The US Department of Transportation (DOT) says it has tentatively denied authorising antitrust immunity for American Airlines (AA, Dallas/Fort Worth) and Qantas's proposed expanded partnership.

The two carriers applied to the DOT for antitrust immunity for their expanded joint business venture in June 2015. The move sought to enhance a partnership that secured anti-trust approvals from either side of the Pacific back in June 2011.

Under the terms of the original deal, only Qantas (QF, Sydney Kingsford Smith) was able to operate transpacific flights as American could not do so given equipment and labour agreement regulations at the time. However, with its exit from bankruptcy, the negotiation of new labour contracts, and the addition of ultra-longhaul-capable aircraft such the B777-300(ER) and B787-8, American became eligible to launch new services between the United States and Australasia (specifically between Los Angeles International and both Sydney Kingsford Smith and Auckland International), beginning in December 2015.

Under the terms of the renewed agreement, the two Oneworld carriers now sought to develop a metal-neutral revenue-sharing joint venture covering North America on the one hand (inclusive of Canada and Mexico but exclusive of Hawaii and US territories in the Pacific), and both Australia and New Zealand on the other. Aside from the implementation of a financial settlement system to share revenues and costs, Qantas/AA said the new joint-business would also allow for better schedule coordination, the launch of new routes, the alignment of sales structures and strategies, and the development of pricing guidelines to cater to various market segment demands.

They argued that antitrust immunity would allow them to compete more effectively with rival immunised transpacific partnerships such as Delta Air Lines-Virgin Australia and Star Alliance's United Airlines-Air New Zealand.

However, the application garnered resistance from several parties, including Hawaiian Airlines (HA, Honolulu) and JetBlue Airways (B6, New York JFK), all of which questioned the new venture's supposed enhanced benefits. They claimed it would only entrench AA's and Qantas's exclusivity in the feeder market to the detriment of smaller, independent carriers such as themselves.

As such, the DOT said in its provisional ruling issued Friday, November 18, that as Qantas is by far the largest competitor operating between the United States and Australia, and that American, given its resources and network size, will want to enter and expand services in a competitively significant and timely manner, the proposed alliance expansion would actually harm competition in the U.S.-Australasia market.

"By combining the airline with the largest share of traffic in the U.S.-Australasia market with the largest airline in the United States, the proposed alliance would reduce competition and consumer choice," it said.

"Rather than creating a more viable entity to compete more robustly with other airlines, an expanded and immunized American/Qantas alliance would account for nearly 60 percent of U.S. to Australia seats and enjoy the largest market share in nearly 200 city-pair markets, sufficient for the alliance to exert market power. The expansion would be particularly significant for consumers given the geographic and demographic character of the U.S.-Australasia market, which features long, thin markets that are isolated from other global traffic flows. For example, the record shows that, between the U.S. mainland and Australasia, there are few passengers connecting via intermediate points in third countries to Australasia, limiting the potential for competing networks to discipline the proposed alliance."

"Additionally, there is limited flow within Australasia or to other countries beyond Australasia. In such circumstances, there is a high risk of competitive harm from approving and granting antitrust immunity (“ATI”). In addition to these anti-competitive effects, the Department is also concerned that the proposed alliance would not generate the public benefits identified by the Joint Applicants in their filings. For example, we tentatively find that, based upon information in the record, the proposed alliance is unlikely to grow capacity over the next five years faster than what the Department would expect based upon the historical growth rate. Additionally, many public benefits from customer service coordination could be obtained through traditional arms-length cooperation such as codesharing."

In all, the DOT said that it tentatively concludes that the proposed alliance would substantially reduce competition and consumer choice, without producing sufficient countervailing public benefits.

Parties have seven business days in which to submit their replies.