1. Collusive Alliances and Intercontinental Competition Hubert Horan Airneth/European Aviation Club Den Haag 8 December 2011 Brussels 9 December 2011

2. Horan Airline Transactions Forum 1 March 2011 Page 2 My perspective on consolidation Developed original NW/KL alliance network Also managed from European (SR/SN) side Shut down multiple unprofitable alliances Consolidation via Alliance Antitrust Immunity Direct experience with economic plans, results Direct experience with true Cross-Border mergers Congressional and DOT testimony recent Transportation Law Journal article Consolidation via Merger Active involvement with current consolidation

3. Horan Airline Transactions Forum 1 March 2011 Page 3 Counter-revolution against liberal international airline competition Intercontinental consolidation since 2003—biggest structural shift in industry history--- was wholly anti-competitive  Totally dissimilar to pro-consumer ATI of mid 90s  Unlike shorthaul/regional markets, Intercontinental sector always competitively deficient  Billions in anti-competitive pricing power created  Synergy claims false; Regulatory justification fraudulent End of liberal, market-based competition means industry efficiency will likely decline  Legal protections gone; Cartelization spreading globally  Growing threat of cross-border regulatory arbitrage

4. Horan Airline Transactions Forum 1 March 2011 Page 4 Issue is role of alliances in consolidation, (not alliances per se) Alliances And Global Competition Alliances And Global Competition Collusive Alliances (with antitrust immunity— same competitive impact as merger) Not “Branded” Alliances (no one objects to Star Alliance frequent flyer reciprocity, lounge sharing) Intercontinental (longhaul)markets — 55% of global revenue— exclusive focus of consolidation movement Not regional/ shorthaul markets —45% of global revenue— no calls for consolidation Alliances driving high concentration and Cartelization industry structure impact Not original 1990s alliance interline codesharing links

5. Horan Airline Transactions Forum 1 March 2011 Page 5 “Industry Consolidation” Movement: we need fewer Intercontinental airlines total industry growth Intercontinental—no growth in 30 years All growth from shorthaul airlines All growth from shorthaul airlines Regional/shorthaul sector (45% of global revenue) All industry growth— intensely competitive but no calls for consolidation Regional/shorthaul sector (45% of global revenue) All industry growth— intensely competitive but no calls for consolidation Intercontinental sector (55% of global revenue) always competitively deficient due to huge entry barriers (both political, economic) Lets merge everyone into just three global competitors!

6. Horan Airline Transactions Forum 1 March 2011 Page 6 IC consolidation strictly North Atlantic; First (mid 90s) phase was pro-consumer Original mid-90s ATI did create Consumer Benefits Thousands of markets got online service, discount fares for the first time AMS ZRH DTW ATL original alliance benefits KL-NW (92) and SR-DL (95): fully exhausted by 1999 Original Collusive Alliances—still robust competition Alliance connections totally displaced traditional interline connections Consumer benefits only on North Atlantic markets; not pursued elsewhere

7. Horan Airline Transactions Forum 1 March 2011 Page 7 Post 2003 phase: no consumer benefits; permanent Cartel created Delta Northwest United Continental USAirways American TWA Finnair Austrian Air France KLM Lufthansa British Air Iberia Brussels Air Canada Aer Lingus Virgin SAS Alitalia Swiss LOT TAP CSA Turkish BMI LH-led Collusive Alliance AF-led Collusive Alliance BA-led Collusive Alliance 26 competitors merged into a permanent Cartel the North Atlantic Cartel the North Atlantic Cartel Totally Artificial Consolidation mostly market forces assumes last 3 airlines (US,VS,EI) unable to survive as small indepedents and join Cartel groups after approval of BA/AA Two separate “consolidation” processes All market exits since 93 totally artificial—big carriers petitioned government to reduce competition

8. Horan Airline Transactions Forum 1 March 2011 Page 8 Post-2003 Cartelization: biggest shift in industry history, with more to come Delta Northwest United Continental USAirways American TWA Finnair Austrian SAS Alitalia Swiss LOT Air France KLM Lufthansa British Air Iberia Brussels Air Canada Aer Lingus Virgin TAP CSA Turkish BMI LH-led Collusive Alliance AF-led Collusive Alliance BA-led Collusive Alliance 26 trans- Atlantic carriers Delta Northwest United Continental American Hawaiian Cathay Pac Air China China East China South Hainan Air Canada Philippines Singapore Thai Malaysian JAL ANA Korean Asiana China EVA Qantas Air NZ V Australia Air Pacific 26 trans- Pacific carriers Pacific: Sham US-Japan “Open Skies” Pacific: Sham US-Japan “Open Skies” Unlike original 90s “Open Skies” designed to massively reduce competition, facilitate subsidies, slot rules and other distortions Cartel using its control of longhaul access to the huge EU/US markets worldwide: artificial market power is key

9. Horan Airline Transactions Forum 1 March 2011 Page 9 BUT TRULY LIBERAL CONDITIONS NEVER ESTABLISHED IN INTERCONTINENTAL MARKETS Pricing/market entry freedom Access to capital markets No artificial competitive barriers Transparent financial reporting Open corporate control market Strong antitrust rules, enforcement Efficient bankruptcy process No political barriers to exit— no carriers “Too Big To Fail” Objective: Maximum consumer/efficiency gains economy-wide (not interests of specific companies/employees) Intercon: conditions to let the market decide “how many airlines” don’t exist LIBERAL COMPETITIVE CONDITIONS CAREFULLY ENGINEERED IN MOST DOMESTIC/SHORTHAUL MARKETS Pricing/market entry freedom Access to capital markets No artificial competitive barriers Transparent financial reporting Open corporate control market Strong antitrust rules, enforcement Efficient bankruptcy process No political barriers to exit— no carriers “Too Big To Fail” Objective: Maximum consumer/efficiency gains economy-wide (not interests of specific companies/employees) ?? Consumers, investors decide “how many airlines” Governments, entrenched incumbents decide “how many airlines”

10. Horan Airline Transactions Forum 1 March 2011 Page 10 Claims of big “scope/scale synergies” from consolidation are false 82—CO/TI  86—TW/OZ  86—NW/RC  87—BA/BR  89—AF/UT/IT  79—PA/NA  88—CO/EA  85—PE/FL  88—US/PI  86—AA/OC  98—SR/SN  87—DL/WA  98—KL/AZ  87—CO/PE  00—AA/TW  87—US/PS  00—UA/US  Hub City Synergy but all 20 years ago ”Scope+Scale Synergy” Mergers All failed—few synergies, huge costs Also some successes in bankruptcy cases (HP/US, LH/LX) Recent mergers (KL-AF, DL-NW, UA-CO) claiming huge efficiencies not found in any previous merger --and provided no evidence to support merger claims

11. Horan Airline Transactions Forum 1 March 2011 Page 11 Post-2003 Consolidation has created huge anti-competitive market power Top 3 Concentration 03->09 total Continent 67%-> 98% total No.Atlantic 54%-> 92%

12. Horan Airline Transactions Forum 1 March 2011 Page 12 Biggest shift in industry history in less than 10 years----three key drivers #1-EU shift from liberal to “managed” competition purely anti-competitive 2003 KL/AF merger #2—staged sequence of follow-on ATI/mergers; DOT willingness to disobey law, use fraudulent evidence Brussels proactively driving consolidation Rig markets to favor “National Champions” (LH/AF), weaken LCCs; subsidies for weak (AZ, OS, OA, LX) totally different merger rules for AF, FR US Open Skies delayed 5 years—wanted more mergers KL/AF: no synergies/consumer benefits; ends EU longhaul competition, establishes Cartel; forces USA consolidation #3—huge “Consolidation is Inevitable” PR campaign

13. Horan Airline Transactions Forum 1 March 2011 Page 13 All ATI Consumer Benefits findings based on willful DOT regulatory fraud Falsely claims that physical barriers force interline carriers to always set fares $200-300 higher than online/ATI connecting fares Falsely claims that ATI always and automatically cut connecting fares $200-300 regardless of market/competitive conditions  “Double Marginalization” violates laws of supply and demand False “rule” that reducing competition always reduces prices designed to nullify both the law and rules of evidence  Every ATI application automatically justified; no need for case-specific evidence False claims fabricated by one UAL consultant in one paper; DOT claims “rule” justified by multiple, independent researchers  based on regression of 1990s data that is totally unrelated to the pricing claim No evidence of any pricing benefits from any ATI grant since 90s  No actual consumer pricing evidence submitted in any recent ATI case  DOT uses fraudulent “rule” as basis for rejecting evidence of higher prices “Double Marginalization”—ATI automatically reduces fares 15-25% --sole basis of $90 million annual Oneworld consumer benefits claim “Double Marginalization”—ATI automatically reduces fares 15-25% --sole basis of $90 million annual Oneworld consumer benefits claim

14. Horan Airline Transactions Forum 1 March 2011 Page 14 All recent Star/Skyteam/Oneworld ATI depended on DOT’s disregard for the law DOT disobeyed Clayton Act requirement for market power test  No ATI decision had any of the pricing data, entry barrier or market contestability evidence needed to show ATI would not create market power DOT disobeyed legal requirement that ATI cannot be granted without proof of “public benefits”  Private benefits to applicant (i.e. consolidation benefits Star Alliance) used by DOT as demonstration of “public benefits”  DOT accepted “improved frequent flyer program” claims as proof of “public benefits” even though frequent flyer benefits decreased  DOT public benefits “findings” not based on any objective data or analysis; just “copy/pasted” applicants unsubstantiated claims Newest DOT regulatory fraud—”metal neutrality” designed to extend collusion to large overlapping nonstop O&Ds  Previous ATI cases had carve-outs, given pricing risks in LHR-ORD type markets  DOT established new “rule” based on false claim that “metal neutral” alliances cannot function if any routes excluded  Rule based on paper by same consultant who fabricated “Double Marginalization”

15. Horan Airline Transactions Forum 1 March 2011 Page 15 “Industry Consolidation movement”-- successful misinformation/PR campaign There has been no independent (regulatory, media, academic) scrutiny of these “Industry Consolidation” claims Inevitable trend towards industry consolidation Industry growing for decades “Trend” just biggest Atlantic carriers Industry consolidation driven by market forces All from government actions; Capital markets not interested Consolidation OK—lots of competition remains shorthaul competitive; Intercon always stagnant/getting and worse Consolidation justified by big scale/scope synergies No previous merger found synergies; United isn’t too small to compete ATI always drives lower consumer fares No verifiable evidence of any consumer benefits since 1999 Alliances create FF and other consumer benefits Branded alliance benefits falsely attributed to Collusive Alliances

16. Horan Airline Transactions Forum 1 March 2011 Page 16 Counter-revolution against liberal international airline competition 90s: Global LiberalizationToday: Intercon Cartelization Who determines number of competitors? Consumers, investors in the open marketplace Governments, entrenched incumbents via private “backroom” discussions Capital flows, efficiency gains From less-efficient to more- efficient More-efficient at mercy of less- efficient (but Too Big To Fail) Legal/regulatory objective consumer welfare, long- term industry efficiency, “level-playing field” Protect/enrich a handful of private companies, especially “national champions” Legal/regulatory approach Neutral umpire enforcing transparent rules using objective data/evidence Undermine law/precedent with fraudulent evidence; opaque rules applied arbitrarily Role of “Open Skies” Facilitate new entry, reduce cross-border and artificial barriers Facilitate reduced competition and regulatory arbitrage; increased protection of weak; Driver of airline success Efficiency, service quality, network strength Ability to capture regulators; control of alliance access

17. Horan Airline Transactions Forum 1 March 2011 Page 17 Looking forward given tomorrow’s highly illiberal environment reducing trans-Pacific from 26 to 3 competitors BA acquiring BMI; only 4 carriers for entire USA crude Canadian/German anti-EK protectionism Competition weakens further—3 alliance competition unsustainable LHR-based Oneworld uncompetitive with continental duopoly squeeze of small alliance members and domestic LCCs UAL IAD-MAD precedent; Qantas offshoring; Tiger safety lapses Continuing, artificial consolidation --many moves unthinkable 10 years ago Negative outlook for markets and industry --stagnant competition means declining efficiency growth of cross-border regulatory arbitrage threatens financial/consumer/safety protections growth of cross-border regulatory arbitrage threatens financial/consumer/safety protections

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20. Horan Airline Transactions Forum 1 March 2011 Page 20 Current Branded/Collusive Alliance models evolved 15+ years ago “Branded” Alliances 90-Global Excellence 97-Star 98-Oneworld 00-Skyteam Collusive Alliances on the North Atlantic 92-KL-led alliance(NW) 95-SR-led alliance (DL) 97-LH-led alliance (UA) 00-AF led alliance (DL) 09-BA led alliance (AA) Collusive Alliances on the North Atlantic 92-KL-led alliance(NW) 95-SR-led alliance (DL) 97-LH-led alliance (UA) 00-AF led alliance (DL) 09-BA led alliance (AA) Alliances categories pre-1990 Frequent Flyer partners foreign airlines join United’s Mileage Plus program or American’s Aadvantage program No anti- competitive risks Narrow route-extention codesharing foreign airlines codeshare on US domestic flights, providing connecting service to points it would (could) not otherwise serve No anti- competitive risks Route-revenue pooling with codesharing Pan Am/Saudia pool revenues, profits from each other’s flights in a specific market Obvious risks very rare in US markets since 70s; but still common outside US new post-1990 Alliances

21. Horan Airline Transactions Forum 1 March 2011 Page 21 Decades of strong, continuous structural growth

22. Horan Airline Transactions Forum 1 March 2011 Page 22 Driving structural growth> dynamic competitive “churn” Competitive “churn”-- active entry and exit— reallocation of capital from weak to strong Churn (exit) since 1980: 77%--USA 56%--W. Europe/rest of Western Hemisp. 40%--rest of world Churn (exit) since 1980: 77%--USA 56%--W. Europe/rest of Western Hemisp. 40%--rest of world Innovation/productivity driven by both serious threat of failure/entry and real opportunity to grow If weak carriers don’t exit, strong incumbents, entrants can’t grow

23. Horan Airline Transactions Forum 1 March 2011 Page 23 Alliance Public Benefits: 30% of North Atlantic seriously underserved in 1990 JFK LHR CDG FRA ORD ATL Nonstop Big Gateway New York to top 20 EU cities London to top 20 US cities One-stop Big Gateway cities to Interior cities top 5-6 EU cities to hundreds of US cities (via US hubs) top 5-6 US cities to hundreds of EU cities (via EU hubs) USA Interior cities to EU Interior cities (i.e. St. Louis-Brussels, Milwaukee-Munich) no online or coordinated schedules; passengers forced to change airlines and terminals; only highest fares available previous solution (PA/TW hubs in Europe) had failed 70% of market had good online schedules, full range of discount fares but 30% of market had poor service and very few discount fares

24. Horan Airline Transactions Forum 1 March 2011 Page 24 UK and Continental Europe markets---very different competitive dynamic UK/Ireland-USA market 15 million pax pure nonstop market not served via European hubs; 80% is London traffic UK/Ireland-USA market 15 million pax pure nonstop market not served via European hubs; 80% is London traffic Continental Europe—USA 40 million pax pure hub market London no longer seriously competes for US-Europe connecting traffic Continental Hubs don’t serve London/Dublin traffic AMS PAR LON SFO LAX DFW IAH CVG ORD DTW MIA ATL IAD PHL EWR JFK BRU MUC CPH MAD FRA ZRH MXP FCO

25. Horan Airline Transactions Forum 1 March 2011 Page 25 Huge risk to consumers with Cartel, 95%+ concentration in place Rapidly Increasing Concentration after 2004 Permanent Cartel with huge entry barriers Healthy, Profitable Competition, even with Alliances Healthy, Profitable Competition, even with Alliances Serious HUGE very low concentration Risks to Consumers

26. Horan Airline Transactions Forum 1 March 2011 Page 26 North Atlantic competitors,concentration and departure shares 1991-2008

27. Horan Airline Transactions Forum 1 March 2011 Page 27 Liberal competition drove decades of profitable industry growth LIBERAL AIRLINE COMPETITION—ECONOMIC REQUIREMENTS Pricing/market entry freedomTransparent financial reporting Access to capital marketsStrong antitrust rules, enforcement No artificial competitive barriersEfficient bankruptcy process Open corporate control marketNo political barriers to exit LIBERAL AIRLINE COMPETITION—POLITICAL REQUIREMENTS Let Consumers/Capital Markets pick winners (level-playing field) Focus on Maximum Gains Economy-Wide (not favored companies) Objectives of Airline Deregulation and US Open Skies treaties Consumers: More service at lower fares Innovation/productivity gains continuously improve industry capital allocation— better airlines prosper/grow bad airlines shrink/exit market pressure from Liberal Airline Competition Industry: Profits, capital for growth

28. Horan Airline Transactions Forum 1 March 2011 Page 28 Consolidation: recent, artificial, and not driven by market competitiveness In 21 of the 22 cases competition reduced artificially--petitioning governments for approval to merge or join a collusive alliance Consolidation used to protect small/weak airlines competitive exit of Large/Medium North Atlantic carriers since 1993

29. Horan Airline Transactions Forum 1 March 2011 Page 29 Consolidation: recent, artificial, and not driven by market competitiveness 21 of the 22 large/medium carriers that stopped competing independently did so artificially--by petitioning governments for approval to merge or join a collusive alliance  since 93 only very small carriers were forced to exit by market competition competitive exit-Large/Medium carriers exit of very small competitors

30. Horan Airline Transactions Forum 1 March 2011 Page 30 Almost every merger since deregulation has been a dismal financial failure 80: Pan Am/National1-Post DeregFAILURE—largely liquidated 82: Texas Intl/Continental1-Post DeregFAILURE—quickly bankrupt 85: Southwest/Muse2-Quasi-BKProfitable—cheap acquisition 85: People Exp/Frontier4-Synergy/ScopeFAILURE—soon bankrupt 86: TWA/Ozark1-Post DeregProfitable—Restructured STL 86: Northwest/Republic1-Post DeregProfitable—Restructured DTW/MSP 86: American/Aircal4-Synergy/ScopeFAILURE—totally liquidated 87: Continental/PE/NY/FL4-Synergy/ScopeFAILURE—soon bankrupt 87: Delta/Western4-Synergy/ScopeFAILURE—largely liquidated 87: Continental/Eastern4-Synergy/ScopeFAILURE—soon bankrupt 88: USAir/PSA4-Synergy/ScopeFAILURE—largely liquidated 88: USAir/Piedmont4-Synergy/ScopeFAILURE—soon bankrupt 94: Southwest/Morris3-Small AcquisProfitable—easy fit with SWA 99: American/Reno4-Synergy/ScopeFAILURE—largely liquidated 00: American/TWA4-Synergy/ScopeFAILURE—largely liquidated 00: United/USAir (plan)4-Synergy/ScopeFAILURE—quickly bankrupt 05: America West/USAir2-Quasi-BKJury Out—low asset cost 5 categories of mergers: 1—Post Deregulation Hub Restructuring 2—Bankruptcy-type Asset restructuring 3—Small Acquisition easily integrated 4—Cost Synergies/ Network Scope 5—Anti-Competitive; exploit dominance, entry barriers 5 categories of mergers: 1—Post Deregulation Hub Restructuring 2—Bankruptcy-type Asset restructuring 3—Small Acquisition easily integrated 4—Cost Synergies/ Network Scope 5—Anti-Competitive; exploit dominance, entry barriers

31. Horan Airline Transactions Forum 1 March 2011 Page 31 Anti-competitive impacts confirmed by preliminary 2010 pricing data post 2004 market power defied laws of supply and demand Domestic fares +15% because seats only + 1% Atlantic fares +46% despite seats +45%

32. Horan Airline Transactions Forum 1 March 2011 Page 32 Post-2003 consolidation required gutting all key antitrust tests Evidence must be significant, market-wide Evidence must be market/case specific and linked to competitive advantage in these markets Evidence of comparable benefits in similar cases Need objective, verifiable evidence to meet tests Does consolidation increase risks of sustainable anti- competitive market power? Are markets contestable? Entry barriers large? Does consolidation create significant, market-wide consumer benefits (lower prices/increased output)? Clearly large enough to offset competitive risks? Two Tests—Central to all Competition Law

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