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 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]
