Antitrust Issues In The Air Transportation Industry

• Pages: 113-225

113

CHAPTER III

ANTITRUST ISSUES IN THE AIR

TRANSPORTATION INDUSTRY

After decades of comprehensive structural and operational

regulation, the passage of the Airline Deregulation Act of 1978 resulted

in substantial deregulation of the air transportation industry. The

Department of Transportation (DOT) today, has the authority to review

airline agreements and joint ventures (which are also reviewed by the

Department of Justice (DOJ)), and to enjoin unfair or deceptive practices

or methods of competition.

This chapter is structured in four parts. Part A provides an overview

of the regulatory framework applicable to the air transportation industry.

Part B describes the federal antitrust review of mergers, slot swaps and

other agreements among air carriers, as well as conduct issues. Part C

addresses international antitrust issues. Part D describes private antitrust

litigation in the air transportation industry.

A. Regulatory Framework

1.

History of Regulation

The federal government’s involvement in commercial aviation dates

back nearly a century. As early as 1918, Congress authorized airmail

service, the primary commercial aviation function at the time.1 The

industry grew over the next two decades, as technology improved and the

Postal Service received authorization to contract with airlines to carry

mail.2 This authorization helped spur the creation of companies like

United Air Lines, American Airlines, and Pan American Airways.3 In

addition to the Postal Service, the Department of Commerce played a

leading role in commercial aviation as an air safety regulator.4

1. See THERESA L. KRAUS, THE FEDERAL AVIATION ADMINISTRATION: A

HISTORICAL PERSPECTIVE, 1903-2008, at 1 (U.S. Dep’t of Transp. 2008).

2. See id.

3. See id.

4. See, e.g., Air Commerce Act of 1926, 44 Stat. 568, 49 U.S.C. § 171 (May

20, 1926).

114 Transportation Antitrust Handbook

a. The Civil Aeronautics Act of 1938

In response to substantial growth of commercial aviation in the

1930s, Congress enacted the Civil Aeronautics Act of 1938, which

consolidated federal oversight of the aviation industry within a dedicated

agency, the Civil Aeronautics Administration (CAA), within the

Department of Commerce.5 The CAA was given a broad range of

powers, including economic and safety regulation and the authority to set

rates. One impetus behind the act was a desire to “allow regulation of

‘chaotic’ competition among air carriers.”6 In the eyes of some in

Congress, competition was to be considered a “proven danger” that

justified regulation to moderate but not eliminate it.7 In fact, it appears

that Congress, on balance, sought to create a moderately pro-competition

policy that would allow for new market entry and restrain competition

only insofar as it might have eroded safety or impaired reliable service.

As described in part A.1.d below, the economic regulatory provisions of

the act arguably were carried out with a zeal that was perhaps

unanticipated by Congress.

b. Birth of the Civil Aeronautics Board (CAB)

In 1940, Congress reorganized several agencies of the government,

including the CAA. A new Civil Aeronautics Board (CAB) was given

responsibility for economic regulation of airlines, safety rulemaking, and

accident investigation, while the CAA’s remnants were restored to the

Commerce Department and made responsible for air traffic control,

safety regulation enforcement, pilot certification, and other safety-related

functions.8

(1) CAB Regulatory Powers

The CAB served multiple economic regulatory functions. First, it

had the power directly to set rates through elaborate administrative

5. Civil Aeronautics Act, Pub. L. No. 75-706, 52 Stat. 973 (1938).

6. SENATE COMM. ON THE JUDICIARY, 94TH CONG., OVERSIGHT OF CIVIL

AERONAUTICS BOARD PRACTICES AND PROCEDURES 48 (1st Sess. Comm.

Print 1975) [hereinafter CAB Practices].

7. Christopher T. Tourtellot, Competitive Policy in Airline Deregulation, 28

AM. U. L. REV. 537, 544-45 (1979).

8. Federal Reorganization Plan No. III of 1940, 5 Fed. Reg. 2,107, § 7, 54

Stat. 1231, 1233 (1940) and Reorganization Plan No. IV, 5 Fed. Reg.

2,421, § 7, 54 Stat. 1234, 1235-6 (1940); see, Kraus, supra note 1, at 4.

Antitrust Issues in the Air Transportation Industry 115

processes, although it more often exercised its rate authority through

approval or disapproval of airlines’ rate filings.9 It also determined

through hearings what routes could be flown and by which airlines.10

Between 1969 and 1974, the CAB imposed a “route moratorium,” during

which “virtually all major proposals for competitive route authority were

denied a hearing,” and which fomented dissatisfaction within Congress

and generated momentum for airline deregulation.11

The CAB also controlled market entry by rigorously subjecting

prospective airlines to a statutory “fitness” test.12 Between 1950 and

1974, the CAB received seventy-nine applications from firms wishing to

offer scheduled domestic airline service, but granted none of them.13 As

of 1975, the CAB also had not allowed any major airlines to go bankrupt,

but instead allowed them to merge to avoid potential bankruptcy.14

(2) CAB Merger Review

The CAB adjudicated airline mergers in full public hearings.15 In

doing so, the CAB considered a merger’s effect on services and

competition, fairness to shareholders of the consideration paid, and the

finances of the carriers involved.16 The CAB’s competition analysis

included traditional antitrust factors such as the creation of a monopoly

or substantial lessening of competition.17 In addition, the CAB often also

9. See CAB Practices, supra note 6, at 10.

10. See, e.g., TWA-Southern Route Exchange Case, CAB, Dkt. 29001, Order

77-4-3 (Apr. 1, 1977) (order), available at

http://dotlibrary.specialcollection.net/.

11. See Edward M. Kennedy, Comment: The American Airlines Industry and

the Necessity of Deregulation, 9 AKRON L. REV. 631, 632 (1975-1976).

12. Civil Aeronautics Act, Pub. L. No. 75-706, 52 Stat. 973, § 401(d) (1938).

The U.S. Department of Transportation continues to evaluate air carrier

applicants for fitness based on organizational and financial wherewithal.

49 U.S.C. §§ 41101, 41103, and 41738.

13. CAB Practices, supra note 6, at 6.

14. Id.

15. See, e.g., Allegheny-Mohawk Merger Case, CAB, Dkt. 23371, Order 72-

4-31 (Mar. 28, 1972), available at http://dotlibrary.specialcollection.net/.

16. See generally Delta-Northeast Merger Case, CAB, Dkt. 23315, Order 72-

5-73 & 72-5-74 (Apr. 24, 1972), available at

http://dotlibrary.specialcollection.net/.

17. See Recommended Decision of Examiner Arthur S. Present at 17-18,

Delta-Northeast Merger Case, CAB, Dkt. 23315 (Apr. 24, 1972),

available at http://dotlibrary.specialcollection.net/.