DOT Says Not Enough Consumer Benefit, Shoots Down Hawaiian/JAL Bid for Antitrust Immunity

Hawaiian, JAL

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.

Not Anti-Competitive

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.

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13 comments on “DOT Says Not Enough Consumer Benefit, Shoots Down Hawaiian/JAL Bid for Antitrust Immunity

  1. The DOT got it right.

    HA and JAL assumed that, with so many JVs involving US carriers, that they should be entitled to one as well. And yet the reason the DOT rejected the JV application is because HA and JAL can achieve what they want without a JV and without the risk of consumer harm. Lack of being able to demonstrate consumer benefit and consumer harm are not the same things but the DOT needs to be able to see consumer benefit to a high enough degree or they won’t grant a JV precisely because there is a risk to consumers of granting a JV that doesn’t deliver consumer benefit but in reality harms consumers. A HA/JL JV had a high risk of consumer detriment absent strong consumer benefit.

    In light of HA’s stated intention to operate from both NRT and HND in part to facilitate connections, it becomes questionable whether it makes sense to maintain NRT now; the local demand will shift to HND. NH’s A380 will pressure fares from NRT using an aircraft that the rest of the world realizes doesn’t work and yet NH just got theirs. HA will have to buy connections within Japan on an interline basis so HA might be better off serving Japan on a nonstop basis from Japan. Given that much of Hawaii-E. Asia outside of Japan has not grown as much HA had hoped and the Japan-Hawaii market is shrinking with Japan’s aging population, HA’s backbone focus on Japan might be excessive.

    Add in the increased competition from WN esp. on intra-Hawaii segments and HA’s strategic crisis just grew exponentially. They certainly have a niche market but the growth potential and their revenue growth will be limited which will keep their margins pressured.

    1. I think HA’s focus on Japan over the rest of Asia is fine for the time being – Japan’s population is shrinking, but they will see the effects over the next 5-30 years, not overnight, which is plenty of time to move around and readjust capacity. Same for the rest of East Asia; China may become an important market (to Hawaii) in the next decade, but those are long term changes as well.

      Being able to coordinate fares and schedules for HNL-Tokyo-domestic Japan flights would be helpful for HA, but I don’t think it’s really necessary either. They will be serving Tokyo, Osaka, Sapporo and Fukuoka already, which covers all the major metro areas except Nagoya and Sendai, both of which are easily accessible from Tokyo by train.

  2. On the surface, this seems to be another case of government authorities being unwilling to do anything that might be seen as helpful for the number one carriers in a particular market. We just saw that with the proposed LATAM joint venture with American in Chile. And, as Terry Maxon pointed out once, size may have been a part of the reason American had such a hard time getting its joint venture with British Airways approved before the Delta/Northwest merger kicked it out of its number one status.

    Hawaiin and JAL aren’t the biggest carriers in the Pacific, but they are the largest in terms of market share between Japan and Hawaii, with 49% of the market according to the DOT ruling (quoted above).

    Interestingly, the DOT didn’t apply the same criterion with respect to the Haneda awards. It gave Star, via United (the bigger of the two joint ventures between Japan and the U.S.), a lion’s share of the new Haneda authorities. But of course, United asked for more.

    1. The HND route awards and the HA-JL JV application aren’t really comparable for several reasons.

      First, HND route access is much more evenly spread both across the US geographically but also across the industry. While UA/NH will be the largest unit in total at HND, they do not have as high of a percentage of traffic as HA/JL will have in Hawaii-Japan; we can’t accurately calculate the exact percentage until JL and NH announce their new HND flights.

      Second, the DOT specifically noted that DL is a non-aligned carrier in the US-Japan market and gave them the highest number of HND routes including every one that DL asked for including HND-HNL. DL and HA will be the two carriers in the Japan-Hawaii market even though DL will have just a single flight w/ so far its smallest longhaul aircraft in HND-HNL. But there is competition. If HA aligns solely with JL, there is a very restrictive effect on intra-Hawaii competition which also includes from the US mainland. There simply wasn’t enough evidence of good compared to the possible harm. The good is much more apparent on longhaul Japan access including from Hawaii to Japan.

      Third, UA will not operate Hawaii to HND and is holding onto its Tokyo presence solely by the hope that NRT will remain a viable airport for premium longhaul traffic from Tokyo – and that is a big and risky assumption given that the market is shrinking and there is a known and quantifiable shift of higher value traffic from NRT to HND on routes where service exists from both Tokyo airports. Thus, Star’s position at HND will only be driven by what NH does which does not equate to what Star is doing on mainland US flights while UA’s future at NRT may not be as solid as some assume – and UA wants you to believe.

      The Hawaii-Japan market is not like other markets and there was too much expectation – including w/ HA and JL – that the DOT would treat the markets similar to other markets with JVs. Until there is a strong competitor that interlines in the intra-Hawaii market and much greater access for competitors in the HND market, HA and JL will probably have to rule out any JVs.

      1. I was simply pointing out that the DOT didn’t use the same criteria as it did with Haneda. That’s all. My observations about Haneda were general in nature, not Hawaii specific. I also realize the situations are quite different.

        In choosing between American and United (the two comparable carriers and joint ventures in the market), the DOT favored the larger carrier and alliance – by a wide margin. That’s unusual, regardless of the market in question. Delta’s in an entirely different situation than United or American since it has no Japanese partner.

        There were good reasons for the DOT’s actions, some of which you pointed out. One you didn’t mention is that United simply has better hubs than its competitors when it comes to serving Japan (and that includes Delta). One of those hubs is Washington, D.C., the nation’s capital.

        United doesn’t have to serve Hawaii from Haneda, because ANA already does. It’ll be interesting to see if JAL or ANA adds service between Hawaii and Haneda. If the market is as big as Hawaiian claimed, I can see both carriers adding flights (and Delta possibly upguaging its proposed aircraft). We’ll see.

        1. I’m not sure how you are comparing AA and UA but AA simply did not request as many total HND flights as UA. The DOT in the latest round did not award two new flights on the same route to any carrier. The DOT could not grant something to AA which it did not request and when they didn’t do for AA what they didn’t do for any other carrier.

          And the issue with Haneda, once again, is that UA can’t afford to walk away from NRT because NH doesn’t have UA employees on its flights. The whole JV situation at HND highlights the risk to UA and AA by partnering w/ a foreign airline that will have more flights than the US airline; without NRT, AA and UA will have given away flights to foreign partners which has enormous employee relations implications.

          As for whose hubs are superior, UA has stronger local markets for international flights than either AA or DL but carries less connecting traffic. Over the past 12 months, the DOT says that DL carried more passengers from the continental US to both Tokyo airports. If the same trends that have existed for HND/NRT continue (and they likely will) once the new round of HND starts, DL will carry more passengers to Tokyo as local passengers while UA will likely carry more passengers including connections.

          But that again reflects all of the US; the reason why the HA-JL JV was problematic is because they were already the top 2 carriers in the Japan-Hawaii market. The bar for proving consumer benefit is much higher when the market is already that concentrated between two carriers that want to cooperate even more than they already do. The Chilean government also came to that conclusion for AA-Latam.

          1. The comparison is that both United and American have ATI joint ventures with Japanese airlines. That’s all. You’re overthinking my rather simple observations a bit.

            1. Another point to remember is that the Japanese carriers can easily change their Haneda routes to adapt to market conditions, something U.S. carriers can’t do – yet.

  3. I agree with the DOT.

    Regardless of HA promising to still interline with people like ANA, a JV could significantly disadvantage other players in the market as HA-JL have clear pricing and capacity power versus someone like ANA looking to market anything beyond HNL. HA could very well make interline pricing uncompetitive for ANA while limiting seats which ends up hurting consumers.

    As far as where does HA go from here – they should remain unaligned, work with everyone and anyone including both JL and NH and not chose favorites.

  4. At first I seemed suspicious of this antitrust immunity request, but after looking further I’m not so sure this is the right decision. ANA also serves HNL from both HND and NRT, and DL flies from Tokyo to HNL as well (moving from NRT to HND soon.)

    On the more price-conscious end of the market, there’s also connecting service on at least six airlines, two (Asiana and Philippines) serving both HND and NRT, Air Asia X from HND, and China Airlines, Fiji Airways, and Jin Air from NRT. Connecting service is less desirable, but can still put downward pressure on prices if the JV tried to bump fares up too high.

    Given that HND has barriers to entry, I could see the DOT restricting additional flights from HND to HNL unless additional slots are also awarded to competitors. But I don’t see this as any less anti-competitive than, say BA/AA between the US and LHR, so the DOT is being inconsistent here.

  5. DOT’s comments about lack of investment in technology infrastructure were interesting. As a long-time HA customer, I’ve never been able to see much value in any previous partnership because HA has always seemed to treat partnerships as a sales channel for getting other airlines’ customers onto HA flights, not for providing more options and opportunities for its own customer base. If that’s now bitten them on the butt, I hope — but am not optimistic — that it will prompt some re-thinking.

  6. One small note I found interesting was the competition share and fare analysis table on page 7 of the Order to Show Cause PDF :

    It’s interesting that only ANA earns far higher than their “natural share” (as in %rev = %pax), JAL has a tiny premium, UA exactly at neutral, while HA DL KE and Misc LCCs are all below. DOT lists DL+KE as a JV here, so Japan-Hawaii is in-scope for them despite neither having a hub.

    ANA fares 30.8% higher than JAL (obviously huge volume discrepancy), so that’s lots of room to work with to absorb yield drop from A380 spiking of capacity. More fascinating is UA managing to fare 25.2% higher than DL .

    Ironically, because the JV was rejected while ANA has gone ahead with their A380 service, from a JV perspective, Star’s offering would jump from 4th place pax share (behind JL 29, HA 24, and DL+KE 21) to #1 (38% according to DOT doc, or 33% ANA stand-alone). Picking HNL for a tiny fleet of 3x A380s was a pure stroke of genius on ANA’s part. Despite the plethora of HND-HNL offers, ANA has managed to find something that could actually attract passengers over to NRT.

    DL probably needs every bit of HND just to be able to close that 25.2% fare gap from UA, despite constant online chatter how DL is such a premium airline when the actual fare data cited by DOT in official show order cause suggests it’s anything but.


    Hawaii-Japan Origin – Destination Passengers, Revenue and Fares (2018)


    Japan Airlines ……….29 %……..30 %…. $ 599
    Hawaiian Airlines……24 %……..22 %…. $ 507

    Delta Air Lines……….16 %……..15 %……. $ 531 <——
    Korean Air Lines……….5 %…….. 4 %……. $ 457

    All Nippon Airways…. 10 %…….13 %…… $ 784
    United Airlines………… 5 %……… 5 %…… $ 665

    All Other…………………11 %……..10 %…… $ 514

    Source: Sabre Market Intelligence

    1. It’s a shame that you don’t have access to the full data which shows that Delta is the highest carrier by total revenue in the Japan – Hawaii market.

      Unlike what has been repeated over and over again, joint ventures do not mean joint revenue. UA will get out of the JV proportionate to what it puts in, in the overall scope of the whole deal. NH isn’t going to give its revenue away to a partner. It will share that revenue with someone that can offer it something in return.

      If you had access to data for the entire Japan to US market, you would see that Delta is still the largest carrier from Japan to the US based on revenue. UA carries more passengers – but many of those are the connecting passengers to other parts of Asia that Delta decided it will carry via Seoul.

      Given that DL will have more access to HND on its own metal than any other US airline, and HND has higher average fares than NRT, and NRT will not carry much local Tokyo traffic given the better alternative at HND, the chances are quite high that DL will remain the highest revenue carrier on its own metal in the US-Japan local market.

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