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Turbulence. Stormy skies. Crash and burn. There has been no shortage of bad news metaphors as members of Congress have responded to the proposed merger of the UAL Corp.’s United Airlines and US Airways Group Inc. In hearing after hearing over the last two weeks, lawmakers have voiced fears that the merger would be the first in a wave of consolidation, ultimately leading to just three giant airlines, each a regional monopoly. Officials from the departments of Justice and Transportation have promised that the $11.6 billion deal will receive close regulatory scrutiny. But it presents them with a thorny antitrust question: Should they block this merger because it might trigger additional mergers? And if they approve the deal, what kind of divestitures can they require to ensure the airline industry remains competitive? In 1978, Congress took the government out of the business of telling airlines where they could fly and what they could charge by passing legislation to disband the Civil Aeronautics Board in 1985. The central premise of deregulation was that consumers would be best served by competition between airlines, and regulatory officials told lawmakers this month that they still believe a hands-off policy is best. “We have an industry that, for the most part, has proven deregulation to be a success,” DOT General Counsel Nancy McFadden testified to the House Judiciary Committee on June 14. “But deregulation can only be successful for the consumers it was meant to benefit if there is adequate competition in the airline industry.” The proposed merger, note lawmakers from both sides of the aisle, appears to undermine the viability of such competition. “We’ve already seen the creation of noncompetitive markets in many cities,” said House Judiciary Committee ranking member John Conyers Jr., D-Mich. “Airline deregulation requires stepped-up enforcement of antitrust laws. … I’m concerned that the United-US Air merger could trigger a spate of other airline mergers.” The slippery-slope argument is emerging as one of the merger’s biggest roadblocks. “The transaction is clearly very important, and possibly catalytic in that it has already spurred at least talks of possible follow-on mergers,” says Jeffrey Shane, a Hogan & Hartson partner in Washington, D.C., who served as deputy assistant secretary for policy and international affairs at the Department of Transportation from 1983 to 1985. “But if the net result is three large airlines, each dominating one-third of the country, that is not sustainable.” While three strong competitors might not raise antitrust concerns in other industries, major airlines have shown a well-documented reluctance to compete head-on in each other’s hub markets. “It’s a regional monopoly system,” Sen. Peter Fitzgerald, R-Ill. told the House Judiciary Committee, adding that such an arrangement in another context — fast food, for example — would never fly. “Imagine Burger King had the Northeast, McDonalds had the south, Hardees had the Midwest. … We wouldn’t put up with that,” he said. “When the airlines talk about the ‘friendly skies,’ are they talking about being friendly to other airlines or consumers?” UNITED THEY STAND Currently, United, American Airlines, and Delta Air Lines are roughly equal in size. Postmerger, United would dwarf them, controlling nearly 25 percent of the market. If American and Delta feel they need to grow to keep up, additional mergers would be a logical move. Possible combinations mentioned at recent hearings include American with Northwest Airlines, Northwest with Continental Airlines Inc., and Delta with Continental. Spokeswomen from American, Delta, and Northwest declined comment, while Continental CEO Gordon Bethune told Reuters his company is not discussing a merger with Delta or any other airline. The Justice Department has already moved to block a proposed alliance between Continental and Northwest that would give Northwest a controlling vote among Continental shareholders. For the Justice Department, trying to weigh the impact of hypothetical mergers is a difficult task, notes Albert Foer, president of the American Antitrust Institute, in written testimony submitted to the Senate Commerce Committee on June 21. “It should not stop the United merger based on mere speculation about the future; but it should not close its eyes to reasonably strong evidence that other mergers will quickly follow. … If this merger is approved, how can the following merger or the one after that be disapproved? Will we ever draw a line, and if not here, where?” Officials from United and US Air have urged the government to approach their merger on an individual, fact-specific basis, and deal with future mergers if and when they arise. “There have been suggestions that this industry will move to three or four or five network carriers — a future I for one do not have the wisdom to predict,” US Airways Chairman Stephen Wolf told the Senate Commerce Committee last week. “But under any of these scenarios, this industry will continue to be characterized by intense competition.” Wolf and United CEO James Goodwin point to a long list of new, low-cost competitors, such as Southwest, JetBlue, AirTran, Spirit, and Legend as proof that the industry is hardly on the verge of monopolization. “Airlines are not seeking to get bigger solely for the sake of size alone,” Goodwin testified before the Commerce Committee June 21. “Airlines are being forced by the marketplace to build the strongest and most comprehensive route structure possible to compete effectively in the global economy. … It is in the national interest to ensure that our carriers are not placed at a competitive disadvantage vis-�-vis foreign carriers.” United is being represented by Steven Bradbury of the D.C. office of Chicago’s Kirkland & Ellis, while US Airways has turned to Henry Thumann, Joel Burton, and John Daum of Los Angeles’ O’Melveny & Myers to win regulatory approval. In addition, United has hired Thomas Boggs Jr., Jonathan Yarowsky, and Gregory Laughlin of Patton Boggs and Andrew Herman and David Frulla of Brand & Frulla to lobby on behalf of the deal. MERGER FRIENDLY The United-US Air deal will be the largest airline transaction ever reviewed by the DOJ, and to date, the agency has not met many airline mergers it likes. When the Civil Aeronautics Board was shut down in 1985, merger review authority was transferred to the DOT until the end of 1988. During that time, a spate of mergers took place. The DOT signed off on two 1986 acquisitions — Ozark by TWA and Republic by Northwest — despite objections from Justice. The airlines shared hub cities, but the DOT let the transactions go through, reasoning that airplanes were the ultimate mobile asset and that if prices got out of whack in one market, other airlines would just fly over some jets and offer competing service. “The [antitrust] division does not subscribe to this entry analysis,” said Deputy Assistant Attorney General for the Antitrust Division John Nannes in written testimony submitted to the House Judiciary Committee. “It simply does not conform to the facts in a post-deregulation world consisting of hub airports.” The Justice Department reviews airline deals under �7 of the Clayton Act, a forward-looking standard that prohibits mergers where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” The Transportation Department also reviews the deal, and makes recommendations to the Justice Department. The DOT also has separate regulatory authority, including the power to approve the transfer of international routes based on a public interest standard. When the DOJ looks at the airline industry, said Nannes, it takes a narrow view of the market, defining it by studying nonstop and connecting service between specific city pairs. “That is not to suggest, however, that transactions involving carriers that do not have overlapping hubs may not also present problems,” he testified. In the United-US Air deal, there is very little overlap in routes — United has an extensive East-West network, while US Airways’ strength is up and down the East Coast. The exception is Washington, D.C., and the parties have already offered to divest the bulk of US Airways’ resources at Reagan National to new entrant D.C. Air. Some members of Congress have expressed skepticism whether D.C. Air, which will be run by Black Entertainment Television founder Robert Johnson, will be an effective competitor. “Can an operation working out of one major airport remain viable?” asked Sen. Olympia Snowe, R-Maine, at the Commerce Committee hearing. Added Sen. Slade Gorton, R-Wash.: “How can a carrier operate with low fares and so few round trips per market?” Johnson assured the committee members that he has a proven track record as a businessman, and will be able to spend less on personnel and airplanes than the mature, large airlines. The terms of the deal call for him initially to lease equipment, flight, and ground crews from United. If the DOJ remains skeptical, United and US Air could likely remedy the situation by agreeing to put the 222 departure and arrival slots at National up for auction. Still, Cornell University economics Professor Alfred Kahn, who headed the aeronautics board during the 16-month period ending with deregulation and is widely referred to as “the father of deregulation,” says that just because United and US Air don’t fly to the same places, that doesn’t mean they don’t compete. “In deregulating the airlines, we relied very heavily on the threat of potential, as well as actual, competition to prevent exploitation of consumers,” he told the House Judiciary Committee. “It seems to me highly likely that there are many routes in which either United or US Airways is a potential competitor. … While I have the impression that suppression of potential competition has not played a major role in most merger litigation, it might properly be definitive in this case.” Recently, the DOJ moved to stop a much more modest effort at consolidation. In October 1998, the agency filed suit challenging a bid by Northwest to acquire 13 percent of Continental’s stock — a move that would give Northwest 51 percent of voting control. Northwest has a hub in Detroit, while Continental has a hub in Cleveland — a little too close for the DOJ’s comfort. The complaint filed in the U.S. District Court in the Eastern District of Michigan, alleges that as a result of the proposed Northwest-Continental alliance, “Consumers likely will pay higher prices and receive lower quality service for scheduled airline passenger service in the markets dominated by Northwest and Continental, and lose the benefit of new, competitive entry by Continental against Northwest.” The case is scheduled for trial later this year. In his testimony on the United-USAir proposal, Nannes gave few hints about how the government will proceed, but he offered up a strong justification for vigorous enforcement of antitrust law. “There have been periods in our nation’s history when we’ve gone back and forth between regulation and reliance on the free market. The general experience is that we do better relying on the free market,” he said. “To deregulate without antitrust is to leave the field open and put consumers at particular risk. … But for appropriate antitrust enforcement, the spectre of regulation could rise again.”

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