Delta & Korean Air Joint Venture: Is It Getting Too Powerful?

Korean Air’s takeover of Asiana was recently finalized, creating a new mega-airline in South Korea. There’s no denying that Delta is a big winner with this development, since Delta owns a stake in Korean Air, and also has a transpacific joint venture with the airline.

With Korean Air getting even bigger across the Pacific, is the Delta and Korean Air joint venture becoming too powerful, though?

Delta & Korean Air joint venture will have 81% market share

Patreon account Enilria makes an interesting argument for the Delta and Korean Air joint venture becoming too powerful. He points out that with the acquisition of Asiana, the Delta and Korean Air joint venture will control 81% of the market between the United States and South Korea.

For those not familiar with the concept of a joint venture, the idea is that it grants airlines anti-trust immunity, and allows them to coordinate fares and schedules. It’s the equivalent of eliminating a competitor in a market. It’s worth emphasizing that all of the “big three” US carriers have transpacific joint ventures — American has Japan Airlines, United has All Nippon Airways, and Delta has Korean Air.

Enilria is shocked that the Department of Transportation (DOT) endorsed the Korean Air and Asiana merger without extracting any concessions, even though other regulatory bodies did negotiate concessions as part of the merger, in order to encourage competition.

Delta has of course hyped it plans to expand its options to and from Seoul Incheon, and how the Korean Air and Asiana merger will continue to push its margins across the Pacific up (in other words, the joint venture believes it can raise fares when it has more market dominance).

Enilria concludes that he doesn’t like the idea of joint ventures in general, that Delta has control of the US government through its lobbying, and that this is the most egregious example he has seen of a joint venture allowing monopolistic behavior:

“The DOJ has endorsed Delta and Korean being able to collude to 81% control the U.S. to South Korea market with no limitation, even in markets where Asiana and the Delta JV will no longer compete.”

Why I don’t see this joint venture as being a huge deal

I have a slightly different take than the above. Is one joint venture controlling 81% of market share between two countries ideal? Absolutely not, ideally no party would control that much market share. However, a few points…

First of all, this is hardly the only country pair where one joint venture controls a vast majority of the capacity. For example, how much of the US to Switzerland market is controlled by the Star Alliance transatlantic joint venture (United, SWISS, etc.)? How much of the US to New Zealand market is controlled by the United and Air New Zealand joint venture? It’s not ideal, no doubt, but it does happen.

Here’s the biggest issue, though. I’m not sure exactly what concessions the DOT should’ve asked for. The United States and South Korea have an Open Skies agreement, so there’s nothing preventing American or United (or other airlines) from adding more flights between the two countries. The way I view it:

• If fares between the US and South Korea skyrocket, we’ll see more airlines add flights between the two countries, since obviously the economics would make sense
• American and United both have an interline agreement with Korean Air, so it’s not like passengers can’t book connecting itineraries involving travel on Korean Air and Delta’s competitors
• Passengers always have the option of connecting when traveling between the United States and South Korea, for lower fares; it’s not like nonstop flights between the United States and South Korea are the only way to travel between the countries
• Ultimately a large part of the need for this strong joint venture is Delta’s weakness across the Pacific otherwise, especially in comparison to United; it’s not even about the US to South Korea market, but rather about the larger US to Asia market, as Delta wants to route everyone through Seoul Incheon

No matter how much Delta expands this, I just don’t find this to be a terribly compelling joint venture for travel beyond just the United States and South Korea. Most people don’t want to fly US airlines to Asia. Korean Air is a second-rate Asian carrier, and Seoul Incheon is just an okay hub.

In terms of the overall competitive landscape between the US and Asia, I’d still much rather be a United flyer, and be able to travel nonstop to so many more destinations.

Now, of course we can start a separate debate about whether joint ventures should be allowed at all. Do they sometimes get too powerful? Absolutely. But I also think they’ve done a lot for global connectivity. It’s also important to acknowledge that the airline industry is low margin and volatile, and ultimately mergers and joint ventures have contributed to the preservation of a lot of capacity, as we would’ve likely otherwise seen a lot more liquidation.

Bottom line

With Korean Air having acquired Asiana, the Delta and Korean Air joint venture has an even more dominant market position between the United States and South Korea. However, I’m not sure there’s anything that could’ve practically been done to prevent that. Delta otherwise isn’t very strong across the Pacific, so this allows Delta to continue to build a strategy there, routing everything through Seoul Incheon.

It’ll be interesting to see how this all evolves, and how the “new” Korean Air allocates capacity, especially with former Asiana jets.

What do you make of the Delta & Korean Air joint venture, and its power?