Antitrustreview-2002

Summer 2002 Issue No. 9
The Transportation Antitrust
Update
Transportation Industry Committee • Section of Antitrust Law • American Bar Association
In This Issue:
The Antitrust Review of the Japan Airlines
and Japan Air System Merger
by Naveen C. Rao .................................................. 2
New Competition-Related Railroad
Legislation Introduced in the Senate
by Andrew B. Kolesar III..................................... 13
The Orbitz Controversy:
Travelocity’s Perspective
by Andrew B. Steinberg....................................... 19
The Transportation Industry Committee
WEBSITE is here:
http://www.abanet.org/antitrust/committees/
industry/trans.html
Our website includes pages with reports of
recent developments, announcements of
upcoming meetings, and useful links. Back
issues of this newsletter are available as well.
We invite you to visit the website and provide
us with your feedback.
Note from the Chair:
he Committee sponsored several
successful programs this past spring. See
page 31 for a brief description.
The articles in this issue of our newsletter
cover a range of transportation competition
issues. Naveen C. Rao of the Federal Aviation
Administration analyzes the Japan Fair Trade
Commission’s approval of the merger of Japan
Airlines and Japan Air System earlier this
year. Andrew B. Kolesar III of Slover &
Loftus provides a summary and analysis of S.
2245, the Railroad Competition, Arbitration,
and Service Act of 2002, introduced by
Senator Conrad Burns this past April. As the
second part of a point/counterpoint exchange,
Andrew B. Steinberg, formerly general
counsel of Travelocity.com and currently
general counsel of Church & Dwight Co.,
responds to the perspectives on antitrust issues
relating to the Orbitz online travel service that
were offered in our last issue by Gary
Doernhoefer, general counsel of Orbitz,
L.L.C.
Special thanks go to each of our
contributors and to our “desktop publishers,”
Deborah Papineau and Cindy Eagle of
Covington & Burling. I am also pleased to
recognize the contributions of our Committee
Vice Chairs, Denise Díaz and Carolyn
Corwin, who are making significant
contributions to our Committee’s activities.
Trey Nicoud
T

Summer 2002 - Issue 9 The Transportation Antitrust Update
2
TRANSPORTATION INDUSTRY
COMMITTEE LEADERSHIP (2002-2003)
Committee Chair: ..................................Trey Nicoud
Committee Vice-Chair: ......................Denise L. Díaz
Committee Vice-Chair:................ Carolyn F. Corwin
Council Liaison: ......................... Calvin S. Goldman
NEW MEMBERS INVITED
New members are cordially invited to join the
Section of Antitrust Law and the
Transportation Industry Committee. Most of
the Section’s programs are developed by the
Committees, giving members the opportunity
to plan and participate in programs that will be
of the most value to their practices. Similarly,
the newsletters, Handbooks, and Monographs
published by the Committees offer a unique
chance to work on publications that will have
a national distribution. At Transportation
Industry Committee programs, members can
meet attorneys from across the country who
are also interested in transportation antitrust
law.
THE ANTITRUST REVIEW
OF THE JAPAN AIRLINES
AND JAPAN AIR SYSTEM
MERGER
Naveen C. Rao*
n April 26, 2002, the Japan Fair Trade
Commission (JFTC) approved the
merger of Japan Airlines (JAL) and
Japan Air System (JAS) in a transaction that
will combine that country’s second and third
largest domestic carriers.1 When the
transaction is complete later this year, the
resulting carrier, known as “JJ” in Japan,2 will
leapfrog All Nippon Airways (ANA) and
become Asia’s largest airline, with estimated
annual revenues of US$17.5 billion.3 The
new company will be the third largest carrier
in the world after American Airlines and
United Airlines in terms of revenue and sixth
•
* Naveen C. Rao is an attorney in the Office of the
Chief Counsel at the Federal Aviation
Administration. He lived in Fukuoka Prefecture
Japan for two years prior to law school and is a
private pilot.
The opinions expressly in this article are solely
those of the author and do not represent the views of
the Federal Aviation Administration.
The author gratefully acknowledges the assistance
he received from Rebecca Fuller and Larry Arima in
preparation of this article.
1 Japanese Fair Trade Commission, Business
Consolidation by Japan Airlines Co. Ltd. and Japan
Airsystem Co. Ltd. Through Establishment of a
Holding Company, Apr. 26, 2002 [Available at:
http://www.jftc.go.jp/e-page/press/2002/april/020426
JJ.pdf].
2 Geoffrey Thomas, ANA’s youthful state of mind,
Air Transport World, Mar. 1, 2002, at 26.
3 Sumiko Oshima and Michael Mecham, Troubled
Times Put JAL on Acquisition Path, Aviation Week
& Space Technology, Nov. 19, 2001 [Available at:
http://www.aviationnow.com/content/publication/aws
t/20011119/avi_air.htm].
O

The Transportation Antitrust Update Summer 2002 – Issue No. 9
3
largest in terms of passengers carried.4 The
merger will entail the creation of a new
holding company in October 2002; actual
operational consolidation will occur in 2004.
While these figures are impressive, the truly
staggering numbers relate to the market
concentration that will result from this merger.
According to Transport Minister Chikage Ogi,
the new carrier will account for 70% of
Japan’s combined domestic and international
traffic. There will be a virtual duopoly for air
service in Japan, with ANA and JAL-JAS
holding a 97% market share of domestic
traffic between them.5 In spite of these
conspicuously high figures, the JFTC gave JJ
the green light.
The following is an analysis of the Japanese
domestic airline industry and the antitrust
review conducted by JFTC. Information on
antitrust in Japan generally is included in
order to place the JFTC decision in context.
CURRENT STATE OF THE JAPANESE
AIRLINE INDUSTRY
Japan’s domestic airline industry currently
consists primarily of three carriers: JAL, JAS,
and ANA.6 ANA is currently Japan’s largest
domestic carrier, with 49% of passenger air
transportation services within Japan as
measured by the number of passengers.7 JAL,
the country’s flagship international carrier, is
in second place, with 25.2% of the domestic
•
4 Id. at 1.
5 Turbulence Ahead, Asahi Shimbun, Jan. 8, 2002.
6 ANA, JAL, and JAS each have several subsidiaries
for commuter, charter, and regional services. The
ANA group consists of the ANA mainline, Air Japan,
Air Nippon (ANK), and Nippon Cargo Airlines. The
JAL group includes the JAL mainline, Japan Asia
Airways (JAA), J-Air, Japan Trans-Ocean Air (JTA),
JAL ways (JAZ), and JAL Express. The JAS group
consists of the JAS mainline, Japan Air Commuter
(JAC), Harlequin Air, and Hokkaido Air System.
Source: 2002 Japan Air Directory.
7 ANA did not begin international services until 1986
and still lags far behind JAL in international traffic.
market. Finally JAS, primarily a domestic
carrier with a handful of international routes,
has a 23% domestic market share. Even before
JAL and JAS announced their intent to merge
in November 2001, Japan already had a highly
concentrated airline industry.
During the 1990s, the Japanese government
began to deregulate the domestic airline
industry. Prior to 1997, the big three were the
only carriers that provided domestic service.
New entry was finally allowed in 1997, and a
number of new names have taken to Japanese
skies as a result: Skymark Airlines (Skymark),
Hokkaido International Airlines (Air Do),
Lequios Airlines, Fair Inc., Amakusa Airlines,
and Iki International. These carriers operate
domestically and do not carry significant
amounts of traffic.8
Prior to deregulation, air fares had long
been regulated by the Transport Ministry.
Prior to 1995 the Transport Ministry had to
approve all fares. Carriers could discount
fares up to 50% upon notifying the Transport
Minister, so long as the discount was not
projected to reduce total revenue.9 The first
step towards true fare deregulation came in
September 1995, when carriers were allowed
to set fares at their discretion within a range
marked by a price ceiling and a price floor
equivalent to 25% of the ceiling price.10 In
early 1997, the government approved a
Revised Deregulation Action Plan that
eliminated supply and demand controls for
domestic passenger air transportation in Fiscal
•
8 The combined market share of these carriers totals
about 3% of the domestic market.
9 Study Group on Government Regulations and
Competition Policy, Review of Government
Regulations in Domestic Air Passenger
Transportation Services-Research Report by the
Study Group on Government Regulations and
Competition Policy, at http://www.jftc.go.jp/e-page/
report/survey/1997/970312ap.htm. See also Section
105.4 of the Civil Aeronautics Law.
10 See Section 105.4 of the Civil Aeronautics Law.

4
Year 1999.11 In February 2000, Japan
abolished the system of air fare approvals
entirely and implemented a file-and-use
system under which carriers simply inform the
government of fare levels. Air fares today are
set at the discretion of carriers.
IMPETUS BEHIND THE JAL-JAS
MERGER
The Japanese economy has been in a
recession for over a decade. All three of the
big carriers, like their counterparts on the
other side of the Pacific, have struggled to cut
costs to remain profitable. The atrocities of
September 11 had a tremendous effect upon
airlines across the globe, and Japanese carriers
were no exception. JAL had the greatest
exposure to overseas turmoil. It derives 60
percent of its revenues from international
flights; of these revenues, 40 percent come
from flights to the United States.12 The
economic slowdown in the U.S. prior to
September 11 had already put pressure on
JAL. After September 11, JAL suffered an
immediate loss of 20 percent of its
international passengers and found its
expected fiscal year 2001 profit transformed
into a 40-billion-yen loss. As a result, JAL
missed its first dividend payment in four
years.13
ANA was also impacted by September 11,
but to a far lesser extent. ANA’s dominance
in the domestic market insulated it from the
shock that jolted JAL. JAS, the smallest of
the three, had struggled through the entire
decade, and the shock of September 11 did not
help.
JAL and JAS share a common characteristic
that makes them more sensitive to economic
downturns than ANA. Both JAL and JAS
carry a large proportion of package tourists
relative to ANA. Package tourists pay steeply
•
11 Id.
12 Oshima & Mecham, supra note 3, at 2.
13 Id.
discounted fares and therefore provide lower
yield per seat than full fare passengers. The
individual passengers who form the core of
ANA’s customer base typically pay higher
fares.14 As a result, JAL and JAS would have
higher break-even load factors15 than ANA.
Thus, both JAL and JAS are especially
sensitive to downturns in travel and were hit
hard by the economic situation, particularly
after September 11.
Airport constraints provided an important
incentive for JAL to seek a union with JAS.
JAL has long wanted to strengthen its position
in the domestic market by adding flights.
However capacity constraints, particularly at
Tokyo Haneda Airport,16 had prevented JAL
from achieving this long held ambition.17
Does this sound familiar?
If adding runways is difficult in the United
States, it is nearly impossible in Japan.
Japan’s limited space and crowded urban
centers make airport expansion very difficult.
Tokyo’s Narita Airport, which opened in
1978, added its second runway in April 2002
after decades of fighting with intransigent
farmers over issues of land and noise. The
new runway is still a compromise; at 7,150
feet, it can accommodate only aircraft up to
the size of the Boeing 767, which are not used
for transpacific flights. Haneda Airport,
located close to downtown Tokyo,18 currently
has three runways. Japanese authorities are
considering the addition of a fourth. One
option under consideration at Haneda is an
8,000-foot floating runway; if selected, this
•
14 Asahi Shimbun, supra note 5, at 1.
15 A break-even load factor is the percentage of seats
that must be filled for the airline to break even.
16 Tokyo is served by two airports: Narita is the
international airport, and Haneda is the domestic
airport.
17 Oshima & Mecham, supra note 3, at 2.
18 Nicholas Ionides, Second Narita runway finally
opens, Air Transport Intelligence, Apr. 17, 2002.

5
would be the first use of a floating structure
for an airport.19
In the short and medium term, adding
runways in numbers sufficient to meet demand
is simply not possible. In the face of these
constraints, JAL pursued the merger with JAS
as a way to better compete with ANA in
domestic markets and to insulate it from
international shocks.
ANTITRUST IN JAPAN
Antitrust law in Japan has a relatively brief
history. The country enacted its first antitrust
law in 1947. This law, formally known as the
“Act Concerning Prohibition of Private
Monopolization and Maintenance of Fair
Trade,”20 is more commonly referred to as the
“Antimonopoly Law” (AMA).21 This statute,
an integral part of efforts by the Allied Forces
to reform Japan’s war economy, is largely
based on the Sherman Act and Clayton Act.22
The AMA created the JFTC and gave the new
agency very broad powers.23 The JFTC
performs a role that roughly combines the
functions of the U.S. Department of Justice
Antitrust Division and Federal Trade
Commission (FTC).
Prior to the Allied occupation, free
enterprise and competition were virtually
•
19 Japanese Authorities Weigh Floating Runway for
Haneda, Aviation Daily, Apr. 26, 2002, at 5.
20 Act No. 54 of Apr. 14, 1947. (English translation-
only Japanese version is authentic). [Available at:
http://www.jftc.go.jp/e-page/acts/amact.txt].
21 Mitsuo Matsushita, The Antimonopoly Law of
Japan, in Global Competition Policy 151-97 (Edward
M. Graham and J. David Richardson eds., 1997).
22 Michael O. Wise, Review of Competition Law and
Policy in Japan (1999). [Available at:
http://www1.oecd.org/daf/clp/country_reviews/regref
jap.pdf]
23 Kenji Sanekata and Stephen Wilks, The Fair Trade
Commission and the Enforcement of Competition
Policy in Japan, in Comparative Competition Policy:
National Institutions in a Global Market 102-38 (G.
Bruce Doern and Stephen Wilks eds., 1996).
unknown in Japan.24 From the 1920s until the
Allied occupation, cartels were not only
tolerated but even encouraged by the
government.25 Japan’s suspicion of the free
market made the AMA highly unpopular; the
JFTC hardly exercised its considerable power
during its first twenty years of existence.26
The suspicion of antitrust ran so deep that
some of Japan’s post war industrial planners
regarded the imposition of antitrust law by the
Allies as a form of revenge for the war meant
to hobble their country.27
The Ministry of International Trade and
Industry (“MITI”) is the Japanese
government’s industrial planning agency. It
took the lead in establishing national
economic policy in the 1950’s and early
60’s.28 MITI is often credited for its role in
Japan’s rise as an economic power after World
War II. MITI’s policies often encourage
production and price cartel agreements and
mergers,29 and the agency has a reputation for
championing the interests of favored firms.
As a result, MITI’s role conflicts with that of
the JFTC. The JFTC has long played second
fiddle to MITI.30
The conflict between JFTC and MITI was
illustrated in a February 1974 criminal suit
brought by JFTC against oil companies for
output and price fixing. The companies
•
24 Matsushita, supra note 21, at 151.
25 Wise, supra note 22, at 1.
26 Sanekata & Wilks, supra note 23, at 102.
27 Douglas E. Rosenthal and Mitsuo Matsushita,
Competition in Japan and the West: Can the
Approaches Be Reconciled?, in Global Competition
Policy 313-37 (Edward M. Graham and J. David
Richardson eds., 1997) (citing William Chapman,
Inventing Japan: An Unconventional Account of the
Postwar Years, 1991).
28 Scott Morton, Antitrust Laws in Countries Other
than the United States, Section II (1997) [Available at:
http://www.antitrust.org/law/International/alother.htm]
29 Id.
30 Wise, supra note 22, at 1.

6
admitted to these practices but were ultimately
acquitted because they were acting pursuant to
MITI “administrative guidance.”31 The
Tokyo High Court declared that, “[T]here was
reasonable possibility that they may not have
been aware of the illegality of the cartel due to
faith in MITI’s administrative guidance.”32
This decision and even more permissive
opinions have established wide latitude for
anticompetitive behavior by companies acting
pursuant to administrative guidance.
The JFTC reviews mergers pursuant to
Section 10(1) of the AMA. This section states
in relevant part, “[N]o company shall acquire
or hold stock of any other companies where
the effect of such acquisition or holding of
stock may be substantially to restrain
competition in any particular field of trade, or
shall acquire or hold stock of other companies
through unfair trade practices.”
The JFTC’s first merger case arose in 1968.
In that year, Yawata Iron & Steel Co. and Fuji
Iron & Steel Co., the number one and two
steel companies, announced their intention to
merge.33 The JFTC initially found the merger
illegal because the new combined entity would
have 100 percent of the market for rails for
railways, 61.2 percent of the market for tin in
food cans, and 56.3 percent of the market in
foundry pig iron.34 After numerous hearings
•
31 Fair Trade Commission, Guidelines Concerning
Administrative Guidance under the Antimonopoly
Act, Jun. 30, 1994. Administrative guidance is
defined as “guidance, recommendation, or advice
given by an administrative organ which requires a
specific person to perform or abstain from
performing a certain act in order to achieve a certain
administrative objective, or an act which cannot be
legally dealt with, within scope of the administrative
organ’s responsibilities or field of operations.”
[Available at: http://www.jftc.go.jp/e-page/guideli
/administrativeGL.pdf]
32 Sanekata & Wilks, supra note 23, at 104.
33 Oct. 30, 1969, 16 KTIS 46.
34 H. Iyori and A. Uesugi, The Antimonopoly Laws
and Policies of Japan 166 (1994).
and filings, the JFTC allowed the merger with
the following remedies: Fuji transferred its rail
business to a competitor, managed the
manufacturing until the competitor was ready
to begin production, and further provided
technical assistance. Yawata had to sell to
another company its twenty percent share of
an affiliate that manufactured tin plates for
food cans. Yawata also had to sell its foundry
pig iron business to its leading competitor.
Finally, Fuji and Yawata agreed to provide
technical assistance to two of their competitors
in the sheet pile market.35
1998 MERGER REVIEW STANDARDS
In December 1998, the JFTC issued
guidelines for merger review that replaced a
set of guidelines issued in 1980.36 The 1998
guidelines notably include, for the first time, a
JFTC protocol for defining markets. The
agency defines markets by looking at goods
and services “‘having the same or a similar
function and/or utility’”37 from the consumer
viewpoint. The next consideration in market
definition is relevant geographic area.
According to Watanabe and Tamai, the market
definition criterion lacks a numeric standard
such as the five-percent cross-price elasticity
criterion that is a general rule in the United
States.38 The second guideline focuses on
substantial restraint of competition.
Under the 1980 guidelines, the JFTC
focused primarily on monopolies and paid
little attention to “highly oligopolistic markets
(collusive oligopoly).”39 The new guidelines
correct this deficiency. The new guidelines
list the following factors to be used in
assessing anticompetitive effects:
•
35 Iyori & Uesugi, supra note 34, at 167.
36 Yasuhide Watanabe and Yuko Tamai, Japanese
Merger Notification and Enforcement Policy, 15
Antitrust 49, 51 (2001).
37 Watanabe & Tamai, supra note 36, at 52.
38 Id.
39 Id.

7
1. [T]he status of the parties—market share,
market rank, and premerger competition
between the parties;
2. [M]arket conditions—the number of
competitors and market concentration,
new entry, importation, and exclusivity or
closeness of the market; and
3. [O]ther factors, such as general business
power of the combined parties post-
merger, competitive pressure from
neighboring markets, and the efficiency of
the parties post-merger.40
The JFTC does not explain how it weights
each of these factors nor does it use any
explicit criteria or numeric standards like the
Herfindahl-Hirschman Index for determining
anticompetitive impact.41 The only objective
standards that JFTC provides are its “white
list” criteria for mergers that would not violate
merger rules.42 These criteria are:
1. [T]he combined market share post-merger
is 10 percent or less in a particular market;
or
2. [T]he combined market share post-merger
is 25 percent or less and its ranking is
second or lower in a non-oligopolistic
market if barriers to entry are low.43
The lack of numeric standards leaves
considerable ambiguity in the guidelines.
There have been two mergers approved
under the 1998 guidelines. In the first,
General Electric (GE), Hitachi, and Toshiba
merged their boiling water reactor (BWR) fuel
operations. BWR fuel is a type of nuclear
fuel. The JFTC determined the relevant
market was the “production and sales of BWR
fuels throughout Japan.”44 The combined
•
40 Id.
41 Id.
42 Id.
43 Id.
44 Id.
market share of the new entity is
approximately 70 percent. The JFTC
approved the merger largely on the following
grounds:
1. Tokyo Electric Power Company
(TEPCO), the largest BWR fuel user, had
had a competitive bid process in place
since 1994 and began purchasing from
foreign suppliers in 1997.
2. Foreign suppliers were expected to
become strong competitors in the BWR
fuel market.
3. The users of BWR fuel had price
bargaining power and would follow
TEPCO’s lead.45
The JFTC required the new entity to cooperate
with new market entrants and customers upon
the agency’s request.
The merger of Exxon and Mobil was the
second to be reviewed under the 1998
guidelines. The JFTC determined the relevant
markets to be crude oil sales to domestic oil
refineries, sales of individual oil products in
Japan’s prefectures, and sale of individual oil
products in the country as a whole. In its
market definition analysis, the agency found
that most refiners purchased crude oil abroad,
the combined market share of Exxon-Mobil
would be slightly above ten percent, and there
are many sellers abroad. The JFTC approved
the merger on the grounds that in the crude oil
market there were multiple competitors
(including one company with a 25 percent
market share), there was vigorous retail
competition that promoted wholesale
competition, and imports were expected to
rise.46
The agency found that in the oil products
market (e.g., gasoline, kerosene, and light oil)
the new merged company would rank second,
with a twenty-percent market share. However,
•
45 Id. at 52-53.
46 Id.

8
the JFTC again found no competition
problems. The agency reasoned that, when
taken together, the existence of a larger
competitor (presumably the same company
with a 25 percent market share in the crude
market mentioned above), an expected
increase in imports, and dynamic market
shares of the oil companies in smaller markets
would cause the Exxon-Mobil merger to have
a net pro-competitive effect.47
THE JFTC’S PRELIMINARY FINDINGS
JAL and JAS submitted their merger plans
to the JFTC for “prior informal consultation.”
On March 15, 2002, the agency released its
findings about the proposed merger. In
conducting its analysis under the AMA, the
JFTC focused only on the domestic air
passenger market. It concluded that the
domestic air cargo market mirrored the air
passenger market, eliminating the need for a
separate analysis.48 The agency did not
consider international air passenger or
international air cargo, stating that those
markets are constrained by more than one
large carrier.
The JFTC expressed concerns about the
harm to competition that would occur as a
result of the JAL-JAS merger, focusing
specifically on four effects and conditions that
would result from the merger.49
1. After the merger, it would become easier
for the big two carriers to engage in
concerted fare-setting actions.
2. The smaller number of carriers on a
particular route would reduce the
availability of “Specified Flights Discount
•
47 Id.
48 Fair Trade Commission, Business consolidation by
Japan Airlines Co. Ltd. and Japan Airsystem Co. Ltd.
through establishment of a holding company – a
summary, Mar. 15, 2002, at 4. [Available at:
http://www.jftc.go.jp/e-page/press/2002/march/2002
0315jaljas.pdf]
49 Fair Trade Commission, supra note 48, at 1.
Fares” on that route and also decrease
rates of discount.
3. New entry would provide only limited
competitive pressure because of the
difficulty of obtaining slots at congested
airports,50 limited airport facilities, and
difficulty of developing aircraft
maintenance capabilities. The two
existing new airlines, Skymark and Air
Do, are unable to expand beyond certain
trunk routes.
4. The reduction from three big carriers to
two big carriers would leave general
consumers with no bargaining power, and
they would be forced to pay what airlines
dictate.
The JFTC believed that the constraints on
new entry and capacity limits reduced the
prospects for price competition. It noted that,
in the past, the three big airlines often
“resorted to concerted fare-setting actions
such as raising their Ordinary Fares (a
benchmark for all air fares) to the same level,
or setting discounted fares simultaneously, at
similar prices with almost the same terms and
conditions as their competitors.”51 In April
2000, JAL, JAS, and ANA all raised their
fares on all routes by 15 percent, with
resulting fares almost identical among the
three carriers.52
The JFTC noted that, in the effective
duopoly that would result from the merger,
both large carriers would have strong
incentives to avoid a fare war, thus increasing
the chance of concerted fare actions. The
•
50 “Congested airports” refers to Tokyo Haneda and
Osaka Itami airports, which have no slots available
and together account for 70 percent of all domestic
passengers traveling by air.
51 Fair Trade Commission, supra note 48, at 2.
52 Id. at 5-6. This situation presents some similarities
to the facts that led to the U.S. Justice Department’s
suit against the Airline Tariff Publishing Company.
See United States v. Airline Tariff Publishing (ATP)
Co., 836 F. Supp. 9 (D.D.C. 1993)

9
JFTC rejected the contentions by JAL and
JAS that they had no choice but to follow
ANA’s pricing given the latter carrier’s power
in the domestic market. The JFTC pointed to
the competitive pricing by new entrants, Air
Do and Skymark, on certain routes. The JFTC
found no reason that JAL and JAS could not
emulate the discounting of new entrants.53
The JFTC was also concerned about
discount fares. The agency found that the
availability and the percentage of discount on
Specified Flight Discount Fares is directly
proportional to the number of carriers serving
a route. For instance, as of January 2002 the
JFTC found that discount fares were available
on 54.1 percent of flights on monopolized
routes, with an average discount of 12 percent.
On routes served by three carriers or more,
discount fares were available on 86 percent of
flights, with an average discount of 26
percent. Where four airlines operate a route,
the average discount is 38.7 percent.54 Based
on these observations, the cause for concern is
apparent. As a result of the merger, the
number of competitors on most routes will fall
from three to two, or even two to one on some
routes.
The JFTC found that the reduction from
three to two carriers will eliminate an
important competitive constraint on the
airlines. Currently, the JFTC assumes that
JAL, JAS, and ANA all constrain one another
by being able to enter each other’s markets if
fares become excessive. After the merger, one
strong, potential new entrant will be
eliminated from the marketplace. The JFTC
also pointed to slot constraints at Tokyo
Haneda and Osaka Itami, as well as the
prohibition against cabotage by foreign
carriers, as limitations on the effectiveness of
new entry as a competitive constraint. Finally,
the JFTC mentioned the limited ability of new
entrants to mount an effective challenge to the
•
53 Id. at 2.
54 Id. at 11 Annex 2
large carriers, as they will be disadvantaged in
terms of route networks, computer
reservations systems, and frequent flyer
programs.
Without much elaboration, the JFTC found
that general consumers (individuals dealing
directly with airlines) will have no bargaining
power and will be inordinately harmed by
concerted fare-setting actions.55 In contrast,
the agency found that travel agents and other
large purchasers would still retain some
bargaining power
THE JFTC APPROVAL
JAL and JAS responded to the March 15
report by submitting a revised merger proposal
on April 23, 2002. Under the revised plan, the
merged airline will surrender nine slots at
Tokyo Haneda Airport for new entrants out of
a total of 180 slots held by the two carriers.
The two airlines proposed to relinquish
sufficient check-in counter space, aircraft
bridges, and gate facilities to new carriers.
They also offered to provide heavy
maintenance and ground services for the
aircraft of new entrants. JAL and JAS also
proposed to reduce fares by ten percent across
the board and promised not to raise fares for
three years. The carriers will also offer
specified flight discount fares and advance
purchase discount fares on all main routes the
new carrier will monopolize and main routes
on which the new carrier will compete with a
“major airline” (obviously ANA).56 The
level of these discounts will be identical to the
prevailing levels offered by the big three. JAL
and JAS have stated that the new carrier will
enter markets in which another major airline is
the monopolist or increase frequencies where
another major airline is dominant. The JFTC
issued its approval three days after receiving
this proposal.
•
55 Id. at 9.
56 Id. at 3.

10
The JFTC and the Transport Ministry
(Ministry) plan to take additional steps to
enhance competition. Many of these steps are
designed to supplement the JAL/JAS
divestiture actions. The first step is the
creation of “competition promotion slots”
(CPS) at Haneda Airport, which will consist of
the nine slots surrendered plus the creation of
up to three more.57 According to the JFTC,
this action will benefit carriers that have been
limited to as few as six slots at Haneda
Airport.
The JFTC states that the Ministry will
conduct a review of the slot allocation at
Haneda in February 2005 pursuant to the
revised Civil Aeronautics Law.58 The JFTC
expects the Ministry to increase the number of
CPS, thereby allowing new airlines to expand
their operations and to increase competitive
constraints on the major airlines.59 In addition
to what has been voluntarily surrendered, the
Ministry will ask the major airlines to cede
additional airport facilities, such as boarding
bridges, check-in counters, and parking spots,
if they are required by new airlines. In a
curious twist, major airlines will be allowed to
take advantage of unused CPS on a temporary
basis if this would enhance competition. For
instance, if a major airline wants to enter a
monopolized route, it may temporarily use a
CPS if it cedes essential airport facilities to a
new airline.60 This provision appears to create
an incentive for the major airlines to cede
additional airport facilities at Haneda.
The Ministry will also ask major airlines to
support their new competitors by providing
maintenance and other unspecified services
necessary for companies entering and
operating in the air transport industry. This
proviso resembles the one adopted by the
JFTC in its approval of the GE, Hitachi, and
•
57 Id. at 4.
58 Id.
59 Id.
60 Id.
Toshiba BWR fuel merger. It is also
reminiscent of the agency’s action in the
Yawata-Fuji steel merger, in which the
merging companies had to provide technical
assistance to competitors. The Ministry and
JFTC could use their powers to prevent
“refusal-to-deal” type situations, suggesting an
expectation that the new entrant airlines could
require more services than the major airlines
would be willing to offer.
The JFTC mentions two of the new airlines,
Skymark and Air Do, each of which has six
slots at Haneda. According to the JFTC, one
of these carriers (presumably Skymark) is
preparing to expand by utilizing all of the new
Haneda slots, conducting crew training in-
house, and independently performing
maintenance and ground services.61 Skymark
expects to receive several new CPS after
February 2005 and is planning accordingly.
The agency found that JAL and JAS’s
willingness to surrender up to three more slots
should allow Skymark to expand without
difficulty until the slot review and allocation
in 2005, therefore providing “effective
competition” until that time.62 The JFTC
expects two other airlines, Skynet Asia and
Lequious Airlines, to begin operations at
Haneda in February 2005, using unallocated
slots that are reserved for new airlines.63
According to the JFTC, after the 2005 slot
review the increase in CPS and the concrete
expansion plans of Skymark will create an
effective competitor to the JAL/JAS and ANA
duopoly. The agency seems to be bullish on
Skymark’s prospects, stating: “[T]he growth
of such a new airline into a competitive carrier
capable of effectively challenging major
airlines, is a highly probable outcome.” 64 The
agency also states that the actions taken by
•
61 Id. at 5.
62 Id. at 6.
63 Id. at 5. It is unclear whether these slots exist now
and, if not, how they will be created.
64 Id. at 6.

11
JAL and JAS to provide facilities, along with
supporting action by the Ministry, will
facilitate business expansion of new airlines.
The JFTC concludes that fare reductions,
market entry, flight frequency increases, and
the increased number of discount fares that
will accompany this merger will benefit
consumers. The agency states that it will ask
JAL and JAS to take unspecified, “necessary”
steps prior to their integration. Finally, the
agency states that it will continue to monitor
the situation in the domestic air transport
business and keep in close contact with the
Transport Ministry, with the view of
“promoting competition in this area.”65
COMPETITIVE IMPACT OF THE
MERGER
It is far from clear that the measures
proposed by JAL, JAS, the JFTC, and the
Transport Ministry will effectively
compensate for the loss of a separate
competitor that carried nearly a quarter of
domestic air traffic. The JFTC’s rationale in
approving the merger suggests that MITI-style
industrial policy has won out over antitrust
policy.
The JFTC seems to rely upon the expected
success of Skymark Airlines to constrain the
ANA and JAL/JAS duopoly. This reliance
seems misplaced; Skymark, which has not
posted a profit since its establishment in
1996,66 operates only two routes at present:
Tokyo-Fukuoka and Tokyo-Kagoshima.
Unlike its very large competitors, it has no
international routes. Unlike the major carriers,
it is not affiliated with a global alliance. ANA
is a member of the Star Alliance, whose
members include United, Lufthansa,
Singapore Airlines, and ten other carriers.
The new merged JAL/JAS carrier will likely
•
65 Id. at 7.
66 Daisuke Wakabayashi, Japan Air Do to seek
protection, ANA to help, Jun. 25, 2002 [Available at:
http://biz.yahoo.com/rc/020625/airlines_japan_bankr
uptcy_2.html].
continue JAL’s affiliation with members of
the Oneworld Alliance, whose members
include American Airlines, British Airways,
Cathay Pacific, and five other carriers.
Frequent flyer programs are one of the few
significant non-price factors on which airlines
may compete. In view of the domestic
strength, international presence, and global
alliance affiliations of ANA and JAL/JAS, any
frequent flyer program that Skymark might
offer will attract relatively little business.
It is doubtful that the smaller airlines will be
able to compete successfully on price. Thus
far, the big three have matched the fares of
new airlines. One of Skymark’s start-up
brethren has already fallen prey to the fare
pressure applied by the big three. Air Do, one
of the new airlines that JFTC hoped would be
an effective competitor, recently filed for
bankruptcy.67 It appears that the airline’s only
chance of survival is a comprehensive alliance
with ANA that is currently under discussion.68
If implemented, this alliance will be a de facto
merger with ANA. According to Credit
Suisse First Boston analyst Osuke Itazaki,
“[T]here will be only two airlines offering
flights to Sapporo [Air Do’s sole destination],
where there were once four. This is obviously
a negative for the airline industry.”69 Upon
hearing of the demise of Air Do, Transport
Minister Ogi mildly admonished the big three:
“It’s true the bigger companies suppressed Air
Do’s entry into the market. The large airline
companies should reflect on their actions.”70
It appears that the JFTC’s vision of future
competition is already proving to be non-
viable, less than three months after the
agency’s approval of the merger.
On the other hand, the JFTC analysis
conspicuously makes no mention of Japan’s
extensive high-speed railway system as a
•
67 Id. at 1.
68 Id.
69 Id.
70 Id.

12
constraint on the major airlines. This
shinkansen “bullet train” system connects
most of the country’s population centers,
except for those in Hokkaido, Japan’s
northernmost main island. Unlike Japan’s
airports, which often lie far from downtown,
train stations typically are in the middle of the
city. Japanese train stations offer the further
advantage of being hubs for local bus, light
rail, and subway systems. It is not clear
whether Japan Railways (JR), the operator of
the shinkansen, has the ability to price freely.
Nonetheless, it appears that JR’s pricing
should act as a constraint on the pricing of
major airlines. For instance, the shinkansen
presents a viable alternative to flights between
Tokyo and Osaka, which lie approximately
250 miles apart. Published flight times are
one hour, while the shinkansen takes 2.5
hours.71 Fares for rail and air transportation
on this route are comparable.72 Depending on
commute times to and from the airport or train
station, the shinkansen could provide a
competitive constraint on the airlines in this
particular market. The railway alternative
should have received at least a mention in the
JFTC analysis.
The JFTC was satisfied with a divestiture of
a mere five percent of the slots held
collectively by JAS and JAL at Haneda, or
roughly 2.5 percent of total Haneda slots. It is
inconceivable that any single airline limited to
that market share could successfully compete
with ANA and JAL-JAS. Even if Skymark
were to receive all CPS that will be allocated
prior to February 2005, it would still have
only eighteen slots out of an estimated total of
360 slots at Haneda. This is before the
planned entry of Skynet Asia and Lequious
Airlines at Haneda. Based on these numbers,
it appears that the Japanese authorities have
accepted a duopoly in airline markets.
•
71See www.oag.com and www.japanrail.com
72See www.expedia.com and www.japanrail.com
The proposed remedies regarding airfares
and flight discounts will provide consumers
with some short-term benefits; however, these
measures will not assure competition in the
long term. The creation of new slots in
numbers sufficient to permit the creation of a
viable competitor is unlikely even with an
additional runway at Haneda. The only hope
for true competition in the Japanese domestic
market may lie in the 2005 slot review. If the
Transport Ministry reallocates large numbers
of slots away from ANA and JAL-JAS to
another carrier, then the competitive situation
would at best return to the status quo.
However, JAL/JAS and ANA would almost
certainly oppose such a move because of their
investments in aircraft and other assets that
would be stranded if they lost significant
numbers of slots.
The JAL-JAS merger will irreparably
damage the limited competition that exists in
Japan today. Even with slot concessions and
other remedial measures, no single carrier will
be able to build the economies of scale
necessary to compete effectively with ANA
and JAL-JAS. It is not clear how the JFTC
expects new entrant airlines such as Skynet
Asia and Lequious Airlines to operate viably
with such limited access to slots and other
resources. The failure of Air Do is a harbinger.
The decision to allow the JAL-JAS merger
will provide Japanese consumers with no more
than a superficial version of a competitive air
transport market.
This information or any portion thereof may not be
copied or disseminated in any form or by any means or
downloaded or stored in an electronic database or
retrieval system without the express written consent of
the American Bar Association.

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