Alleging that the combination of American Airlines and US Airways would harm consumers and thwart competition, federal and state regulators on Tuesday filed suit to block the $11 billion deal that would create the world’s largest airline.
“We simply cannot approve a merger that would result in U.S. consumers paying higher fares, higher fees and receiving less service,” said Justice Department Antitrust Division chief William Baer, speaking during a conference call with reporters. “By challenging this merger, the Department of Justice is saying that the American people deserve better.”
When the merger was first announced in February, many anticipated it would be approved, largely because the DOJ had already signed off on combinations involving Delta and Northwest in 2008 and United and Continental in 2010. As Representative Spencer Bachus (R-Ala.) put it during a February 26 hearing: “They created other airlines with significant advantages. If we don’t let these guys merge,” they’ll be at a disadvantage.
But those earlier consolidations complicated things for American’s parent company AMR Corp. and US Airways Group Inc. “We learned during our investigation what happened to competition from prior acquisitions,” Baer said. “The market today is not functioning as competitively as it ought to be.” Moreover, he said, “If you reduce the number of players, it makes it easier” for firms to coordinate pricing.
Headquartered in Fort Worth, Texas, the new American Airlines would offer more than 6,700 daily flights to 336 destinations in 56 countries and employ more than 100,000 workers. The merger won the support of American’s creditors and the airlines’ unions, with the exception of the machinists, who want a new contract before considering it. The European Commission approved the deal on August 5.
But in a complaint filed in U.S. District Court for the District of Columbia, the DOJ and the states of Arizona, Florida, Pennsylvania, Texas, Tennessee and Virginia, as well as the District of Columbia, spelled out how the merger would hurt competition.
According to the government, US Airways post-merger would have no incentive to continue its aggressive discounting program, Advantage Fares, “eliminating significant competition and causing consumers to pay hundreds of millions of dollars more.”
The complaint also stressed that American, currently in bankruptcy, has a stand-alone plan to emerge and grow—existing plans to add nearly 115 new routes. “They do not need this merger to continue to thrive,” Baer said of both airlines.
Following a merger, US Airways executives – who would manage the merged firm but retain the American name – “would be able to abandon American’s efforts to expand and instead continue the industry’s march toward higher prices and less service,” the government said. As evidence, it pointed to statements by US Airways executives that American’s growth plan would disrupt the industry and “negatively impact” revenues.
Furthermore, the government argued that the merger would hurt passengers at Reagan National Airport in Washington. Right now, US Airways controls 55 percent of the takeoff and landing slots at the airport. Post-merger, the share would be 69 percent – a whopping score of 4,959 on the Herfindal-Hirschman Index used to measure market concentration. Anything over 2,500 is considered highly concentrated. “The merger should be presumed, as a matter of law, to be anticompetitive,” the complaint says.
Asked whether divesting the slots at Reagan National would resolve the government’s concerns, Baer said that the complaint lays out a number of additional competitive issues. “We’re open to any proposal,” he said, but “we think the right solution here is a full-stop injunction.”
US Airways has been in this position before. In 2001, the airline’s $12.3 billion merger with United Airlines collapsed after the Justice Department said it would sue to stop the deal.
The airline has changed outside counsel – in the unsuccessful United deal, it turned to O’Melveny & Myers, but has now tapped Dechert partner Paul Denis, who did not respond to a request for comment.
Merger cases rarely go to trial, but Denis is an experienced litigator, having represented Whole Foods Market Inc. in its battle with the Federal Trade Commission over its purchase of Wild Oats Cooperative Inc. He also represented Polypore International Inc. and Dean Foods Co. in antitrust litigation against the government.
American has turned to Jones Day partners Joe Sims and J. Bruce McDonald. Sims did not immediately respond to a request for comment.
Baer was adamant that the government is prepared to try the case if necessary. “We don’t file a lawsuit unless we are vigorously prepared to defend it,” he said.
It’s the second mega-suit filed by DOJ litigators since Baer, a former partner at Arnold & Porter, took over as head of the antitrust division in early January. The department also sued to stop brewing giant Anheuser-Busch InBev's $20.1 billion acquisition of Grupo Modelo. The case settled in April with one of the largest divestitures of all time.