Airline Competition and Consumer Protection: Headwinds on the Horizon--Navigating 2024's Challenges
Market Insight 26 January 2024 26 January 2024
UK & Europe
Aviation & Aerospace
Predictions on Consumer Protection to Consolidation – Agencies Are Cracking Down
In 2024, the airline industry will face stepped-up agency enforcement of competition laws, more investigations, and penalties under “unfair competition”” and “deceptive trade practices” authority, and increased consumer protection rules, penalties, and compensation schemes for delayed and cancelled flights.
Airline consolidation and financial restructuring will remain necessary to achieve economies of scale and scope, with prospects of: (i) increasing negotiating power with OEMs and service providers; (ii) gaining access to more aircraft and engines amidst heavy demand, labor shortages, groundings, and delivery delays; (iii) acquiring new slots and gates where entry barriers exist, and (iv) adding consumer benefits of new routes, reciprocal loyalty programs to earn-and-burn frequent flyer points, and upgraded joint club access.
A focus will remain on both accommodating the post-pandemic surge in leisure travel, while gaining back higher-yield traffic from increasingly elusive business travelers, who have become accustomed to more work-from-home and “Teams” calls.
Revisiting and structuring alliances with true metal neutrality, seamless travel, will remain key, as will assisting lenders and private equity in navigating the complex web of antiquated, yet entrenched foreign ownership and control laws to avoid subjective regulatory findings of impermissible “effective” or “actual” foreign control.
Both non-aligned “legacy” and low-cost carrier growth will continue with significant and expanding market share. Regulators will continue to question and block exclusivity provisions that otherwise might prevent code-sharing with non-alliance partners. Airlines can expect competition authorities to continue to question the need for renewal or expansion of antitrust immunity, which remains key in risk management to facilitate broader alliance cooperation on routes, capacity, and pricing in the face of prohibitions on cross-border M&A.
Airline merger and acquisition activity will continue but expect competition authorities to be aggressive in their scrutiny and more willing to raise objections and block transactions. Carve-outs and slot divestitures—structural remedies once assumed as viable alternatives to address perceived pockets of market power—are facing increased skepticism from competition authorities. For example, the UK is consulting on a radical overhaul of its slot system, post Brexit, which is likely to increase competition and shake up existing airport slot rights held traditionally by certain airlines.
Transport regulators will take aim with potentially increased arrows in their quiver to punish airlines for extended tarmac delays and cancellations, and may require even more burdensome passenger compensation schemes, with strict interpretations of “extraordinary circumstance” that might excuse delays beyond their control. Skirmishes and major battles likely will continue over ancillary fees and control over distribution channels.
In the United States, an emboldened Department of Justice Antitrust Division (DOJ) has flexed its muscles and successfully challenged two airline combinations—wins that may have a chilling effect on future combinations and alliances.
First, DOJ challenged the “Northeast Alliance” between JetBlue and American, where the two airlines collaborated on a “virtual network” of code sharing, slot swaps, and new routes to try and challenge the market position of the major carriers. DOJ, however, described the alliance as a “de facto merger” of the companies’ operations in New York and Boston that risked diminishing the incentive for the airlines to compete in other markets.
The court sided with DOJ and the carriers dismantled their NE alliance, but American has challenged the court’s ruling. They argue that DOJ and the court "wrongly terminated a beneficial commercial arrangement that added more flights, more seats, and more options for consumers without raising prices." With actual data to back up these arguments, many eyes will be watching the outcome of the First Circuit Court of Appeals’ decision in this case.
Second, on January 16, 2024, DOJ notched another victory, challenging JetBlue’s acquisition of Spirit. JetBlue made strong arguments that its combination with Spirit was necessary to challenge the concentration of the domestic industry into four airlines with 80% of the market, whereas a combined JetBlue-Spirit would have just over 10% of the domestic market. The court sided again with DOJ, saying Spirit’s unique business model was important in driving down fares in selected markets, and the merger would threaten JetBlue’s “maverick” business model.
In the wake of the decision, some equity analysts have questioned the ability of Spirit to go it alone, as it has struggled to gain profitability and seen its stock battered. Query whether the Biden Administration has considered the possibility that an unintended consequence of challenging a merger between two smaller carriers might be to drive out an innovative, low-cost carrier. Both carriers have filed an appeal of the court’s decision. Also hanging in the balance is JetBlue’s agreement to pay Spirit a reverse breakup fee of $70M and pay Spirit shareholders $400M if the deal fails over government opposition.
For those fashioning airline M&A, parties must consider whether competition authorities will ignore efforts to accept major concessions and carveouts to address alleged market power and city-pair overlaps. For example, to allay concerns about a diminution in competition in cities where JetBlue and Spirit overlapped, JetBlue offered significant divestitures: transferring to Allegiant gates in BOS and EWR, along with 43 takeoff-and-landing authorizations at EWR, and up to 5 gates at FLL.
But both DOJ and the court rejected these concessions. It would appear that DOJ is signaling a more “up-or-down”--accept or reject—approach in determining under the Clayton Act if post-merger effects would be a substantial lessening of competition.
With an Alaska Airlines potential acquisition of Hawaiian Airlines now pending, this new DOJ prism will again be tested. Of course, DOJ’s apparent hostility to structural remedies may change dramatically in a new Administration.
In like manner, the European Commission has expressed its own skepticism and objections over airline alliances and consolidation. The EC has now filed its “Notice of Objections” to two major airline deals.
First, the EC noticed its objections to Korean’s proposed acquisition of Asiana. The EC is expressing concerns over the potential lessening of competition in both passenger and cargo markets in EU-Korea routes. The Commission is concerned that the transaction may reduce competition on four passenger routes, between South Korea and France, Germany, Italy, and Spain, and in the provision of cargo transport services between all of Europe and South Korea.
More recently, on 23 January 2024, the Commission filed its Notice of Objections in Lufthansa’s proposed acquisition of Italian carrier ITA. There, the Commission raised concerns about reducing competition on short-haul routes connecting Italy with countries in Central Europe. It did not just raise objections on routes where they compete head-to-head on a non-stop basis, but worried about “limited competition” from low-cost carriers like Ryanair in more remote airports. They even raised concerns about “expected” entry routes, or one-stop routes.
The Commission raised additional concerns about long-haul routes between Italy and North America with Star Alliance partners, and even on Japan and India routes. They raised concerns about creating or strengthening ITA’s “dominant” position at Milan-Linate airport. Once again, the competition authority questioned proposed structural remedies to allay competition concerns. There appears to be shared skepticism about the effectiveness of slot remedies to address post-acquisition market concentration at select hubs.
As a result, airlines considering acquisitions with slot-and-gate structural remedies to allay market power concerns might consider that competition authorities may prefer “peer level” buyers that have the financial and market strength to grow the asset in a way that is at least equal to if not more aggressive than the seller’s approach. Competition authorities may be less supportive of smaller or weaker buyers that could face difficulties in optimizing the asset and competing successfully in the market. Getting superb analysis and testimony by economists with credibility before the competition authorities and courts may well be key.
Meanwhile, Europe’s Regulation 261/2004 requiring airlines to pay compensation for cancelled and delayed flights continues apace, spawning a cottage industry of claims experts. These companies, like “EUclaim” and “Flightright,” are more than happy to pursue the inconvenienced passenger’s rights, for 15-25% of the compensation received.
Regulation 261 covers at present all intra-EU flights, all flights departing from the EU, regardless of destination, or flights to the EU, but only for passengers flying on an EU carrier. The complicated compensation scheme, which according to the EU Court of Justice can even apply to flights that leave earlier than scheduled, has costed the airlines millions. It will also continue to be fodder for challenges to consider what are truly “extraordinary circumstances,” when the airline’s delay or cancellation is due to circumstances outside its control, like weather, natural disasters, ATC strikes or failures (such as was seen when the UK’s NATS ATC system malfunctioned in August), or hidden defects, as opposed to discovered maintenance or technical problems that might be within the airline’s control.
While the US to date has not imposed similar compensation rules for delayed or cancelled flights, they have put pressure on the airlines to provide meals, lodging, and other reimbursements with a federal dashboard—to the irritation of most airlines—that lays out and compares their commitments for “controllable” cancellations or delays. It now seeks to enforce these commitments as “deceptive practices” if airlines do not make good on their commitments. DOT’s aggressive approach in this area was on display in its 18 December 2023 decision to impose a $140 million penalty on Southwest for its 2022 holiday cancellations and delays, with $750 million in passenger refunds, reimbursements, and future compensation.
At the same time, the DOT has issued two Notices of Proposed Rulemaking (NPRM), one on ticket refunds, and another on ancillary fees. While codifying longstanding DOT interpretations that it is an “unfair business practice” for an airline to refuse to provide requested refunds to consumers when an airline has cancelled or made a “significant change” to a scheduled flight, both rulemakings have encountered formidable opposition. Their future is highly uncertain, particularly under any change in Administration.
In Canada, the Canadian Transportation Agency (CTA) promises to clear its backlog of over 50,000 passenger complaints and requests for compensation for delayed and cancelled flights. They are looking to change the exception “for safety purposes,” and adopt the EU’s “extraordinary circumstances” standard. The result of this change and others under review might be to eliminate some airline denials of compensation claims, including those for lost luggage and delays caused by required maintenance and other safety reasons.
In the meantime, eyes are on Canada’s Supreme Court, which has accepted airlines’ appeal of Canada’s original Airline Passenger Protection Regulations (APPR). IATA, Air Canada, Porter and others filed suit, arguing the CTA exceeded its authority in promulgating the APPR, and that its enforcement contradicts the Montreal Convention, which sets forth a compensation regime for international carriage by air. While a lower court rejected the challenge, the High Court has yet to weigh in. Canada has also stepped up its review of air carrier accessibility plans, both for the traveling public and employees.
Down Under, the Australian Competition and Consumer Commission (ACCC) appears to be increasingly aggressive on greenwashing, after an Internet sweep it claims found 57% of companies making potentially misleading environmental claims. Like the UK’s Advertising Standards Authority (ASA), which has gone after Air France/KLM, Lufthansa, and Etihad for so-called greenwashing cases, the ACCC brought an action against Etihad for allegedly making misleading sustainability claims.
The ACCC also threatened “millions of dollars” in penalties (with maximum 10% of turnover) against Qantas, alleging that the airline sold tickets to more than 8,000 flights without disclosing they had been cancelled. The ACCC has been given a fresh mandate to step-up monitoring of airline prices, profits, and route capacity after the government blocked Qatar Airways from increasing flights to Australia.
During 2024 and beyond, it’s clear that the aviation industry must anticipate stepped up antitrust and consumer protection enforcement. Airlines will need to navigate these regulatory and enforcement challenges with foresight and adaptability.
Prioritizing consumer protection and aligning with evolving regulations on flight delays and cancellations will enhance customer satisfaction and mitigate legal risks. In the realm of aviation industry consolidation, companies should carefully evaluate their strategies, considering antitrust implications and foreign ownership restrictions. Collaborative efforts within alliances can offer viable alternatives.
While 2024 may pose challenges, proactive and informed decision-making will be essential to thrive in this evolving regulatory landscape. Ultimately, the aviation industry's ability to respond strategically to these issues will shape its success and resilience in the year ahead.