US Department of Justice Gets a Cranky Jackass Award for Its Lawsuit to Stop the US Airways/American Merger

The shock of the year was delivered yesterday when the US Department of Justice (DOJ) announced that it was suing to stop the merger between American and US Airways from going ahead. While I think everyone figured that there would be some concessions required at slot-restricted Washington/National airport, nobody predicted that the DOJ would really try to block this in its entirety. The response has been nearly unanimous — this is insane. And for that, the DOJ has earned itselfCrazy Jackass Award a Cranky Crazy Jackass award.

The Merger is On Hold, Temporarily
Let’s start with what this means for the merger. The DOJ has decided it wants to block the merger, and to do that, it has to file a lawsuit. That is what happened yesterday. There will now be a million meetings back and forth seeing if they can hammer out some sort of agreement around concessions to get the DOJ to withdraw its lawsuit. If that happens, then it’ll be back on track. If it doesn’t, it’ll go to court, and they’ll have to fight it out. That could take months.

Why is this happening right now? Well, the bankruptcy judge was about to approve the merger at a hearing tomorrow, so DOJ had to act now if it wanted to butt in. It did. This could mean that they just wanted more time to conclude an agreement with the new American, and this is the way to do it. But the wording that’s coming out of the DOJ right now is so strong (read this transcript) that they are trying to make it clear they want this thing called off. Of course, this is Washington so you can never take anything at face value anyway. It could just be politics and negotiation. The only thing we know is that the merger isn’t closing in the next couple weeks. They’ll be lucky to get it done by the end of the year, if at all.

Sloppy Arguments
If you’d like, you can read the 56-page complaint filed by the DOJ here, but I might recommend against it. Personally, this lawsuit bothers me a lot. Why is that? Because when I see the government delve into something that I actually know about, and I see how absolutely amateurish and inaccurate the arguments are, it makes me lose faith in our government’s ability to do anything.

There are several arguments being laid out, and I’m going to post tomorrow with a point-by-point review. But the DOJ really seems to have outdone itself this time. I like the first impression from Jamie Baker (analyst with J.P. Morgan).

While we’ve not thoroughly digested all the legal merits of a proposed suit(s), our first interpretation is that DOJ has significantly altered its usual [mergers and acquisitions] analysis to introduce connecting markets and baggage fees into its calculus. As such, it is difficult for us to imagine how both parties could offer any meaningful regulatory appeasement.

It really does appear that DOJ has gone off the rails. The best way to sum up the argument is that airlines should all be punished for trying to be successful enterprises. The complaint is filled with talk about how capacity has shrunk and fares have risen. They think this merger will result in more of the same. But what they’ve failed to recognize is that the airline industry of the past was a sickly mess. You had too many cooks in the kitchen and some of them had the cooking skills of a 12-year-old. So airlines pushed in too much capacity just to gain market share, then they had to discount fares and nobody made money. It was a mess.

Apparently the DOJ likes that plan. It’s sad to think this is how the government looks at private industry. If you want to decide that the airline industry is a public utility, then go all-in and fully regulate it. (Fares will rise, but I would respect the argument.) Otherwise, this nanny-state-style semi-regulation will keep the industry from ever becoming truly healthy.

A Lawsuit That Will Do the Reverse of What It’s Designed to Do
What makes this worse is that all the other big mergers have been approved. Delta and United are now so much bigger and have so much more coverage than either American or US Airways, that they are in a different class. Neither American nor US Airways can adequately compete with those two alone. So by denying the ability for American and US Airways to become one, DOJ is actually hurting competition by ensuring that there are only two competitors at the top instead of three.

What I find really frustrating is how the DOJ seems to have decided to take some arguments at face value while refuting others, solely because it helps their complaint and not for legitimate reasons. They have no problem accepting historical statements from American and US Airways that they’ll be fine as standalone airlines. DOJ applies no rigor to see if that’s actually the case. But they refuse to accept the merger arguments being made by both airlines. That doesn’t make much sense.

I do believe US Airways can survive as a standalone airline; a niche carrier that earns less revenue and therefore has to keep its costs lower. That means labor gets paid less, so they don’t really like this plan either.

I have a more difficult time imagining American surviving on its own. It simply can’t provide the breadth and depth needed to compete with Delta and United (once it gets its act together) on a global scale. What’s more, the very plans to provide substantial capacity increases (praised by DOJ), are misguided and likely to hurt not just American but the entire industry, if seen to fruition. If American remains under current management, I do have concerns about its ability to succeed in the long run.

But is that really for DOJ to judge? If the two airlines can combine to create a better, more profitable company, then that should be their prerogative, assuming the anti-competitive effects aren’t too great. DOJ has used flawed analysis to try to prove that this is anti-competitive, and I’ll show more about that tomorrow.

Something Smells
Ultimately, DOJ doesn’t want this to happen, and it’s hard to figure out why, exactly. Something doesn’t smell right. Maybe this will give the government a little good press in the eyes of the common man after so much bad press coming down the pipe? Maybe there are some stakeholders who really don’t want this to happen and have leaned on their contacts to make that the case? Or maybe some of those parties are trying to extract a pound of flesh before the merger goes through? Regardless of the motivation, what the DOJ has done is shameful. It has put together some half-assed arguments that are not supported by fact.

I’ll get into these arguments more tomorrow, but when the government decides to cut and paste screenshots from a specific flight search on a single day as evidence that fares are lower on one airline, it’s not even trying. (And it’s way worse than that, since the truth is the complete opposite when you look at DOT fare data.)

Where does this leave us? We sit and wait. With any luck, this will actually just be DOJ rattling its cage to get more concessions and we’ll have an agreement eventually. But the way they’re talking, we might be in for a long slog on this.

More tomorrow.

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