from ORD-LGA on each of UA and AA, plus a smattering from DL and others to Midway. And until they do something about it, they will not optimize their profits.

One of the majors is almost destined to fold, leaving 3 network carriers – DL, AA, and CO/UA (or barring the joint venture, CO-alone). [US loyalists, please dont take it personally that you were left out].

On the other hand, if CO had to leave SkyTeam, then I think points (2) and (3) are much stronger, as CO would truly be the stepchild, and they would have been the one at the greatest disadvantage financially. In that sense it is better to keep CO than lose them (it would be really bad for NYC fliers for CO to go under) but on the whole, I think more consolidation has to happen with one more network carrier to go.

Let’s see how it plays out.

Comments

Benjh says:

July 10, 2009 at 1:26 pm

Gary, hope you can post, in good time, your analysis of continental’s entrance into *A. In particular, why do you think op miles are gonna be worth so much more? (do you mean more than in ST, or alone?).
AS says:

July 10, 2009 at 2:33 pm

Maybe I’m missing something here, but it feels like a big part of the premise of airline viability and ATI benefit is based on Continental’s exit from Skyteam. I thought Continental voluntarily withdrew from Skyteam with the objective of cooperating with United? If I’m wrong on that, and they had to leave, that changes things.

However, on the rest of it, I have some comments.

I don’t know that the DOJ was “late to the party” as the DOT only released their preliminary findings in April. Not to mention, the DOJ was almost in “sleep mode” since mid-September due to the election, and the new political appointments have only fallen into place during Q1 and Q2 so there hasn’t been a whole lot of time to respond.

I don’t think the concessions are “face-saving”. They are less restrictive than what the DOJ proposed, but they are along the same lines and in-line with what you would expect. While not everyone will agree with the outcomes they are pretty well outlined by DOT: for Europe and China, at least, ATI is banned on a very small number of routes where the new Joint Venture will now have exclusive access to restricted routes. I didn’t really understand the Toronto-Chicago and Toronto-San Francisco rationale. Neither did I understand the Washington-Frankfurt and Chicago-Frankfurt exemption, but competition on that route is not changed by the Continental integration. It was a *A monopoly before, and will be one after, so no change.

I also don’t agree completely with benefit to consumers.
#1 – CO miles become more valuable?

This is going to depend on the award chart. If the CO award chart is less generous than United’s (which itself isn’t cheap), it will become more costly for most customers to go somewhere via an award than it is today. If normal inventory is blocked and only premium (2x miles) inventory is available, again awards become more costly. If First Class isn’t available, then the benefits are diminished compared to what could have been.

*A has a deeper network and some excellent carriers, but I’d urge you to wait to see the award chart before you pass judgement. I’d also urge you to look at markets like NYC where current *A customers will lose out, since there are more miles competing for the same number of seats.

(2) Financial viability of the carriers and (3) Alliance Stepchild.

If Continental withdrew voluntarily from Skyteam, then I don’t agree with this point, otherwise I would agree with (3) but still not (2).

CO had ATI in SkyTeam which I am assuming they could have kept if they didn’t tie-up with United. On (2), one of the carriers has to go bust and the rumor mill has long been saying United is the one. There has been chronic overcapacity in the industry and its a money-losing industry, and there just isn’t room for this many network carriers. The niche carriers are doing better as they try to cherry-pick profitable routes, but they aren’t growing into big players. The network carriers are trying to do too much, and have historically not been sufficiently focused on profitability. You don’t need 15 flights a day from ORD-LGA on each of UA and AA, plus a smattering from DL and others to Midway. And until they do something about it, they will not optimize their profits.

One of the majors is almost destined to fold, leaving 3 network carriers – DL, AA, and CO/UA (or barring the joint venture, CO-alone). [US loyalists, please dont take it personally that you were left out].

On the other hand, if CO had to leave SkyTeam, then I think points (2) and (3) are much stronger, as CO would truly be the stepchild, and they would have been the one at the greatest disadvantage financially. In that sense it is better to keep CO than lose them (it would be really bad for NYC fliers for CO to go under) but on the whole, I think more consolidation has to happen with one more network carrier to go.

Let’s see how it plays out.
Drew says:

July 10, 2009 at 9:32 pm

Guys, Gary is spot on when he talks about how CO points are worth much more.

A short, quick example of my situation: Basically, I’ve been saving miles to go to Thailand business for first class. With Continental in ST, my options were partner flights on Korean air and Northwest, for the most part.

With Continental in Star, I could chose from Luftansa, Air Canada, Air China, ANA, Thai Airways and a few more.

If Air Canada doesn’t have seats available, maybe Air China will. Or ANA, or Thai. Get it? I simply have more options.

And, the kicker: As a result of these increased options, odds are I’ll be able to go to Thailand much, much sooner than I had planned.

Yes, Continetal could increase their awards charts, but I don’t see them increasing them more than what most Star carriers have. Most Star carriers have their awards charts in alignment. I don’t see major changes there (though, again, I could be wrong).

I love Continental, but I used to wonder why they weren’t in the top alliance. When I heard they were joining Star, I felt like a 9-year-old on Christmas morning. Continental Onepass members are about to be rewarded very, very nicely.