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By rushing to rescue the ailing airline industry, Congress may have deprived the largest carriers of their best chance in years to get substantially bigger. That is because the massive federal aid package lawmakers are preparing for airlines, whose business plunged following the Sept. 11 terror attacks in New York and Washington, D.C., effectively prevents carriers from invoking the so-called failing-firm defense. Under this defense, antitrust regulators sometimes permit otherwise anti-competitive deals if one of the companies is at risk of going bankrupt and if there are no other buyers that present fewer antitrust problems. That described the state of the airline industry before the federal aid package. Carriers such as US Airways Group Inc. and America West Inc. were expected to file for bankruptcy without the aid and it is unclear if either would have been able to emerge from Chapter 11. Even some of the stronger carriers, such as Continental Airlines Inc. and Northwest Airlines Inc., were rumored to be studying bankruptcy protection. “Without the bailout from the government, it seems likely a number of airlines will be forced into reorganization,” said James Baker, a law professor at American University and former economist at the Federal Trade Commission. The president, however, on Saturday signed legislation providing $5 billion of direct compensation and $10 billion of loan guarantees. Antitrust experts said the government financing changes the legal equation, because the cash will keep the carriers out of bankruptcy for at least several weeks. By then, the industry may have at least partially recovered and the failing-firm defense might no longer apply. Of course, the failing-firm defense only is cited if a carrier wants to buy a rival. Several analysts have questioned whether even the biggest airlines are willing or able to do mergers. Officials at United and American did not return calls, but both have been laying off employees and reducing services to stem losses. They both face potentially crippling lawsuits stemming from the attacks, even though Congress passed legislation limiting their liability. That suggests that deals are not in the works. Yet there is reason for United or American to try to pull off an acquisition consisting of debt assumption and stock. Antitrust regulators normally would block a big deal by either carrier. As such, now may be the only chance to buy the gates and market share of US Airways or America West. Without the aid package, UAL and AMR Corp., the Fort Worth, Texas-based parent of American Airlines, would likely have been the only potential bidders for bankrupt carriers because they have more financial options than their smaller rivals. If either company wanted to bet on a future recovery in the sector, it could have tried an industry-altering acquisition. With the bailout, rivals such as Delta Air Lines, Northwest and Continental may regroup and pray for a recovery in air travel. If that happens and they want to expand, these carriers would have the edge over United and American because antitrust regulators prefer the least anti-competitive combinations. Thus, a deal between two smaller carriers would almost always be preferable to a merger of large and small carriers. This helps explain why the bailout enjoys support of antitrust advocates such as Albert Foer, president of the American Antitrust Institute, who said the financial rescue is a winner for the public because it prevents big carriers from immediately snuffing out competition. “It is in the consumer’s best interest to keep as many airlines functioning as we can, especially in this interim period, until we actually find out the extent to which demand will return,” Foer said. “It is possible that, once security is tightened and people get back to normal routines, this will look like a temporary event.” If United or American eventually jump into the M&A ring, they could win approval even without the failing-firm defense. Kevin Sullivan, a partner at law firm King & Spalding in Washington, D.C., said the environment for airline consolidation is different today than two months ago, when the Department of Justice blocked the United-US Airways deal. “As a practical matter, the economics of the market have changed dramatically,” Sullivan said. “There is now so much more capacity that you would get a completely new look at any merger.” Sullivan said Congress would be less likely to object to more consolidation because lawmakers are preoccupied by the terrorist attacks. That contrasts with the uproar of the past year that helped derail UAL’s acquisition of US Airways. The door to consolidation also could open if increased security measures force carriers to abandon the hub-and-spoke system and instead fly direct between more cities, Foer said. Abandoning hubs may mean that the U.S. aviation industry could be competitive with fewer carriers, Foer said. That means regulators could permit more consolidation. “A lot of possibilities are present,” he said. “We should avoid locking ourselves into something that reduces competition prematurely.” Copyright (c)2001 TDD, LLC. All rights reserved.

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