Regulators throw cold water on Delta Air Lines’ joint venture deal with Mexican airline

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Earlier this month, the U.S. Department of Transportation gave preliminary approval for Delta Air Lines to form an immunized joint venture with Aeromexico for U.S.-Mexico routes.

This would allow the two carriers to cooperate on scheduling and pricing -- essentially they would act as a single airline for the purpose of transborder flights.

Earlier this month, the U.S. Department of Transportation gave preliminary approval for Delta Air Lines to form an immunized joint venture with Aeromexico for U.S.-Mexico routes. This would allow the two carriers to cooperate on scheduling and pricing -- essentially they would act as a single airline for the purpose of transborder flights.

Even when low-cost carriers have been able to secure slots in Mexico City, they have often been at unworkable times. For example, JetBlue began flying from Mexico City to Orlando and Fort Lauderdale last year, but neither route is doing very well because both flights have to depart Mexico City before 6 a.m.

The DOT tries to compensate

Earlier this year, Mexican regulators approved the Aeromexico-Delta joint venture, provided that they give up eight slot pairs in Mexico City. That's the number of slot pairs Delta currently holds there. Essentially, this remedy would prevent the Mexico City market from becoming any more concentrated than it already is.

By contrast, in early November, the DOT tentatively ruled that Delta and Aeromexico must give up 24 slot pairs in Mexico City and six slot pairs at New York's JFK Airport to proceed with their joint venture. Contrary to other recent slot divestitures, Delta and Aeromexico wouldn't be compensated for giving up slots, because slots cannot be bought or sold at Mexico City's airport.

Additionally, whereas Mexican regulators would have allowed Delta and Aeromexico to give the eight slots to any other airline (or combination of airlines), the DOT wants to supervise the allocation of any slots they divest.

In effect, the DOT is contending that the status quo is not acceptable, especially in Mexico City. It wants to trade antitrust immunity for greater airport access for low-cost carriers.

An AeroMexico advertisement is seen in Mexico City February 17, 2015. REUTERS/Edgard GarridoAn AeroMexico advertisement is seen in Mexico CityThomson Reuters

Obviously, if this occurred, it would be very beneficial for JetBlue and Volaris. Both carriers would be eligible to request slots in Mexico City, and Volaris would also be eligible to request slots at JFK Airport. Furthermore, both have expressed strong interest in adding flights between the U.S. and Mexico City if they can get more slots at reasonable times.

Is the deal dead?

As of last month, Delta Air Lines was confident that its joint venture with Aeromexico would receive antitrust immunity by the end of the year. Delta also planned to increase its ownership stake in Aeromexico to 49% by then.

However, Delta and Aeromexico have objected strenuously to the DOT's conditions. They argue that the slot divestitures are excessive and unprecedented. Furthermore, they contend that the DOT's decision to limit the antitrust immunity guarantee to a five year term -- after which Delta and Aeromexico would have to reapply -- creates too much uncertainty.

The conditions proposed by the DOT are so severe that Delta and Aeromexico aren't sure the deal is worthwhile anymore. It seems quite plausible that the DOT's plan to facilitate a surge of competition on routes from the U.S. to Mexico City while shrinking Aeromexico's Mexico City hub would more than offset any benefits from coordinating the two carriers' schedules.

It's possible that Delta and Aeromexico will be able to negotiate less onerous conditions. But the DOT may be worried about the precedent of bargaining over antitrust matters. It's also unclear how the incoming administration will view this case.

Thus, it seems increasingly likely that Delta and Aeromexico will put their joint venture plans on the back burner for now. In the future, a change in the political climate or a change in the facts on the ground -- particularly increased competition in Mexico City -- could help them get antitrust immunity without such punitive conditions.

Read the original article on The Motley Fool. Copyright 2016. Follow The Motley Fool on Twitter.


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