When US Airways and American Airlines announced plans earlier this year to combine, few expected the $11 billion deal to encounter antitrust turbulence. But last week, the ride got bumpy indeed when the U.S. Department of Justice, six states and the District of Columbia filed suit to block the merger.
For US Airways, it's familiar territory — the airline failed to secure the government's blessing in 2001 for its merger with United Airlines and abandoned the deal. The concerns raised then, albeit in a much different, pre-9/11 context, presaged objections to the deal now: How much consolidation is too much in the airline industry?
In last week's suit, filed in U.S. District Court for the District of Columbia, the Justice Department seemingly concluded that a tipping point has been reached. While the mergers of Delta Air Lines Inc. and Northwest Airlines Corp. in 2008 and United Air Lines Inc. and Continental Airlines Inc. in 2010 passed antitrust muster with minimal concessions, regulators now have drawn a line: The combination of American, the fourth-biggest U.S. airline, with No. 5 US Airways goes too far.
"We know from prior mergers that elimination of head-to-head competition on nonstop routes results in substantial price increases for consumers," Justice Department antitrust division chief William Baer said during a conference call with reporters. "By challenging this merger, the Department of Justice is saying that the American people deserve better."
Still, the government will have a formidable task to prove in court that, post-merger, the combined firm would raise prices and cut service, and that competition from "nonlegacy" airlines like Southwest Airlines Co. and Jet Blue Airways Corp. wouldn't be a significant factor in mitigating the merger's effects.
US Airways and American have vowed to fight — and are doing so in an unusually public manner. The day after the suit was filed, the airlines' outside antitrust counsel held a 45-minute conference call with reporters from virtually every major news organization. The lawyers — an antitrust dream team consisting of Dechert partner Paul Denis and O'Melveny & Myers partner Richard Parker for US Airways, and Jones Day partner Joe Sims for American parent company AMR Corp. — pulled no punches.
"The government got this one very wrong," said Parker, a well-known litigator hired about three weeks ago by US Airways to serve as lead trial counsel. "Both companies are looking forward with confidence to their day in court."
"We're litigating this case, period," said Denis, adding that the suit was not a surprise, but that he was "surprised the complaint was not stronger. We expect the government to put on a better case." Sims chimed in: "This is a kind of kitchen-sink complaint. It looks like they pulled up every vegetable in the garden." He mocked the complaint's length — 56 pages. "If you have to take 56 pages to tell your story, it's probably not that compelling," he said.
Jones Day partner John Majoras is lead trial counsel for American and partner J. Bruce McDonald is working on the case, as well. American has also tapped MJ Moltenbrey, an antitrust partner at Paul Hastings.
The lawyers are squaring off against DOJ lawyers led by Baer, a former partner at Arnold & Porter who in earlier government service at the Federal Trade Commission oversaw one of the boldest merger challenges of all time: successfully blocking the union of Staples Inc. and Office Depot Inc. in 1997. Since Baer took over as head of the antitrust division at the beginning of the year, he's reinforced his reputation for hard-line enforcement, challenging brewing giant Anheuser-Busch InBev's $20.1 billion acquisition of Grupo Modelo. The case settled in April with one of the largest divestitures ever.
To onlookers, the case against the airlines pushes the envelope. "Stunning" is how Patrick Ryan, head of the antitrust practice at Jeffer, Mangels, Butler & Mitchell, put it. "It's an extremely aggressive move."
Key issues as the case moves toward an all-important preliminary injunction hearing are likely to include market definition and "smoking gun" documents from airline executives, antitrust experts said.
FEWER LEGACY CARRIERS
In the complaint, the government focuses on competition from the other so-called legacy carriers: Delta and United. The merger would reduce their number from four to three — ominous consolidation, from an antitrust point of view.
The government dismissed competition from Southwest, Jet Blue and other nonlegacy airlines because "in many relevant markets, these airlines do not offer any service at all, and in other markets, many passengers view them as a less preferred alternative to the legacy carriers."
But as Parker pointed out, Southwest is actually bigger than US Airways in terms of number of passengers carried, and "Jet Blue and others are prepared to expand."
The government took a broad view when it comes to defining markets where American and US Airways engage in head-to-head competition. In earlier airline mergers, the focus was on markets in which the merging parties both provided nonstop flights, said Mark Ostrau, co-chairman of Fenwick & West's antitrust practice. According to the complaint, American and US Airways offer overlapping nonstop service on 17 domestic routes.
But the government asserts that the two airlines also compete directly on more than 1,000 routes on which one or both offer connecting service.
"What's changed?" Ostrau asked of the new focus. By casting the net so broadly, he said, the complaint "doesn't really allow for an easy fix."
The government further argues that reducing the number of players in the airline industry makes coordinated behavior more likely when it comes to setting ticket prices and fees. "Each transaction is small; and most pricing is readily transparent," the complaint says. "If not stopped, the merger would likely substantially enhance the ability of the industry to coordinate on fares, ancillary fees, and service reductions."
But the airline lawyers counter that it's not nearly that simple. "It's uniquely difficult to implement" coordinated pricing when it comes to plane tickets, Parker said. "There are thousands of fares that are changing every day."
Perhaps the government's strongest argument centers on Ronald Reagan Washington National Airport. Right now, US Airways controls 55 percent of the takeoff and landing slots there. Post-merger, the share would be 69 percent — a whopping score of 4,959 on the Herfindahl-Hirschman Index, which is used to measure market concentration. Anything over 2,500 is considered highly concentrated. According to the complaint, the merger should be "presumed, as a matter of law, to be anticompetitive."
When US Airways first attempted to merge with United in 2000, the company up-front offered to divest the bulk of its slots at Reagan to newcomer D.C. Air — but even that was not enough to save the deal. No such public offer of divestiture has been made in the current merger.
The Justice Department in its complaint also relies on comments made by the leaders of both airlines that seem to treat competition as a threat. For example, US Airways executives said American's plan to emerge from bankruptcy would "negatively impact" revenues and "disrupt" the industry.
Michael Carrier, distinguished professor at Rutgers School of Law — Camden, said such documents can prove powerful before a judge or jury. "They can reverberate more than a mountain of charts by an economist," he said.
But US Airways lawyer Denis dismissed the documents, saying that they "have nothing to do with the merger. They're taken from other contexts in the past."
On a basic level, the two sides disagree about what the merger would mean for consumers. The Justice Department asserts that it "would result in U.S. consumers paying higher fares, higher fees and receiving less service," Baer said.
But the lawyers for the airlines counter that it would bring about lower fares, better service and more routes covered because the merged companies will be more efficient. Then again, as Carrier of Rutgers pointed out, "Every company always says that before a merger." He continued, "The Justice Department is willing to flex its muscles, it's willing to litigate."
Contact Jenna Greene at firstname.lastname@example.org.