Posted on: Saturday, August 31, 2002

Justice Department objects to Aloha-Hawaiian pact

By Frank Cho
Advertiser Staff Writer

The U.S. Justice Department is urging federal transportation officials to deny a request by Aloha and Hawaiian airlines to coordinate interisland operations, saying it will result in "serious harm" to consumers.

The Justice Department's objection, filed yesterday with the U.S. Department of Transportation, comes a month after the carriers applied for immunity from antitrust law to coordinate capacity on five major interisland air routes for a limited time.

The airlines have said such cooperation is necessary to ensure that both survive in the interisland market, which has seen declining air travel for several years.

But justice officials disagreed. In the 25-page filing yesterday, officials said that neither airline is in imminent danger of failing and that the anti-competitive effects of an exemption could last well beyond the limited life of the agreement.

"Allowing the only two carriers serving these routes to coordinate capacity will result in serious harm to consumers traveling in the interisland city pairs," according to the objection filed by Michael Billiel, a Justice Department attorney. "There is no evidence whatsoever to support the claim that immunity is necessary to preserve service on these routes."

The sharply worded objection by the Justice Department is the strongest yet against the effort by the two carriers to coordinate operations. An influential agency, the Justice Department's opposition now raises questions on how it might affect the Department of Transportation's decision on whether to approve the carriers' request.

The Transportation Department has said it expects to issue its decision by the end of September.

Yesterday, officials for the airlines said they plan to respond to the filing.

"We think that the (Department of Justice) missed the point of the application. This is not so much about the condition of the carriers as it is about the condition of the interisland market," said Keoni Wagner, a spokesman for Hawaiian Airlines.

"If the carriers cannot operate profitably, there will be changes one way or another," Wagner said. "This application is intended as an organized and rational solution."

A spokesman for Aloha Airlines said the company is studying the filing and will respond to the Department of Transportation.

The two airlines' application with the federal Department of Transportation would allow them, for a limited time, to look at how full each other's planes are on interisland routes and then they could determine how many flights can be cut.

In their plan, the airlines said they will evenly split the remaining seats and monitor sales to make sure one airline does not end up with more profits than the other.

The application states that neither Aloha nor Hawaiian earned a net profit on interisland operations in 1999, 2000, 2001 or the first quarter of this year.

Federal antitrust laws normally prohibit competitors from cooperating. But as part of an aviation security measure passed in the aftermath of the Sept. 11 attacks, Congress created a limited antitrust exemption for airlines that operate intrastate flights.

If the request is approved, the airlines could cooperate until Oct. 1, 2003.

In its filing yesterday, the Justice Department noted that the airlines said Gov. Ben Cayetano supported the carriers' efforts to obtain an exemption and said it was "necessary to ensure the continuing availability of air transportation ... within the state of Hawai'i."

But justice officials said the airlines misrepresented Cayetano's comments as endorsing their claims about their financial condition.

"The governor does nothing of the kind and is in fact quite careful to indicate that many statements in the declaration are based entirely on the applicants' representations," justice lawyers wrote.

Justice lawyers said that in several instances, the names of Hawaiian and Aloha airlines were dropped from Cayetano's statements, making it appear he was making statements that supported their claims.

Cayetano, through a spokesman, declined to comment yesterday on the Justice Department's statements.

The Justice Department also said in its filing that there is no evidence that either of the airlines is failing or would have to leave the market.

Hawaiian Airlines had positive profits and cash flow through 2001 and was holding cash and cash equivalents of more than $81 million as of June 30, the Justice Department said in its filing. The company has also received an additional $25 million in payments from the government, the department noted.

Comments regarding Aloha's financial condition were filed under seal and not available for public review because Aloha is a private company.

In the Justice Department filing, justice officials said that in the first quarter of 2002, on the four routes covered by Aloha and Hawaiian's proposed agreement, load factors were in the 70 percent to 80 percent range. By comparison, industrywide load factors for domestic flights were 64 percent.

Hawaiian's 2001 interisland yields were up 11.8 percent over the previous year, the filing said. In contrast, major airline yields for 2001 were 7.9 percent below yields the previous year. Aloha's first-quarter 2002 interisland yields were up 10.9 percent compared to the same time last year, the filing said.

"The actions of both carriers cast serious doubt on any claim that they are near financial failure," justice officials said.

The Justice Department also criticized the carriers' proposed agreement under which each would be limited to 50 percent of the interisland market. Under the agreement, if a carrier exceeds that marketshare, it pays a penalty to the other carrier.

"Even if a carrier deviates only slightly from its allocated capacity, the penalty paid to the other carrier can be quite large."

The "system will create a powerful disincentive for the carriers to reduce fares or improve service in order to attract additional passengers," the filing said.

Justice officials also said the effects of the agreement may continue long after it has ended because, "having managed to raise prices, they may find it profitable to maintain them at this higher level, particularly given their ability to observe and respond immediately to one another's future initiatives."

Reach Frank Cho at 525-8088 or at fcho@honoluluadvertiser.com.