Hawaiian, JAL come up short on anti-trust immunity plans

More than a year after Hawaiian Airlines and Japan Airlines (JAL) announced their intentions to form a broad joint venture covering their flights between Asia and the Islands the US Department of Transportation approved the request. And also denied it. The carriers will be permitted to increase their code-share and loyalty program reciprocity but will not receive the anti-trust immunity (ATI) that would have allowed them to coordinate on scheduling and pricing of fares in the shared markets. In denying that portion of the request the DoT indicated that Hawaiian had invested too much on its own in the intervening year to justify the ATI, and also that it has not invested enough.

ATI is not necessary for the Joint Applicants to deliver substantial new benefits, and even if that were the case, many of the technological systems needed for the benefits to occur could not be implemented in the near term. Under these circumstances, the Joint Applicants have not demonstrated that they meet longstanding standards for granting ATI.

– US Department of Transportation

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Too much investment

While awaiting the DoT’s ruling Hawaiian continued to run its business as a growing airline. For international markets Japan is its main focus and the carrier added (HNL-FUK) or expanded (HNL-CTS) multiple routes in the market. These routes would benefit from the ATI, but Hawaiian launched them without that partnership. To the DoT this was evidence that the ATI was unnecessary and not in the public interest.

The evidence demonstrates that Hawaiian has the ability and incentive to increase capacity, without ATI, in response to market demand. The Joint Applicants have not submitted compelling evidence to show the additional increments of capacity that could only be achieved with ATI. …

Nevertheless, Hawaiian’s aforementioned capacity additions in the absence of ATI demonstrate that it has the ability and incentive to expand in this market. At the same time, the JAL Group is developing a wide range of new products and services to potentially align to evolving customer needs. The Joint Applicants are demonstrating that they do not require ATI to respond to competitive challenges and are developing the market in light of ongoing changes to market dynamics.

It is worth noting that Qantas and American Airlines faced an even longer review period for their recently approved ATI/JV operations and also that the pair approached its market growth differently. Even with codeshares possible the two did not add new routes in their proposed ATI markets, though they did promise that they would, similar to JAL/Hawaiian. Once the AA/Qantas deal went through the new routes were quickly added to the schedules. By holding off until the DoT approved the deal the carriers presented the ATI as a necessity for that growth rather than just a nice bonus. The short-term growth for Hawaiian may have cost the company in the bigger picture.

The carriers also proposed an increase in marketing tied to the ATI approval. Specifically, Hawaiian expected greater access to JALPAK, JAL’s tour package arm focused on Japanese point of sale. Once again, however, the DoT finds that the two carriers are sufficiently integrated, without the ATI. Existing investment and positioning is sufficient to the Agency, “Inclusion of Hawaiian’s products into JALPAK tour packages gives consumers greater choice, a key benefit of service coordination between the two carriers. Yet Hawaiian is now part of JALPAK, indicating that its participation in the distribution system does not in fact require ATI. “

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Not enough investment

Hawaiian took a hit from the DoT with respect to its IT infrastructure investment, or lack thereof. Delivering the benefits of an immunized partnership requires tight integration between the airlines’ operational systems to ensure that passengers realize a (relatively) seamless travel experience. The DoT clearly identifies that expectation.

The strongest case for ATI will demonstrate that the Joint Applicants have the essential technological infrastructure in place to quickly deliver public benefits, such as the ability to synchronize ticketing and baggage checks, coordinate in online sales and marketing channels, and other areas to make customer interactions involving interline itineraries between the applicant carriers more seamless.

But the decision also calls out Hawaiian’s systems as providing “limited capability to allow for seamless ticketing and reservations with its partners, thus undermining claims that integrated cooperation would create benefits for customers soon after the grant of ATI.” The carriers suggested a minimum of one year from the approval until these key integrations might first take effect. The DoT says that partners need to be able to move more quickly, with a notably higher level of investment and integration available.

We acknowledge the Joint Applicants’ argument that they have a stronger incentive to make investments in a seamless travel experience once a grant of ATI is made. While the Department would not, in this instance, expect all of the IT investments to be in place prior to receiving ATI, a minimal level of capabilities, which is not evidenced in the record, would be required to meet longstanding policy standards requiring that public benefits must be delivered proximate to the grant of ATI.

Not enough passenger benefit

Ultimately the DoT found ATI-supported schedule coordination unlikely to deliver improved connections or increased city pairs for consumers. The desire to keep most flights within a relatively narrow window limits flexibility the airlines might pursue.

The primary example the Joint Applicants provide of the potential benefits of schedule coordination, where Hawaiian could move its Honolulu-Tokyo Narita flight to an earlier departure time in order to avoid an overlap with a JAL-operated flight, does not materially change how the two carriers could serve the market. The change would merely produce an overlap flight with JAL at an earlier time.

Perhaps most critical is that the flights are all full anyways. The DoT cites T100 data indicating “these flights routinely operate at load factors above 90 percent” in concluding it unlikely “these changes would produce a materially different option for travelers.”

Moreover, the history of ATI approvals is driven on the positive impact to connecting passengers vis-a-vis reduced fares through “reduction in double marginalization.” But Hawaii-Asia is overwhelmingly a point-to-point market. Some 85% of the passengers between Japan and Hawaii do not connect. A significant portion of the much smaller Hawaii-Asia markets also fly nonstop. Again, the DoT focuses on connecting passengers likely to see savings and concludes that not enough exist to justify the reduction in competition otherwise.

Hawaiian will still have the economic incentive to carry these passengers on its nonstop flights whenever possible and will not be metal neutral with respect to connecting itinerary options over Tokyo. As a result, there would not likely be subsequent consumer benefits or additional schedule and fare options in these markets. Hawaiian’s nonstop flights to these countries are not subject to revenue sharing, limiting potential benefits created by the proposed JV. In sum, even with ATI, benefits for connecting traffic over Japan appear limited.

The full response from the US DoT can be found here.