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.

48 Responses to The Department of Justice’s Big Gamble

  1. “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!

  2. dan powers says:

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

    • Jason H says:

      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?

  3. David says:

    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 the hope they can get a better deal out of AA/US via the court than they could privately.

    • CF says:

      David – My understanding is that the judge can review a settlement offer made by the two parties but she won’t suggest one. She’ll just rule in the end whether it’s allowed or not.

  4. 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?

    • CF says:

      Noah – I don’t think so. I’m told that once the suit is filed then any settlement would have to given in writing. They can’t just withdraw and pretend like it never happened.

  5. Bravozulu says:

    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 was the DoJ stopping the injustice of WN monopolizing MDW?

    Moving on to the legal strategies by the DoJ. You might be right in regards that the DoJ might be hiding their strongest arguments, but on the surface I don’t see anything that is a “red flag”. In fact, I believe AA/US can counter with a very good ace up there own sleeves against the DoJ. During USAir’s 2nd bankruptcy GE was providing it with the DIP financing. US had to do prove to GE that they had cut their cost enough to receive more funding. They came up with a business plan that relied on cutting cost. GE looked at the plan and said “we love it, but to be on the safe side we’d love for you guys to cut another 200 million on top of what you already cut.” How do you cut 200 million you ask? Well, you look at your routes and start cutting to the bone. US looked at where they were the weakest-the Midwest. They stopped serving AZO, GRR, EVV, SBN, MSM among other cities. US had to make some tough decisions to survive and unfortunately the above small communities lost out on air service. I guarantee the new AA would restore service to the above cities through CLT. This would provide direct competition against DL that serve the cities through ATL. It will only happen if the merger goes through. This is exactly why AA/US need to merge. No way do those cities get new service unless the DoJ approves the AA/US merger.

    • Ben says:

      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 adding a bunch of new flights at IAD or BWI (though I imagine the high landing fees at IAD make expansion a non-starter)

      • Bravozulu says:

        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 make fun of your argument, but that’s the reality of the DoJ’s argument. Like the article states the DoJ has put themselves into a corner taking this stance. They let the genie out of the bottle when they allowed DL/NW & UAL/CAL to merge. I doubt you can but her back in the bottle at this point.

    • 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 susceptible to future competition. Federal slot restrictions at DCA reduce that threat, and make it easier de facto to monopolize.

  6. Jim says:

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

  7. MeanMeosh says:

    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 tougher nut to crack. Much of their objections seem to be based on the typical parochial concerns, i.e. service and job cuts in PHX, and reduced frequencies to smaller airports in Texas. US and AA have been saying that there will be no significant service cuts or job losses, and that may well end up being proven true 5 years from now, but the pols making noise simply aren’t buying it – they’ll point to MEM, PIT, and STL as evidence that airline CEOs are liars who will say anything just to get sign-off on their merger plans (different circumstances, but the pols don’t care about that). I don’t really know how you address that issue successfully, short of putting in writing that there will be no routes cut or job losses on any route or base currently operated, which nobody in their right mind would agree to.

  8. 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)?

    • CF says:

      Alpha Bravo – As far as I know, this merger isn’t expected to reduce capacity over what’s in the market. There will definitely be shifting of resources around, but I’d expect relatively flat capacity before vs after the merger. However, with American’s proposed standalone 20% growth plan, the end result would be a lot less capacity in the combined airline than as a standalone. But you have to believe that the crazy 20% growth plan would actually occur, and most people don’t.

  9. 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.

  10. 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%.

  11. Terry says:

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

    • 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 plan”. GOOD. He needs this mega merger more than anyone else or his house of cards will be threatened. Naturally he is putting a brave face on this current situation, what choice does he have?

      Those individuals who were so positive of a fast merger are now whistling in the dark hoping that they can salvage most of what they expected. As a consumer, I hope the DOJ does its job and protects the average traveler, while allowing a REASONABLE profit for the airlines in question. Remember the old saying “Better Late Then Never”.

      • sally65 says:

        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 airfare. If you want to eliminate competition, deny the merger. Yes if you live in Podunk, Iowa, you are always going to pay way more than if you live in Chicago. That’s because none of the airlines want to serve the small markets anymore. There’s no money in it. Find out more about the industry before you make statements you do not understand.

        • 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 says:

            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 says:

      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 says:

      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 says:

      @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 Bankruptcy, USAIR would then be able to buy up 100% assets(including slots, name, etc) and it would no longer be a merger per se… In the end, there most likely will be a compromise, and this benefits the DOJ, because Cranky was spot on that the DOJ is in a corner and besides its general incompetence, has not demonstrated concisely that the merger is creating a monopoly(aka not using anti-trust legislation).. People can continually bemoan flight blogger’s analysis and say that the merger is bad, or that it will not go through…but if it is left to the courts, and that includes the Supreme court, then the merger will happen, as the highest court favors business over everything else…

  12. 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 on the principle of “stare decisis” — a legal principle by which judges are obliged to respect the precedent established by prior decisions. I never practiced antitrust law, but it seems likely to me that a court would look dubiously on the government’s effort to now “reinvent” antitrust law. After all, everyone knows that there is nothing materially different about this merger from the United-Continental deal, which the current Administration approved. It is also remarkably similar to the Northwest-Delta deal (Bush administration). And I think I could compellingly argue that the Southwest-AirTran merger (approved by Obama) was FAR more likely to raise fares than an American-US Airways deal. To allow those deals to proceed and then prevent American and US Airways from getting to the size necessary to compete against these new government-sanctioned behemoths seems particularly cruel and — for lack of a better word — illegal.

    I also applaud Brett’s efforts so far to show the absurdity of the government’s pricing claims. In all honesty, nobody really knows whether fares will increase or decrease with an American/US Airways merger; my guess is that in 98% of markets, it will make little pricing difference. What would change is that American’s valuable assets would be put into the hands of what has been proven to be America’s best airline management team and, undoubtedly, those assets would be better managed for the benefit of shareholders, customers and employees. I think everybody in the industry understands that the “logical,” stable framework for the future of the industry is to have three strong USA-based network global carriers (which conveniently matches the number of global alliances) who can compete against the zillion of foreign airlines on international routes, and with the myriad of USA-based “low fare carriers” on domestic routes. To claim that a merged American/US Airways — which will not be materially larger than Delta, United or Southwest — represents some sort of new monopoly force in the industry that must be stopped by government intervention seems patently absurd.

    So I guess the burning question now is what happens next. That seems extremely difficult to predict, which is no doubt largely why US Airways stock has declined since the DOJ’s move was announced (investors rightfully hate uncertainty). I think the management teams at US Airways and American are rightfully outraged and indignant at the government’s action, and want their day in court. I also think they feel confident that they will win. But litigation is time consuming and unpredictable, especially since there only seems to be a few thousand people in the United States who actually understand the economics of the airline industry (and, sadly, very few of those folks probably work in the government). At the same time, I think we are also seeing how weak the government’s legal case against American and US Airways is, and how little support there is from any constituency to stop the merger.

    So my guess is that this absurd litigation will be stopped by an absurd settlement, as that will be in both parties interest. Basically, the government will wring some feel-good-but-essentially-meaningless “pricing” concessions from Doug Parker’s team and declare victory. Those concessions will also probably involve divesting some slots at Washington National Airport that probably won’t help consumers either, especially those from smaller cities who will lose their nonstop service to DC — but so be it.

    Of course, all bets are off if this is somehow some sort of pure ideological crusade by Mr. Baer. In that case, either the courts will step in to stop his folly, or his illogical crusade will cause real harm to the thousands of investors, employees and passengers who would benefit from a revitalized American Airlines.

    • 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?

      • 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 airline merger could be approved under such criteria (certainly not NW/DL or CO/UA), so it’s a complete reinvention of the standard. It’s also a dumb standard, because there’s lots of connecting competition in almost any meaningful aviation market in the US. The DOJ claims that US is some sort of pricing “maverick” likely to lower fares, but that argument is absurd to everyone in the industry; we all know that Doug Parker and Scott Kirby are pricing “geniuses,” and are certainly not known to be avid discounters.

        • 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 pair markets served by both of the carriers involved in terms of (1) nonstop service and (2) nonstop and connecting service.? (http://www.justice.gov/atr/public/testimony/4956.htm)

          In 2005, Deputy Assistant AG for Antitrust J. Bruce McDonald spoke about much the same in a speech to airline executives in Washington. (http://www.justice.gov/atr/public/speeches/217987.htm)

          Now, how hard did they look at connecting markets? And, what weight did connecting markets have in their ultimate decision? Those may be fair questions. I think the outcomes of each analysis (that UA/CO & DL/NW were not opposed) will certainly be cited by the defendants in this case as evidence to reasonably conclude that connecting markets weren’t so much a factor in the DOJ’s past analysis of airline mergers. But, DOJ has paper to suggest it had been considered.

          I think the bottom line is that we don’t know all of the cards each player is holding at this point, so I think it’s too soon to suggest that this DOJ suit necessarily “re-invents antitrust law”.

        • 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 to the quick nonstop.

    • Realist says:

      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.

  13. Jim says:

    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.

  14. Rozelle says:

    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. ;)

  15. 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 knew it could) do plenty to stop the merger just by filing suit. Only time will tell what actually occurs… but, I think CF discounts the strong possibility that DOJ’s legal strategy here may be one other than “win on the merits”.

    • CF says:

      Scott @ DTW – There were plenty of people suggesting last week that just by filing the suit, DOJ can stop this thing by slowing it down dramatically. But after talking to antitrust attorneys, it sounds like that’s not how merger cases proceed. The timeline is pretty tight in general. DOJ can’t really starve the merging companies as might be the case in other types of trials. But we’ll know more by the end of the month.

  16. Goober says:

    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 is a 50% profit margin. This is an industry that is lucky to get 5%. People complain that airlines don’t innovate, well how can they if they are always hanging on? It is being said the usair is “very profitable”. You know why? their pilots and employees are paid in some cases 50% less. US air pilot for example are the lowest Airbus pilots in the world. Not an exaggeration us air pilots make 30% less than even spirit airlines.
    Do you think us air will still be “very profitable” when their lame duck union get’s them pay on par with delta?

    Another thing to look at is how “profitable” is profitable. UA for example made ~450 mil last q. But the devil was in the details as the operation LOST money. The only reason they made money was via bag fees. What happens if American is forced to implements Hortons’ laughable “stand alone” plan and grow 20% (which is a quack plan and was never meant to actually be used)? You think american will be able to keep fairs where they are? Of course not, and the entire industry will suffer as prices come down and oil continues to rise. We will be back to 2008 where airlines lost millions per week.

    So yes I want consumers to pay more. The only “consumers” it will hurt are the leisure travelers and they don’t drive this industry. 60% of revenue comes from 20% of flyers. Those are the corporate flyers and they want more choices. Right now they are stuck with UA and DL. They want a third option, that will LOWER prices. The job creators will pay less and they are the ones that matter. Not some family of four wanting to go to disney world, and if it is too expensive for them well maybe they should consider greyhound.

    This is the big picture that will be looked at not a the ultra-weak case of the doj. That is why I wish this would go all the way to the judge so all this info comes out and AA isn’t forced to give up ANYTHING.

  17. yo says:

    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.

  18. 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 2001 (including DL, CO, NW, UA, US, WN, FL… did I miss any?) and certainly more carriers flying across the Atlantic (if not also the Pacific), and DOJ still saw fit to cite the reduced competition in those connecting markets as a key element of its opposition to that merger, I find it hard to see how it’s connecting-market argument is so “off the wall” in US/AA.

    What hasn’t really been mentioned yet in the discussion this week or last week here is the financial health of the carriers in the last round of transactions. In 2008, BOTH DL and NW were very much teetering on the edge of survival… and neither could substantially grow on their own. While CO seemed to be in better shape (its Board first voting to go it alone before being coaxed-into the UA merger by the threat of another go at a UA-US combination), UA’s situation was probably worse than either DL or NW’s pre-merger.

    In this case, we see a very healthy airline in US… and an airline that was dead-seat AGAINST merging in AA until US put together a pay-off package that was sweet for everyone (unions, investors, and certainly AA CEO Horton). AA argued vehemently that it was not only strong enough to go it alone, but that it would be better off on its own post-bankruptcy until US finally made the deal just to sweet for everyone to pass-up. (Whether or not AA was right in its assertions that it could survive, if not thrive, on its own is irrelevant… they bet their credibility on months of arguing forcefully that a merger was neither necessary nor in the best interest for AA.)

    Certainly, a combined US-AA would have major benefits to those who profit from the airline, and I’m not saying there was anything dishonest, unethical or wrong from a business perspective with Parker’s pursuance of the merger (I think he was absolutely upholding his fiduciary responsibility to do what’s best for the company). But, the promise of a more profitable enterprise post-merger is not enough for DOJ to overlook potential anticompetative effects of said merger.

    As DOJ has stated consistently in the past (quoting one example), “… if a firm is failing, then on balance it may be better to allow even an anticompetitive merger than to watch the failing firm’s assets leave the market and be unavailable to any competitor. In such a situation, we will allow an otherwise anticompetitive merger to go forward without challenge only if the following conditions are met: the failing firm will be unable to pay its bills in the near future, the failing firm could not successfully reorganize in bankruptcy, the firm has tried to sell itself to someone else, in a combination that will not lessen competition as much, and without the acquisition the firm’s assets will exit the market… These are strict requirements.” (http://www.justice.gov/atr/public/speeches/217987.htm)

    In UA/CO and DL/NW, it seems to me that the airlines involved had a much stronger case that failure to approve the merger would result in, to use DOJ’s words, at least one “firm’s assets [exiting] the market”. AA cooked their own goose in that respect, because its very vocal opposition to merging in the past year or so has provided DOJ with a mountain of evidence to use against the merger at trial.

    • 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 says:

        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 says:

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

      • 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.

  19. 7Driver says:

    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.

  20. Realist says:

    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 to shoot for the hip and might not be up to the task of running the World’s biggest airline. I know Cranky isn’t going to like this idea since Parker is his hero, but it might allow the DOJ to claim that some of their most damning concerns have been addressed, and would allow the unions and creditors to achieve their desired result.

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