OUCH: The DOT Blocks American & Qantas Partnership Expansion

In the past year American has added their first two routes to the South Pacific. Specifically, American launched flights from Los Angeles to both Sydney and Auckland. American and Qantas already had a joint venture, though American didn’t operate any of the flights across the Pacific.

The intent was that American and Qantas would be expanding together under their joint venture, giving passengers more transpacific options. For example, as part of this Qantas also relaunched flights between Sydney and San Francisco, instead taking some frequencies off their Los Angeles route, since American would be filling that gap.

While Australian authorities had already approved the expanded joint venture, the US authorities hadn’t. However, I think both airlines were rather confident it would be approved, as they’ve launched new flights that were motivated by the joint venture.

Well, the US Department of Transportation has now issued their tentative ruling, and they’re denying American and Qantas the right to expand their joint business. Here’s the beginning of the ruling:

By this order, the Department of Transportation tentatively denies the application of American Airlines, Inc. and Qantas Airways Limited. The applicants are long-standing commercial partners who are requesting approval to expand their existing partnership with an expanded joint business. Through a restated agreement, American and Qantas are seeking to jointly plan and price their services, and share revenues and costs, on routes between the United States and Australia/New Zealand. The Joint Applicants currently compete in many of these markets between the two regions today, including in the nonstop Los Angeles-Sydney market.

So, what’s the DOT’s logic for denying the expanded joint business? They’re basically concluding that the proposed alliance would substantially reduce competition and consumer choice, without producing sufficient countervailing public benefits. Here’s their longer explanation, which is interesting to read:

The Department is tentatively concluding that the proposed alliance expansion would harm competition in the US-Australasia market, in particular in the large US-Australia market. By combining the airline with the largest share of traffic in the US-Australasia market with the largest airline in the United States, the proposed alliance would reduce competition and consumer choice. Qantas is by far the largest competitor operating between the United States and Australia, and American is likely the only remaining US airline positioned to enter and expand services in a competitively significant and timely manner, given its resources and network size.

In addition to these anticompetitive effects, the Department is also concerned that the proposed alliance would not generate the public benefits identified by the Joint Applicants in their filings. For example, we tentatively find that, based upon information in the record, the proposed alliance is unlikely to grow capacity over the next five years faster than what the Department would expect based upon the historical growth rate. Additionally, many public benefits from customer service coordination could be obtained through traditional arms-length cooperation such as codesharing.

American and Qantas can try to appeal this, though my guess is that it won’t go anywhere. It’ll be interesting to see what this means for the American and Qantas transpacific route networks. I know a lot of the growth we’ve seen has been because the airlines were counting on joint venture approval, so without that happening, I’m curious how their strategy will change.

Not specific to this, but it’s nice to finally see the Department of Transportation not rubber stamping everything anymore. They’ve rejected this expanded joint venture, and apparently are also requesting Alaska and Virgin American make major concessions if they want the merger to be approved.

It would have been nice if the DOT were a bit more selective before the “big six” became the “big three,” as now it’s just too little too late. But hey, I guess they have to start somewhere.

What do you make of the DOT denying the expansion of the American & Qantas joint venture?