International Air Alliances: Greater Transparency Needed on DOT's Efforts to Monitor the Effects of Antitrust Immunity

Each year, millions of passengers travel internationally by plane. Many of these passengers are served by U.S. and foreign air carriers that have formed alliances to coordinate and integrate their networks. With antitrust immunity provided by DOT, airline alliances pursue a wide range of cooperative activities as outlined in joint venture agreements between the airlines. While this cooperation is meant to provide consumers with better services, it could also affect the extent of airline competition.

GAO was asked to review consumer issues related to immunized international air alliances. This report (1) describes how DOT's review of antitrust immunity applications considers the potential effects on consumers and (2) evaluates how DOT monitors approved grants of antitrust immunity. GAO analyzed DOT's antitrust immunity proceedings, interviewed officials from DOT, the Department of Justice, as well as a nongeneralizable selection of 13 stakeholders, including consumer organizations and domestic air carriers with and without antitrust immunity.

Potential effects on consumers are included in the analyses the Department of Transportation (DOT) conducts when reviewing international air carriers' requests for antitrust immunity. If granted, this immunity allows the airlines to engage in certain cooperative activities, such as coordinating prices and schedules, without risk of violating U.S. antitrust laws (see figure). DOT's analyses examine:

The potential competitive effect of the proposed cooperative agreement in terms of relevant markets, on changes in the number of competitors and market shares, and on market entry.

The potential for the close integration of carriers to create public benefits, such as lower consumer prices or expanded service offerings.

Such analyses involve DOT staff's reviewing an array of data, documents, and reports filed in a public docket by carriers and interested parties and, ultimately, making a decision based on their assessment of the application. DOT has premised its decisions to grant immunity on the expectation that consumer benefits flow from high levels of integration of critical business functions between carriers. To date, DOT has granted antitrust immunity 31 times, with 23 grants currently in effect, which cover agreements made among carriers in each of the three major international air alliances. DOT has rejected three applications due to concerns about potential anticompetitive harm or insufficient public benefits for consumers. Stakeholders GAO interviewed generally agreed that DOT's decisions were transparent, but some disagreed on the potential benefits of immunity for consumers.

DOT takes multiple steps to monitor alliances and understand the effects of immunity. Since 2009, DOT has required all transatlantic and transpacific partnerships to submit annual reports on the status of their immunized agreement. Additionally, DOT recently commissioned an empirical evaluation of immunities' effects and is currently reviewing the findings. However, DOT does not externally report information on the effects of granted immunities to Congress, industry stakeholders, and the public. As a result, these external entities are unable to determine what, if any, steps DOT is taking to ensure that grants of antitrust immunity remain in the public interest. Further, without additional transparency and information on DOT's findings on the effects of immunities, external entities do not know if immunized alliances have delivered the expected consumer benefits that DOT used as a basis to approve the carriers' request for antitrust immunity.

GAO recommends that DOT externally report to policymakers and the public on the effects of antitrust immunity, based on DOT's monitoring activities. DOT agreed to provide public information on its monitoring, but not to report on the effects of antitrust immunity. GAO continues to believe its recommendation, in full, is valid as discussed further in the report.

International air travel connects the United States to the world, enabling  commerce, tourism, and more. In 2017, U.S. air carriers served over 200- million passengers traveling to or from the United States, earning  revenues of nearly $62 billion. U.S. and foreign air carriers often  cooperate with one another to carry these passengers across their  respective networks. Three of the largest U.S. carriers offering  international service—American Airlines, Delta Air Lines and United  Airlines—have formalized this cooperation in many markets by forming  alliances with groups of foreign carriers. Alliance partners may apply for a  grant of antitrust immunity from the U.S. Department of Transportation  (DOT). A grant of immunity enables partners to coordinate on fares,  schedules, and shared-network expansion in ways that might otherwise  violate U.S. antitrust laws. DOT has authority to grant antitrust immunity  to international airline alliances, provided DOT determines that  immunizing the alliance is required by the public interest. Since DOT  granted antitrust immunity to the first alliance agreement in 1993,  American, Delta, and United have entered into various immunized  cooperative agreements with their major alliance partners. This immunity  can provide benefits to consumers in certain ways, but alliances may also  affect the extent of airline competition.

You asked us to review issues related to international airline alliances and  any effects on consumers of antitrust immunity. This report (1) describes  how DOT’s review of antitrust immunity applications considers the potential effects on consumers, and (2) evaluates how DOT monitors the  effects of approved grants of immunity.

To describe how DOT’s review process for antitrust immunity applications  considers the potential effects on consumers, we reviewed the federal law  that authorizes DOT to grant antitrust immunity, analyzed DOT  documents, and interviewed DOT officials, industry stakeholders, and  others. We reviewed other relevant federal laws and procedural  requirements to identify and understand the standards for DOT to  approve a proposed cooperative agreement and grant antitrust immunity.  We reviewed publicly available documentation related to each of the  antitrust proceedings that DOT has adjudicated. This documentation  included DOT orders, carrier applications, and public comments, and  other filings from interested parties, published on regulations.gov, the web  site on which the federal government publishes materials related to the  development of federal regulations. We also examined documents, which  are not publicly available, from DOT’s internal deliberations. This  documentation included, for example, an analytic memo by DOT that  assessed applications for immunity. Based on these documents, we  described how DOT’s process, specifically its competitive and public- interest analyses, conceptualizes and analyzes possible effects on  consumers of antitrust immunity. Our description does not summarize  every consideration or sequencing of analyses within DOT’s processes,  because, in part, each proceeding may vary based on individual  circumstances and these processes have changed over several decades  of DOT’s application of its statutory authority.

We also reviewed economic literature on antitrust immunity cited in DOT  orders and recommended by DOT officials for insights on some of the  bases for DOT decision-making. This literature included reports by  economic consultants and scholars published in academic and  professional journals. We also conducted a range of interviews with  federal officials and stakeholders. We interviewed officials from DOT’s  Office of Aviation Analysis, the office responsible for antitrust issues in the  department and from the Department of Justice’s Antitrust Division. We  also interviewed representatives from the three U.S. airlines that are part  of immunized alliances and a nongeneralizable selection of three non- immunized airlines (selected because of their participation in markets  affected by immunities). Finally, we interviewed three consumer  organizations, three aviation organizations, and an academic who had  some experience and relevance to antitrust and airline competition  issues.

To evaluate how DOT monitors the effects of grants of antitrust immunity,  we reviewed DOT documentation and interviewed DOT officials, industry  stakeholders, and air carriers, as described above. We also examined  2017 annual reports, the most recent available, and supporting  documentation that immunized carriers are required to provide DOT and  DOT analyses of these materials. Based on these materials, we  described the monitoring approach and activities DOT undertakes for  active grants of immunity. We compared DOT’s monitoring process to  relevant principles in Standards for Internal Control in the Federal  Government.

We conducted this performance audit from October 2017 to March 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

U.S. and foreign air carriers have cooperated in a variety of ways to  expand their international reach and service offerings. Legal requirements  in the United States and other countries prevent mergers between U.S.- owned airlines and foreign owned airlines and also place restrictions on  carriers providing end-to-end service between locations within other  countries as well as between third countries. Air carriers may cooperate  with each other to provide a wider range of services, more seamlessly,  despite these restrictions. Simple forms of cooperation include, for  example, “interlining,” which are voluntary commercial agreements to  carry passengers across two or more carriers on the same itinerary, and  “codesharing,” an agreement whereby carriers place their marketing code  on a flight operated by another carrier. This practice allows consumers to  book a single ticket for an itinerary involving two separate airlines, with  one airline selling tickets under its own code for travel on the other  carrier’s flight. These cooperative activities allow carriers to access each  other’s network with varying degrees of cooperation.

As part of their cooperative efforts, some carriers have formed global  alliances. An alliance is an agreement between two or more airlines to  link each of the airlines’ route networks and coordinate on specified  activities, such as marketing and sales; coordination of airport operations  (e.g., sharing gates or baggage facilities); and frequent flyer program  accrual and redemptions. Alliances represent more involved coordination  than interline or codeshare relationships. This expanded cooperation,  according to DOT, allows participating carriers to further expand the  geographic reach of their respective networks that the carriers would not  be able to do on their own, because of the aforementioned legal  restrictions and due to the economic and operational difficulties a single  carrier would face implementing such an expansion in foreign markets.  As of January 2019, there were three global airline alliances, each with a  major U.S. member airline and multiple foreign partners: Oneworld  (American Airlines); SkyTeam (Delta Air Lines); and the Star Alliance  (United Airlines). These three airline alliances have 61 airline members:  13 for Oneworld, 20 for SkyTeam, and 28 for the Star Alliance.

Many of the carriers within each of these alliances, as well as other  carriers, have pursued antitrust immunity from DOT to cooperate more  closely on key economic elements of their businesses that U.S. antitrust  laws might prohibit. The specific activities are delineated in cooperative  agreements and carriers have the option to implement such agreements  without antitrust immunity from DOT. Carriers are more likely to pursue  immunity when the proposed cooperation—and risk of antitrust  violations—involves increasingly integrated business functions, according  to DOT. However, once carriers that are party to such an agreement are  immunized, carriers can cooperate more comprehensively than through  interlining and codesharing arrangements (see fig. 1). For example, these agreements may stipulate that carriers share revenues across their  flights, regardless of which carrier operates the flight, and jointly  coordinate on schedules, prices, and sales.

Since 1993, when DOT immunized the first cooperative agreement,  between Northwest Airlines and KLM Royal Dutch Airlines, DOT has  adjudicated 38 cases which involved one or more U.S. carriers and  foreign carriers. Currently, United, Delta, and American—and their  major foreign airline partners—are each members of multiple immunized  cooperative agreements with their foreign airline partners. As a result,  immunized carriers now provide air service across the globe. For  example, in 2017, immunized carriers across these three alliances  provided approximately 75 percent of the available seats on trans-Atlantic  flights between the United States and Europe, and also provided on  trans-Pacific service to Asia, and Australia, as well as service to South  America.

DOT’s process for reviewing each application for antitrust immunity  includes two analytic steps. First, DOT must decide whether to approve a  proposed cooperative agreement. In this step, by statute, DOT is  directed to approve cooperative agreements deemed “not adverse” to the  public interest. DOT conducts a competitive analysis to make this  determination. Second, DOT decides whether to grant antitrust immunity  to the agreement’s partners for activities undertaken pursuant to the  approved agreement. DOT’s statutory authority provides for such a grant  of immunity only to the extent necessary for the parties of the agreement  to go forward with the transaction and only if the immunity is “required by  the public interest,” vis-a-vis the creation of consumer, commercial, or  other public benefits that would not otherwise occur. These steps will be  discussed in detail in the following section. The statute does not detail  specific competitive metrics or public benefits that DOT must consider in  its evaluation but rather provides DOT leeway in making such  determinations. The Department of Justice, which is responsible for  reviewing and approving domestic mergers, may provide DOT with input  during deliberations. DOT may also consult with relevant authorities in  the foreign partner’s country. In granting antitrust immunity, DOT may  require carriers to comply with specific conditions and, for grants of  antitrust immunity approved since 2009, reporting requirements.

DOT’s process to consider requests for immunity follows procedural steps  delineated in the Administrative Procedure Act (APA). The APA provides for public notice and comment. At the beginning of the proceeding,  carriers applying for immunity place information about the proposed  cooperative agreement in a public docket. DOT staff then review this  material, may request additional information to address any questions  raised by their review, and will solicit comments from the public. The APA,  in contrast to Department of Justice merger review procedures, specifies  steps that afford public involvement and requires agencies to respond to  the public comments. In DOT’s proceedings, the Department typically  issues “show cause” orders that articulate the tentative approval or  disapproval of the application. After publishing this show-cause order,  DOT solicits additional public comments for review prior to issuing a final  decision. See figure 2 for a summary of this process.

DOT’s statutory authority indicates that DOT may conduct “periodic  reviews,” but the statute does not include a definition of the nature or  frequency of these reviews. All of DOT’s orders granting antitrust  immunity state DOT may amend or revoke a grant of immunity at any  time. Further, after DOT issues a final order that approves a request for  antitrust immunity, the public docket remains open and provides a forum  for ongoing public comments that DOT is obligated to respond to.

Potential Effects on Consumers Are Included in DOT’s Assessment of Applications for Antitrust Immunity

DOT analyzes competitive and public benefit effects, taking into  consideration the potential effects on consumers, when deciding whether  to approve cooperation agreements and grant carriers antitrust immunity,  based on our review of DOT’s processes. In competitive and public  benefit analyses, DOT uses the professional experience and expertise of  staff to identify and assess relevant market factors, the terms of proposed  cooperative agreements, supporting documents, and other information  in light of the facts and circumstances specific to each case. DOT’s  competitive analysis focuses on the likely effect of the cooperative  agreement on competition in key airline markets, while the public benefits  analysis focuses on the likelihood of carrier integration yielding consumer  benefits. As discussed earlier, DOT’s process includes opportunities for  stakeholders’ participation. Stakeholders we interviewed considered the  overall review process transparent, though some had criticisms of the  underlying economic evidence DOT uses to predict if, and how, consumer  benefits might arise.

DOT’s Competitive Analysis of Proposed Cooperative Agreements Examines Potential Consumer Effect

The potential effects of proposed cooperative agreements on competition,  and thus consumers, are central to DOT’s analysis. Specifically, DOT  looks to see how the agreement may affect competition across routes  affected by the alliance agreement. To make this assessment, according  to DOT documentation that we reviewed and officials whom we  interviewed, DOT focuses on three key elements of the proposed  agreement. Specifically, DOT identifies (1) the geographic scope of the  proposed alliance and which markets that the agreement would affect; (2)  the number of competitors in each market, their market shares, and the  level of market concentration; and (3) the feasibility and likelihood of  market entry by new competitors into markets that might be adversely  affected by the agreement as well as the ability of existing carriers to  compete in such markets (see table 1). DOT’s assessment is based on  an array of information provided by applicants and third parties. This  information may include competitive analyses or other studies conducted  by consulting economists for the applicants, and business plans and data,  among other things. DOT may also independently use departmental  databases to conduct its own analysis, including those data DOT collects  from foreign carriers pursuant to data-reporting requirements in existing  grants of antitrust immunity.

DOT looks at competitive issues at the region-to-region (e.g., United  States to Europe), country-to-country (United States to France), and city- to-city levels (e.g., New York-to-Paris city pair market), or airport-to- airport pairs (Chicago O’Hare-to-London Heathrow). The analysis focuses  largely on city- or airport-pairs because the sale of air transportation  between cities/airports is the product being sold by airlines and  purchased by the consumer, according to DOT officials. Consequently,  DOT looks most closely at those city-pair markets where the number of  competitors is expected to decline, such as from 3 to 2 or 2 to 1, when the  applicants are counted as a single competitor. According to DOT officials,  this approach to competitive analysis is consistent with legal and  economic practice and in the application of antitrust laws and principles  used by other competition authorities, such as the Department of  Justice. Officials then recommend determinations as to whether such a  reduction in competitors in these markets is likely to be harmful to  competition and, in turn, to consumers. According to DOT officials, the  department has no predetermined threshold for defining substantive  competitive harm because it would not be appropriate to pre-define what  constitutes a “substantial reduction in competition” that would necessitate  disapproval of an application. Instead, the Department looks at the  characteristics of discrete markets where there is a reduction.

In addition to looking for potential competitive harms in the city-pair  analysis, DOT’s competitive analysis also assesses if the agreement  could enhance competition in some markets. In particular, DOT may  find that certain markets will have an increase of an effective competitor  due to the agreement. Specifically, based on applicants’ filings, DOT may  expect the cooperating carriers to enter new routes that neither had  previously served. For example, DOT approved a grant of immunity in  2010 based on expectations that the applicants would have increased  opportunities for new or expanded transpacific routes and service and  enhanced connecting options, among other benefits. Additionally, if two carriers each served a market with a market share under 5 percent—the  threshold DOT uses for deeming a carrier as providing competitive  service on the route—the agreement may push that market share above  the 5-percent threshold and effectively result in a new competitor on the  route. Also, according to DOT, the carriers’ agreement could result in  connecting flights across two carriers to become effectively “online” (as  opposed to “interline”) for some city-pair markets due to the agreement.  This could potentially offer consumers competing options among airlines  that provide direct flights on a given route. We reviewed DOT  documentation in which its analyses had projected these improved  competitive outcomes across thousands of city-pair markets based on an  application for a cooperative agreement. Finally, according to DOT  orders, carrier agreements can promote competition in various markets, if  the agreements strengthen inter-alliance network competition. For  example, DOT approved and immunized the cooperative agreement  between the major partners of the Oneworld alliance, in part, based on  the finding that a third immunized global network could better discipline  the fares and services offered by the Star and SkyTeam alliances.  Specifically, in approving the immunity application, DOT noted consumer  benefits stating that “enhanced inter-alliance competition is beneficial for  consumers across many markets, in particular the hundreds of  transatlantic markets in which the applicants become more competitive as  a direct result of the alliance. Travelers in those markets gain new  competitive options.”

Though DOT may find prospective competitive harm from the agreement,  such as a reduction in the number of competitors in certain markets, DOT  does not necessarily reject the application if a DOT-stipulated remedy can  potentially mitigate those harms, according to department officials. DOT  has used different potential remedies over the years, including carving out  specified city-pairs from a grant of immunity and requiring carriers to  divest from slots at specific airports (see table 2). DOT officials indicated  carve-outs are less favored now than in the past because carve-outs on  specific routes can, in DOT’s view, diminish broader public benefits of the  alliance by limiting the degree carriers can merge their operations. DOT  currently has 11 active carve-outs in three alliances, with the last carve- out issued in 2009. More recently, DOT officials indicated mitigations  based on slot divestitures have the potential to better target competitive  harms on specific routes by enabling new entrants to these cities with  slot-constrained airports. DOT required slot-based remedies in two grants  of immunity, one in 2010 and one in 2016. In the 2010 immunity grant,  DOT required applicants to relinquish slots at London’s Heathrow airport  and specified that two slots must be for Boston-Heathrow services and  two for services between any U.S. location and Heathrow. DOT  expected these remedies, once implemented, to enable other carriers to  start new services to compete with the newly immunized alliance, thereby  ensuring adequate competition remains in the affect market. Whether and  what mitigation strategies are pursued can be a contested aspect of the  proceeding, in which DOT, the applicants, and third-parties debate the  competitive implications of the agreement and the mitigations based on  the facts and circumstances of each situation.

In a 2016 case involving Delta and Aeromexico, DOT included two new or  rarely used conditions in the grant of antitrust immunity. Specifically, to  address competitive concerns specific to this case, DOT made its  approval conditional upon the removal of exclusivity clauses in the joint  venture agreement that precluded specified types of cooperation with  other carriers. Though the carriers argued that such clauses were  necessary to encourage long-term investment in their cooperative  products and services, DOT took into account the perspectives from  stakeholders’ docketed comments, concluding that such clauses could  give the carriers an undue ability or incentive to foreclose actual or  potential competition. Additionally, DOT placed a 5-year sunset  provision on its grant of antitrust immunity to Delta and Aeromexico to  allow DOT a defined opportunity to revisit whether specific slot constraints  identified at the Mexico City airport had been resolved. Prior grants of  immunity regularly included requirements for carriers to resubmit their  cooperative agreements to DOT after 5 years as part of DOT’s  subsequent monitoring (discussed below), but the immunity was not time  limited. DOT officials explained the inclusion of the sunset provision was  to address concerns specific to this case, rather than a new departmental  policy.

Once the competitive analysis and any decisions on mitigations are  complete, DOT determines whether, on balance, the proposed agreement  would likely have an overall positive, neutral, or negative competitive  effect and decides whether to approve the agreement. In all cases  where DOT has granted antitrust immunity, DOT found the proposed  cooperative agreements, on balance or with any specified remedy in  place, to be either neutral or pro-competitive. However, DOT has denied  approval of a proposed agreement, citing that the carriers’ combined  market share on routes where they both operate service would be so  dominant they could, for example, raise prices to the detriment of  consumers.

DOT’s Evaluation of Potential Public Benefits Depends on Whether Proposed Cooperation Is Sufficient to Yield Pro- Consumer Effects

DOT conducts public benefits analyses to determine if there are benefits  of proposed cooperative agreements for consumers. Based on our review  of applications, carriers typically point to varied benefits such as the  potential for lower fares on certain routes, improved connectivity, and  reciprocal frequent flier benefits for consumers. In considering the public  benefits claims made by applicants as well as any potential benefits of the  proposed agreement identified by DOT, the department assesses  whether (1) the public benefits identified are significant and likely to be  realized in a timely fashion and (2) if a grant of immunity is necessary for  the carriers to go forward with the agreement such that benefits will be  achieved.

DOT officials emphasized that this assessment focuses on the carriers’  anticipated level of integration. The officials said higher levels of  cooperation in a proposed agreement, given the nature of the airline  industry and depending on the economic incentives employed, can lead  to lower fares, especially for connecting itineraries. Though DOT officials  acknowledged that the flow of consumer benefits due to high levels of  carrier cooperation is not absolute or certain, they said DOT’s analysis  has consistently supported the notion that connecting passengers who  traverse carriers on a given itinerary pay less as cooperation between  alliance carriers increases. DOT has applied this policy in each of the  proceedings involving grants of antitrust immunity to the three major air  alliances—SkyTeam (2008), Star Alliance (2008), and Oneworld (2010)— as well as subsequent cases. For example, DOT approved immunity within the Star Alliance based on its expectation that fares for connecting  itineraries for Star’s transatlantic routes would decrease, benefiting the  majority of its transatlantic passengers. DOT further noted that this  connecting service would “discipline fares on non-stop routes,” as well.  The practical consequence of this policy, according to DOT officials, is  that DOT expects applicants to present detailed cooperation agreements,  which show integrative efficiencies and processes, at the time the  requests for antitrust immunity are made. In other words, DOT expects  antitrust immunity, when provided, will provide consumers with an array of  benefits—lower connecting fares, new route offerings, among others— that follow from these business efficiencies.

DOT’s public benefits analysis considers the specific provisions of each  proposed agreement to assess how the applicants plan to coordinate a  wide range of business functions. These can include network and  capacity planning, scheduling, pricing, sales, revenue management, and  customer service, among other considerations. DOT officials told us that  they examine the carriers’ revenue-sharing plans, corporate strategic  documents, and other relevant documentation. For example, DOT may  look to see if carriers plan to:

Share revenue in a manner to provide incentives to carriers to  coordinate the management and selling of their combined networks to  make more seats and more frequencies on routes linking their  respective networks available, substantially increasing connectivity  and time-of-day schedule options and improving customer service by  treating their partner’s customers just as they would their own.

Align their different ticket fare and availability classes and procedures  such that their revenue management systems make seats available  on domestic flights for passengers connecting from the foreign  partner’s flights at the same levels and on the same terms as if  customers were connecting online from their own international flights.

Coordinate marketing and incentivize sales staff to promote the  carriers’ combined, rather than individual networks, and thereby  creating more options for consumers.

Align products for a consistent, seamless passenger experience (e.g.,  baggage fees, upgrade policies, frequent flyer program rules).

According to DOT, the agency further reviews governance and revenue- sharing provisions to ensure that sufficient economic incentives exist to  substantially increase the number of passengers flowing through the  combined networks and to significantly increase capacity (particularly on  hub-to-hub routes and home country hub-to-beyond foreign hub routes).  Further, DOT has sought detailed information from applicants on their  plans to increase capacity beyond what they would do in the  counterfactual scenario in which DOT did not grant immunity. These  officials said that DOT places particular emphasis on the quantity,  likelihood, and viability of additional capacity when determining whether  the application will produce substantial benefits that might not occur if  applicants choose not to go forward with the agreement in the absence of  a grant of immunity.

DOT also considers filings from other parties that support or cast doubt  on the applicants’ claims. For example, in 2005, DOT denied an  application from six carriers seeking immunity for the SkyTeam Alliance.  According to DOT officials, based on the case record and competitive  circumstances at the time, DOT found that immunizing the proposed  agreement would not provide sufficient public benefits. This finding  comported with arguments from objecting parties that immunity was not  required to produce benefits because there was a high likelihood that  SkyTeam members would continue integrating their management and  operations, in order to maintain and maximize the profitability of their  existing relationships.

As with the competitive analysis, DOT officials use their professional  experience and expertise, as well as the case record of each application,  to determine the likelihood of benefits, and the necessity of antitrust  immunity for carriers to implement their proposed plan quickly. As a  general practice, DOT does not attempt to replicate the benefits analyses  that carriers may provide as part of their application, according to DOT  officials. DOT officials explained that they use their knowledge of the  industry to verify and validate the applicants’ benefit claims by  qualitatively assessing the reasonableness of the market and broad  economic assumptions underlying these claims. Based on this assessment, DOT may condition a grant of immunity on carriers’ first  demonstrating a readiness and ability to implement the agreement. For  example, in one case, the department did not initially grant antitrust  immunity to the partners of a cooperative agreement because DOT  determined that incompatibilities in the carriers’ information technology  systems would prevent the partnership from yielding consumer benefits.  Consequently, DOT officials said they advised the applicants to reconcile  these shortcomings, or risk DOT finding the benefits of the proposed  cooperative agreement implausible and, in turn, antitrust immunity  unwarranted. Similarly, DOT has also conditioned several grants of  antitrust immunity on the carriers’ expeditious implementation of the  proposed cooperative agreement.

Based on our analysis of DOT’s antitrust immunity proceedings, DOT has  ultimately approved most of the requests for antitrust immunity that it has  received, with some stipulating competitive remedies. Specifically, DOT  has adjudicated 38 applications involving a U.S. and foreign carrier(s)  since 1993, granting antitrust immunity 31 times, according to our  analysis. Twenty-three of these grants remain in effect across 13 different  carrier agreements. See appendix I for information on adjudicated  immunity proceedings involving U.S. and foreign carriers. In two  proceedings, DOT denied antitrust immunity based on findings from its  public benefits analysis. Specifically, in one proceeding, DOT found that  the overall level of public benefit was small because the proposed  alliance focused on a single route and was not likely to create new routes  or a significant number of new travel options for consumers. In the other  proceeding, DOT noted that code sharing or other less-involved forms of  collaboration could produce similar benefits, namely new and expanded  service additions, suggested by the carriers. Consequently, DOT denied  these applicants’ requests for antitrust immunity.

Stakeholders We Interviewed Generally Agreed That DOT’s Process Was Transparent, but Disagreed on Extent That Immunity Is Beneficial to Consumers

Most stakeholders, in particular representatives from major carriers, we  interviewed considered DOT’s final decisions and application review  process to be largely transparent, but lengthy. DOT officials and some  stakeholders we interviewed underscored that there are opportunities for  interested parties, including competing airlines, to examine all submitted  application materials—including confidential and proprietary information— and to provide substantive comments. DOT officials emphasized the  importance of a complete record of information on the official docket as  the basis for their decisions. DOT is required to make a final decision  within 6 months from the date of an application but may issue a notice to  suspend the procedural schedule in order to establish a complete  record. Some carriers we interviewed said that DOT’s review and efforts  to establish a complete record can cause a proceeding to be lengthy. For  example, the most recently completed proceeding to date was over 18  months from when the application was filed until DOT issued a decision.  This proceeding involved a number of filings that pointed to the likely  harm to present and future competition from independent carriers in  specific markets due to the potential for exclusionary behavior by the  applicant carriers.

Our documentation review affirms DOT’s and stakeholders’ view that  available proceedings’ records include DOT’s analyses and findings. With  the exception of confidential or proprietary information, all applications,  notices, DOT orders, and other documentation related to an application  can typically be found on the public docket. Our review of all the  proceedings found that each DOT order providing a grant of immunity  included discussion of DOT’s findings from its competitive and public  benefits analyses, as well as discussion of why and how DOT arrived at  stipulated remedies, if any. For example, as previously discussed, in the  2010 Oneworld order, DOT described the potential competitive harm at  specific airports that the department identified in its analysis and rationale  for requiring a divestiture of slots at those airports as a remedy for those  potential harms.

Though we found consensus among stakeholders that DOT’s process is  transparent, there is disagreement among the stakeholders we  interviewed about the potential benefits of immunity for consumers.  Specifically, two third-party stakeholders and representatives of all non- immunized carriers we interviewed suggested that carriers do not need  antitrust immunity to cooperate in ways that benefit consumers, such as  through codeshare and interlining agreements. Some of these  stakeholders noted that immunized carriers, through their cooperative  agreement, could have access to better market data than non-immunized  carriers or leverage their increased network size to gain unfair competitive  advantages. Representatives for all three U.S. carriers with approved  immunized agreements indicated these immunities were, and continue to  be, essential to their ability to provide high-quality service to their  customers. Moreover, these carriers believed that changes to DOT’s  process should be focused on expediting the process so that public  benefits achievable only through grants of antitrust immunity could be  realized more quickly. DOT officials indicated they are aware of the  controversial nature of grants of antitrust immunity and noted that it takes  time for DOT to gather and assess the evidence in each proceeding.  These officials indicated that the department considers different views  when considering applications, monitors academic and other literature on  the topic, and applies these ideas as the officials deem appropriate in  their decision-making.

DOT Monitors Immunized Cooperative Agreements in Various Ways but Does Not Report on the Effects of Granted Immunities

DOT Undertakes Multiple Activities to Monitor the Implementation and Effects of Immunized Cooperative Agreements

DOT conducts a number of activities to oversee and monitor individual  immunized cooperative agreements and to understand how broad trends  in international air competition affect immunized agreements. For  example, DOT officials responsible for the program explained that they  analyze a variety of international and domestic airline-competition issues  including, but not limited to, airline alliances and, accordingly, keep track  of market developments, such as new carriers entering markets and  changes in market shares of established carriers. By monitoring these  broad trends, DOT is able to better understand industry dynamics,  according to officials we interviewed.

For specific grants of immunity, DOT officials emphasized that they may  tailor some monitoring activities to the nature of the agreement and the  specific requirements set forth in DOT’s grant of immunity. For example,  DOT officials explained they track compliance with the required slot  divestitures in one grant of immunity through a designated trustee or, for  immunities that require carriers to maintain capacity on certain routes, by  DOT officials’ own review of existing flight schedule databases. DOT  officials noted that the department’s specific monitoring activities are  undertaken to track the implementation of cooperative agreements and to  assure carriers comply with the terms of immunity grants (see table 3).

In recent years, DOT’s monitoring activities have focused on the status of  cooperation under immunized agreements and whether that cooperation  is leading to merger-like efficiencies. To that end, according to DOT  officials, all seven grants of immunity approved since 2009 require  carriers to submit confidential annual reports to DOT. These reports  cover topics including the public benefits of the agreement and  commercial developments between the partners. Each year, DOT  develops a template for these reports that delineates what information  must be included on operational aspects of the implemented agreement  (e.g., integration of routes and service planning) and the extent that  partnered carriers have aligned their customer service policies to provide  customers with a consistent experience across partners, among other  topics. These reports, and DOT’s associated reviews, are the core of  DOT’s current monitoring efforts, according to DOT officials and,  according to representatives of the carriers submitting these reports,  provide DOT with extensive information on the implementation status of  the immunized agreement. Our examination of the most recent of these  reports, for 2017, affirms they include considerable information on the  implementation of the agreement and status of the alliance.

DOT’s monitoring activities also include some review of empirical  information on the effects of individual immunities. Specifically, as  discussed above, carriers seeking immunity routinely identify anticipated  consumer benefits, such as lower fares and greater frequency of service,  and DOT has predicated grants of immunity on these expected benefits.  According to DOT officials, they monitor available schedule, pricing, and  other data to check whether observed outcomes are consistent with  expectations, and if not, whether other factors, such as fuel prices or  other market changes, provide a qualitative explanation of observed  trends. The 2017 annual reports that carriers submitted to DOT also  included information on these trends, based on our review of these  documents. Likewise, according to DOT officials, DOT takes steps to  track the status of remedies—such as whether airport slots were, in fact,  divested and market entry occurred as was expected. DOT’s specific  steps to do so vary depending on the nature of the remedy and the  availability of relevant information. Furthermore, DOT officials commented  that third parties, such as other air carriers, have incentives to alert DOT  to concerns about violations of exclusivity prohibitions that help DOT  verify and enforce this condition of some immunity grants.

DOT’s monitoring activities do not typically include independent  econometric analysis to examine the effects of the immunities it has  granted, according to DOT officials, but the department tracks economic  literature on these effects and has recently commissioned its own study.  As we have noted, DOT looks for substantial integration among carriers  requesting immunity as an indication that pricing efficiencies will be  attained and benefit consumers. For a connecting airline route where one  carrier serves one leg of the route and a different carrier serves the other  leg, it is broadly recognized by economists that joint price-setting by the  carriers will generally result in a lower airline fare. However, in cases  where two airlines are competing on the same route—as could be the  case on nonstop routes between the U.S. and another country—carrier  coordination could reduce the extent of effective competition and lead to  higher fares. Additionally, lesser forms of coordination that do not rely on  a grant of immunity may also address the “double pricing” inefficiencies  on connecting routes.

Academic literature that uses statistical modeling to examine the effect of  antitrust immunity has come to differing conclusions on the effect of  immunity on fares for airline passengers. For example, one study found  that connecting routes served by carriers with immunized cooperative  agreements had lower prices compared to connecting routes served by  carriers with other forms of cooperating agreements that were not  immunized, and this study also found that immunities did not lead to  higher fares on nonstop routes. However, another study found that  antitrust immunity reduced competition and, thus, caused higher prices on  nonstop routes; this study also found that pricing efficiencies on  connecting routes did not require antitrust immunity.

Recognizing the varying findings of the available literature, DOT  commissioned a specialized study in 2016 to improve its understanding of  the effect of immunities and airline joint ventures on consumer prices.

According to DOT, the department provided guidance, data, and other  input to support this work, but did not assist in the analysis or guide its  conclusions. The report was provided to DOT in the summer of 2018, and  according to DOT officials, as of December 2018, the department was  reviewing the study’s findings, and considering how, if at all, it might apply  the methodologies used in the study to DOT’s own monitoring activities in  the future. DOT officials also indicated they have not made any final  determinations about what, if any, adjustments may be appropriate to  existing grants of immunity or to DOT’s process for considering future  immunity applications based on the study’s findings.

Based on our review of antitrust immunity proceedings, DOT has rarely  amended or modified, and has seldom revoked immunity of an approved  cooperative agreement. However, DOT has changed some terms of  approval when carriers have sought immunity for updated agreements  that, for example, added other carriers to an existing agreement. DOT  officials explained that initiating a change in an existing immunity grant is  a time-consuming and technically difficult process because it would  involve the same administrative steps as in the initial approval process.  Further, DOT officials indicated that carriers have been generally  responsive to the requirements laid out in DOT’s grants of immunity, and  as a result, DOT has not needed to pursue many corrective actions.  Moreover, these officials explained that they are well aware of carriers’  plans to pursue new immunized agreements, and as a result, DOT  officials are able to await those proceedings to make incremental  changes to the terms of DOT’s original approval. For example, DOT’s  early grants of immunity did not include annual-reporting requirements,  but as carriers updated their agreements and sought new immunities,  DOT used these new proceedings as an opportunity to add this  requirement.

DOT Does Not Report on Monitoring Activities or on Whether Immunities Have Produced Anticipated Benefits

There is generally little, if any, information from DOT available to external  stakeholders and the public regarding DOT’s monitoring efforts and its  findings on the effects of granted antitrust immunities. DOT publishes one  summary document on its website that lists every active and inactive  immunized cooperative agreement. This document, which according to  officials, DOT updates periodically with each new grant of immunity,  includes web links to the dockets of formal proceedings associated with  each immunity application and grant. This document provides a single  portal for anyone to access materials related to antitrust immunities that  are spread across multiple dockets. Each docket remains open for public  comment as long as DOT’s grant of immunity remains active. For  example, in 2017, stakeholders submitted public docket comments critical  of the market effects of a cooperative agreement awarded antitrust  immunity 15 years earlier. In this case, DOT provided a formal, public  response, as required, on the issues raised.

DOT does not report information on its own voluntary monitoring activities  in public dockets or elsewhere. For example, DOT does not post  information on whether immunized carriers have submitted required  annual reports or, as periodically required, resubmitted their cooperative  agreements to DOT. Moreover, DOT does not release its assessments of  these materials nor does DOT make any public statements on whether a  grant of immunity yielded, in actuality, the types of carrier cooperation  expected, whether DOT-imposed remedies were implemented and had  the expected results, or whether the immunity generated the public  benefits as expected when approved. As described previously, DOT has  approved grants of immunity based on the expectation of various public  benefits. These potential benefits include, for example, lower consumer  prices for connecting flights, expanded route and schedule offerings, and  increased market entry and competition. DOT provides no reports to the  public or Congress related to whether these expectations were met.

Internal controls help program managers achieve desired results and  adapt to shifting environments, evolving demands, changing risks, and  new priorities. As part of an internal control system, management  should externally communicate quality information. Attributes of this  principle call on federal program managers to communicate quality  information externally so that external parties can help the government  achieve its objectives and address related risks. Generally, according to  this internal control standard, government reporting is intended for the  executive branch’s decision makers and Congress as well as the general  public. Management may select appropriate methods for external  reporting. Accordingly, program managers should consider what methods  are appropriate for such a broad audience, considering factors such as  the nature of information and cost. In the context of grants of antitrust  immunity, relevant parties include Congress, industry stakeholders, and  the general public. Each of these groups may have distinct needs and  abilities to access, understand, and act upon information about the effects  of antitrust immunities in the marketplace.

DOT officials cited several reasons for not reporting on their monitoring  activities and related findings. DOT officials underscored that much of the  information gathered in its voluntary monitoring efforts—annual reports, in  particular—are proprietary and, therefore, not information DOT could  publicly disclose. Representatives from immunized carriers we  interviewed also stressed that public disclosure of the business plans and  alliance status assessments provided to DOT would be damaging to their  business if made public. DOT officials also expressed concern that  commentary from the department about the effects of immunities could be  construed as departmental promotion of a specific alliance, or  “prejudgment” of an issue that could come before the department in a  future proceeding. DOT officials also said competition authorities, such as  the Department of Justice, do not typically address the results of a case  (e.g., post-merger analyses) and are only involved with the process and  guidelines associated with reviewing and adjudicating a case.

While there are valid concerns about the publication of proprietary  information and statutory prohibitions on doing so, there are available  avenues for DOT to report on the findings of its monitoring activities and  assessments of the consumer effects of antitrust immunities broadly.  Further, many of the expected benefits of grants of immunity—such as  changes in prices, schedules, and markets served—can be evaluated  without relying on proprietary information. For example, the number of  competitors serving city-pair markets and carriers’ market shares can be  calculated—as DOT does during the approval process—using publicly  available data. Prices changes under the immunity can also be evaluated  using publicly available information. Likewise, an assessment of the  market outcomes of competitive remedies—such as whether slots were  divested and competitors provided new service as expected—does not  require business-sensitive information about the internal workings of an  immunized alliance, but rather data on the public actions of carriers in the  marketplace. These data are publicly available through schedule data and  information in DOT datasets. Government reporting can also protect  proprietary information from improper disclosure, either by issuing  restricted reports to Congress or through stating findings at a very general  level. For example, the Federal Trade Commission has balanced the  protection of proprietary information from public disclosure while also  reporting on the commission’s findings of the effects of its commission- imposed competitive remedies. Specifically, the Federal Trade  Commission published two merger remedies studies, eliminating the  names of and financial information about the merging parties and the  buyers of the divested assets in publicly available versions. The Federal  Trade Commission made both of its studies public.

The lack of information available on the observed effects of immunities in  the marketplace, including the effects of DOT-stipulated remedies, can  make it difficult for external stakeholders to assess what consumer  benefits have, or have not, been realized. According to consumer and  antitrust organizations we interviewed, the lack of available information  left them speculating that DOT did not conduct any monitoring of granted  immunities after approval. Likewise, representatives from two of the three  non-immunized carriers we interviewed noted the contrast between the  transparency of DOT’s approval process and the opacity of its monitoring  process. Additionally, two stakeholders we interviewed opined that airline alliances have harmed consumers by, for example, creating restrictive  rules that make certain types of travel more difficult than in the past,  among other anti-consumer effects. Some stakeholders mentioned they  had no basis to review or comment on whether DOT monitoring activities  are sufficient. Another stakeholder mentioned that in the absence of any  reports or other information from DOT, they did not know if alliances have  delivered the consumer benefits initially expected.

DOT officials stressed that because the process for consideration of  immunity is public any outside party may petition the department for  review of an existing immunized alliance and provide information on the  docket—which remains open—if any party believes that an alliance is  acting contrary to the public interest. However, two stakeholders we  interviewed indicated that it was difficult to use the docket comments  process to lodge observations or criticisms without, for example,  disclosing their own competitively sensitive information and absent  information on the implementation of immunized alliances. Further, the  information available on dockets does not provide congressional  policymakers with readily available information on the findings of DOT’s  many ongoing monitoring activities. During the approval process, DOT  publishes key aspects of its analytic findings in show-cause and final  orders to the public docket. These documents provide insights into the  basis for DOT’s decisions. DOT could periodically provide information on  the effects of immunities, based on its monitoring activities, on the docket,  or through other mechanisms, such as public reports or through  confidential reports to Congress. This information could provide greater  transparency and be useful in considering changes in DOT’s authority to  grant antitrust immunity, an authority the Congress and others have  considered at various points. With more information about DOT’s  monitoring activities and findings, policymakers, stakeholders, and the  public would have an improved understanding of the competitive effects  of immunities.

As U.S. and foreign air carriers have pursued more integrated forms of  cooperation through international air alliances, DOT has extended  American Airlines, Delta Air Lines and United Airlines antitrust immunities  with their major foreign partners with the expectation that the immunities  would yield public benefits. Cooperation between international air carriers  can lead to certain benefits for consumers, and immunizing such  cooperation from antitrust laws may yield additional benefits. DOT’s  review of requests for immunity and oversight of immunized agreements  are important to ensuring robust competition and, thus, consumer benefits  in the marketplace. DOT’s ongoing monitoring pays significant attention to  whether and how grants of immunity affect consumers. However, DOT  generally has not reported on its monitoring activities and market  outcomes of immunities. As the authority responsible for granting antitrust  immunity, DOT holds a unique responsibility for reporting on these  effects. Per internal control standards, the department’s responsibilities  extend to communicating information to key stakeholders about the effect  of immunities, based on DOT’s monitoring activities. DOT must balance  providing information to policy makers and the public with statutory  requirements that protect proprietary information from disclosure. DOT  rightly keeps information on the status of cooperation under immunized  agreements confidential. However, the market outcomes of immunities  are not proprietary and DOT could publicly report on them. Such reports  feasibly could include DOT’s views on whether the prospective benefits  projected at the time of immunities’ approval have been realized and  whether the department’s remedies have been implemented by  immunized carriers and have had the effects expected by DOT. Like  DOT’s current practice of periodically updating the summary document on  immunities, DOT could issue such reports at a time interval it determines  appropriate. Doing so would improve transparency and provide the public  with improved information on the effects of antitrust immunities on  consumers.

The Director of DOT’s Office of Aviation Analysis should provide periodic  external reporting, at a time interval DOT determines appropriate, to the  public and policymakers, on the effects of antitrust immunity—based on  the range of monitoring activities undertaken by DOT—including whether  grants of immunity have achieved anticipated benefits and the status of  remedies—such as airport slot divestitures—imposed as part of DOT’s  approval. (Recommendation 1)

We provided a draft of this report to DOT and the Department of Justice  for review and comment. We received written comments from DOT, which  are reproduced in appendix II and summarized below. In email, the  Department of Justice told us they had no comments on the draft report.  DOT and the Department of Justice also separately provided technical  comments, which we incorporated as appropriate.

In its written comments, DOT partially concurred with the  recommendation. More specifically, DOT stated it will provide additional  public information about the status of its monitoring activities and  remedies, but it did not agree to report publicly on its findings about  whether grants of immunity have achieved anticipated benefits. As  discussed below, after evaluating the concerns that DOT raised, we  continue to believe that periodically reporting on the effects of antitrust  immunities would improve transparency and accountability.

In its written response, DOT stated that if DOT were to release any  additional materials than it already does, it could have a chilling effect, not  just on competition by revealing proprietary information and insight on the  real-time commercial strategies of a particular alliance, but also on the  carriers’ willingness to share detailed and sensitive information with DOT  that is necessary to conduct oversight. We disagree with DOT’s assertion  that reporting on the effects of immunities would have a chilling effect on  competition and the willingness of airlines to share information with DOT.  Our report explains that DOT is prohibited from releasing proprietary  information to the public and we expressly called on DOT to balance  protecting this information while making appropriate information available  to policy makers and the public. Moreover, contrary to DOT’s implication,  we are not recommending DOT release the information DOT reviews  during the annual reporting process, such as alliances’ revenue  management and competitive strategies. Instead, the recommendation  calls for DOT to report on the market effects of immunity relative to DOT’s  anticipated benefits cited in DOT’s approvals of antitrust immunity and the  status of remedies. As we noted in the draft report, these include trends in  consumer fares, schedule offerings, and the like that DOT could report on  without relying on proprietary information.

DOT also stated that it must balance the importance of transparency with  its statutory obligations to adjudicate each request for antitrust immunity  fairly. Further, it stated that making such findings independently from the  decision-making process in dockets with pending matters raises issues  with prejudgment and ex parte communications, and is administratively  unworkable. Doing so for cases that are not pending also raises issues of  prejudice and prejudgment of “issues that are likely to be raised in future  cases involving amendment of the alliance agreements (e.g., when  membership changes).” We agree that DOT’s role as an impartial  adjudicator is critical. We do not agree with DOT’s assertion that making  public its assessment of the effects of immunities that have been granted  would jeopardize its impartiality, because DOT could report this  information and still consider each case based on its particular facts and  circumstances. Further, the recommendation provides DOT with flexibility  on how, when, and exactly what to report on that should allow DOT to  avoid any prohibited ex parte communication.

DOT described existing activities it believes maintain transparency for the  public and ensure an ability for interested parties to seek review on the  record of previously granted authorities. These activities include DOT’s  public dissemination of passenger ticket and schedule data and the  publication of DOT’s own orders that summarize departmental  assessments of the state of competition as well as its immunity decisions.  We note that our draft report described these activities in detail and  recognized the overall transparency of DOT’s application review process.  Nonetheless, we maintain that these activities do not provide regular or  reliable information on the actual effects of antitrust immunities, based on  DOT’s monitoring activities, and that DOT could do more to increase  transparency through external reporting on these matters. For example,  DOT’s provision of data to the public does not diminish the value of DOT  providing its own independent reporting on whether expected consumer  benefits, in fact, have materialized. Likewise, DOT’s published orders on  specific immunities come at time intervals largely determined by the  applicants and, naturally, when reviewing these applications, DOT’s  competitive analysis focuses only on those markets relevant to the  application at hand. More intentional reporting on the effects of immunity  from DOT could address these shortcomings of existing activities.

In other comments that were not included in DOT’s letter, DOT  questioned the applicability of internal control standards to its role in  monitoring grants of antitrust immunity. The principle of internal control  we applied calls on management to externally communicate quality  information that helps the agency achieve its objectives and manage  risks. As we stated in the report, such communication can help program  managers achieve desired results and adapt to shifting environments,  which is relevant to DOT’s responsibility in this area.

Ultimately, the recommendation, in full, aims to improve the transparency  on the effects of antitrust immunity. Providing external stakeholders with  additional information on DOT’s monitoring activities, as DOT agrees to  do, should enhance confidence that DOT is undertaking oversight  activities. Providing information on whether grants of immunity have  achieved anticipated benefits, will further improve transparency and  provide the public and Congress with useful information to inform  policymaking in the future.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Department of Transportation, the  Attorney General, and other interested parties. In addition, the report will  be available at no charge on the GAO website at http://www.gao.gov. If  you or your staff have any questions about this report, please contact me  at (202) 512-2834 or vonaha@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix III.

Appendix I: Listing of Grants of Antitrust Immunity

Appendix II: Comments from the Department of Transportation

Appendix III: GAO Contact and Acknowledgments

In addition to the individual named above, Heather MacLeod (Assistant  Director); John Stambaugh (Analyst in Charge); Friendly Vang-Johnson;  Jim Geibel; Amy Suntoke; Delwen Jones; Amy Abramowitz; and David  Hooper made key contributions to this report.

Each year, millions of passengers travel internationally on U.S. and foreign airlines. Some of these airlines have formed alliances to coordinate and integrate their prices and schedules. Alliances may be granted immunity from U.S. antitrust laws if the Department of Transportation determines that consumers will benefit from this coordination and there won’t be a harmful effect on airline competition.

Transportation monitors these alliances to ensure that consumers are actually benefitting from them. However, the department isn't required to report on the effects of these alliances to Congress or to the public. We recommended that it do so.