DOJ Filing Suit, Moves to Block Airline Merger
After a decade of rapid consolidation in the nation’s airline industry, the Justice Department filed a lawsuit on Tuesday to block the proposed merger between American Airlines and US Airways, which would create the world’s largest airline.
The move, joined by attorneys general from six states and the District of Columbia, surprised industry officials, who had expected little resistance to the deal. But it underscored a newly aggressive approach by the Justice Department’s antitrust division, which has been more closely scrutinizing proposed mergers as the economy recovers. In 2011, for example, it blocked the merger of AT&T and T-Mobile, and this year it forced Anheuser-Busch InBev to significantly alter the terms of its takeover of the brewer of Corona before approving it.
The airline industry, though, has had a nearly unfettered run of mergers in recent years, and the American-US Airways combination was seen as the capstone. In no small part, this consolidation of the industry into a handful of carriers had the support of regulators. Starting in 2008, the Justice Department approved the mergers of Delta Air Lines and Northwest, United Airlines and Continental, and Southwest and AirTran.
But antitrust regulators said these past mergers had in effect undermined the case for the American-US Airways combination. While those mergers helped the industry return to profitability and brought more stability, they also led to higher fares, regulators said. A union between American and US Airways would take the consolidation too far, the Justice Department said, hurting consumers and leading to substantially less competition and higher airfares and fees, and to less service to many airports.
“Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace,” said Eric H. Holder Jr., the United States attorney general.
The decision to file a civil antitrust lawsuit in the United States District Court for the District of Columbia brought an unusually strong reaction from the airlines. In a joint statement, American and US Airways said they would mount a “vigorous and strong defense” of their plan.
“We believe that the D.O.J. is wrong in its assessment of our merger,” the airlines said. A combined American and US Airways, they said, would create more options for customers than either airline could offer on their own.
Doug Parker, chief executive of US Airways, who was planned to run the combined airlines, struck a defiant tone in a statement to employees, saying, “We will close the merger before year end.”
In arguing against the merger, the Justice Department said the vast majority of domestic airline routes were already highly concentrated. The merger, it said, would result in four airlines controlling more than 80 percent of the United States market for commercial air travel.
“We looked very carefully for six months at this deal, and we think it’s pretty messed up,” said William J. Baer, the assistant attorney general in charge of the department’s antitrust division. “It looks pretty bad for consumers.”
He told reporters that the merger could cost consumers “hundreds and hundreds of millions of dollars.”
He said regulators reached that conclusion after reviewing internal plans for the merger at US Airways and American and studying how much fares rose after the other giant mergers.
Asked if some type of compromise might still be possible, Mr. Baer said, “We think a full-stop injunction is the right course for the consumer.”
Mr. Baer said the combined airline’s pricing power would be apparent at Ronald Reagan National Airport near Washington, where it would have a monopoly on 63 percent of the nonstop routes.
JetBlue’s expansion at that airport in 2010 led to 30 percent cuts in some fares, he said. But JetBlue leases half of its takeoff and landing slots from American, which could cancel that deal if the merger occurred.
Mr. Baer, who took over in January, has demonstrated that he is not afraid of taking a fight to court, analysts said, as he did this year with the case in which the department charged that Apple colluded with publishers over e-book pricing. Last month, a federal judge agreed, ruling against Apple.
“They’ve shown that they are not going to be gun-shy about enforcing antitrust laws,” said Michael A. Carrier, a distinguished professor at Rutgers University law school.
Joining the Justice Department in filing the suit were attorneys general from Texas and Arizona, where American and US Airways are based, as well as Florida, the District of Columbia, Pennsylvania, Tennessee and Virginia.
The last time the Justice Department challenged a merger was the proposed combination of United Airlines and US Airways in 2001. But the attacks of Sept. 11, 2001, sharply altered the financial stakes for the industry, pushing several carriers into bankruptcy — including Delta, United and Continental — and leading to about $60 billion in losses for the industry in the following decade. American was the last of the major carriers to file for bankruptcy protection, in November 2011.
The Justice Department’s announcement represents a significant setback for American’s plans to exit bankruptcy. It amounts to a rebuttal to the position taken by a federal bankruptcy judge, who approved the merger as part of American’s restructuring plan. What is more, all three labor groups representing American employees, including pilots, flight attendants and mechanics, backed the plan put forward by US Airways to merge the airlines.
In doing so, they opposed the initial plan championed by American managers to remain an independent carrier and emerge from bankruptcy alone. That plan, however, was viewed by most analysts as unrealistic given how big Delta and United have become since their respective mergers.
In laying out its case, the Justice Department quotes US Airways executives describing how consolidation had helped the industry raise fares. It also discusses how US Airways provides some low-fare competition through its Advantage Fares program, saying that other carriers, including American and Delta, routinely matched those lower fares.
The Justice Department also explained how American could exit bankruptcy as a “vigorous competitor” without the merger, saying it would have “strong incentives to grow to better compete with Delta and United.” As an example, it cited the carrier’s large new aircraft order and said that American’s stand-alone plan called for increasing flights and destinations.
The decision surprised airline analysts.
“ ‘Bizarre’ is one word,” said Robert Mann, an airline consultant and former executive, who characterized the Justice Department as “late to the game with concerns over airline industry consolidation.”
A report by the Government Accountability Office in June found that the planned merger would reduce competition in a far larger number of airports than earlier airline mergers, including the one that fused United and Continental into the nation’s current leader.
The Obama administration was heavily criticized in its first two years for seemingly failing to keep campaign promises of active antitrust enforcement. One of the antitrust division’s first actions in 2009 was to withdraw a Bush administration policy that favored caution by regulators and the development of safe harbors for companies that controlled a given market.
After that, however, the administration had to deal with the fallout from the financial crisis and the housing collapse, and significant antitrust action was delayed until the second half of the administration’s first term, said Stacey Anne Mahoney, a partner at Bingham McCutchen in New York.
“The second Obama administration is building up some steam in terms of federal antitrust enforcement efforts,” Ms. Mahoney said. Earlier this year, it had seven antitrust actions in litigation at the same time, the most ever, officials said.
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