Northwest Pleads for Immunity

The airline is struggling with how to react after the DOT rules against a trans-Atlantic alliance.
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Northwest Airlines

(NWACQ)

remains unsure how to react nearly four months after a Transportation Department ruling prohibited the extension of the carrier's antitrust immunity with

KLM

to include two new partners.

Since 1993, Northwest and KLM have been allowed to discuss pricing, scheduling and marketing for their trans-Atlantic flights, to pool resources such as airplanes and employees, and to split revenue evenly.

Things became a bit more complicated in 2004. That year,

Air France

(AKH)

bought KLM. Air France and

Delta Air Lines

(DALRQ)

have had antitrust immunity on trans-Atlantic flights since 2002. Now, Northwest and KLM want their immunity to include Air France and Delta.

Without expanded immunity, Northwest says it would be difficult to discuss critical operating issues with KLM, while not discussing the same issues with its partner's owner. Thus, one of the most successful partnerships in aviation may lose the ability to act efficiently. "We honestly don't yet know how it all sorts out," said Andrea Fischer Newman, Northwest's senior vice president of government affairs, in an interview.

She said the airline was astonished by the ruling. "We believe the DOT made the wrong decision, one that is inconsistent with 15 years of U.S. aviation policy," she said. "We hope to continue our partnership with KLM, but the ruling gives us serious concerns about how this plays out for Northwest."

Open Skies

Northwest will likely reapply for an extension of its antitrust immunity to include Air France and Delta, Newman said, but she didn't specify when that might occur.

In a regulatory filing to support its request for expanded immunity, Northwest said that without it, "the joint applicants would be faced with unnecessary antitrust risk as Air France and KLM proceed to integrate (to enjoy the benefits efficiencies of their combination transaction). One U.S. carrier or the other could be faced with the prospect of losing benefits currently enjoyed from its alliance."

The approval of an Open Skies agreement between the U.S. and the European Union could hasten the integration between Air France and KLM, a recent report by Dresdner Kleinwort Wasserstein contended.

"If Open Skies is approved, a consolidation process initiated by Air France-KLM could accelerate," the report said. Air France declined to comment on the potential impact on the Northwest and KLM partnership, referring questions to Northwest.

The DOT ruling may also hinder international expansion by U.S. companies beyond Delta,

AMR

(AMR)

and

UAL

(UAUA)

. These big three carriers have essentially locked up relationships with the principal airlines of Europe, including

British Airways

(BAB) - Get Report

, Air France and

Lufthansa

.

"If US Airways wants to fly to Europe and wants a partner and wants antitrust immunity, where are they going to go?" asked Newman. "There are essentially no European partners left." US Airways is the operating unit of

US Airways Corp.

(LCC)

.

First Rejection

The Northwest application for antitrust immunity was the first ever rejected by the DOT, which had previously approved 24 of them. Immunity is currently in effect for seven partnerships involving United Airlines, four each with American Airlines and Delta, and one involving

Continental Airlines

(CAL) - Get Report

. American Airlines has previously withdrawn three requests, including two involving British Airways.

Last December, the DOT said that immunity for Northwest, KLM, Air France and Delta would have been the first to cover "two existing immunized alliances," as well as two U.S. airlines. All four airlines are members of the SkyTeam alliance, one of the three major global network arrangements.

Although increasing competition is a key DOT objective, the alliance networks "largely overlap each other, meaning that the proposed, expanded

alliance will not result in the initiation of online services in new markets to any significant degree," the department said in its ruling.

Additionally, the department said it wants stronger evidence that antitrust immunity would provide more public benefit than the code-sharing it already allows within the alliances. The most vocal opponent of the antitrust immunity for KLM and Northwest has been American Airlines. In repeated filings with the DOT, American contended that the first such agreement between two U.S. carriers would be anticompetitive and that its influence would spill over into the domestic market.

"SkyTeam, the world's largest international aviation alliance by many metrics, is seeking additional grants of immunity from antitrust law that would further enable its members to replace competition among themselves with the coordination of pricing, yield management, scheduling, revenue sharing and corporate/agency discounting," American said.

At the same time, it said, "granting the joint application would open no new aviation markets, would create no meaningful new online services, would foster no new inter-alliance competition and will generate no significant efficiencies that would benefit consumers."

American's opposition results from the lack of antitrust immunity for its partnership with British Airways. Newman said Northwest's situation isn't analogous because American and British Airways were granted antitrust immunity but declined to meet the condition that the U.K. carrier give up some of its slots at London's Heathrow Airport. By contrast, she said, Northwest's primary objective is to protect an existing arrangement.

The Northwest and KLM alliance, which dates to 1989, was the first of many international airline marketing partnerships. It now accounts for about $2 billion in annual revenue for the two airlines. Plus, it makes travel easier for hundreds of passengers a day, primarily because antitrust immunity enables the airlines to offer better connections.

Today, there are three daily departures from Minneapolis to Amsterdam, even though demand for this particular route is limited. Each day, on all airlines, only 66 people who originate their travel in Minneapolis have a final destination of Amsterdam. Similarly, 52 people travel daily from Minneapolis to Paris, 49 to Frankfurt and 40 to London

"This clearly shows the difficulty in trying to make these markets work when only 15% of international traffic in the U.S. originates in noncoastal regions," said Northwest spokesman Kurt Ebenhoch. "There aren't as many travelers as from other parts of the country, so carriers with noncoastal hubs must rely more on connections. We can do that best through an immunized partner."