Regulatory air wars

American, US Airways merger approved by EU, rejected by U.S.

By Jon Ross

   In early August, it looked like an $11 billion merger deal between AMR Corp., the parent of American Airlines, and US Airways was finally in sight and a new American Airlines was underway.
   The carriers agreed to a deal after months of negotiations and were set to close in the third quarter of this year. American would use the deal to emerge successfully from bankruptcy, a condition already approved by its creditors and the bankruptcy judge, and both carriers had already started working toward what a combined operation might look like by announcing new leadership positions.
   Everything was on track as the two carriers received permission from the European Commission to consummate the deal on Aug. 5. Less than a week later, the U.S. Department of Justice, in a surprise move with the support of six attorneys general, put the brakes on the deal, announcing its intent to sue on antitrust grounds. The argument against the merger is that it would “substantially lessen competition for commercial air travel in local markets throughout the United States.” Justice is concerned about the more than 1,000 routes where the two carriers currently compete head-to-head. The department is also concerned about the number of airlines that would be left after the merger — four major airlines, it said, will control more than 80 percent of the U.S. market.
   “If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers. Both airlines have stated they can succeed on a standalone basis and consumers deserve the benefit of that continuing competitive dynamic,” Justice’s Bill Baer said in a statement.
   In its ruling, the European Commission said the merger would lead to a monopoly on the London-Philadelphia passenger route, where the carriers have paired up in a joint venture with British Airways and Iberia. It added, however, that if the newly combined carrier released slots at the London Heathrow Airport — as well as “other commitments” — the merger could go through.
   “The commission could clear this transaction in the first phase given the commitments offered by the parties which address the competition concern we identified on the London-Philadelphia route,” said EC Commissioner Joaquín Almunia in a statement. “The commitments include a corresponding slot at London Heathrow as well as far-reaching feeder arrangements to induce entry by a new competitor on the route.”
   In a joint statement, AMR Corp. and US Airways pledged “a vigorous defense” of their merger, stating they will use every legal avenue available to contradict the Justice Department’s decision that a merged American would lead to less competition and ultimately be bad for consumers.
   “We believe that the DOJ is wrong in its assessment of our merger. Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together,” the carriers said. “Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices.”
   In a recent note from analyst Cowen and Co. regarding the proposed merger, Helane Becker wrote the DOJ’s decision will, among other things, delay American Airlines’ emergence from bankruptcy until the end of the year, or could push the process into 2014.
   “As it stands now, if the merger does not go through, American will be two-thirds the size of Delta and United and be forced to compete in an increasingly competitive industry, especially as more international airlines fly to cities in the U.S.,” Becker wrote.
   Becker also took issue with DOJ’s categorization of Southwest Airlines as a carrier that wouldn’t add significant competition to a merged American Airlines. From the Justice Department’s reading, there would be three major U.S. airlines after the merger because Southwest is simply too small to be a major player. But Becker thinks Southwest would provide plenty of passenger-based competition.
   “Southwest is one of the most competitive airlines, with competitive air fares throughout the domestic U.S.,” she wrote.
   Delta and United Airlines, which have both gone through their own mergers, clearly benefit from the DOJ’s decision, she wrote, which will force American to become a smaller airline. The merger may allow American to emerge from bankruptcy as a healthy airline that will be able to compete and pay back its
   creditors.
   “We believe the government got it wrong this time,” she wrote. “In order to have a level playing field, we believe this merger should be approved.”
   On Aug. 20, the presidents of the Dallas Regional and Fort Worth chambers of commerce wrote the Texas’ attorney general, Greg Abbott, to express their support of the merger. In the letter, they said American’s location in Texas makes the state more competitive.
   “If this merger is not finalized, there is no plan B for American Airlines.  Failing to allow American Airlines to merge with US Airways will result in further bankruptcy proceedings that will stretch for an extended period of time,” they wrote.  “In addition, service and employees will suffer, causing financial dislocations around DFW International Airport, one of the world’s busiest and a critical hub of global business in Texas.”
   They added airline mergers are now seen as standard practice in the aviation industry. Not allowing American and US Airways to merge after Delta Air Line’s merger with Northwest Airlines in 2008 and Continental’s deal with United in 2010 would not be just, they argued.
   “These mergers represent the new reality in the rules of the game previously established for the aviation industry,” they said, “and to suddenly move the goalposts now is unfair, unrealistic and is a double standard, which is harmful to our economy.”