c.2013 New York Times News Service
c.2013 New York Times News Service
Shareholders and employees of American Airlines and US Airways may well be wondering: Why us?
Until this week, when the Justice Department filed suit to block the proposed merger of the airlines’ parent companies, it had been notably lax on airline mergers. What the antitrust division deemed acceptable — even beneficial — for Delta Air Lines and Northwest Airlines (in 2008), and Continental and United Airlines (2010), and Southwest Airlines and AirTran Airways (2011) now “threatens substantial harm to consumers,” the complaint says.
US Airways has been doubly unlucky. United abandoned a merger deal with US Air in 2001 after the Bush administration said it would file an antitrust suit. And the head of the Justice Department’s antitrust division, William Baer, said this week that the department might have sued to block US Airways’ 2006 hostile bid for Delta if US Airways hadn’t abandoned the takeover. (US Airways did get approval to acquire America West in 2005.)
The government “abandoned the framework it used in approving the last three airline mergers,” said Paul T. Denis, a partner at Dechert LLP, which is representing US Airways. “In some ways, the complaint is a throwback to the 1970s,” before market-oriented economic analysis led to a broad revision in antitrust policy. “Now they’re saying those prior mergers were anti-competitive. That’s surprising. But even if they believe that, it’s not relevant to whether this merger will have an adverse effect.”
US Airways and American have come out fighting. The government “got this one wrong, very wrong,” Richard Parker, an antitrust litigator at O’Melveny & Myers and former director of the Federal Trade Commission’s antitrust arm, the Bureau of Competition, said at a news conference Wednesday. He stressed that only a judge can block the merger and vowed to take the case to trial. But perhaps the airlines shouldn’t have been so surprised by the lawsuit — and shouldn’t be quite so eager for a courtroom showdown.
“It’s a different regime, different standards and a different time,” said Herbert Hovenkamp, professor of law at the University of Iowa and widely regarded as a dean of the antitrust bar.
The relevant question may not be why the department moved to block the American-US Airways deal, but why it approved the United-Continental merger — a move it now seems to regret.
William J. Baer, the associate attorney general in charge of the antitrust division, told me this week: “We consider every merger one at a time. Here, we had a proposed merger that would reduce the legacy carriers from four to three. That’s not the same as six to five, or five to four. That logic would get you from two to one pretty quickly.”
And while he said he couldn’t comment on the earlier airline mergers, since he’s been the antitrust chief for just seven months, “if you look at the net effects, what we’ve seen is a reduction in capacity and higher prices, and not the benefits that were promised.”
Whatever the recent precedents, the proposed American-US Airways merger violates the Justice Department’s merger guidelines, which the Obama administration finally seems to be taking seriously. The merger would substantially reduce competition because “there are too many routes that would create a monopoly or oligopoly,” Hovenkamp said.
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According to the Justice Department, the American-US Airways merger would substantially reduce competition in more than 1,000 city pairs served by the two airlines. Among the more egregious examples it cited are Charlotte, N.C.-Dallas; Charlotte-Durango, Colo.; Dallas-Philadelphia; and Kahului, Hawaii- Tampa, Fla. It said the merger would create four out-and-out monopolies, albeit on secondary routes, including three that serve St. Croix in the Virgin Islands.
It’s pretty clear what happens when concentration increases substantially on a route between two cities. After Continental and United merged, the combined airline accounted for 79 percent of the service between O’Hare International Airport in Chicago and George Bush Intercontinental Airport in Houston. During a three-month period after the merger, fares on that route were 57 percent higher than three years earlier, according to the aviation industry website PlaneStats.com. United’s fares overall increased 16 percent in the same period.
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“Over and over, the airlines have merged, concentration has increased, and prices have gone up,” said Christopher L. Sager, an antitrust professor at Cleveland-Marshall College of Law, who warned about the effects of the American-US Air merger in testimony before the House Judiciary Committee in March. “This is what economic theory would predict and it is, in fact, exactly what the carriers have done. They have no incentive to use higher profit margins to lower prices for consumers.”
Like AT&T, whose proposed acquisition of T-Mobile was also a flagrant violation of the guidelines, the airlines seemed surprised that the Justice Department took its own standards seriously. Given the Obama administration’s tougher stand on antitrust enforcement, “It should have been crystal clear under the revised guidelines that this merger was vulnerable to challenge.” Hovenkamp said. Baer added, “I can assure you we’re taking the guidelines seriously.”
But obstacles to mergers that violate the guidelines can be overcome by other benefits, an approach that worked for United and Continental. Indeed, the arguments those airlines advanced to support their merger — a more comprehensive route network with smoother connections, better service, increased business for suppliers, greater employee stability and benefits, and creating sustainable long-term value for shareholders — are almost exactly the ones US Airways and American have been making.
The Justice Department closed its investigation of the proposed Continental-United combination after Continental agreed to transfer its landing slots and other assets at Newark Liberty International Airport to the discount carrier Southwest Airlines, which at the time had limited service to the New York area. The Justice Department issued a statement in August 2010 saying that the agreement eased most of its concerns and said the deal “will likely significantly benefit consumers.”
But much has changed in just the past few years. Far from benefiting consumers, the department now states flatly, “increasing consolidation among large airlines has hurt passengers” because of higher fares, new fees and add-on costs, reduced service and fewer amenities. The complaint notes disapprovingly that the merged United and Continental “reduced capacity at nearly all its major hubs” and “at many other airports where the two airlines previously competed.”
Southwest, known for its discount pricing and regarded as a savior two years ago, no longer seems as significant a competitive threat to higher pricing.
“When Southwest entered a market, it was able to constrain price increases, even in concentrated markets,” Sager said. “The Justice Department took this seriously. But now empirical evidence is suggesting that Southwest has become such a large entity that it’s no long a reliable constraint.”
And two years ago, the airlines were still struggling from the effects of the recession. They’re now flying close to capacity and generating higher revenue and profits. The complaint noted that US Air had record profits in 2012 and that American, although it is still operating under bankruptcy court supervision, had record revenue in its latest quarter, with $357 million in net profits.
“American does not need this merger to thrive, let alone survive,” it said.
An obvious compromise might be for American and US Airways to give up landing slots at Reagan National Airport, much as Continental and United did at Newark. That would remove at least one major impediment, since the two airlines control 69 percent of the slots there. But surely such a move was already considered and rejected before the department filed suit. When I spoke to Baer this week, he didn’t seem inclined to compromise.
“If they have ideas, I’ll listen,” he said. “I didn’t say I would compromise. As I look at the deal, the best outcome would be a full injunction.”
Hovenkamp added: “When there’s a dozen or so anti-competitive city pairs, that’s one thing. You can spin off some routes. But when there are this many problems, it would require a massive redistribution of resources. I wouldn’t say it’s impossible, but it seems very unlikely.”
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Even if the merger’s fate is ultimately decided in court, American and US Airways may simply have waited too long, as their rivals consolidated and became more profitable.
“There’s a huge first-mover advantage” in any market, Sager said, since the industry is less concentrated and there are fewer bad precedents. American and US Airways are saying “You have to give us this chance because everyone else got it,” he said. “But that doesn’t make any sense. Just because you let two competitors merge doesn’t mean you have to let everyone else merge. You’d have to approve every merger, which cannot be the law, should not be the law and is not the law.”