Searching for the Sweet Spot: An Analysis of the American-US Airways Merger

Case Western Reserve Law Review Case Western Reserve Law Review

Volume 65 Issue 2 Article 9

2014

Searching for the Sweet Spot: An Analysis of the American-US Searching for the Sweet Spot: An Analysis of the American-US

Airways Merger Airways Merger

Mathew Drocton

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Case Western Reserve Law Review·Volume 65·Issue 2·2014

487

— Comment —

Searching for the Sweet Spot:

An Analysis of the American–

US Airways Merger

Contents

Introduction ................................................................................... 487

I. Expect Delays: The DOJ Complaint ........................................... 489

A. Increased Concentration ................................................................ 490

B. Coordinated Behavior .................................................................... 491

C. Elimination of Competition ............................................................ 494

D. Procompetitive Effects ................................................................... 494

II. Cleared for Take-Off: The Settlement ................................... 495

A. Previous Mergers .......................................................................... 495

B. Current Settlement ........................................................................ 497

III. Possible Turbulence: An Analysis of the Settlement ............ 500

A. Adequacy of the Settlement ............................................................ 500

B. Impact on Market Efficiency .......................................................... 503

Conclusion ...................................................................................... 504

Introduction

After the passage of the Airline Deregulation Act of 1978,

the

airline market moved toward consolidation with the Department of

Justice remaining relatively taciturn.

Since the deregulation, there

1. Airline Deregulation Act of 1978, Pub. L. No. 95-504 (codified at 49

U.S.C. § 40101 (2012)).

2. But see, Press Release, Dep’t of Justice, Department of Justice and

Several States Will Sue to Stop United Airlines from Acquiring US

Airways (Jul. 27, 2001), http://www.justice.gov/atr/public/press_

releases/2001/8701.pdf (moving to block the proposed US Airways and

United merger because “[t]he proposal did not assure competition for

those adversely affected by the acquisition, such as passengers in east

coast connect markets, and instead substituted regulation for competition

on some key routes and created competitive harms through United’s and

American’s agreement to jointly fly and price the New York, Washington

and Boston shuttle routes”) (quoting R. Hewitt Pate, Deputy Assistant

Attorney General for the Department of Justice).

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have been more than 160 airline bankruptcies

and approximately $15

billion in operative losses over the past decade.

Following the consummation of the United-Continental merger in

2010, US Airways expressed interest in securing a merger of its own.

On November 29, 2011, American Airlines and its parent, AMR

Corporation, filed for bankruptcy.

American’s bankruptcy filing came

after years of financial struggles ending with a $1.06 billion loss during

the 2011 fiscal year.

American sought a merger with US Airways to

escape bankruptcy and regain profitability. The two airlines agreed to

a stock swap valued at $18 billion.

Citing concerns of market

enervation, the DOJ initially moved to block the prospective American–

US Airways amalgamation.

The newly formed airline would utilize

American’s brand while operating under US Airways’ management.

Critics argued that the DOJ’s suit illustrated disparate treatment with

regard to prior airline mergers and possibly signified a new antitrust

policy.

The Airline Deregulation Act seemingly left the airline industry in

a state of economic turmoil. The DOJ, primarily concerned with

competition and consumer protection, now faces the additional task of

market preservation, which inadvertently factors into their antitrust

calculus. In order to achieve economies of scale in the current climate,

market consolidation is arguably a necessary evil. If an airline fails, the

market suffers loss of competition with an already concentrated market.

Alas, the DOJ is left with the task of reaching a sustainable level of

profitability for airlines while maintaining competition.

3. U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-10-778T, AIRLINE MERGERS:

ISSUES RAISED BY THE PROPOSED MERGER OF UNITED AND CONTINENTAL

AIRLINES 4–5 (2010) (“While most of these bankruptcies affected small

airlines that were eventually liquidated, 4 of the more recent bankruptcies

(Delta, Northwest, United, and US Airways) are among the largest

corporate bankruptcies ever . . . .”).

4. Id.

5. See Holman W. Jenkins Jr., Airlines vs. History, Wall St. J., May 5,

2010, at A19 (“We didn’t need seven of them in 2005. We don’t need four

of them now. We need three.”) (quoting US Airways’ Doug Parker).

6. In re AMR Corp., 477 B.R. 384, 401 (Bankr. S.D.N.Y. 2012).

7. Id. at 397.

8. Susan Carey, Fixing a “Fragile” Air Merger: US Airways CEO Kept the

Faith During Antitrust Suit; New Challenges Await, W

ALL ST. J., Dec. 2,

2013, at B1.

9. See Complaint, United States v. US Airways Grp., Inc., No. 1:13-cv-

01236, (D.D.C. Aug. 13, 2013) [hereinafter Complaint].

10. See, e.g., James B. Stewart, A Merger Too Far for U.S. and Airlines,

N.Y. T

IMES, Aug. 17, 2013, at B1 (“The government ‘abandoned the

framework it used in approving the last three airline mergers,’ said Paul

T. Denis, a partner at Dechert L.L.P. . . .”).

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This Comment analyzes the approval of the American–US Airways

merger and the economic impact on the airline industry. While many

believe the DOJ’s treatment of the merger signals a shift in policy, this

Comment will posit that the agency’s response is consistent with past

practice. In fact, this Comment will suggest that the requirements the

DOJ has imposed arguably do not do enough to remedy the potential

anticompetitive issues produced by the combination. Part I outlines the

complaints filed by the DOJ and explores the anticompetition concerns

raised. Using the merger guideline’s framework, Part I discusses the

alleged effects of the merger, as argued in the DOJ complaint. The

already concentrated market conflated with the sizeable competition

provided by two of the largest airlines proves the DOJ’s concerns to be

legitimate.

Part II details the litigation surrounding the prospective merger

and explores the antitrust settlement. Comparing recent approved

airline mergers, Part II argues that the settlement did not depart in

any meaningful way from previous antitrust policy in the airline

industry. The American–US Airways merger posed greater anticomp-

etition concerns than prior mergers causing the lawsuit. Ultimately, the

economics and trial uncertainty resulted in larger scale divestments

instead of an attempt to block the merger.

Part III analyzes the sufficiency of the settlement in light of the

original issues raised in the DOJ complaint and discusses the impact

on the airline market. By considering the economic implications of the

divestitures and the competition generated by Low Cost Carriers

(LCCs), Part III calls into doubt the settlement’s ability to redress the

original anticompetition concerns. Additionally, the economic impact

on the market appears to be a net positive, as it addresses the faltering

profitability of the airlines.

I. Expect Delays: The DOJ Complaint

In evaluating a proposed merger, the DOJ defines the market;

calculates the market concentration; considers the unilateral effects,

such as elimination of competition; and lastly contemplates potential

coordinated behavior.

Next, the DOJ balances the anticompetitive

effects against possible procompetitive effects.

Following the DOJ’s

examination, Bill Baer, head of the Antitrust Division at the DOJ made

the position of the agency perfectly clear when he stated that “[w]e

think the right solution here is a full-stop injunction.”

At first glance,

11. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER

GUIDELINES §§ 4–7 (2010) [hereinafter 2010 Merger Guidelines].

12. Id. at § 10.

13. David Ingram & Karen Jacobs, U.S. Sues to Block AMR-US Airways

Merger; Stocks Fall, REUTERS, Aug. 13, 2013, http://www.reuters.com/

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a DOJ suit to block the American–US Airways merger appears to be a

stark change with regard to past antitrust policy.

The State filed suit to block the American–US Airways deal,

claiming the merger violated Section 7 of the Clayton Act.

The DOJ

complaint relied upon the three anticompetitive effects penned in the

Merger Guidelines: (1) increased competition, (2) increased coordinated

behavior, and (3) elimination of head-to-head competition.

A. Increased Concentration

Looking to individual markets, the American–US Airways merger

would cause a significant increase in market concentrations. When

evaluating the effects on market concentration, the DOJ often calcu-

lates the Herfindahl-Hirschman Index (“HHI”) of market concentration

by summing the squares of each firm’s market share.

Generally,

unconcentrated markets contain an HHI below 1,500, moderately

concentrated markets contain an HHI between 1,500 and 2,500, and

highly concentrated markets contain an HHI above 2,500.

Additionally, if a merger creates a highly concentrated market and

“involve[s] an increase in the HHI of more than 200 points[, the merger]

will be presumed to be likely to enhance market power.”

A post-

merger American–US Airways would result in 1,000 city pairs,

exceeding a 2,500-point HHI while also increasing the HHI by more

than 200 points.

Also, of particular importance, the market would

consist primarily of three legacies, the major airlines with interstate

routes prior to the Deregulation Act of 1978 and the competitive Low

Cost Carrier (“LCC”) Southwest.

The post-merger result would be

article/2013/08/13/us-amr-usairways-lawsuit-idUSBRE97C0JF20130

813.

14. Stewart, supra note 10, at B1.

15. Complaint, supra note 9, at 7. Section 7 of the Clayton Act outlaws

acquisitions that substantially lessen competition or tend to create a

monopoly. 15 U.S.C. § 18 (2012).

16. Complaint, supra note 9, at 12–32.

17. 2010 Merger Guidelines, supra note 11, at § 5.3.

18. Id.

19. Id. If such a presumption is created, “[t]he presumption may be rebutted

by persuasive evidence showing that the merger is unlikely to enhance

market power.” Id.

20. Amended Complaint at 14, United States v. US Airways Grp., Inc., No.

1:13-cv-01236 (D.D.C. Sept. 5, 2013) [hereinafter Amended Complaint].

21. See Competition and Bankruptcy in the Airline Industry: The Proposed

Merger of American Airlines and US Airways: Hearing Before the

H. Comm. on the Judiciary, 113th Cong. 107 (2013) [hereinafter Airline

Hearings] (statement of Christopher L. Sagers, James A. Thomas

Distinguished Professor of Law, Cleveland State University) (“American

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four airline carriers with control over 80 percent of the domestic airline

market.

Ultimately, the airline industry currently operates at

abnormally high concentration throughout various markets, and if HHI

receives credence, the merger will cause anticompetitive effects.

However, market share statistics are not conclusive but merely a factor

to be considered.

B. Coordinated Behavior

The oligopolistic nature and readily transparent pricing in the

deregulation era of the airline industry makes coordinated pricing and

decreased service relatively simple to implement. Coordinating behavior

for an industry dominated by five firms is perhaps not as disconcerting

as an industry dominated by four firms. The DOJ pointed to four post-

merger results that would increase coordinated behavior: (1)

elimination of US Airways’ Advantage Fares program, (2) increased

capacity discipline, (3) elimination of American’s expansion plans, and

(4) increased fares.

US Airways plays a pivotal role in airline competition through its

Advantage Fares program, which offers discounted one-stop fares that

compete with nonstop fares.

Because US Airways would no longer be

competing with American, the DOJ expressed concern that the merger

would eliminate, or significantly curtail, US Airways’ Advantage Fare

program and, in turn, eliminate important competitive effects.

The

merger, in theory, would put an end to the one-stop discounted rate

offered by US Airways.

The DOJ additionally cited concerns that a post-merger market

would increase the practice of capacity discipline. Use of capacity

discipline—intentionally keeping a lower capacity growth in order to

increase returns—has become ubiquitous among legacies in order to

regain profitability in times of rising fuel prices and a depressed

/U.S. Airways deal would leave the sector with only four major players:

United, Delta, American and Southwest. Nationally, those four firms will

hold more than 70% of airline travel.”).

22. Ingram & Jacobs, supra note 13.

23. See Brown Shoe Co., Inc. v. United States, 370 U.S. 294, 322, n.38 (1962)

(“Statistics reflecting the shares of the market controlled by the industry

leaders and the parties to the merger are, of course, the primary index of

market power; but only a further examination of the particular market—

its structure, history and probable future—can provide the appropriate

setting for judging the probable anticompetitive effect of the merger.”).

24. See Complaint, supra note 9, at 15–30.

25. See Amended Complaint, supra note 20, at 18 (stating that US Airways’

one-stop flights are “up to 40% cheaper than other airlines’ nonstop

service”).

26. Id. at 18–23.

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economy.

Industry consolidation allows for greater use, or perhaps

abuse, of capacity discipline. Industry trends prove an increase in

limiting service through this practice.

Noting the economic benefits,

the DOJ ultimately expressed disdain for the decline in flights and

resulting increase in fares.

Airline executives, including the president

of US Airways, have stated the important effects of capacity discipline

and show no signs of cutting this practice.

Giving more force to the

DOJ’s argument, post-merger United “reduced capacity at nearly all of

its major hubs (including Cleveland) and at many other airports where

the two airlines previously competed.”

Perhaps the most important

effect of capacity discipline by an American–US Airways merger would

27. See MICHAEL D. WITTMAN, AN ASSESSMENT OF AIR SERVICE ACCESSIBIL-

ITY IN U.S. METROPOLITAN REGIONS, 2007–2012, AT 17 (2014), available at

http://hdl.handle.net/1721.1/87063 (“[T]he number of flights at most

U.S. airports decreased from 2007 [to] 2012 as airlines reconfigured their

networks and practiced ‘capacity discipline’ in the face of high fuel prices

and a recessed economy . . . .”); see also MICHAEL D. WITTMAN & WILLIAM

S. SWELBAR, TRENDS AND MARKET FORCES SHAPING SMALL COMMUNITY

AIR SERVICE IN THE UNITED STATES (2013), available at

http://hdl.handle.net/1721.1/87064 (“Instead of operating as many

flights as possible in an attempt to gain market share, large airlines began

a more efficient capacity and network management paradigm in an

attempt to reduce operating costs by removing redundant flying and

rationalizing service at some smaller hubs.”).

28. See Chris Tarry, ANALYSIS: Capacity discipline still necessary despite

rosier economic outlook, Airline Business (May 2, 2014) (“In terms of

regional variation, the capacity discipline evident among the North

American airlines seems to be continuing. Within the North American

domestic market, capacity in 2014 is expected to be just 2% higher than

in 2013, following a 2.2% increase last year.”), available at http://www.

flightglobal.com/news/articles/analysis-capacity-discipline-still-necessary

-despite-rosier-economic-398254/.

29. Amended Complaint, supra note 20, at 23–26.

30. See, e.g., Press Release, Delta Air Lines, Delta Air Lines Announces

September Quarter Profit (Oct. 25, 2011) http://news.delta.com/index.

php?s=20295&item=123808 (“With continued capacity discipline,

coupled with improvements we are making in our product and service, we

are well positioned to deal with the impact of today’s high fuel prices and

an uncertain economy.”) (quoting Delta’s President Ed Bastian); Jay

Boehmer, Carriers Continue to Make the Most of Capacity Control, Bus.

Travel News, June 28, 2010, at 19 (“‘One of the most important things

that happened in the industry is capacity discipline,’ US Airways

president Scott Kirby said. ‘In 2009, you saw all airlines reduce capacity,

following the spike in fuel and the bad revenue environment. What was

unique about 2008 and 2009 capacity is that not only the legacy carriers

reduced capacity, but for the first time in history of the industry the low-

cost carriers by and large reduced capacity . . . .’”)

31. Amended Complaint, supra note 20, at 25.

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be a resulting decline in connectivity.

A more concentrated market

would increase coordinated efforts to reduce seating and services in

order to increase profitability.

American’s original bankruptcy plan consisted of firm growth and

expansion, which the DOJ believed would end if the merger goes

through. American submitted a plan that consisted of concentrating on

their five key hubs by “[e]xpanding American international presence,”

utilizing “codesharing,” “implementing a long-term fleet plan, creating

a capital structure that allows American to grow,” and “setting up a

sustainable cost structure.”

The complaint argued that with the

merger, American would likely abandon their previous plan to increase

flights.

Eliminating overlapping routes, in part, makes the airline

mergers financially advantageous. US Airways executives argued that

the combined networks would create additional connecting routes and

ultimately expand service.

A merger between American and US

Airways would undercut the incentive and need for American’s

expansion.

The price fixing paradigm generally accepts that fewer firms in a

market increases the ease in which prices can be coordinated. The

complaint cited recent examples of coordinated pricing that persist at

current concentration levels.

Given the close nature and transparency

32. See, e.g., Wittman, supra note 27, at 19 (“Very large regions of over 5

million residents saw their average Air Service Accessibility Index score

decrease by 10.2% from 2007 [to] 2012. While this is a significant decline,

it is less than the average decline of 11.6% for all regions [over] the same

period. Medium-sized regions with populations of 0.5 million—5 million

felt the biggest brunt of the decline in service at medium-sized U.S.

airports. These regions lost about 14.3% of their air service accessibility,

on average, from 2007 [to] 2012.”); see also Wittman & Swelbar, supra

note 27, at 3 (“Instead of operating as many flights as possible in an

attempt to gain market share, large airlines began a more efficient

capacity and network management paradigm in an attempt to reduce

operating costs by removing redundant flying and rationalizing service at

some smaller hubs.”).

33. In re AMR Corp., 477 B.R. 384, 402 (Bankr. S.D.N.Y. 2012).

34. Amended Complaint, supra note 20, at 26.

35. Airline Hearings, supra note 21, at 35 (statement of Stephen L. Johnson,

Executive Vice President, Corporate and Government Affairs of US

Airways, Inc.) (“To illustrate the effect of the superior combined network,

even if you focus only on airports with more than 50 departures per week,

the merger will create over 1,300 new online connecting routes benefiting

millions of passengers.”).

36. See, e.g., Amended Complaint, supra note 20, at 27 (“American

announced that it would charge for a first checked bag on May 21, 2008.

On June 12, 2008, both United and US Airways followed American’s lead.

Similarly, over a period of just two weeks this spring, all four legacy

airlines increased their ticket change fee for domestic travel from $150 to

$200.”).

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of current airline practices, high levels of coordinated pricing and

business schemes already exist, and it seems inconclusive whether one

less legacy can aggravate the current conditions.

C. Elimination of Competition

The new American would dethrone Delta as the largest domestic

airline carrier, raising concerns of a likely decrease in competition. Pre-

merger American and US Airways competed against each other, with

nonstop service on seventeen routes domestically.

Arguably, a

generally undifferentiated product, such as airline travel, exacerbates

this concern.

Indeed, LCCs, with the exception of Southwest, cannot

provide the necessary competition to the legacy dominated market.

The complaint particularly singled out Reagan National, noting that

the combined airline would possess 69 percent of the slots.

Moreover,

American would no longer be competing at Reagan National against

US Airways’ already dominant presence. For these reasons, elimination

of a legacy post-merger undercuts significant competition in the market.

D. Procompetitive Effects

The DOJ alleged an absence of procompetitive effects regarding the

prospective merger.

It may, however, be axiomatic that a DOJ

complaint seeking to prevent a merger would not contain propitious

effects of the proposed transaction. Specifically, the complaint states

that the merger would not result in expansion and the new airline would

participate in coordinating conduct.

37. Amended Complaint, supra note 20, at 30.

38. See 2010 Merger Guidelines, supra note 11, at § 6.3 (“In markets involving

relatively undifferentiated products, the Agencies may evaluate whether

the merged firm will find it profitable unilaterally to suppress output and

elevate the market price. A firm may leave capacity idle, refrain from

building or obtaining capacity that would have been obtained absent the

merger, or eliminate pre-existing production capabilities.”).

39. See Airline Hearings, supra note 21, at 109 (statement of Christopher L.

Sagers, James A. Thomas Distinguished Professor of Law Cleveland State

University) (“While there are a few remaining LCCs that have some

wherewithal to compete, the only LCC whose entry has ever persistently

driven down fares in city-pair markets is Southwest, and Southwest has

now achieved a nationwide presence of its own and its costs are believed

to have risen as well.”).

40. Amended Complaint, supra note 20, at 30.

41. Complaint, supra note 9, at 6–7.

42. Amended Complaint, supra note 20, at 33.

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II. Cleared for Take-Off: The Settlement

A. Previous Mergers

The Delta-Northwest merger in 2008 and the United Airlines–

Continental merger in 2010 provide the most relevant examples of the

DOJ’s current antitrust policy in the airline industry. Delta acquired

Northwest in a $2.6 billion deal that crowned Delta the largest airline

at the time.

The DOJ closed its investigation of the Delta-Northwest

merger by issuing a statement highlighting the anticipated efficiencies

and procompetitive effects.

The DOJ chose not to implement any

remedial measures and approved the merger. The effects of the merger,

however, paint a contrary picture. All other things held constant, the

merger caused the total passengers in 2009 to decline by 5.3 percent

compared to the 3.5 percent decline the prior year.

Additionally,

Delta’s Cincinnati hub saw a 50 percent decline in passengers between

2005 and 2009.

The elimination of Northwest as a separate competitor

equated roughly to a 5.1 percent increase in fare price, at least in the

short run.

43. John Crawley, Delta Buys Northwest to Create Biggest Airline, Reuters

(Oct. 30, 2008, 7:32 AM), http://www.reuters.com/article/

2008/10/30/us-delta-northwest-idUSTRE49S8BA20081030.

44. See Press Release, Dep’t of Justice, Statement of The Department of

Justice’s Antitrust Division on Its Decision to Close Its Investigation of

the Merger of Delta Air Lines Inc. and Northwest Airlines Corporation

(Oct. 29, 2008), http://www.justice.gov/opa/pr/2008/October/08-at-

963.html (“[T[he merger likely will result in efficiencies such as cost

savings in airport operations, information technology, supply chain

economics, and fleet optimization that will benefit consumers. Consumers

are also likely to benefit from improved service made possible by

combining under single ownership the complementary aspects of the

airlines’ networks.”).

45. Press Release, Dep’t of Transp., Summary 2009 Traffic Data for U.S and

Foreign Airlines: Total Passengers Down 5.3 Percent from 2008 (March

29, 2010), http://www.rita.dot.gov/bts/sites/default/files/rita_

archives/bts_press_releases/2010/bts015_10/pdf/bts015_10.pdf.

46. Press Release, Dep’t of Transp., Summary 2008 Traffic Data for U.S and

Foreign Airlines: Total Passengers Down 3.5 Percent from 2007 (Apr. 23,

2009), http://www.rita.dot.gov/bts/sites/default/files/rita_

archives/bts_press_releases/2009/bts019_09/pdf/bts019_09.pdf.

47. John W. Fischer & Michaela D. Platzer, Airline Industry Mergers: Issues

of Congressional Interest, in Airline Industry Mergers:

Background and Issues 1, 7 (Felix J. Mercado ed., 2011).

48. See Dan Luo, The Price Effects of the Delta/Northwest Airline Merger,

44 Rev. Indus. Org. 27, 45 (2013) (“Although . . . the regression

coefficient of DL/NW overlap routes is insignificant in nonstop markets,

the actual fares increased by 5.1%. There is a positive fare trend between

the periods, but another reason for the positive price effect is that the

merger appeared to cause exit by LCCs that provided nonstop service.”).

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The United-Continental merger came on the heels of the DOJ’s

rejection of Continental’s request for antitrust immunity to work with

United, among other carriers, in setting prices and scheduling.

In a

similar financial state as American, United and Continental faced

significant losses in 2009.

Like the American–US Airways presence at

Reagan National, United-Continental’s resulting 60 percent control out

of Newark gave the DOJ pause.

Ultimately, the United-Continental

investigation ended with the airlines agreeing to transfer slots at

Continental’s key hub, Newark, to Southwest.

Satisfied with the

remedial divestiture, the DOJ stated that the merger “will likely

significantly benefit consumers on overlap routes as well as on many

other routes.”

For many observers, approval seemed inevitable

because the airlines contained complimentary routes with minimal

overlap.

The newly formed airline became the largest airline. The

merger did not come without complications. The new airline hit

turbulence with consumers, ranking worst for the number of consumer

complaints, but that is an aside from the competition focus.

But cf. id. at 45 (finding that the change in overlap markets was close to

zero). The results are based on the first quarter of 2008 (pre-merger) data

and the second quarter of 2010 (post-merger) data. Id. at 30.

49. Dealbook, D.O.J. Opposes Antitrust Immunity for Continental, N.Y.

Times (June 30, 2009, 6:05 AM), http://dealbook.nytimes.com/2009/

06/30/doj-opposes-antitrust-immunity-for-continental/.

50. See Fischer & Platzer, supra note 47, at 7 (“[R]evenues were down 19.1%

at United (losing $651 million) and 17.4% at Continental (losing $282

million) between 2008 and 2009.”).

51. Julie Johnsson, Antitrust Regulators OK United-Continental Deal, Chi.

Trib., Aug. 28, 2010, at C8.

52. Press Release, Dep’t of Justice, United Airlines and Continental Transfer

Assets to Southwest Airlines in Response to Department of Justice’s

Antitrust Concerns (Aug. 27, 2010) [hereinafter Continental-United Press

Release], http://www.justice.gov/opa/pr/2010/August/10-at-974.html.

53. Id.

54. See Justin Dickerson, Antitrust in the Skies: The United and Olympic

Airline Mergers, 15 Touro Intl. L. Rev. 1, 8 (2012) (“Nonetheless, most

industry experts also anticipated that United and Continental would face

few antitrust objections. United and Continental separately shared no

hubs, and were not in significant ‘head-to-head’ competition as horizontal

competitors on many routes domestically or internationally.”).

55. See U.S. Dep’t of Transp., Air Travel Consumer Report 42 (2012)

available at http://www.dot.gov/sites/dot.gov/files/docs/2012

AugustATCR_1.pdf (averaging 6.86 complaints per 100,000

enplanements compared to the 2.50 complaints for the second worst).

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More recently, the DOJ approved a Southwest-Airtran merger

2011 without the remedial measures that were present in the United-

Continental merger.

Indeed, the DOJ believed that the merger would

ultimately be beneficial to consumers through “new service on routes.”

The minimal route overlap and size differential prevents a meaningful

analogy to the American–US Airways merger. The Southwest-Airtran

merger did not involve a legacy nor did it concern the same market

concentration as the American–US Airways merger.

B. Current Settlement

In remedying an anticompetitive merger, agencies utilize two types

of remedies: structural and conduct.

Agencies express a preference for

structural remedies due to the increased certainty provided and their

cost-effective nature.

Given previous concerns over effective monitor-

ing and collusion allegations,

a structural divestiture settlement

seemed inevitable. Furthermore, the DOJ implemented similar divesti-

tures in the United-Continental merger.

56. The transaction is actually an acquisition but has become commonly

termed a “merger” and still provides a relevant example.

57. Press Release, U.S. Dep’t of Justice, Statement of the Department of

Justice Antitrust Division on Its Decision to Close Its Investigation of

Southwest’s Acquisition of Airtran (Apr. 26, 2011), http://www.justice.

gov/opa/pr/2011/April/11-at-523.html (noting that the DOJ’s Antitrust

Division “did not challenge the acquisition after considering the consumer

benefits”).

58. Id.

59. See U.S. Dep’t of Justice, Antitrust Division Policy Guide to

Merger Remedies 6 (2011), available at http://www.justice.gov/

atr/public/guidelines/272350.pdf (“Structural remedies generally will

involve the sale of physical assets by the merging firms or requiring that

the merged firm create new competitors through the sale or licensing of

intellectual property rights. . . . A conduct remedy usually entails

provisions that prescribe certain aspects of the merged firm’s post-

consummation business conduct.”).

60. See U.S. Dep’t of Justice, Antitrust Division Policy Guide to

Merger Remedies 7 (2004), available at http://www.justice.gov/atr/

public/guidelines/205108.pdf (“Structural remedies are preferred to

conduct remedies because in merger cases because they are relatively clean

and certain, and generally avoid costly government entanglement in the

market.”); see also Jessica C. Strock, Setting the Terms of a Break-Up:

The Convergence of Federal Merger Remedy Policies, 53 Wm. & Mary

L. Rev. 2147, 2154 (2012) (“An analysis of divestiture policy is important

because the agencies favor divestitures over other types of merger

remedies.”).

61. See supra note 36 and accompanying text.

62. See Continental–United Press Release, supra note 52.

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Providing transparency for the airline industry or quelling critics,

the DOJ issued its Competitive Impact Statement outlining the current

settlement and its remedial nature. The settlement agreement “requires

the divestiture of slots, gates, and ground facilities at key airports

around the country to permit the entry or expansion of airlines that

can provide meaningful competition in numerous markets. . . .”

Specifically, the new American must divest 104 slots at Reagan

National, thirty-four slots at LaGuardia, and two airport gates at each

Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles

International, and Miami International.

In application, the merged airlines lost 15 percent of the combined

airline slots at Reagan and 7 percent at LaGuardia.

The settlement

also accounted for fears of further expansion of the new airline

powerhouse. The settlement prevents reacquisition of divested slots and

requires advanced notification of any slot acquisition at Reagan

National, regardless of whether it meets the HSR Act threshold.

The Department of Transportation shared interests and concerns

with the DOJ and entered into its own agreement with the merging

airlines. Primarily concerned with the merger’s effect on smaller

communities, the agreement required the newly formed airline to

“schedule all commuter slots held or operated by US Airways, AMR,

or New American . . . to serve Medium, Small and Non-hub airports

for a term . . . of five . . . years.”

Passing DOJ scrutiny represented perhaps the steepest hurdle;

however, the merger required further clearance. Opponents of the

settlement sought a TRO in contemplation of their pending civil suit

under Section 26 of the Clayton Act.

The bankruptcy court ultimately

denied the Plaintiffs’ TRO and allowed the transaction to proceed.

Determined, challengers proceeded to the D.C. District Court. The

District Court held that the proposed settlement was in the public

63. Competitive Impact Statement at 2, United States v. US Airways Grp.,

Inc., 2014 U.S. Dist. LEXIS 101877 (D.D.C. Nov. 11, 2013) (No. 1:13-cv-

01236-CKK) [hereinafter Competitive Impact Statement].

64. Id. at 2–3.

65. Bart Jansen, Justice Settles Merger Lawsuit with AA, US Airways, USA

Today (Nov. 12, 2013, 2:05 PM), http://www.usatoday.com/story/

travel/flights/2013/11/12/justice-merger-american-us-airways/3506367/.

66. Competitive Impact Statement, supra note 63, at 14.

67. Agreement Regarding Merger Between US Airways Group,

Inc., and AMR Corporation 1 (2013), available at http://www.dot.

gov/stes/dot.dev/files/docs/FinalAgreement_DOT_US_AA_.pdf.

68. Section 26 allows private parties to sue for injunctive relief based on

anticipated damage caused by an alleged violation of antitrust laws.

15 U.S.C. § 26 (2012).

69. In re AMR Corp., 502 B.R. 23, 42 (Bankr. S.D.N.Y. 2013).

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interest under the Tunney Act.

Citing the low rational basis standard,

the District Court rejected concerns of loss of routes and lack of scale

for the divestments.

Anticompetitive concerns surfaced on an international level as well.

The European Commission notably determined that the merger would

cause a monopoly for the London–Philadelphia route at the London

Heathrow airport.

In similar fashion to the DOJ, the European

commission utilized divestitures and cleared the transaction.

While some onlookers may view the treatment of the American–US

Airways merger as new antitrust policy for the airline industry, the

DOJ’s action appears in congruence with previous mergers and shifting

market conditions. Indeed, the $11 billion American–US Airways

merger

encapsulated greater route overlap in a more concentrated

market

than the previous mergers. Perhaps the uncertainty of trial

prompted the settlement, or perhaps it was an unwillingness to pay

higher fares by the many DOJ employees flying out of D.C. Ultimately,

the uncertainty of trial and prospective economic analysis likely carried

the day.

70. United States v. US Airway Grp., Inc., No. 13-cv-1236 (CKK), 2014 WL

1653269 (D.C.C. Apr. 25, 2014). The District Court found the divestitures

to LCCs to be adequate in order to offset the anticompetitive effects of

the merger and stated that the settlement will provide LCCs “new

incentives to invest in new capacity and generate additional passenger

demand.” Id. at 29–30. 15 U.S.C. § 16(e)(1) requires a comment period

for judgments entered into by the United States in order to determine

whether the judgment represents public interest. 15 U.S.C. § 16(e)(1)

(2012).

71. US Airway Grp. 2014 WL 1653269, at *7.

72. Press Release, European Comm’n, Mergers: Commission Approves

Proposed Merger Between US Airways and American Airlines’ Holding

Company AMR Corporation, Subject to Conditions (Aug. 5, 2013)

http://europa.eu/rapid/press-release_IP-13-764_en.pdf.

73. Id. (“US Airways and American Airlines submitted commitments to

release one daily slot pair at London Heathrow and Philadelphia airports,

and also provided further incentives such as the possibility for a new

entrant to acquire grandfathering rights after a certain period of time.”).

74. Jia Lynn Yang & Ashley Halsey III, Antitrust Officials Sue to Block US

Airways-American Airlines Merger, Wash. Post (Aug. 13, 2013), available

at http://www.washingtonpost.com/business/econmy/officials-sue-to-block-

us-airways-american-airlines-merger/2013/08/13/6e2f3f0e-0427-11e3-9259-

e2aafe5a5f84_story.html.

75. See supra Part I.A.

76. See J. Parker Erkmann, Drama at the Courthouse Door: The US Airways-

American Merger, 1 Air & Space L. Jul. 1, 2014, at 1, 16 (“The DOJ’s

decision to settle reflects the significant litigation risk it faced. While all

settlements reflect an assessment of litigation risk, the DOJ was under

intense pressure. It had the burden of proving that the transaction would

substantially lessen competition. This showing would be made with

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III. Possible Turbulence:

An Analysis of the Settlement

A. Adequacy of the Settlement

The airports requiring divestitures in the settlement undoubtedly

address the anticompetitive arguments addressed in the DOJ complaint

at least to some extent at those airports; however, the remedial nature

is less certain at the other concentrated airports not requiring divest-

itures. Rationalizing the settlement’s anticompetitive effects in other

markets or airports presents a separate challenge. Additionally, the

DOJ’s settlement does not seek preservation of US Airways’ Advantage

Fare program.

The DOJ cannot rest on its laurels regarding the

Reagan National and LaGuardia divestitures while neglecting to

address the harm posed to passengers at other airports.

In thorough

fashion, the initial complaint outlined more than 1,000 city pairs with

an HHI increase in the highly concentrated range,

yet only seven

airports require divestments. Of course, the divested airports will affect

other airports through connecting routes.

The Competitive Impact Statement issued by the DOJ defends the

then anticipated pushback from merger opponents.

Unremarkably and

unsurprisingly, the CIS outlined anticipated benefits of LCC expansion

and the void it will fill given the loss of a legacy. In pertinent part, the

CIS estimates that the divestments allow LCCs to provide an additional

four million seats per a year at Reagan National and 1.5 million seats

per year at LaGuardia.

Stepping away from market specifics, the settlement does not

provide for a similar legacy powerhouse like American and its pre-

merger expansion plan.

The original complaint highlighted the highly

documents and testimony of the parties and industry participants and

economic analysis as presented by testifying experts.”).

77. But cf. United States v. US Airways, Grp., Inc., 79 Fed. Reg. 14,279,

14,287 (Mar. 13, 2014) (“[T]he benefits of LCC entry and expansion

enabled by the remedy will extend to a larger number of passengers and

deliver a greater overall benefit to consumers as compared to the

Advantage Fares program.”).

78. See Kottaras v. Whole Foods Mkt, Inc., 281 F.R.D. 16, 25 (D.D.C. 2012)

(“[A] merger that substantially decreases competition in one place—

injuring consumers there—is not saved because it benefits a separate

group of consumers by creating competition elsewhere.”).

79. See Amended Complaint, supra note 20, at Appendix A.

80. See Competitive Impact Statement, supra note 63.

81. Response of Plaintiff United States to Public Comments on the Proposed

Final Judgment at 11, United States v. US Airways Grp., Inc., No. 1:13-

cv-01236 (CKK) (D.D.C. Mar. 10, 2014) [hereinafter Response].

82. See Competitive Impact Statement, supra note 63, at 8 (“The proposed

remedy will not create a new independent competitor, nor does it purport

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competitive effects of US Airways’ Advantage Fares and their effect on

competition with nonstop fares provided by legacies, yet the settlement

makes little mention of remedial measures for the inevitable demise of

Advantage Fares.

In other words, the settlement does not adequately

explain how the divestitures will redress many of the original

anticompetitive concerns.

The DOJ ended its investigation of the United-Continental merger

after the airlines promised to divest certain gates.

Three years later,

the DOJ appeared to have buyer’s remorse with the deal, using the

result of the transaction as a justification for blocking the American–

US Airways merger.

Of course, the present settlement requires more

extensive divestments. Even still, the total divested slots reflect an

approximate 112 daily flights a day in comparison to the 6,700 daily

flights that the new airline will operate a day.

Assistant Attorney

General William Baer argued that the divestments allow for LCCs to

disrupt the tight-knit, legacy-dominated market in a way that would

otherwise be impossible.

In D.C. fashion, the DOJ turned the once

cautionary tale of United-Continental into a supporting case for the

current settlement. The thirty-six divested slots allowed Southwest to

create five nonstop routes, which led to sixty connecting routes.

Slots at specific airports like Reagan National and LaGuardia and

the limited gates at other airports, which rarely change hands, maintain

difficult and almost insurmountable barriers to entry. Arguably, the

settlement enabled the DOJ to address the longstanding concern of

to replicate American’s capacity expansion plans or create Advantage

Fares where they might otherwise be eliminated.”).

83. See Letter from the American Antitrust Institute et al., to William H.

Stallings, Chief, Transp., Energy & Agric. Section of the Dep’t of Justice

Antitrust Div. 11 (Feb. 7, 2014), available at http://www.

justice.gov/atr/cases/usairways/comments/aaus010.pdf [hereinafter AAI

Letter] (“[C]onsumers on the routes where American and US Airways

competed with nonstop service will be harmed (such as those flying

between Charlotte and Dallas-Ft. Worth), as will the ‘[m]illions of

consumers [who] have benefitted’ from Advantage Fares . . . .”) (quoting

Complaint, supra note 9).

84. See Continental-United Press Release, supra note 3.

85. See Amended Complaint, supra note 20, at 25 (“United and Continental

closed their deal on October 1, 2010. The combined firm has reduced

capacity at nearly all of its major hubs (including Cleveland) and at many

other airports where the two airlines previously competed.”).

86. Jad Mouawad & Christopher Drew, Justice Dept. Clears Airlines’ Merger,

N.Y. Times, Nov. 13, 2013, at B2.

87. Id.

88. Response, supra note 81, at 9–10.

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LCC expansion by facilitating LCC entry at major airports.

consideration of the limited divestments in comparison to the inevitably

greater loss of routes due to overlap, it is important to note that legacies

and LCCs are not equal in market impact. Specifically, the impact on

price fares caused by entry of a legacy pales in comparison to fare

reductions caused by entry of an LCC.

The DOJ response brief cited

JetBlue’s entry into the Reagan National to Boston route, which

reportedly caused average fares to drop by 39 percent and passengers

to almost double.

Allowing LCCs to enter the market, the settlement

can prove a disrupter for previously tight-knit coordination among the

legacies.

Perhaps the added competition that LCCs will provide to the

divested airport slots and gates address the expansive anticompetitive

arguments originally raised. Even still, the consensus on LCCs is

splintered, at best, with Southwest providing the most significant

competition.

Most notably, LCCs do not have the necessary network

to adequately compete with the now three legacies.

The settlement

does, however, allow for LCC expansion, but given the limited and

89. See id. at 8 (“The LCCs that acquire the assets will establish stronger

positions at strategically important destinations—including top business

markets—where it has been particularly difficult to obtain access. These

assets will provide them with the incentive to invest in new capacity and

position them to offer more meaningful competition system-wide, forcing

legacy carriers to respond to that increased competition.”).

90. See Jan K. Brueckner, Darin Lee & Ethan S. Singer, Airline Competition

and Domestic US Airfares: A Comprehensive Reappraisal, 2 Econ. of

Transp. 1, 2 (2013) (“The presence of in-market, nonstop LCC

competition reduces fares by as much as 33% in the nonstop markets, and

adjacent LCC competition in these markets reduces fares by as much as

20%. . . . The addition of a second legacy nonstop carrier reduces fares by

at most 5.3% in these markets, with a third carrier having no fare effect.”).

91. Response, supra note 81, at 10.

92. Compare Michael D. Wittman & William Swelbar, Evolving

Trends of U.S. Domestic Airfares: The Impacts of Competition,

Consolidation, and Low-Cost Carriers, 20 (2013) (“The presence

of an LCC like Southwest, JetBlue, Allegiant, or Spirit is associated with

a decrease in average one-way fare of between $15 [and] $36, depending

on the airline and the year and controlling for distance and other airport

characteristics. However, the presence of AirTran and Frontier no longer

have a significant effect on average one-way fares once other LCC

competition is taken into account.”), with Luo, supra note 48, at 37 (“The

presence of Southwest lowers fares by 7%, while the coefficient of other

LCC competitors providing connecting service is insignificant.”).

93. See Amended Complaint, supra note 20, at 3–4 (“That enhanced

cooperation is unlikely to be significantly disrupted by Southwest and

JetBlue, which, while offering important competition on the routes they

fly, have less extensive domestic and international route networks than

the legacy airlines.”).

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airport-specific divestments, the LCCs will likely be unable to realize

the growth needed to generate systemic competition.

In modern times,

Low Cost Carrier may be a misnomer as operating costs of LCCs

increase.

Additionally, the uncertainty as to which LCCs will receive

the divested slots and gates, along with the uncertainty as to how those

assets will be used, casts doubt on the sufficiency of the settlement.

B. Impact on Market Efficiency

Market efficiency may be ancillary to the DOJ’s primary concern

of maintaining competition and protecting consumers, but it remains

relevant to the point of sustainable growth.

Proponents of market

consolidation calculate that the airline market currently underprices

fares, and an increase in individual market share—by merging airlines

or by market exits—will only ameliorate the current inefficiencies.

While raising fare prices may appear contrary to competition concerns,

under a long-run lens, consolidating the market would assuage previous

allocative inefficiencies and allow airlines to move closer to Pareto

optimal pricing.

The Delta-Northwest and United-Continental

mergers arguably proved the benefits of achieving economies of scale.

94. See AAI Letter, supra note 83, at 10 (“[D]ivestitures to smaller LCCs will

have no system-wide impact, and indeed arguably reduce the likelihood

that Southwest or JetBlue could conceivably discipline the oligopoly

behavior of the ‘Big 3.’”).

95. See Mauricio Emboaba Moreira, John F. O’Connell & George Williams,

The Viability of Long-Haul, Low Cost Business Models, 2 J. of Air

Transp. Stud. 69, 88 (2011) (finding that LCCs have no more than a

10% cost advantage over legacies through three studies).

96. Antitrust policy concerns the total welfare standard, not the consumer

surplus standard. See Barak Y. Orbach, The Antitrust Consumer Welfare

Paradox, 7 J. Competition L. & Econ. 133, 162 (2010) (“As a surplus

criterion, as opposed to welfare optimization, the total surplus standard

is consistent with the antitrust methodology.”).

97. See, e.g., Paul Mifsud et al., Commentary: United + Continental Is a Big

Win for All Stakeholders, 329 Airfinance J. 6 (2010) (“What we found

was that, for the decade ending in 2009, the industry produced an average

of 7% excess capacity, and this factor alone led to $70 billion in net losses

(in 2009 $), or negative 5.7% in revenue. The elasticity of demand analysis

concluded that the industry underpriced the product by 11% over the 10

years ending 2009. . . . The only way the industry could have priced the

product above its true economic cost would have been to reduce the 7%

excess capacity by raising revenue to the required level. Of course, this

was not possible because every airline had to grow market share in order

to lower relative unit costs and expand valuation multiples.”).

98. Id.

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Both airlines saw a reduction in both fixed

and variable costs

100

after

consummating their transactions. Moving forward, the new American

can expect similar reductions in operation costs and increased profits.

Conclusion

The airline market continues to consolidate in an attempt to

achieve economies of scale. The DOJ, in recent years, exercised a unique

and relaxed antitrust policy in the airline industry. Filing suit to block

the American–US Airways merger appeared contrary to that prior

policy; however, the DOJ’s antitrust policy in the airline industry did

not change in any meaningful way, and future proposed mergers can

expect similar treatment, albeit not legacies. The complaint outlined

very real concerns of anticompetitive effects that will result from the

merger, yet the divestitures instituted in the settlement remedy a

limited number of those effects.

Mathew Drocton

†

99. See Philip G. Gayle & Huubinh B. Le, Measuring Merger Cost Effects:

Evidence from a Dynamic Structural Econometric Model 33 (Jan. 8, 2014)

(unpublished manuscript) https://editorialexpress.com/cgi-bin/

conference/download.cgi?db_name=IIOC2013&paper_id=122 (finding

that the post-merger United-Continental had a $6,479 lower than mean

fixed costs among other airlines and post-merger Delta-Northwest had a

$5,478 lower than mean fixed costs).

100. See Id. at 29–30 (calculating a $7.50 decline in marginal costs for Delta-

Northwest and a $13.60 decline in marginal costs for United-Continental).

† J.D. Candidate, 2015, Case Western Reserve University School of Law.