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U.S. Clears Continental for Alliance

Stocks in this article: CAL UAUA

The Justice Department had objected to the request that Continental receive "global immunity," which it viewed as "unprecedented in scope and breadth, sanctioning collusion by United and Continental on all international service, eliminating or significantly reducing competition." It said fares would likely increase by 15% on some routes and advocates that the DOT grant more limited immunity.

In particular, the Justice Department said United and Continental are the only two U.S. carriers offering nonstop service to Beijing (Air China also offers nonstop service). They are also the only two U.S. carriers flying nonstop to Hong Kong, but foreign carriers control 72% of that nonstop market.

On Friday, the DOT said that after reviewing the objections, it found "the purported risks to competition from granting unrestricted 'global' scope are insignificant and unsubstantiated" and that "DOJ's prediction of adverse price effects is flawed and contradicted by previous empirical analysis." It said little change is likely in the U.S. Beijing and U.S.-Hong Kong markets.

However, the department added new conditions requiring that the joint venture be implemented within 18 months, bringing benefits to passengers quickly, and that certain routes including the Beijing routes, four routes between Newark and Europe, and several routes to Canada be exempted from the immunity.

Currently, Delta (DAL), Northwest, AirFrance and KLM also have an immunized alliance for transatlantic flights, which benefits passengers by providing more frequent flights to hubs in Amsterdam and Paris, where faster connections are available.

Aviation consultant Mike Boyd says the advent of a Democratic administration may have prompted a more critical view of alliances in some quarters. "Up to now, alliances up to now have been obscenely beneficial to the consumer," Boyd says. "You cannot argue that. They mean more choices and faster travel, like being able to fly Delta to Paris and then connect, seamlessly, to Air France to go to Marseille. But now we have a new DOJ. The former DOJ would have approved any alliance of any kind. Now, it is being a lot more doctrinaire."

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