The U.S. Department of Transportation (DOT) is proposing to deny an application for antitrust immunity made by Delta Air Lines and affiliates of the...

In its September 8 show-cause order, the DOT says:

“Unlike many past alliance cases where the applicants sought a grant of antitrust immunity to enhance or expand their existing commercial relationships, here the applicants are seeking immunity before they have developed any significant commercial links. At the time this application was filed, the applicants had just begun to explore a commercial relationship, and both were serving the U.S.-Australia market for the first time. It had only been six months since Virgin Blue’s long-haul unit, V Australia, initiated service to the United States, and it had been less than one month since Delta initiated its first services to the Australian continent.

“Delta and the Virgin Blue Group are still working to adapt to the U.S.-Australia market and complete the necessary steps to create a viable commercial relationship, which requires experience in evaluating the market-specific commercial conditions, linking reservations systems, identifying markets in which to codeshare, and establishing procedures to market and sell each other’s services. This process is likely to take some time given that the Virgin Blue Group comprises three distinct airlines that are managed separately, and given that the Group is considering a series of new strategic options, which could affect the applicants’ implementation of the immunized alliance.

“Moreover, the applicants are seeking antitrust immunity for a “tactical” alliance focused on a single market, the U.S.-Australia market. The market is an ultra-long-haul, thin market with only a few nonstop routes and relatively few intermediate connecting options … The applicants’ new entry has dramatically changed the market’s structure, contributing to significantly lower fares and substantially increased capacity. The context is unprecedented – an historically static market that has experienced a sudden and significant increase in capacity by airlines that have no prior experience in the market and that are proposing to form a new alliance.”

V Australia, the long-haul arm of the Virgin Blue Group of airlines and a subsidiary of Virgin Blue Holdings, operates a fleet of Boeing 777-300ERs, outfitted in three-class seat configuration

The DOT’s show-cause order proposing to deny the antitrust application from Delta Air Lines and the Virgin Blue Group also points out:

“Where applicants have little or no experience as alliance partners and have not worked together previously on the joint activities, the applicants must meet a high standard to demonstrate that the public benefits resulting from their efficiency claims are valid. In this case, the applicants have merely stated that they will explore potential efficiencies and cost reductions in the future. Accordingly, there is no basis at the present time to identify sufficient benefits to justify a grant of antitrust immunity.”

The order goes on to note:

“Seat capacity in this market, unlike other intercontinental markets, is up substantially due to Delta’s and V Australia’s entry into the U.S.-Australia market. While service in most other U.S. to international markets was either stagnant or declining last year, seats between the continental U.S. and Australia increased 19.3% from 2008 to 2009. This occurred even as the incumbent carriers, Qantas and United, collectively decreased capacity just over 3%, despite Qantas deploying the A380 in the market in October 2008. Delta and V Australia together provided 18.7% of total seats in the market in 2009 versus 0% in 2008.

“Given current market conditions, the applicants have not made a convincing case that a grant of antitrust immunity would produce any substantial consumer benefits that are not available today.”

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