Inside The DOT Showdown: Why Delta’s Aeromexico Lawsuit Is More Strategy Than Substance

As part of a process begun under the Biden administration, the Department of Transportation issued an order a month ago that the Delta-Aeromexico antitrust-immunized joint venture has to terminate by January 1, 2026.

Delta owns 20% of Aeromexico and can keep this stake, can keep codesharing, and can maintain its frequent flyer partnership. They just can’t coordinate on schedules and pricing.

The two airlines have now opened a filing with the 11th Circuit Court of Appeals to challenge this ruling.

• DOT claims that the Delta-Aeromexico partnership gives those two carriers an unfair competitive advantage in key U.S.–Mexico City markets, leading to higher fares, reduced capacity, and barriers to entry for other airlines.

• DOT cites specific interventions by Mexico that exacerbate the competitive imbalance: Mexico’s withdrawal or reallocation of slots at Mexico City’s Benito Juárez airport (slot confiscations) without transparent rationale; reassignment of cargo operations at Mexico City; successive reductions in allowable aircraft movements at the airport.

• And they contend this is in conflict with the U.S. – Mexico Open Skies agreement, while Mexico says they’re just trying to manage congestion at the airport.

If Mexico is in violation of its Open Skies agreement, DOT says that the market is no longer open to competition and that allowing two partners that together control a majority of flights no longer makes sense.

Delta argues that the DOT has invented a requirement for Open Skies agreements between the U.S. and home country of whatever airline is under consideration as a condition of an antitrust-immunized joint venture. That’s not exactly true.

And it makes for an interesting history less of how we got to where we are with these partnerships that allow U.S. and foreign carriers to collude (e.g. United/Air Canada/Lufthansa; American/British Airways/Iberia/Finnair/Aer Lingus; United/ANA; American/Japan Airlines; Delta/Korean Air; Delta/Virgin Atlantic/Air France/KLM).

• DOT has discretion, but is not required, to grant immunity for these agreements.
  
• DOT set a standard that includes Open Skies and has applied it consistently for forty years.
  
• And, in fact, it was Delta itself via merger partner Northwest Airlines that advocated this standard in creating the first one.

The Department of Transportation has an odd power to grant antitrust immunity between U.S. and foreign airlines. This is included in the Airline Deregulation Act, and is an artifact of international price fixing as standard in the industry. (Just as pre-deregulation, the federal government set domestic airfares, international airfares were set through industry group IATA.)

DOT does not have to use this power. The first antitrust-immunized joint venture was between Northwest and KLM. After the Supreme Court’s 1984 Copperweld v. Independence Tube Corp. decision held that a parent company and its wholly owned subsidiary are not capable of conspiring under the Sherman Act (i.e., they can be treated as a single firm for antitrust purposes), the two airlines presented antitrust immunity as a solution to the challenges they were having coordinating after KLM had invested in the U.S. carrier.

• Don Horn, who served as Assistant General Counsel for International Law at DOT for more than three decades, basically accepted this as an end-run around foreign ownership restrictions. When foreign ownership barriers were effectively the only roadblock to a lawful merger, DOT could grant antitrust immunity so the two carriers could operate jointly.

• The combined Northwest-KLM share of transatlantic traffic then was small, so there was little risk of them forming a monopoly. It wouldn’t have faced significant scrutiny had a merger been permissible.

• This became linked to Open Skies for two reasons – first, with an Open Skies treaty in place, markets were contestable and so antitrust immunity posed less competition risk, and second, DOT grants of immunity linked to Open Skies created an incentive for countries to go along with U.S. foreign policy which prioritized these agreements.

There’s no obligation for DOT to grant antitrust immunity. The thrust of much of Delta’s argument is consistency in DOT policy but to be consistent they need to require Open Skies! And their position is that these arragenments are not in the public interest without it.

Delta says DOT shouldn’t have fixated on competition at Mexico City, but DOT says that it’s the centerpiece hub of the joint venture where Delta and Aeromexico control 60% of slots and where the Mexican government’s interventions (slot confiscations, cargo ban, opaque capacity cuts) make flights between the U.S. and Mexico City not meaingfully contestable with a joint venture in place – and that this creates risks for competition in other Mexican cities. A court may not have to grant total deference to DOT here, but DOT’s interpretation of the facts is certainly reasonable and lies within an area in which they have significant discretion and no obligation to grant immunity.

Delta argues ‘whataboutism’ with Tokyo Haneda, London Heathrow, and Lisbob? But DOT says the Mexican government is actively distorting compettiion in ways that undercut the original 2016 findings that granted antitrust immunity to the airlines, and that congestion itself is not the same as government-driven market access distortions.

Delta says the DOT should have considered less punitive measures, but DOT says they did consider them and rejected them believing that the core competition problem would remain intact.

Finally, they debate the evidence supporting DOT’s conclusions. DOT, though, says that most consumer benefits (which is a key standard at play) accrue wihtout antitrust immunity. The airlines can have frequent flyer partnerships and codeshares for instance – but that the extra benefits promised by antitrust immunity had not actually materialized over the past decade since growth in capacity with the JV has actually underperformed relative to legacy airlines and low cost carriers. So while Delta argues methodology of studies, DOT says we can observe the actual effects.

Ultimately Delta might be able to use the legal process to delay terminating their joint venture, which buys them additional time to lobby for a different outcome. But purely on the legal merits Delta doesn’t seem to have much of a case though I’d love to hear from antitrust experts in the field among my readers.