Airborne and DHL: some policy considerations

by Albert A. Foer*

Let's talk about the rather byzantine activities taking place in the express delivery market. It seems that FedEx and UPS together control 79% of the market, and that Airborne is number three with 19%, while DHL has less than 2%. Through a transaction that is being attacked by FedEx and UPS, Airborne and DHL are attempting to get together to create a stronger number three. (No one seems to say where the US Postal System fits into this picture.) DHL and Airborne say that the transaction will give more consumers a real option and that the new operation will have the ability to expand Airborne's focus from large corporate accounts to smaller and mid-sized accounts.

Normally, one wouldn't expect a consolidation of such a small magnitude to cause antitrust problems, but the fact that DHL is foreign-related has set off alarm bells that may startle the Justice Dept. and force the public to take a closer look at the protectionism that characterizes our air transportation system. Senator Ted Stevens (R-Alaska) inserted a last-minute amendment to the war appropriation that is apparently intended to keep this deal from happening.

A central issue is that U.S. law prohibits foreign entities from owning or controlling more than a 25% voting stake in a U.S. airline. To get around this 25 percent bar, DHL plans to spin off Airborne's air operations and separate it from ground services. The independent company, called ABX Air, will be owned by Airborne (i.e., domestic) shareholders, but will do most of its business with DHL.

A battle has been going on for several years relating to whether DHL is controlled by foreigners. UPS and FedEx claim that a complex web of subsidiaries hides Deutsche Post's ownership of DHL, which in turns controls Delaware-based DHL Airways. Deutsche Post is owned by the German government. An administrative law judge at the Transportation Dept. is studying the question of whether the German government controls DHL Airways or would control ABX if it supplies the units with most of their business. The ALJ will also look at overlapping management between DHL and ABX and the ability of either company to get business from other customers.

The American Antitrust Institute is not in a position to say who is foreign-owned or foreign-controlled, but as advocates of consumer-directed antitrust, we are necessarily concerned about laws that keep competition from doing its work. At a time when U.S. carriers are ailing and some are in danger of liquidation, it would seem to make sense to enable foreign carriers to merge with domestic carriers. As a Wall Street Journal story asked recently, what if Lufthansa wanted to secure its U.S. partner by buying a controlling stake in UAL Corp.'s United Airlines and bringing it out of bankruptcy?

And even apart from an ailing transportation sector, with a concentrated domestic structure characterized by dominated hubs, limited gates and ever-stronger alliances, it would be a boon for consumers if a Richard Branson could enter the U.S. market by, e.g., acquiring and then growing a regional carrier into another Southwest or Jet Blue. Ultimately, as we learned with our automobile industry, the answer to increasing domestic concentration must be more international competition affecting the domestic market.

Two arguments tend to be made against loosening the denial of foreign entities to own an existing domestic carrier or to establish a new one. It is said that national security would be endangered, in that we would not be able to count on non-U.S. airlines under the Civil Reserve Air Fleet program, by which U.S. commercial carriers pledge to provide military airlift in a defense emergency in exchange for exclusive access to U.S. government peacetime business. However, a foreign carrier operating in domestic commerce would (and this could be re-affirmed in legislation) be subject to the same laws and regulations that apply to other U.S.-based companies, preserving dependable governmental access to the aircraft.

The other chief argument is that more open competition in aviation will negatively affect American workers and wages. The extent to which this would be a problem depends on what arrangements are made with what countries. The logical place to start is to open up aviation within the U.S. and the European Union as something of a common market. A recent study by the Brattle Group on behalf of the E.U. indicates that the differential in pay scales would be in the area of 15%. That hardly seems unbridgeable.

The current arrangement between the U.S. and the E.U. can be described as patchwork. There are bilateral "Open Skies" agreements between the U.S. and eleven E.U. Member States, but these agreements do not reflect complete liberalization. Quoting the Brattle Group report, "[T]hey deny foreign entities the ability to own and control an existing domestic air carrier, or establish a new one ("right of establishment"); restrict important traffic rights, such as a foreign carrier's right to provide domestic service ("cabotage"); limit opportunities for leasing foreign aircraft and crew; and impose domestic content ("Fly America") requirements." And bilateral agreements that are even more restrictive apply to four other European countries that account for roughly half of the cross-Atlantic traffic. The E.U. has endorsed elimination of all commercial restrictions on E.U.-U.S. aviation competition and investment.

Without more, we cannot say whether the proposed DHL-Airborn merger is pro-competitive, but we would not want to see it stopped on grounds of protectionism, if the DOT has any wiggle room within the present statutory structure. In the longer run, we should be taking seriously the E.U.'s proposal for more competition in international aviation.

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*Albert A. Foer is President of the American Antitrust Institute, www.antitrustinstitute.org.

Correction to the above: The issue in paragraph 4 is not whether DP is hiding its ownership of DHL, but whether DHL is able to control DHL Airways through various contracts. Also, the ALJ will focus on whether DHL has control over DHL Airways, not ABX. These modifications do not affect the point of the essay, but the author regrets the inaccuracies. AAF