Let the market prevail

Let the market prevail

Isaac Newton stated, "For every action, there is an equal and opposite reaction." Newton's third law explains not only why aircraft are capable of flight, but why air-cargo customers had such broad, swift reaction to the International Air Transport Association's Resolution 502.

If approved by the U.S. Department of Transportation, the resolution would change the airlines' formula for pricing lightweight cargoes such as computer chips and flowers. It has met extensive opposition from shippers because it could increase airfreight costs by up to 20 percent. Shippers are frustrated because the airlines have ignored their pleas to rescind the proposal, or even to provide data to justify it.

While foreign governments must ultimately approve Resolution 502, IATA recognizes that the DOT is the de facto international approver. Once it receives DOT approval, IATA plans to declare the resolution effective globally.

Shippers believe IATA has not provided data that substantiate the resolution, that publicly available IATA documents are contradictory, and that market dynamics indicate the change is unnecessary.

When details of 502 leaked in the summer of 2002, customers immediately asked IATA for supporting data. Expeditors International asked IATA to provide:

-- "Adequate details of the overall global density situation.

-- "A sufficient explanation as to why this proposed change is logical given the current environment.

-- "Corresponding data that is made available to, and is accepted by, the forwarding and shipping community."

This and subsequent requests went unheeded. IATA also failed to provide substantiated data or answers to the DOT. By contrast, shippers submitted data that directly refutes IATA claims.

IATA's explanations of the resolution's impact frequently leave shippers confused. Submissions to the DOT demonstrate that airlines expect revenue to increase 20 percent.

IATA tells the DOT the resolution "will not result in an automatic increase in the cost of air transport," but it acknowledges the airlines' intentions are to "seek improved compensation, at the time they renegotiate contracts with shippers or forwarders." How will negotiations increase airline revenue without increasing shipper cost?

IATA's contradictions, disavowed data and unanswered questions force shippers to draw their own conclusions. Shippers conclude that Resolution 502 will increase rates as a result of anti-competitive means - a conclusion the Department of Justice independently confirmed.

The airlines tell us a 20-year standard is outdated because . . . well, it has been 20 years. Shippers look at the past 20 years of changes - including deregulation, expanded fifth-freedom rights, increased freighter use, the emergence of cargo alliances, and economic factors - and draw different conclusions.

Before deregulation, governments approved airline tariffs and protected national airlines. Today, however, governments increasingly open skies and realize that market forces protect consumers while improving service. The resulting changes, including increased flight destinations, have dramatically decreased the reliance on interline cargo shipments - the primary rationale for antitrust immunity.

In 2001, the European Commission directed IATA to stop setting rates and standards for intra-European Economic Area shipments. The commission determined that market forces adequately replace the antiquated, anti-competitive IATA processes. Subsequently, intra-Europe service and pricing have improved.

More recently, cargo partnerships have emerged to allow cargo airlines to improve operational efficiency and service offerings. The intent of these partnerships allows airlines, through competition, to achieve the same efficiencies that IATA seeks through anti-competitive meetings.

Finally, an examination of rate behavior proves that market forces adequately govern cargo pricing. When capacity from Asia became tight in March 2002, rates rose. Market forces - supply and demand - functioned exactly as expected. Granting antitrust immunity to IATA is unneeded.

U.S. law clearly states that the DOT may grant IATA antitrust immunity only (a) to meet serious transportation needs or to achieve important public benefits, and (b) if reasonable, less anti-competitive means are unavailable. IATA failed to identify the transportation need to be addressed or important public benefit to be achieved. Furthermore, IATA ignores the fact that market forces effectively establish rates in today's air-cargo market. Shippers remain optimistic that the DOT will reject IATA's request for antitrust immunity and allow market forces to prevail.

Reed Carr is global transportation development manager for Intel Corp. He can be contacted at (480) 554-6304, or via e-mail at reed.carr@intel.com.