Seen as a threat by American and European unions
Liner shipping executives flying across the Pacific next month might not be aware they could be enjoying the benefits of what has been called the most important development in aviation since the invention of jet aircraft.
The likelihood is the airline they will be using is a partner in one of two new American-Japanese joint ventures that have been granted exemption from anti-trust regulations by the relevant agencies in the US and Japan. The approval of immunity last year came as the debate in shipping over how it is treated around the word by competition authorities was being re-ignited.
Liner shipping had been thrown into turmoil by the crash of 2008, leading to reductions in capacity through vessel lay-ups and slow-steaming that in turn caused disruptions to supply chains and to extreme volatility in rates. Shippers criticised the lines which in turn blamed the restrictions imposed on them by competition regulators.
Aviation was not without its own turbulence as it struggled to emerge from the recession only to be hit by clouds of volcanic ash and snowbound airports in Europe. At the same time it was flying through the storm of controversy that has blown up over the increasing freedom being granted to airlines to combine their services and operations.
The joint ventures on the Pacific, for example, bring together the two largest international carriers in the US and Japan which from April will be able to offer the same prices, share revenues and costs and combine marketing and sales. They will be acting as if they were, in effect, one airline.
The exemptions or anti-trust immunity (ATI) on the Pacific follow similar immunisation of joint ventures between American and European airlines covering routes across the Atlantic. “Open Skies” agreements between the US and the European Union (EU) and latterly between the US and Japan enabling such approvals are expected to be followed by ones between the EU and Japan and perhaps between China and the other three.
The new trans-Pacific joint ventures also bring together members of two of the three global airline alliances that have evolved – cautiously at first but more lately with growing confidence – to take advantage of the liberalisation of a once-fettered sector. Within these alliances members may still compete with each other and, unless they have ATI, cannot discuss prices, capacity allocation or, in fact, anything that would make them less aggressive competitors.
Those alliance members that have immunised joint ventures have to meet the condition of “metal-neutrality”, meaning that each airline is indifferent to which aircraft is used to carry passengers, so ensuring the more equal sharing of revenues.
This metal-neutrality is seen as a threat by American and European unions representing airline staff since they believe it offers an opportunity for their employers to outsource jobs. They, fearing the gradual loss of their bargaining powers, have so far failed to persuade the regulators, particularly in the US, to force airlines to use their own aircraft and thus their own staff in immunised joint ventures. They have, however, formed their own trans-Atlantic and global alliances to carry out joint campaigns and information-sharing agreements.
The more international airlines become in their operations, the more complex the labour laws that apply to them and their air crews. An American-Irish joint venture, for example, that flies from the US to Spain with “US-sourced” crews has been cited by unions as a prime example. Airline staff will increasingly be flying in the twilight zone of labour regulation in which many seafarers already find themselves.
Others, including independent airlines that are outside the three alliances, believe that the alliances and metal-neutral joint ventures are being given too much immunity. They will have felt indicated by a report published last month by the US Department of Justice (DOJ) which estimated the mostly-immunised airlines in the alliances had by 2009 captured an 82% market share on the Atlantic. The DOJ report also claimed that, contrary to what the alliances say is one of the benefits, fares on non-stop flights tended to be, in fact, higher where there was less competition. (ATI is granted by the Department of Transportation rather than the DOJ which often opposes approvals of the joint ventures.)
Airlines are still subject to close scrutiny and, if caught price-fixing without immunity, face heavy fines and even having their executives sent to prison. Recent cases in the US and Europe involving both passenger and cargo traffic have seen some of the biggest names in aviation found guilty. Nor is ATI granted unconditionally: airlines may be forced to give up take-off and landing slots to competitors or some proposed routes may be rejected, while approved routes are kept under regular review.
Airline alliances and metal-neutral joint ventures are a far cry from the days when aviation was hamstrung by a system of bilateral agreements between countries safeguarding their national carriers. Deregulation, the privatisation of those mostly inefficient carriers and the competition from low-cost airlines have paved the way, some believe, for the creation of a global carrier, although there remain complex problems to resolve.
One recent report even went so far as to claim that airline alliances, particularly those with immunity, represent “arguably the most important development in the industry since the introduction of jet aircraft”, claiming they have “allowed much of the industry to replicate the advantages enjoyed by the efficient global networks in many other sectors (e.g. telecommunications, shipping, financial services)”.
What airlines say in essence is that to meet the rising demand from fast-paced business travel and cost-conscious tourism they have to provide services that can only be achieved through greater economic integration short of actual mergers. Larger networks and cheaper fares are possible, the airlines say, only if they can combine with a high degree of certainty over their immunity from legal action.
Shipping executives might feel the same argument could be applied to them as they strive to cope with both market upheavals and uncertainty over the stance of regulators on their freedom to co-ordinate their actions.
Source: BIMCO