Justice Department To Airlines: Your Days Of Mega-Consolidation Mergers Are Over

American airlines us airways at reagan airport dc
The proposed merger of American Airlines and US Airways would create the world’s largest airline. REUTERS/Larry Downing

The Justice Department filed a lawsuit Monday to block the $US11 billion merger of American Airlines and US Airways, a deal that would have created the world’s largest airline.

It was a surprise move from an office that has allowed three major airline combinations in the past five years, and could mark a watershed moment in how the DOJ handles the airline industry.

The DOJ complaint argues that the merger is not key to the survival of either company and that the loss of a competitor in an already small field would “result in passengers paying higher airfares and receiving less service.”

For their part, American and US Airways said they plan to “mount a vigorous defence and pursue all legal options” to complete the “procompetitive deal.”

A Line In The Sand

This isn’t totally new territory for the DOJ. It blocked United’s proposed acquisition of US Airways in July 2001, on the grounds that it would lead to higher airfares. But given that it has allowed more recent deals to go through (Delta and Northwest in 2008, United and Continental in 2010, and Southwest and Airtran in 2011) without protest, this pivot looks like a watershed moment.

Of the three big recent mergers, the DOJ only interfered in one, requiring United-Continental to give up some slots at Newark Liberty International Airport, to Southwest Airlines. That, it said at the time, “resolves the department’s principal competition concerns.”

In contrast, the appendix to this lawsuit lists more than 1,000 routes between cities where the combined airline would have a presumptively illegal monopoly. That’s evidence that the Department does not think this can be resolved, antitrust lawyer Marc Ostrau told Reuters.

Bert Foer, President and Founder of the American Antitrust Institute, told Business Insider “they’ve pretty much precluded a post-complaint divestiture remedy,” referring to the possibility that the DOJ would let the deal go through if the airlines gave up some key slots at airports where their dominance would most hamper competition.

This could be indicative, Foer says, of a new, more systematic approach to analysing how airlines operate and compete. Given the modern airlines business, that’s a better way to look at it, Brookings Institution senior research associate Adie Tomer said in an interview.

The city pair view is less valid now, Tomer explained, because the big domestic airlines can fly just about anywhere in the country — they just have to stop somewhere first. “At the end of the day, they have complete overlap.”

Whether or not the DOJ is basing this decision on a new view of the industry, the move represents a “sea change,” Tomer said, and “suggests DOJ is trying to start drawing a line in the sand.”

William Bill Baer department justice in 1998 intel processor
Bill Baer was the director of the Federal Trade Commission when it decided to sue Intel for violating antitrust laws, in 1998. Now he runs the antitrust division at the Justice Dept. REUTERS/Mike Theiler

Why Now?
The shift could be the result of new personnel in the DOJ. Bill Baer was confirmed as the assistant attorney general for the antitrust division in December 2012.

According to the New York Times, antitrust experts expected him “to continue what has been widely seen as the Justice Department’s reinvigorated enforcement of antitrust laws after a period of lax oversight during the Bush administration.”

The blocking of the new merger may be an indication of Baer’s leadership, Foer speculated. In January 2012, the Department hired its first director of litigation, Mark Ryan — a sign that it is willing to go to court when necessary.

Time To Rein In The Airline Industry?

“Frankly, I don’t see much difference” between this merger and past ones, Tomer said. The combination of American Airlines and US Airways would create the world’s largest airline, like the merger of Delta and Northwest did in 2008.

It seems the DOJ’s lawsuit is more a product of the industry’s current situation than a reaction to a deal that goes too far.

The steady consolidation of US airlines — from 10 major airlines 12 years ago to five today — has helped the industry remain profitable in recent years, though margins are very thin.

But at a certain point, the interest of consumers (who need more competition to keep fares affordable) must be balanced against the interest of airlines (who need less competition to stay in business).

The DOJ, it seems, has decided that now — when five airlines could drop to four — is that time.

In its complaint, the DOJ rejects the idea that either airline needs this deal to stay in business, arguing, “American does not need this merger to thrive, let alone survive.”

In a report following the DOJ decision, J.P. Morgan analyst Jamie Baker wrote that keeping US Airways (LCC) and American Airlines (AMR) independent makes them weak compared to Delta (DAL) and United (UAL).

The Airline Pilots Association, the world’s biggest pilot union, is much more upset, writing in a statement that the “DOJ has completely ignored decades of instability in the airline industry.”

Airlines for America, a trade group whose members transport more than 90% of US airline passenger and cargo traffic, struck a similar tone in an emailed statement, saying consumers win when airlines are strong.

But the DOJ argues that American Airlines and US Airways will be fine financially on their own, and that the merger would hurt customers too much to let it go down.

Ultimately, it’s most likely the courts will decide who’s right.