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In the wake of opposition from the Department of Justice, Delta Air Lines Inc. and Northwest Airlines Corp. are warning that survival of major domestic carriers could be at stake unless Washington allows the two airlines to expand a joint alliance with foreign counterparts. Their effort comes as the airline industry, plagued by increasing fuel prices and higher security costs, seeks assistance from government agencies on a range of fronts, such as the recent effort by United Air Lines Inc. to jettison its obligation for pension benefits to the government’s Pension Benefit Guaranty Corp. Delta and Northwest, the third- and fourth-largest airlines in America, have asked the Department of Transportation to exempt their participation in SkyTeam, a consortium of international airlines, from antitrust restrictions preventing coordination of routes and fees. Delta currently has immunity for its international alliance with Air France SA; Northwest has immunity for its alliance with KLM Royal Dutch Airlines. But the question now is whether two major U.S. carriers should be able to participate in such a large alliance. The key issue for DOT officials: whether the consortium’s prices will result in higher costs for domestic air flights. Currently, the four worldwide airline alliances operating with exemptions are limited to only one U.S.-based airline. The Justice Department has asked DOT to reject the SkyTeam request on grounds that two domestic airlines in one alliance might use their inside knowledge of each other’s business practices to raise prices or otherwise lessen competition, especially on select U.S. domestic routes that feed international flights. But participation in a global alliance is increasingly necessary for U.S. carriers, insists Timothy J. Muris, who represents Northwest. Muris is a former chairman of the Federal Trade Commission and now a lawyer at O’Melveny & Myers’ Washington office. “The situation with the airlines is precarious now,” Muris said. “Obviously, their position is worse,” if DOT doesn’t grant antitrust immunity for the deal. Both Delta and Northwest have warned they might be forced to file for bankruptcy. Muris said he remains optimistic that DOT will approve the deal, regardless of DOJ’s opposition. If DOT does believe there are grounds to permit immunity, “DOJ laid out a road map for them to follow in granting it,” Muris said. Rejecting the joint venture, Muris continued, “could be an artificial inducement to consolidation.” Domestic airlines tried to consolidate prior to the 2001 terrorist attacks, largely as a measure to create more efficient carriers and as a way for some of the older “legacy carriers” to streamline their businesses and compete with younger discount airlines, which have lower operating costs. But the Department of Justice’s Antitrust Division generally fought such mergers until one of the parties was in dire financial straits, such as American Airlines Inc.’s purchase of bankrupt TWA. Bankruptcy is a fear for all the older airlines, warns Douglas M. Steenland, president and CEO of Northwest. “Over the past four to five years, the U.S. legacy carriers have been in a race against time to restructure themselves so as to become profitable on a long-term, sustainable basis,” he said during a speech in Washington in July. The biggest advantage to Northwest and Delta would be access to international flights beyond the international hubs where they land, Muris said. When carriers are tied into the “behind and beyond” market served by their alliance partners they can provide U.S. fliers with lower costs on the total trip, he explained. For instance, Steenland said the existing Northwest/KLM alliance generates “$2 billion in annual revenues for the two companies. A smashing success by any measure.” And that success would be decimated if Northwest has to pull out of SkyTeam. Steenland suggested that American Airlines, one of the only major U.S. airlines without international partners, is the only competitor opposing the SkyTeam deal. “The lone opponent is American Airlines,” Steenland said. American Airlines sought an alliance with British Airways plc, but was denied antitrust immunity due to American and BA dominance at Heathrow International Airport in London. Indeed, United Airlines is on the record predicting SkyTeam could benefit consumers. “Given this landscape, there is no reason for DOT to place even greater obstacles in the way of carrier efforts to better integrate their networks and expand their operations,” company lawyers said in comments filed with the DOT. But American Airlines antitrust counsel, Mark Schechter, a partner at Howrey in Washington, said the alliances were initially granted antitrust immunity to ensure that consumers weren’t hurt by restrictions on foreign ownership of domestic airlines and by limits on routes foreign carriers can serve. They were not intended to allow collaboration between two domestic airlines that have historically fought for U.S. market share. “The airline industry is evolving,” Schechter said. “The question is, do you want it to evolve because of market forces, or return to regulation?” Copyright �2005 TDD, LLC. All rights reserved.

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