DOT Gets Strangely Feisty in the Administration’s Dying Days, Denies Qantas and American’s Joint Venture

With less than two month’s left until a new administration takes over here in the US, it looks like the Department of Transportation (DOT) has decided to get aggressive on its way out the door. As a going-away present, DOT has stomped on Qantas and American’s joint venture plans. This was a surprising move. If the order does indeed go final, then there could be some strongly negative consequences for travelers, depending upon how the airlines move forward.

American Qantas Denied

American and Qantas, partners long before even oneworld existed, did already have a form of enhanced cooperation between the US and Australia. Back in 2011, they had a joint business approved, but it was structured differently than your usual deal. The reason? American didn’t fly to Australia or New Zealand, because it didn’t have the right aircraft and its pilot agreement wouldn’t allow it. So the business was about cooperating in order to feed Qantas’s flights alone.

Fast forward to 2015 and the situation had changed. US Airways and American had merged, the labor agreements were no longer an issue, and American had plenty of 777-300ER and 787 aircraft coming onboard that could fly down there. So, American and Qantas put in for a traditional joint venture with all the trimmings. They’d share revenues which would allow them to be “metal-neutral.” In other words, it didn’t matter who operated the flight; the money would get split. They’d of course have antitrust immunity in order to discuss and coordinate schedules and pricing between the US and both Australia and New Zealand. This is something we’ve seen approved time and time again with other airlines.

With this new metal-neutrality, American and Qantas were going to work together to add flights. Qantas had left the Sydney-San Francisco market years ago when its finances were dire, but it wanted back in. It didn’t have the aircraft, so it turned to American. American announced it would begin flying Sydney to LA on its own aircraft. That allowed Qantas to pull some of its own capacity out of LA and put it back into San Francisco instead. The end result would be a true competitor to United on Sydney-San Francisco (nobody else flies it). And American would finally have its own airplanes in the Australia market for the first time in decades.

There was more to come. Qantas had served the Auckland-LA market until 2012 when it finally just couldn’t justify it any longer. It had limited feed in the US, and the A330 it used wasn’t the ideal aircraft. Competing with Air New Zealand, the only other airline at the time to fly between the US and New Zealand at all, was tough. But a couple years later, it all started to make sense to consider a return in a different way.

American had 787s coming online, and it was building up its empire with a slew of new flights in LA. That seemed like the perfect airplane for a route to Auckland, and one that would now have much better feed on both ends from Qantas and American. The route began operating earlier this year.

The consumer benefit of this joint venture seemed to be unquestionable, and I don’t know anyone who thought it would be denied. After all, Delta and Virgin Australia had the same arrangement, as did Air New Zealand and United. Sure, Qantas was bigger than anyone in the Australia-US market, but overall the deal made sense. Apparently DOT disagreed.

I’m not sure if this is DOT just deciding to go out with a bang before Trump rolls into town, or if it has simply decided to stray from precedent. But something screwy is going on here. What’s the justification? You can read the order here, but in short.

By combining the airline with the largest share of traffic in the U.S.-Australasia market with the largest airline in the United States, the proposed alliance would reduce competition and consumer choice.

Looking at it further, this really was about Australia. In fact, DOT admitted there could be benefit in the New Zealand-US market, but it wasn’t enough to overcome the issues in Australia. I still find this strange. DOT has approved all kinds of joint ventures, including the Aeromexico/Delta tie-up (albeit that requires some slot givebacks in New York and Mexico) and United/Air New Zealand, both recently. But Aeromexico is the lone legacy carrier in Mexico and has a commanding share of traffic. As for New Zealand, well, Air New Zealand dominates. I guess Australia is somehow more special.

For its part, American says it is “disappointed” and will file an objection. After all, this is just tentative and in theory DOT could reverse course. But I think that’s unlikely. And that puts American in a quandary.

Both American and Qantas can either accept this and continue to operate as planned, or they could show how much consumer benefit really was at risk by making a drastic move. Without revenue-sharing and pricing coordination, the math on American’s routes to Auckland and Sydney won’t be the same. DOT suggested they should be fine by codesharing, but it’s not going to result in the same level of success. So, Qantas could pull out of SFO leaving United as the monopoly carrier. American could pull out of Auckland leaving Air New Zealand/United as the monopoly carrier from the entire continental US. And American could pull out of Sydney.

If American and Qantas were to do that, it would be a mighty blow against consumers, and it would send a strong message to the government that joint ventures really do matter. But with a new administration coming in, it might not even be worth the fight. Either way, this is a strange one.

[Original SUV photo via Flickr user Hungarian Snow/CC BY-SA 2.0]

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kozmaterry
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kozmaterry

This is a good decision. Qantas has too much market share. Adding American will cause fares to be higher. If AA wants to be in New Zealand that is fine but it does not need Qantas.

Hope this sticks

matt weber
Member
matt weber

I have a hard time understanding how Auckland-LA was going to make money no matter who flew it. Neither QANTAS or American are exactly low cost carriers, and the Auckland market has been plagued by low yields for a very long time. QANTAS dropped 1st Class Service from Auckland about 15 years ago (in fact they dropped it even before they had any 747’s configured without an F/P cabin) because the demand just wasn’t there (NZ hasn’t even offered a F/P product for even longer). While a 787 would have lower costs than an A330 or 747, I doubt those… Read more »

A
Guest
A

So you are encouraging Qantas and AA to pull routes just to give UA/NZ monopoly pricing power as a “see I told you so” to the DOT?!? I know that joint ventures work in many ways, not the least of which is cost savings from shared operations. That being said, if an airline can run a route profitably on their own, why wouldn’t they run it partner or not? It seems like what you are suggesting is tantamount to the toddler that packs up all his toys and goes home the second he doesn’t get what he wants. I know… Read more »

Jbr787
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Jbr787

Would it have been possible for the DOT to approve parts of the proposed joint venture, say to approve coordination excluding LAX-Australia routes?

Also, great SUV picture; made me laugh.

Alex B.
Guest

Have any of the other Joint Ventures come anywhere close to including nearly 60% of the seats in a given market? That seems to be a straightforward reason to deny this, and one that would be entirely consistent with other recent JV approvals.

Itami
Guest
Itami

How much feed can Qantas realistically expect in Auckland? All the cities that they fly to AKL from already have nonstops to LAX. Would they just be leaning on Jetstar’s domestic New Zealand network?

I wouldn’t be surprised if LAX-AKL and SYD-SFO can break at current fuel prices, but they can’t be very high margin even in the best of times. It’ll be interesting to see where this stands two years from now.

southbay flier
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southbay flier

I assume that the AA flight to AKL provides feed for JQ. Most of the beautiful scenery is on the South Island so it is helpful to have an airline provide feed to CHC and ZQN at a minimum.

Wally
Member
Wally

Excuse my ignorance but it seems this is all about metal to metal versus code sharing am I right? What is the difference between the two practices?

cblock2
Member
cblock2

I think the DOT has, rather belatedly, come to the conclusion that all the mergers in the US have led to reduced competition, and they’re just looking for anything they can push back on in the waning days of this administration, just as they appear to be with Alaska/Virgin America. Only other theory I have – and it’s a stretch – is that they’re concerned that there are effectively only two domestic airlines in Australia and believe competition would be better served if Qantas, the much larger of the two, weren’t closely tied up with a US carrier, as they… Read more »

Tim Dunn
Member
Tim Dunn

I can’t think of a single joint venture where the two applicant carriers were awarded a JV when the two would carry 60% of the market and/or one of the carriers had a 50% share. The Trump administration might come up w/ a different response but it isn’t likely….60% share in a market raises concerns on multiple levels and he has raised concerns about other megamergers in other industries. AA/QF made a lot of network changes based on their belief that the JV would go through. It will remain to be seen what they choose to do but I’m not… Read more »

Doug Swalen
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Doug Swalen

I am wondering if the DOT factored in the questionable health of Australia’s #2 carrier. Virgin is not in great shape and its long term outlook is grim, especially after the Hainan investment upset the apple cart. A JV between Qantas and American could really give the two too much power if Virgin implodes.

southbay flier
Guest
southbay flier

It seems unusually harsh. AA is not much bigger than Delta. So, I don’t see what the big deal about being the biggest US airline is at this point. Australia has QF and VA flying between Australia and the US. There seems to be enough competition. What gives?

Kevin
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Kevin

from the data I see, AA is 264M ASMs, DL is 246M and UA is 220M. that means that AA is 18% larger than UA and about 8% larger than DL (all ish. In my mind that is much bigger.
For UA to close that gap would have major pricing effects on the market, ie if UA flooded the market with 18% more capacity or DL doing it with 9%. That is how I judge the market.
AA does have significant market control

christophe.bottega
Member
christophe.bottega

Getting into the NSFW segment, Cranky ?

oldiesfan6479
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oldiesfan6479

1-Adam12, 1-Adam12, a light tan Ford SUV, Cali plate Foxtrot-Uniform-Alpha-Alpha-Quebec-Foxtrot–wanted for illegal plate display (only) at this time. Last seen on Moorpark westbound from Cahuenga. 1-Adam12, handle code 2.

Ted dansen
Guest
Ted dansen

I’m with you on this one Cranky. This seems like the last stand for the DOT before a new direction.

ptahcha
Guest
ptahcha

In addition to the massive market share, I’m guessing that DOT is also considering the high barrier to entry for new competitions. It’s easier for carriers to start new service to Mexico w/r/t the Aeromexico example. It’s a lot harder to get planes to Australia/New Zealand.

Vincent
Guest
Vincent

I am with you.
If you do it for one Airline you have to be fair and do it for all.