It wasn’t long ago that I found myself worried that this industry was getting to be too boring. Welp, I was wrong. Adding on to the growing pile is the Department of Transportation’s (DOT) tentative decision to grant closer cooperation — but deny antitrust immunity (ATI) — to Hawaiian and Japan Airlines (JAL) in their joint venture bid.
In the order issued last week, DOT said that Hawaiian and Japan Airlines could implement their proposed tighter cooperation, but they just couldn’t get THAT tight. The proposal was to form a joint venture for flying between Hawai’i and Japan plus from Hawai’i beyond Japan to China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. Without antitrust immunity, however, the two airlines can’t coordinate schedules and fares. That’s a significant blow.
Here’s how DOT summarizes its decision to deny ATI:
We are tentatively withholding a grant of immunity based upon the particular facts and circumstances of the record in this case, tentatively finding that the proposed public benefits can be achieved without a grant of ATI.
That’s the headline, but how does DOT come to that conclusion? Let’s start with how it doesn’t get there.
Usually the big concern is that a joint venture with ATI would cause competitive harm, but DOT didn’t find that to be the case here. Honolulu-Tokyo is responsible for more than half the passengers that would be covered by the JV, and in that market:
…the Joint Applicants will account for roughly 49% of nonstop seats in the HNL-TYO market. Star, having increased capacity with ANA’s A380 service, will account for roughly 38% of nonstop capacity and SkyTeam for roughly 14%. This leaves three JVs, each with market shares supporting effective competition.
Futher, DOT found that “for more than 90% of passengers in the Hawaii-Japan market, competition would remain either strong or unchanged.”
There was concern from others, chiefly from JAL’s rival ANA, that this joint venture would be detrimental for interline connections within Hawai’i since Hawaiian is the only option available for ANA and others. (Southwest doesn’t interline.) DOT also dismissed that:
…the Joint Applicants have made a compelling argument that foreclosing interline feed is not in Hawaiian’s financial interest, and the record suggests Hawaiian will continue to provide interline access for multiple carriers.
So there isn’t any concern about harm here. It’s more about whether the combination would actually create benefit. This is where DOT hits a wall.
A Pitch Falls Flat
Hawaiian and JAL said the benefits of a joint venture with ATI would be as follows:
- Coordinated pricing and scheduling will lead to fares going down
- A bunch of new passengers will fly thanks to “the combination of the Hawaiian and JAL networks, retiming of certain Hawaii-Japan flights, and introduction of new capacity.”
- There will be new markets thanks to expanded codeshares and closer cooperation.
In short, more flights, better connections, and cheaper fares. Hooray! Only thing is… DOT isn’t buying.
Let’s start with the point about increasing capacity. DOT says that Hawaiian is already adding capacity on its own, so it doesn’t need JAL in order to get it to add more. It gives the example of Hawaiian starting Honolulu to Fukuoka (after Delta pulled out, I will add) and a couple more weekly flights to Sapporo.
The thing is, there’s nothing suggesting that Hawaiian couldn’t grow on its own. The point is that Hawaiian says it can grow more if it has ATI with JAL. DOT scolds Hawaiian on this point.
The Joint Applicants have not submitted compelling evidence to show the additional increments of capacity that could only be achieved with ATI.
Then DOT turns its focus on to JAL’s capacity plans. The Department notes that JAL is starting ZIPAIR, an owned low-cost carrier. But then it points out that JAL isn’t planning on sending ZIPAIR to Hawai’i.
Instead, the record indicates that the JAL brand will focus on premium demand in the Hawaii-Japan market.
So what? Well, that’s what JAL does today. DOT said this:
The Joint Applicants do not provide insight on how the two carriers will together strategically address the rapidly changing market dynamics in Hawaii-Japan.
If I’m reading this right — and it’s possible I’m not — DOT is suggesting that if ZIPAIR were going to fly to Hawai’i and it was going to be enhanced by the joint venture, then this would provide consumer benefit. But since JAL is just going to serve the same customer base it always has in this agreement, it’s not enough. I find that odd considering Hawaiian and JAL each serve different customer bases, so bringing them together may create opportunities to better compete in the “rapidly changing” market.
Then DOT delves into the issue of increasing connectivity. The focus appears to be on the Honolulu to Tokyo market and how it’s already flying full, so new connecting passengers couldn’t be accommodated without displacing locals. DOT is concerned:
The record does not clearly indicate how much new capacity would be necessary to carry additional connecting passengers without displacing nonstop passengers, potentially leading to higher fares.
To rebut this, I’ll point back to my interview with Hawaiian CEO Peter Ingram from August when he told me about the new flight to Haneda that Hawaiian was just awarded.
There’s not as much today. We do have some connectivity beyond our gateways in Japan today. We mentioned that in the context of the incremental frequency we may be adding at Haneda. [Ed note: The “maybe” is because this was before the slot awards were finalized.] That really is a frequency that the business case is built around connectivity. When we got our first flight into Haneda back in 2010 we were limited to operating very late at night. And so there is a lot of potential for domestic connections at Haneda but not if your flight operates long past the time that all those domestic flights are flying.
The flight that Hawaiian starts next year is all about serving connecting markets, particularly within Japan. The joint venture was important in Hawaiian’s decision to apply for that route, and connectivity matters for its success, or so Hawaiian says. DOT seems to overlook that for some reason.
Let’s also remember that today, the airlines individually look to maximize the revenue by segment which keeps connecting fares higher. (This is known as double marginalization.) But with ATI, they would look to maximize revenue for the entire journey. DOT gets itself into a “chicken or the egg” argument here.
The Department’s analysis similarly tentatively finds that these benefits [of reduced double marginalization] will accrue to relatively few travelers. The majority of the traffic in this market – over 85% – flies point-to-point, with the majority just in the Honolulu-Tokyo city pair. The benefits of reduction in double marginalization largely do not apply to these passengers. While double marginalization has the potential to be reduced on itineraries for travel beyond Tokyo, few passengers connect over Tokyo for travel outside of Japan.
Well, right, but part of the reason that there are fewer connecting passengers is because fares are higher and airlines focus on selling those fares in the local market. Presumably when the airlines can joint price and adjust connections, that should result in more connecting opportunities… especially on the new Haneda flight next year which is based on the ability to sell more connections. DOT again disagrees.
From there, DOT just hammers away on a variety of points, but you get the idea. It shoots down everything Hawaiian and JAL have done to prove consumer benefit.
This isn’t a final order yet, so there is time for a response. Hawaiian will be doing just that. Here’s the airline’s statement.
We are disappointed by the U.S. Department of Transportation’s preliminary ruling to not grant antitrust immunity to our joint venture application with Japan Airlines. The tentative decision recognizes the consumer benefits of our joint venture, but it overlooks the importance of antitrust immunity that major global airline alliances already enjoy, harming a small U.S. carrier like Hawaiian by preventing it from being able to compete on equal footing and offer more competitive choices to travelers between Hawai’i, Japan and beyond. We look forward to emphasizing the undisputed consumer value of our application in our response to the U.S. DOT.
I’d be surprised if this decision didn’t become final. Now the question is… will Hawaiian and JAL still find enough benefit to implement the tighter partnership without being able to gain ATI? The airlines probably don’t want to tip their hats just yet since they are going to fight the decision. We’ll know more in the next few weeks.