The Department of Justice’s Big Gamble

A lot of people seem to think that the Department of Justice (DOJ) will eventually come to a settlement that would allow the American/US Airways to go through. While I’d think to think optimistically like that, I have trouble actually doing it. I’ve had the chance to do some research and talk to antitrust attorneys, and it seems to me that by filing a lawsuit to block the merger, DOJ has backed itself into a corner. It has to win this thing, because the alternatives are not really palatable. Considering that the case seems so weak at this point, it’s pretty surprising to see DOJ do this to itself.

DOJ in a Corner

Many people still think that slots at Washington/National hold the key to making this merger go through. If the new American would just give up enough slots, then the whole objection would go away. I believed that to be the case myself up until the lawsuit was filed. But the suit itself uses very broad strokes to talk about how horrible this merger will be for everyone in the world. It would seem unlikely that an agreement to shed some slots in DC would satisfy all these grandiose objections.

Despite the bluster, I hope there are still settlement talks in progress. Those will center on two types of fixes. One is the traditional fix we’ve been talking about – a structural remedy. Structural remedies involve shedding off parts of the business to help satisfy competitive concerns. That would include getting rid of slots at Washington/National. It’s hard to think of any other structural remedies that would really matter. Sure they could get rid of slots in New York or they could possibly ditch some more in London, but those are markets where there isn’t a concern anyway.

The other type of remedy is a behavioral remedy. That would basically be a promise from the merged company to do a certain thing (or not do it), possibly for a certain amount of time. In this case, you would think a behavioral remedy would be something like agreeing not to charge the $40 fee for award travel that DOJ strangely fixated on in the complaint. But DOJ will probably want something broader – like a commitment to not raise fees or something like that. I would be surprised if the new American would consider handcuffs strong enough to make a difference to DOJ.

But even if there was an agreement on behavioral remedies, you simply can’t address much of the complaint. DOJ has pointed out a thousand (mostly tiny and unimportant) markets where the merger would reduce competition too much for its tastes. There’s no way to satisfy DOJ’s desire for more competition on those routes.

Where does that leave us? Well, it means that if DOJ wants to settle, it’s going to have to settle for something that doesn’t actually satisfy all the issues in the complaint. In theory, that doesn’t technically matter. DOJ can still withdraw the lawsuit and this whole thing could go away. But there is one snag.

Have you ever heard of the Tunney Act? My understanding is that it states that if an antitrust suit is filed and there is a settlement, then the sides have to file it with the judge in the case to ask for approval. The funny thing is that the merger can close with or without approval, so it seems useless, but there is one thing of interest here. DOJ will have to put in writing why the settlement satisfies the department. (If any antitrust lawyers out there would like to confirm or disagree with this, please do so.)

So let’s say DOJ agrees to settle for slots at National. It then has to put in writing how that satisfies the whole big, broad complaint. And the next time there’s an antitrust case with a merger in any industry at all, you know the companies will pull out that written justification from this case to bolster their own. And DOJ would hate that.

So if DOJ really wanted to settle for slots at National, it would have done so before filing such a strongly-worded, broad case. Now it has sort of pinned itself into a corner. If it settles, it sets precedent that can be used against it in the future. If it goes ahead with trial, it risks everything.

See, if it goes to trial, then the judge will review the case on its merits. And the end result will be binary. Either the DOJ’s complaint is validated (which still seems unlikely at this point, though we don’t know if DOJ has something more substantial hidden somewhere) or it’s shot down. And if it’s shot down, then the new American not only gets to merge, but it gets to keep all its slots at National and everywhere else. That’s quite a risk to take.

Clearly DOJ thinks that it can win this thing or it never would have taken a chance like this. But it’s a huge gamble. Now we just have to wait and see what happens.

Wondering about that timeline? Well, by the end of this month we should have a better idea for the pace that this trial will take. In general, merger cases go pretty quickly since DOJ has already had access to records since before the merger was even announced. So there shouldn’t be a need to do much more discovery. Doug Parker has said that he now expects to see the merger completed by the end of the year. That takes into account the expected length of the trial. That could be optimistic, but you get the point. We’re talking about months, not years.

Like I said, we should know more about timing by the end of this month… unless a settlement is somehow reached more quickly. Considering all I’ve learned, that seems less and less likely.

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48 Comments on "The Department of Justice’s Big Gamble"

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MilesAbound
Guest

“So if DOJ really wanted to settle for slots at National, it would have done so before filing such a strongly-worded, broad case”

This statement assumes the DOJ used competent lawyers who thought about unintended consequences like this when they were given the mission to rack up huge amounts of hours on a long complaint. That’s a bold assumption!

dan powers
Guest

How about USair in a few months declares chapter 7 and AA buys the assets…. a’la AA+TWA????

Jason H
Guest

Wouldn’t it be the opposite, where AA declares chapter 7 (can you do that so soon after declaring chapter 13?) and US takes over?

Jason H
Guest

Chapter 11 not 13… I can never keep legal stuff straight.

David
Guest
When the case goes to court, how much freedom does the judge have when giving a ruling ? Can he/she give *only* a “approved/denied” response, or can the judge call on the advice of an expert witness / friend of the court statement and give a “approved subject to these conditions and competition remedies” response ? If the judge can only give a purely binary response, then I agree this was a bad move. If the judge can set their own competitive remedies for approval, then I’m wondering if this is some sort of fishing expedition by the DoJ in… Read more »
noahkimmel
Member

I agree that it was a broad lawsuit if all they were looking for were DCA slots. Surely that would have been the focus of the complaint if that was the concession they wanted.

Cracky, what about the timing of the lawsuit-waiting until the last minute? Could they withdraw the suit, then negotiate a settlement and not be subject to Tunney?

Bravozulu
Guest
Very good article cf! In regards to the DCA slots/gates-I would ask why the DoJ is so concerned about AA market share in the DCA metro area that is already served by UAL in IAD and WN in BWI? I further compare WN’s market share in MDW to that of the new AA in DCA. I believe WN owns 80% of the gates/slots in MDW compared to the new AA of 70% gates/slots in DCA. With Chicago being much larger population and only served by two airports (ORD/MDW) compared to three airports (DCA/IAD/BWI) in the DC area-I would ask where… Read more »
Ben
Guest
DCA slots are always going to be held in higher regard because that is the main or desirable airport in the DC region. It’s the easiest access for the most people in the region. People in Maryland don’t want to have to drive all the way over to IAD unless they have to, and people like myself in Northern Virginia don’t see BWI as ideal because while the fares are usuallly cheaper, it’s an hour+ in the car each way. It’s just not worth it. DCA is also slot controlled, which limits new competition. Nothing is stopping other carriers from… Read more »
Bravozulu
Guest
Okay-so DCA is the desirable airport in DC and is slot controlled. What happens to those slots that AA/US give up? Assuming that is what this whole thing is about. My guess is those slots will be given to WN or Jet Blue, or Spirit. I wonder what cities those airlines will serve from DCA? Hmmm……Ah yes! I got it! Ladies and gentleman Southwest airlines is pleased to announce new non-stop service from DCA-MCO! Thank God for the new MCO flight! Too bad it came at the expense of Louisville Ky losing their slot to DCA. I’m not trying to… Read more »
esw
Member
Bravozulu – Two differences wrt MDW versus DCA, other than demographics, make it harder for an airline, even one with larger presence, to dominate the market the way one could at DCA with a smaller presence: (1) Unlike DCA, MDW is not slot-controlled by the feds; (2) all MDW gate leases have a secondary use provision, such that if another carrier wants to squeeze a flight onto a gate WN leases between WN operations, they are allowed to do so. Even successful monopolists compete – against the threat of future competition. Whatever MDW’s actual snapshot competitive landscape, it is always… Read more »
Jim
Guest

JFK, PHL, and DCA after the merger. Glad I live in Chicago.

MeanMeosh
Guest
I still think there’s more to it than just the DCA slots, but it seems the federales are fixated on two things most of all: 1) fee increases, especially bag fees, and 2) the disappearance of the “Advantage Fares” on connecting routes. My guess is, if a settlement is to be had, in addition to divesting some slots at DCA, USAA will have to agree not to increase fees or get rid of the Advantage Fares for a set period of time or until certain benchmarks are met (or gradually phase them in/out, respectively). The state AGs may be the… Read more »
Alpha Bravo
Guest

Somewhat related question, but what is domestic capacity looking like in Q4 of 2013 versus Q4 2012? Up down or flat? Will this merger reduce capacity as they become integrated (if they merge)?

DesertGhost
Guest

I hope US Airways and American fight this to the bitter end. Neither side wants to lose. And one never knows what a judge will decide. Settlements often occur very late in the process simply because of the uncertainty of the judicial process. As the old saying goes, “You’re better off with the devil you know than the devil you don’t.” So I see a settlement at some point, maybe even at the last minute.

David
Guest

Gotta love those steps outside the court…

mmcdonald
Member

I live in STL, and here are two factoids: 1. It is not a business-friendly region, and that includes the airline business. It brings a lot of grief on itself. 2. Yes, AA service has dropped down to about 16% of the action at Lambert, but Delta has quietly moved in and has almost as much at this point. Competition at work, without an assist from DOJ. Of course, the big, huge guy is Southwest, with more than 50%.

kozmaterry
Member

Cranky is way off base. This is a strong not a weak case. This is not about DCA.
This merger will not happen

Consumer Mike
Guest
Although I believe that Cranky appears to have now done some homework on the legal front, I believe that he and many of the blogers are overly focused on the DCA slots and other misleading reasons for the DOJ action. In my opinion there is more to the legal action than just airport slots, which is good for the average consumer. Even with Cranky’s high exposure to the airline industry, I believe that in this case, most blogers have an equal guess as to what will finally happen. Doug Parker must be losing sleep over this disaster to his “master… Read more »
sally65
Guest
Obviously you do not understand the airline industry. If this merger does not go through, there will be no advantage to the “average consumer.” The competition is for the international and transcontinental market for business travelers. Southwest is not in that market. JetBlue is trying to get into it. But if this merger does not go through, US Air and American become less competitive and you have two giant airlines who will set the prices. The other two won’t be able to afford to compete. Also the “average consumer” pays very little more than they did in the 1990’s for… Read more »
Vinay Bhaskara
Guest

Actually, the average consumer pays about 20% less for an airline ticket (12-14% including ancillary fees) than he or she did in 1999.

fia000
Guest

You can parse numbers different ways. Avg airfare is up 8% in real terms compared to 2007, before the start of the financial crisis and before a-la-carte pricing came into effect. Factor those in and the total airfare is much higher. At Southwest, which to a large extent hasn’t gone the a-la-carte route and a better indicator of the total cost, airfare is 25% higher than in 2007.

CB
Guest

if the doj had sucha rock solid case it wouldn’t have waited so long to file its objection. Their complaint reeks of desperation, taken out of context e-mail from 4 years ago shows it even more.

Joe
Guest

Cranky stated the lawsuit was more than slots at DCA . . .

I’m really interested in seeing what the DOJ has up their sleeve. There has to be a lot more.

MP
Guest
@terry, the DOJ has a very weak case against AA/US merger, and I believe most commentators are accurate in assessing that this is not solely about DCA slots, though government self-interest in that particular market should be assumed, the problem with the case is simply a matter of judicial precedence, in that by approving the mergers of DL/NW, UA/CO, Southwest/Airtran, they have set the tone and under review, that will lead any judicial interference, aka if the case goes to court, the court will side in favor of the merger because of precedent. Alternatively, American could technically declare Chapter 7… Read more »
Wayne Rutman
Guest
What seems to have happened here is that the DOJ this year got a new assistant attorney general for antitrust (William Baer) who, for whatever reason (personal ambition, ideology?) decided he was going to ignore prior precedent and adopt new antitrust standards for airline mergers. You might think that the Attorney General (or the President) would have checked this reckless prosecution (or persecution, if you prefer) but, as many have previously observed, the current occupants of these offices haven’t demonstrated particular consistency or skill while in office. As a retired lawyer, I always weighed the merits of a case based… Read more »
scott.wintner
Member

Wayne — I’ve yet to see an analysis demonstrating how this action by DOJ conflicts with past precedent and “reinvents” anti-trust law. Though, many commentators (here and elsewhere) claim that it has. Given your background, can you provide us with a bit more expert intel on that subject?

Wayne Rutman
Guest
It’s pretty obvious how they’ve reinvented antitrust law here. In the past, they used to determine anti-competitive overlap based on nonstop routes flown by the carriers. AA and US have only 12 such routes, quite low for a merger, because the networks are so complimentary and both airlines are hub and spoke carriers not sharing a hub. This time, they say CONNECTING routes are the proper measure of competition and, of course, there are more than 1500 routes where you could today theoretically buy a ticket on either carrier (like connect in DFW instead of PHX). Obviously, almost no major… Read more »
scott.wintner
Member
Wayne — Thanks for that added info. However, I’d disagree that anti-competitive overlap has always been based solely on nonstop routes flown by the merging carriers. There’s ample evidence from past DOJ actions to support that competition of a market as a whole — including connecting routes — has been part of DOJ’s analysis at least for the past decade. As far back as 2000, then-Deputy Assistant AG for Antitrust John Nannes explained in testimony before the House T&I Committee, ??in considering the antitrust implications of a particular transaction, the [DOJ Anti-Trust] Division looks at the effect in all city… Read more »
noahkimmel
Member
I am ok with using connecting markets as a metric, as so many pax now connect in today’s megahub world. The challenge is that these need to be handled differently, likely categorized. PDEWs and Market Share matter! Just because US has a price in the market, does not mean they command any relevant share, and even a large share of a market of 3 people does not really matter. Also, price is not the only factor that drives behavior. A 5 hour layover in a city 1000 miles out of the way may be cheaper, but not relevant to compare… Read more »
Wayne Rutman
Guest

Brett’s devastating (to the DOJ) competition analysis done for PlaneBusiness is now public. http://www.planebuzz.com/?p=2957 I see that it’s already attracting considerable attention, as it should. Folks, this is an open and shut case. There’s no genuine antitrust issue here.

Realist
Guest

Wayne, it’s pretty clear that wall street investors thought this merger would cause revenues and profits to increase for the entire industry. Are wall street investors always right? Absolutely not, but in this case it’s at least worth noting how they were betting.

Jim
Guest

DOJ does have to put into writing how the agreement satisfies their concerns, but it’s highly unlikely that this would hurt them in the future. There are few big airline mergers left that could possibly happen, and other industries are different by nature. They could write something that is narrowly construed in order to make sure that it does not apply to any other situation.

But I agree that they will most likely win this case. Despite what anyone says, this merger would reduce competition on several routes.

Rozelle
Guest

Perhaps the details are not quite ironed out and Parker/Horton are buying time, calling in favors with state attorneys general to stall until they catch up. By the end of the year, when they are ready, they will tell their government friends to drop the charade and the government will announce their vague demands are satisfied and sign off on the merger. In this scenario, media pundits are encouraged to include the phrase, “the world’s largest airline” as many times as possible for maximum promotional potential. ;)

scott.wintner
Member
I think the notion that this lawsuit is really about DCA is just off-base… for all of the reasons CF notes why, if that were really the issue, there would have been far more effective ways for DOJ to seek relief. I think that DOJ’s complaint makes it clear they intend to (at least do its best to) block the merger from happening. More importantly, though, I think CF has placed too high an importance on DOJ actually proving and winning its case on the merits. As has been discussed in the comments to last week’s posts, DOJ can (and… Read more »
Goober
Guest
us airways is a dying airline, those hubs were losing money and us airways isn’t the kind of airline to grow. They are half the size they were in 1995 and they will be half the size they are now in 2025. The most frustrating thing about the doj and people who are against this merger is that they don’t have a clue how this industry works. They make the claim that the consumer will be hurt because prices will go up. GOOD! prices need to go up they should have risen years ago. This isn’t an industry where there… Read more »
yo
Guest

Very interesting analysis, sounds like DOJ has a case of “do something-itious” they feel they need to do something, but not sure what. Kinda like the dog chasing the car…what does the dog do if it catches the car? Sounds like a wonderful CF, should be fun to watch.

scott.wintner
Member
Everyone has been comparing this merger to the most recent mergers (UA/CO, WN/FL & DL/NW), but I’ve been curious to compare/contrast this merger with the last one DOJ effectively stopped — UA/US in 2001. It seems pretty clear from documents at that time (such as the press release issued by DOJ in anticipation of filing suit) that connecting market competition was one of a handful of key factors behind the Department’s opposition to a combined UA/US… particularly on the East Coast and on international routes. Keeping in mind that there were even MORE carriers competing along the East Coast in… Read more »
political_incorrectness
Guest

Using those merits for being on the brink of collapse, I don’t think AirTran or Southwest were at that point yet that merger went through and the whole purpose of that was to get rid of a competitor and get into Atlanta. Having to change the entire reservation system, I do not think they needed to merge to survive. AirTran had its own uniqueness to the system which made it an effective competitor given serving many secondary airports without bleeding.

SAL
Guest

I actually think Southwest/AirTran merger affected the airline industry more than Delta/Northwest and United/Continental. That merger removed a LCC from the market and made Southwest a mega-airline, up there with Delta and United. If the DoJ had blocked the Southwest/AirTran merger, I think AA/US would face fewer hurdles as Southwest and AirTran would be strong competitors to many AA/US connecting routes.

Jim
Guest

Airtran had something like 3% of the domestic market before it was acquired. It was certainly several times smaller than US or AA.

scott.wintner
Member

Political_Incorrectness & SAL — I don’t disagree. I didn’t touch on WN/FL above because I, too, have a hard time reconciling that one. It’s also the merger about which I know the least among the three most recent.

7Driver
Guest

Does the lawsuit have merit? No, overall the facts are not in DOJ’s favor. Therefore they must settle or lose. Their only two arguable points of merit are size (larger than the largest airline merger) and DCA service (not just slots but related service to smaller secondary markets). DOJ can’t win so they must settle to save face or lose. Either way they really just don’t have any power other than the initial filing because in the end, the judge decides. Hopefully, it will play quickly for all involved.

Realist
Guest
I’m a bit late to this thread and don’t have time to review all 45 comments so others may have already made this point. Since so much of the DOJ’s complaint focused on the anti-competitive behavior/statements of the US Airways’ management, one possible (or even necessary) remedy to allow the merger to go forward is to find a new management team for the merged carrier that promises to play nice while Horton, Parker and Kirby drift away on their golden parachutes. This would not be a bad thing since the e-mails and published statements show Parker and his team tend… Read more »
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