The Cartels Running Up Transatlantic Airfares

0:00 Europe and North America are the two most

0:02 culturally and economically interlin continents in the world.

0:05 Yet, an ocean stands between them.

0:08 A colossal number of people travel between the two for work,

0:11 for family, or for fun, making the North Atlantic the largest and most

0:14 valuable longhaul aviation market in the world.

0:17 Logic would then follow that it's the most

0:19 competitive longhaul aviation market in the world.

0:21 [music] And while it might look that way sitting at JFK airport watching dozens

0:25 of different European airlines roll by, the logos

0:28 painted on the side are merely a facade.

0:32 On the surface, it appears that 33 different airlines

0:34 fly 126 different routes between New York and Europe.

0:38 These are not only the big players like BA,

0:40 Air France and KLM flying to major destinations like London,

0:43 Paris and Amsterdam, but also plenty of smaller airlines like Air Serbia,

0:47 High Sky or Azorus Airlines serving smaller markets like Belgrade,

0:50 Bucharest or Ponta Delgata.

0:52 This appears like a healthy competitive landscape until you look closer.

0:56 [music] If you wanted to fly, say, to Brussels,

1:00 you'd have a choice between a 6:10 p.m.

1:02 departure from JFK on Brussels Airlines or a 6:30 from Newark on United.

1:06 But what you wouldn't have is a choice on how much to pay

1:09 [music] because almost every single day

1:11 the airlines are charging the same price.

1:14 But there's a good reason for this.

1:15 Brussels Airlines [music] and United are effectively acting as a single airline.

1:21 It's the same thing for Munich.

1:22 United operates a 515 from Newark,

1:24 Lufansza A 530 from JFK, then another Newark frequency at 8:30.

1:29 All priced identically.

1:31 This is a cartel.

1:33 Not a drug cartel, but a business cartel.

1:36 Brussels Airlines, United, Lufansza,

1:38 as well as Swiss and Austrian Airlines are all colluding.

1:42 Together, they decide how often to fly,

1:45 where to fly, and crucially, how much to charge individually.

1:50 They don't care who flies what because they pull transatlantic revenue,

1:53 then distribute it according to the terms of their joint venture agreement.

1:56 It doesn't matter to United whether

1:58 a passenger takes them or Lufansza to Frankfurt.

2:00 They'll earn the same amount regardless.

2:02 This all means that [music] from the perspective of competition economics,

2:06 these five airlines are really acting as one.

2:10 This is intriguing.

2:12 If you refer to article 101 of the treaty

2:14 on the functioning of the European Union, it reads, [music] quote,

2:17 "The following shall be prohibited as incompatible with the internal market.

2:20 All agreements that directly or indirectly fix purchase or selling

2:24 prices." It's hardly a secret that these airlines are price fixing.

2:27 They'll happily discuss it with their investors.

2:29 This would leave any normal business in a world of legal trouble.

2:32 But the United and Lufansza cartel has this.

2:36 In this document, the European Commission outlines

2:38 their decision to exempt these airlines from antitrust law.

2:43 This is a legally approved cartel.

2:46 European and American regulators have allowed

2:48 these airlines to collude [music] against the consumer.

2:52 And it's not the only such case.

2:54 The next largest encompasses Delta, Virgin Atlantic, KLM, and Air France,

2:58 representing about 26% of the transatlantic market from New York.

3:01 Then the third major transatlantic joint

3:03 venture includes American Airlines, Air Lingus,

3:05 British Airways, Finire, Iberia, and Levelville,

3:08 operating a further 18% of flights.

3:10 Together, this sums to 75% of all Eurbound flights from New York.

3:16 75% of all flights in the most lucrative longhaul

3:19 market in the world are operated by just three entities.

3:24 Regardless, it is still true that New York has

3:27 perhaps the most robust European competition of any US airport.

3:31 But that means that elsewhere, the problem is even worse.

3:34 In the smaller market of DC, for example,

3:36 these three joint ventures encompass 85% of all transatlantic flights,

3:40 severely stifling competition.

3:42 And that stat will go up to 89% soon if SAS and ITA Airways are

3:47 granted approval to join the Sky Team

3:48 and Star Alliance joint ventures as they intend.

3:51 Now, the majority of the legal proceedings

3:53 allowing for such collusion have taken place just a subway ride away from Dallas

3:57 airport at the US Department of Transportation.

4:00 American law does allow the DOT to grant antitrust immunity to airlines,

4:04 but there's one key stipulation.

4:06 They must deem that the public benefits enabled

4:09 by collusion outweigh the negative consequences of reduced competition.

4:14 Therefore, airlines submit long winding arguments to the DOT explaining why,

4:18 in their opinion, the public would benefit so greatly from their collusion.

4:23 One of the most recent cases took place between 2012 and 2019

4:26 as Virgin Atlantic sought inclusion

4:28 into Delta's existing transatlantic joint venture.

4:31 [music] To start, they pursued antitrust immunity on US UK routes.

4:34 Their legal argument was all in support of this one line.

4:38 Quote, "The joint venture will be a more effective competitor on USUK routes.

4:43 They explain that the crux of the public benefit would be quote

4:46 the creation of a meaningful competitive

4:48 alternative to the alliance between American

4:50 Airlines and British Airways that presently dominates the US UK market."

4:54 The pair characterized their flight frequencies

4:57 as a key cause of their ineffectiveness.

4:59 What makes London in particular such a valuable destination to airlines

5:02 is that it's a top origin and destination for business travelers.

5:06 And business travelers are more likely

5:08 to purchase costlier business class and lastminute tickets.

5:11 But business travelers tend to also be very schedule dependent.

5:15 They want to be away from home for as little time as possible.

5:18 Meaning if their meeting ends at 2 p.m., they want to be on a 5 p.m.

5:21 flight home from Heathrow.

5:23 Large companies that require lots of business travel typically sign corporate

5:26 contracts with airlines in exchange for reduced fairs and increased perks.

5:29 But according to Delta, these buyers have quote repeatedly told Delta

5:33 its service frequencies and time of day coverage

5:35 on NYC to LHR are inadequate and have

5:38 refused to commit business to Delta on the route.

5:41 The trickiness was that Delta couldn't simply just add more London flights.

5:45 Heathro is one of the most heavily slot restricted airports in the world.

5:48 With just two runways, every landing slot is used,

5:51 and demand so severely outstrip supply that these slots

5:54 sell for tens of millions of dollars.

5:57 The most valuable slots are the early

5:58 morning arrival times used by overnight transatlantic flights,

6:01 just the type Delta needed.

6:02 And even if the cost was worth it to them,

6:04 slots only go up for sale every so often.

6:07 Alternatively, if Delta formed a joint venture with Virgin, they told the DOT,

6:11 they could coordinate their schedules to improve time of day coverage.

6:15 They'd keep the eastbound schedule the same.

6:17 In that direction, times don't matter as much

6:19 since they're almost all in the evening.

6:20 But for westbound flights, they'd shift the schedule around to remove competing

6:24 departure times and help improve coverage across the day

6:26 so that the longest gap would be the 3

6:28 hours between Virgin's 5 and [music] 8:00 p.m.

6:30 flights.

6:31 Ultimately, the DOT was compelled by Delta

6:34 and Virgin's argument and approved their antitrust immunity waiver.

6:37 But that approval acted as a tacit admission.

6:40 If the public benefit for Delta and Virgin's joint venture was

6:43 the creation of a strong competitor

6:45 to American and British Airways' joint venture,

6:48 that must mean that American and British

6:50 Airways' joint venture created a public detriment.

6:53 So then why did the DOT approve

6:55 American and British Airways' joint venture in 2010?

6:58 Well, the crux of their argument was

7:00 that Delta already had their own immunized transatlantic

7:03 joint ventures and that the formation

7:04 of their own would make them a stronger competitor.

7:07 So once again, why did the DOT approve

7:10 Delta and Air France's joint venture in 2002?

7:12 Of course, Delta argued that it would make them

7:15 a stronger competitor to the already approved United Lufansza joint venture.

7:20 And why did the DOT approve United and Lufansza's

7:22 joint venture all the way back in 1996?

7:25 Well, that's where things start to make at least slightly more sense.

7:29 The original vision for transatlantic joint ventures was to expand

7:32 the hub and spoke network model to both sides of the Atlantic.

7:35 After deregulation in the 70s and 80s,

7:37 airlines in the US and Europe rework their route networks to operate

7:40 most flights to or from a limited number of hub airports.

7:44 They'd coordinate their schedules to have a big

7:46 bank of flights arrive around the same time,

7:48 then another big bank leave shortly after,

7:50 so passengers from big cities to small [music] towns

7:52 could have a huge array of conveniently timed connections.

7:56 This dramatically increased consumer choice for short-haul travel,

7:59 but it had less of an impact for long haul.

8:01 United, for example, flew to major European cities like London,

8:04 Paris, Zurich, and Rome.

8:06 But if you're going to a smaller destination that lacked United service,

8:09 Bilbao or Leon or [music] Stoutgart,

8:12 you were better off booking your flight with a European airline

8:14 since they'd offer European side connections onto their short hall flights.

8:18 But this still left some customers out.

8:20 If someone was traveling from a smaller US city without service

8:23 from a European airline to a European

8:25 destination without service from an American airline,

8:28 they'd have a harder time getting a [music] fast and cheap itinerary.

8:31 The idea through cooperation was to allow

8:33 passengers to connect through hubs on both sides,

8:36 combining the networks of Luanza and United,

8:39 and therefore creating a far larger,

8:41 far more competitive and convenient network.

8:44 [music] Today, this partnership has grown

8:45 into a critical core of the two airlines's businesses.

8:49 Each morning, eight United wide bodies bring well

8:51 over a thousand passengers into Lufansza's Frankfurt hub,

8:54 and the majority of them continue their journey by making

8:56 their way through the airport's maze of terminals onto another Lufansza flight.

9:01 Through cooperation,

9:02 the German airline has coordinated their schedule to make sure they

9:05 have well-timed capacity to the destinations popular with US origin passengers,

9:09 but not otherwise serviced by United, like Stockholm, Vienna, or Istanbul.

9:13 After all, it's in their interest.

9:15 Since they pull transatlantic revenue,

9:17 they want to be sure that their network offers a better,

9:20 faster, cheaper itinerary than through Amsterdam, Paris,

9:23 [music] London, or any other competitor's hub.

9:26 This network integration has unquestionably been a net positive for consumers.

9:30 It's expanded choice and even injected more competition into the mix as now

9:34 United can compete to European destinations it doesn't directly serve as well.

9:38 The benefits might even justify the DOT's approval of their antitrust immunity.

9:42 They might represent the public benefit that outweighs the public harm if

9:47 crucially the antitrust immunity was what

9:50 made this [music] public benefit possible.

9:52 But it's hard to find the evidence of that.

9:55 United and Luansza did not start integrating their networks

9:58 in 1996 upon approval of their antitrust immunity [music] waiver.

10:02 They did so in 1993.

10:05 Passengers from Tampa, Orlando, Philadelphia, New Orleans,

10:08 and Phoenix could now connect through Dallas airport onto a flight to Frankfurt.

10:11 then from Frankfurt to eight German cities in Vienna.

10:14 And similar arrangements were set up for Chicago and San Francisco.

10:18 They didn't pull revenue or coordinate pricing,

10:20 but rather just paid each other for the seats on each

10:22 other's flights sold as part of the other airlines itineraries,

10:25 steering clear of antitrust violations.

10:28 It was not until 3 years later

10:29 that the two airlines applied for antitrust immunity

10:31 with the argument that it was needed to do

10:33 the very thing they had already started doing.

10:36 Now, they made arguments on why they'd be better

10:38 incentivized to continue to do what they were already doing.

10:42 But regardless of the truth of that, their antitrust immunity application

10:45 presents the network integration as the core of the public benefit,

10:49 the element that is legally required

10:51 to outweigh the harms of reduced competition.

10:53 This public benefit, however, was clearly already in the airlines's interests

10:57 [music] considering they were already implementing it.

11:00 Further evidence of the feebleness of this so-called

11:03 public benefit can be found in the present.

11:05 American has a major partnership with Qatar Airways.

11:08 American operates flights from Philadelphia to Doha,

11:10 which is not a route that would normally turn a profit on its own merits,

11:14 but it's scheduled to arrive at the Middle Eastern hub around 4:30 p.m.

11:17 with just enough time for passengers to transfer

11:19 onto Qatar's [music] 6 to 9:00 p.m.

11:21 eastbound bank and plenty do thanks

11:23 to the through ticketing offered by the carriers.

11:25 In the inverse, Qatar's US network is formed around

11:28 [music] Americans network with flights to most of their hubs,

11:31 Los Angeles, Dallas, Chicago, New York, and Miami.

11:34 This is a deep partnership.

11:36 It's now the core of how American

11:38 serves the growing Middle East and India markets.

11:40 While it's the primary way that Qatar

11:42 expands [music] its reach deeper into the US.

11:44 What this is not, however, is an antitrust immunized joint venture.

11:49 It's got all the public benefits

11:50 that airlines purport come with antitrust immunity.

11:53 Network integration, [music] schedule coordination,

11:55 through ticketing while keeping Qatar and American as competitors.

11:59 For a passenger going from say Boston to Delhi,

12:01 [music] the two airlines offer two

12:03 different itineraries at two different price points.

12:06 American through New York, Qatar through Doha.

12:08 With both able to offer one-stop

12:10 itineraries that don't involve the others flights,

12:12 they don't offer junk tickets on the route,

12:14 [music] meaning they must offer better pricing

12:16 or product to win the customer's business.

12:18 This is far from the only

12:20 example of a non-immunized partnership between airlines.

12:23 United has a near identical arrangement with Emirates.

12:25 They operate a New York to Dubai flight to feed onward connections while

12:28 Emirates [music] operates to most United hubs

12:30 to facilitate travel further into the US.

12:33 Deltas [music] announced a similar arrangement with soon to launch Riad Air.

12:37 The US airline will operate flights to the new airlines hub

12:39 in Riad while Riad Air is expected to serve major Delta hubs.

12:43 None of these partnerships are antitrust [music] immunized.

12:46 All operate nearly identically to immunized partnerships.

12:50 This wouldn't matter whether or not antitrust immunity is needed

12:53 for these partnerships if antitrust immunity didn't have a downside.

12:56 But the downside is not hard to find.

12:58 Italy, for example, [music] is a massive destination for US travelers.

13:02 From New York, there are plenty of non-stops

13:04 to the major markets like Milan and Rome.

13:06 Four genuine competitors fight for business on these routes,

13:09 and pricing is therefore low.

13:10 An average of $566 and $486, respectively, in the high demand month of August.

13:16 Then there are the less competitive routes to smaller markets like Venice,

13:20 Naples, Bari, and Polarmo, where two competitors duke it out head-to-head.

13:24 But as you'd expect, less competition means pricing [music] power

13:27 is stronger and airfares are higher.

13:29 $579, $578, [music] $860, and $819.

13:35 Between these four, the distinction in pricing

13:38 can be even further explained by competitive dynamics.

13:40 In Venice [music] and Naples, it's United versus Delta, true direct competitors.

13:45 In Bari and Polarmo, it's [music] United versus Neos,

13:48 a small Italian airline with just six longhaul

13:51 aircraft operating once or twice [music] weekly service.

13:54 With a limited name recognition in the US,

13:56 it's hardly a strong competitor to United for US origin [music] traffic,

13:59 potentially explaining the higher price point on these routes.

14:03 Rather than engaging in a price war with Neos,

14:05 United seems to allow them to eat just a little bit of their lunch,

14:08 as Neos consistently charges a couple hundred less than United on these routes.

14:13 The sole route without head-to-head competition to Italy, Deltas to Katana,

14:17 does buck this trend [music] slightly since its average pricing is just $600,

14:21 but this route does have indirect competition [music]

14:23 from United Neos since Polarmo is also in Sicily,

14:26 meaning it likely pulls from a similar pool of passengers.

14:29 Looking further, the Spanish market demonstrates a similar trend.

14:33 The most competitive destinations, Barcelona and Madrid,

14:36 average the lowest, while the least competitive,

14:38 like Santiago de Compostella, Bilbao, Malaga, and Pom America, are the highest.

14:42 [music] Taken together, a graph of August airfares to every Italian and Spanish

14:47 destination from New York [music] demonstrates a clear trend,

14:50 the exact trend economic theory would predict.

14:53 The more competition a route has, the lower [music] the airfares.

14:57 What one could infer from this is that when airlines have fewer competitors,

15:00 they have stronger pricing power, meaning they have greater ability to charge

15:04 passengers more without losing their business.

15:06 Therefore, one could infer that over the Atlantic,

15:09 the diminishment of competitiveness due to antitrust

15:11 immunity waiverss has given airlines more pricing power,

15:14 [music] leading to higher airfares overall.

15:17 There's also anecdotal evidence of this.

15:19 For example, Dublin is only 400 m or 650 km further from Boston than San Diego.

15:25 JetBlue flies to both destinations

15:27 [music] using similarly configured A321 aircraft,

15:30 but their pricing between the two routes is dramatically different.

15:34 In August, they're charging an average

15:35 of $186 for the transcontinental [music] route,

15:38 but $476 for the transatlantic one, 2 and a half times more.

15:44 And even then, JetBlue is the lowest cost operator on this route,

15:48 perhaps because it's not part of any of the major joint ventures.

15:52 Delta is charging slightly more at $485

15:55 while Airingus' seats are selling for $536.

15:59 Now, admittedly, this is imperfect evidence.

16:01 There [music] are some legitimate additional costs for transatlantic operations,

16:04 like ETOP certification, taxes, and fees.

16:06 And airlines do use different pricing strategies between domestic

16:09 and transatlantic that inflate the cost [music] of oneways to Europe.

16:12 But marketwide, transatlantic fairs are some of the highest cost

16:15 long haul routes in the world on a per mile basis.

16:19 And airlines will even admit this, at least indirectly.

16:22 Here's Lu Tanza in an investor presentation touting

16:25 that Transatlantic is their quote core profit pool.

16:27 And here's British Airways' parent company saying essentially

16:30 the same thing in a transcript of an investor presentation.

16:33 This all tracks with economic theory.

16:35 When there's lower competition, firms have stronger pricing power,

16:38 [music] enabling them to command higher profits.

16:41 And the problem goes beyond the consolidation

16:43 of these airlines into larger singular entities because these larger

16:46 singular entities have been able to leverage their dominant

16:49 market positions to drive genuine competition out of business.

16:53 Back in the late 2010s, Norwegian Airlines made a play at long haul

16:56 and grew into the largest foreign carrier serving

16:59 the New York market and the fifth largest

17:01 transatlantic airline outright behind [music] United, Delta, American BA.

17:05 They were operating a lowcost model,

17:07 severely undercutting their competitors' prices [music]

17:09 and therefore severely threatening their supremacy.

17:12 In particular, it was most threatening to British Airways

17:14 since their main base was at London's [music] Gatwick Airport.

17:17 And so BA's parent company,

17:19 I AG did anything they could to drive the upstart carrier out of business.

17:23 When Norwegian started Gatwick to New York flights,

17:25 British Airways launched Gatwick to [music] New York flights,

17:28 even though the only other long haul flights they

17:30 operated from the airport were to warm weather leisure destinations.

17:33 When Norwegian started Gatwick to Oakland,

17:35 California flights, British Airways started Oakland flights,

17:38 even though they already operated flights to San Francisco

17:40 airport a [music] mere 10 m or 16 km away.

17:44 When Norwegian started Gatwick to Fort Lauderdale flights,

17:47 British Airways started Fort Lauderdale flights,

17:49 even though they already operated to Miami 20 m or 32 km away.

17:54 When Norwegian started Barcelona to Oakland and LA flights,

17:57 British Airways' parent company IIG started a [music] brand new lowcost

18:01 airline called Level and also launched Barcelona to Oakland and LA flights.

18:06 The tactic here was obvious.

18:07 I was [music] trying to bleed Norwegian dry.

18:11 They'd match Norwegian's route launches,

18:13 saturate the market, price tickets aggressively low,

18:16 take passengers away from Norwegian, and ultimately the tactic worked.

18:20 Norwegian's longhaul operations started to falter in 2019.

18:23 [music] They reshuffled their network to find routes that could work.

18:26 But then after a full shutdown due to CO,

18:28 the airline 787s were never reactivated

18:30 and Norwegian never flew a longhaul flight again.

18:33 Unsurprisingly, with the exception of Barcelona to Los Angeles,

18:36 none of the routes [music] IG launched

18:38 to match Norwegian service still operate today,

18:40 further demonstrating their [music] true intent.

18:43 Given their scale, it made plenty of sense for IEG to launch and lose money

18:47 on these routes if it prevented Norwegian

18:49 from getting a foothold in their key markets.

18:51 While it's far from a given that Norwegian

18:53 Longhaul would have survived even without this anti-competitive behavior,

18:56 IG's actions demonstrated that they were genuinely threatened and they did not

19:00 consider it a given that Norwegian Longhaul would die out on its own.

19:04 It's really hard to understand American and European

19:07 regulators' logic behind antitrust immunity over the Atlantic.

19:10 The public-f facing logic is clearly faulty.

19:13 But even if one attempts to read between the lines,

19:16 there's little logic there either.

19:18 It's possible that it was just a genuine mistake.

19:20 That initial approvals in the '90s

19:22 happened in the tumultuous time following deregulation

19:24 when consequences were less understood and stability

19:27 and air service was a higher priority.

19:28 But that mistake has snowballed.

19:30 In recent years, the dominant [music] logic behind approvals

19:33 is that that's the way it's always been done.

19:35 Regulators appear to be blindly approving more and more antitrust immunity

19:40 waiverss so long as collusion mirrors the structure of existing collusion.

19:44 They don't want to rock the boat, but by avoiding so,

19:47 they're helping the [music] consumers lose out,

19:49 the very people they're there to serve.

19:51 They're helping airlines charge more,

19:53 making it slightly less accessible for everyone to hop across the pond.

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