Airlines Reject Government Code-Share Regulations

WASHINGTON – Three of the biggest airlines — Delta, Northwest and Continental — said Tuesday they will go ahead with a planned marketing alliance, ignoring government restrictions meant to curb anticompetitive behavior.

The decision prompted an immediate legal challenge from the Transportation Department.

The "code-sharing agreement" among the third-, fourth- and fifth-largest airlines would enable each to sell tickets for all three airlines and allowing them to reach more destinations without flying more planes. They also could offer reciprocal benefits such as frequent flier miles.

The Justice and Transportation departments approved the agreement Friday, but transportation officials added stringent requirements. They feared the three airlines, which would control about 35 percent of the market, would use the alliance to discourage competition without the conditions.

The airlines reviewed the government's plan during the weekend and said Tuesday they couldn't accept some of the conditions but would go ahead with the alliance anyway.

"That's a pretty strong reaction by the airlines," said Severin Borenstein, a professor at the Haas School of Business, University of California-Berkeley, who formerly worked on airline regulation in the Justice Department.

Borenstein said the Justice Department clearly has antitrust authority, but it's less clear what authority the Transportation Department has over code-share agreements.

Tuesday afternoon, a Transportation Department statement said it was specifically directed by Congress to review code-sharing agreements for anti-competitive effects.

David Stempler, president of the Air Travelers Association, predicted a long delay before an administrative judge decides the case. The judge's decision could then be taken to the U.S. Court of Appeals.

"Administrative hearings really drag things out," Stempler said.

Northwest, Delta and Continental issued a joint statement saying they would go ahead with the plan.

"The carriers intend to defend their marketing agreement vigorously while continuing to implement it, in order to protect the pro-competitive, pro-consumer benefits identified by the Justice Department and to prevent the Department of Transportation from placing Continental, Delta and Northwest at a competitive disadvantage during a time of unprecedented crisis in the airline industry," the statement said.

The three airlines, which lost about $1 billion in the past three months, are trying to win back passengers with a bigger network and a better frequent flier program.

"The bigger the company, the more attractive the frequent flier program," said Alan Bender, an aviation professor at Embry-Riddle Aeronautical University in Daytona Beach, Fla. "The more routes they have, the more they can war against the low-cost airlines."

Low-cost airlines like JetBlue and Southwest opposed the alliance, saying it amounted to a virtual merger.

Darryl Jenkins, head of George Washington University's Aviation Institute, said the restrictions were the most far-reaching the Department of Transportation had ever imposed.

In the meantime, Jenkins said, transportation officials can punish the three airlines by denying their requests for overseas routes.

The airlines said the Transportation Department held them to a different standard than United Air Lines and US Airways, which were allowed to sign a similar agreement in October.

The carriers objected to three conditions: that they give up leases on airport gates used fewer than six times a day over two months, that they limit the total number of flights that share codes to 2,600 and that they refrain from making joint bids on corporate or travel agency contracts.

They agreed to relinquish 13 gates at four hub airports, as transportation officials demanded.

The airlines said they will fight efforts by the Transportation Department to enforce the restrictions.

Both the Transportation and Justice departments reviewed the agreement. The airlines said the Justice Department, which didn't impose the objectionable restrictions, is "the government agency with the principal responsibility and expertise in enforcement of U.S. competition laws."

Northwest and Continental have had a code-sharing agreement in place since 1998.