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Antitrust Immunity Deals: How U.S. Airlines Avoid Foreign Ownership Restrictions

There have been a slew of airline antitrust deals in the news this week, so I thought it would be a great time to address this excellent question from my editor regarding why antitrust deals even exist in this industry in the first place.
I'd still be interested in a post that explains why airlines have antitrust immunity and the arguments for and against it. Still strikes me as deeply weird.
It's a great question, because for people outside this industry it makes no sense at all. But just this week, we've seen American (AMR) put its joint venture into place with British Airways, Iberia and others after it received antitrust immunity. We also saw the Department of Transportation approve two more antitrust deals: one between United (UAL) and ANA in Japan and the other between American and Japan Air Lines. As if that wasn't enough, United and Air Canada announced that they're going to form a joint venture as well. Why would the airlines even consider this? Three words.

Foreign ownership rules.

It's no secret that airlines are all about consolidation these days. There's only one problem with that. In most cases, cross-border consolidation isn't allowed. In the US, for example, Americans must own at least 50 percent of any airline and 75 percent of the voting shares. Why? There are plenty of excuses, but none that I find compelling. I'll dig in to the "why" of it next week, but for now, we just have to accept it as fact, because it is.

Since this is the case, the airlines are in a box. They want to fully integrate with their partners so that they can reap all the benefits of being a global carrier, but they aren't legally allowed to do it. That leaves them searching for the next best thing, and that's a joint venture with antitrust immunity.

One of the earliest examples of this in the US was when Northwest and KLM linked up in the early 1990s. Lufthansa and United have also been doing this for quite some time. Basically, the airlines put all their Transatlantic routes under a joint venture. Then the revenues from those flights were split down the middle (with a few adjustments along the way to make it fair).

Since the airlines are given antitrust immunity on these routes, they can really treat this operation as part of their own. This meant seeing strange things, like a Northwest DC-10 flying from Washington to Amsterdam. But when the airlines can look at this as a joint product, it means there's a lot more flexibility.

These have only grown in recent years thanks to actual mergers. Within the US, we've seen Delta/Northwest and United/Continental as the most prominent. In Europe, Air France and KLM have come together while Lufthansa has bought every airline it could get its hands on. The result is ever-larger joint ventures that incorporate the subsidiaries as well.

It's obvious why the airlines want this, but why would the government allow it? Well, Congress is the one that regulates foreign ownership and it's the Department of Transportation (DOT) that rules on these joint ventures. So we can only assume that the DOT thinks that these are beneficial for the airlines and the traveling public or it wouldn't be issuing approvals.

That leads one to think that maybe if the DOT were responsible for foreign ownership rules, those rules wouldn't be quite as strict. But instead, the DOT is doing what it can within the law. Instead of thinking of these as joint ventures, you can probably consider them pre-mergers, if the opportunity ever arose to finish the job.

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Photo via Flickr user aflcio/CC 2.0
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