BAFFLING ABOUT-FACE IN AMERICAN-US AIRWAYS MERGER
c.2013 New York Times News Service
Did the Justice Department cave?
This week, the government announced that it was dropping its lawsuit to block the merger of American Airlines and US Airways after the parties reached a settlement. The new American will be the world’s largest airline and one of just three remaining legacy carriers in the United States, along with Delta Air Lines and United Airlines.
“This settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country,” Attorney General Eric H. Holder Jr. said this week.
But in August, he had this to say about the proposed merger: “The American people deserve better. This transaction would result in consumers paying the price — in higher airfares, higher fees and fewer choices.” And in its complaint, the Justice Department noted that the three legacy carriers and Southwest would control 80 percent of domestic air service.
No wonder this week’s settlement left many antitrust experts scratching their heads, even as the airlines and their shareholders celebrated.
The Justice Department did get some important concessions from American and US Airways, primarily an agreement to give up slots at some of the nation’s busiest airports, including La Guardia in New York, Reagan National in Washington and Logan Airport in Boston, to low-cost carriers. The department said it was the biggest divestiture program agreed to by any airline as a condition of federal approval of a merger.
But when the government sued to block the merger, it stressed the “thousands” of routes where US Airways and American “compete directly,” not just a handful of congested airports. Unmentioned in the settlement, but a prominent feature in the earlier complaint, are US Airways’ low-cost Advantage Fares, which the government argued would probably vanish on the many routes where competition between the two carriers would be eliminated.
“The settlement is hard to square with the original complaint,” said Christopher L. Sagers, an antitrust professor at Cleveland-Marshall College of Law.
He testified in Congress last March about the potential harm to consumers if the merger went ahead.
“I have a lot of respect for the people in the antitrust division,” he said this week, “But I’m perplexed, and so are a lot of other people. I’m afraid the merger is likely to result in some real consumer harm.”
Scott Hemphill, an antitrust professor at Columbia Law School, said he, too, was surprised by the settlement.
“The complaint went on at length that US Air was a potent competitor because of one stops and Advantage Fares,” Hemphill said. “This made US Air an unusual and potentially disruptive carrier. If that’s true, as the complaint alleged, you can’t divest your way out of that problem. The way the complaint was structured suggested the government would see this to the end and block the merger.”
Hemphill noted that the complaint read as though the Justice Department had come to believe the earlier mergers were a mistake. As the complaint put it: “Increasing consolidation among large airlines has hurt passengers. The major airlines have copied each other in raising fares, imposing new fees on travelers, reducing or eliminating service on a number of city pairs, and downgrading amenities.”
Enforcement of antitrust policy is a law enforcement function, and like other enforcement activities of the Justice Department, it is supposed to be strictly insulated from political pressure. The Tunney Act, which requires judicial review of any antitrust settlement, was passed in 1974 as result of a scandal in which President Richard Nixon ordered the Justice Department to settle an antitrust case against International Telephone and Telegraph after the conglomerate made secret contributions to the Nixon campaign.
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The president was captured on tape calling for the head of the antitrust division, Richard McLaren, to be fired if necessary.
“The ITT thing — stay the hell out of it. Is that clear? That’s an order.” Nixon went on, “I do not want McLaren to run around prosecuting people, raising hell about conglomerates, stirring things up.”
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The law didn’t stop American and US Airways from mounting a huge lobbying and public relations campaign. Last month, Rahm Emanuel, now Chicago’s mayor and formerly President Barack Obama’s chief of staff, along with the mayors of Philadelphia, Phoenix, Dallas, Fort Worth, Miami and Charlotte, N.C., signed a letter calling on Holder to drop his opposition to the merger. Sixty-eight Democratic members of Congress wrote a similar letter to Obama.
In September, the airlines held a “fly in” for more than 300 employees, who lobbied lawmakers before rallying on Capitol Hill.
“There was a huge public relations campaign,” Sagers said. “Rahm Emanuel was involved. I don’t want to cast aspersions, but at the least it’s very troubling. If there was any political influence in getting this dropped, from the White House or Holder, that would be a huge scandal.”
William J. Baer, the head of the antitrust division, flatly denied any political pressure when I spoke to him this week.
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“The lobbying had absolutely no effect on us, and that’s true from the staff level right up to my boss,” he said, referring to the attorney general. “There was never any doubt that the attorney general would block this merger unless the airlines committed to meeting a very high threshold, which we felt they did.”
He said that, before the lawsuit, the airlines were offering hardly any concessions.
Whatever the language in the complaint, Baer made the point to me, as did others, that nothing is simple when it comes to competition in the airline industry. The hub-and-spoke route systems, frequency of service and price competition are fiendishly complex and hard to compare with other industries.
“The context is an airline industry that is continuing to consolidate and isn’t very price-competitive or consumer-friendly,” said Gene Kimmelman, the former chief counsel for competition policy in the antitrust division and now a project director at the New America Foundation. He said the airline industry did not easily lend itself to antitrust solutions.
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Baer said one of his staff members had spoken with Herbert Hovenkamp, an antitrust professor at the University of Iowa, widely regarded as the dean of the antitrust bar, about the settlement.
“Is it a perfect settlement? No, but settlements are never perfect,” Hovenkamp told me this week. “They’re a compromise. The government got the best deal it could, given that it might have lost at trial.”
Hovenkamp continued: “What I like about it is that it gives a leg up to low-cost carriers like JetBlue and Southwest that have been disruptive forces in this market. One of the things that kept the airline industry from more competition has been the suppression of the low-cost carriers. They have attractive prices but have limited networks, few connecting flights and they’re frequently relegated to the minor airports in a region.”
He noted that air travelers along the heavily traveled East Coast might especially benefit from more competition American and US Airways gates are given up at La Guardia, Logan and Reagan National airports.
Baer also stressed that the settlement offered what could be the last opportunity to open up congested major city airports to the low-cost carriers.
“The complaint was clear: We thought the current competitive dynamic was unhealthy,” he said. “There were only four legacy carriers, and they weren’t competing aggressively. The low-cost carriers made a difference, but only up to a point, because the bigger airports were constrained by the limited number of slots and gates. What basically got us to the point where we could embrace the settlement is that we believe the low-cost carriers will create a healthier, more competitive dynamic than simply banning the merger altogether. That did nothing about airport concentration and dominance over gates.”
He said it was difficult to predict whether competition would diminish — and fares increase — on some routes now affected by US Airways’ Advantage Fares.
“We just decided the benefits of opening up competition to the low-cost carriers would outweigh the one-stop issues,” he said.
Even Sagers conceded that the Justice Department “got larger concessions than in prior airline settlements.” He added, “It’s a very complex deal in a complex industry, and it will take several years to judge who was right.”
By then, of course, it will probably be too late to do anything about it.