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DOJ Files Complaint Challenging US Airways and American Airlines Merger
Practical Law Legal Update 9-537-5225 (Approx. 5 pages)
DOJ Files Complaint Challenging US Airways and American Airlines Merger
by Practical Law Antitrust
| Published on 14 Aug 2013 • USA (National/Federal) |
The DOJ filed a complaint challenging the proposed merger between US Airways Group, Inc. and AMR Corporation.
On August 13, 2013, the DOJ and the Attorneys General for Arizona, Florida, Pennsylvania, Tennessee, Texas, Virginia and the District of Columbia (collectively, DOJ) issued a press release announcing that they have filed a complaint challenging the proposed merger of US Airways Group, Inc. and AMR Corporation (American Airlines), two of the five remaining major airlines in the US. For a summary of the merger agreement, see What's Market, AMR Corporation and US Airways Group, Inc. merger, and for a summary of the antitrust risk-shifting provisions of the merger agreement, see What's Market, Antitrust risk-shifting provisions in AMR Corporation/US Airways Group, Inc. merger agreement.
The DOJ alleges that the merger would significantly harm competition in violation of Section 7 of the Clayton Act by:
- Significantly increasing airline market concentration.
- Increasing the likelihood of airline coordination, causing:
- elimination of US Airways' discount fares;
- higher fares and decreased airline capacity;
- American Airlines to abandon expansion plans; and
- higher ancillary fees, such as checked bag fees.
- Eliminating head-to-head competition in hundreds of markets.
Throughout the complaint, the DOJ uses statements from US Airways executives to support its assertion that the merger will negatively impact consumers.
Increased Market Concentration
Since 2005, the number of major airlines in the US has decreased from nine to five, leaving Delta, United, American, US Airways (all considered "legacy" airlines) and Southwest. The DOJ alleges that if the American and US Airways merger proceeds, the remaining three legacy airlines and Southwest would account for over 80% of the domestic airline market, and the new American would be the largest airline in the world. Further, the proposed merger would:
- End discounted fares offered by US Airways and American on routes where those airlines compete head-to-head.
- Increase the likelihood that the airline industry would coordinate to:
- raise prices;
- reduce output; and
- diminish quality of service.
The DOJ is particularly concerned with increased concentration of gates (known as slots) at Ronald Reagan Washington National Airport post-merger.
Increased Likelihood of Coordination
The DOJ alleges that the merger would significantly increase the likelihood of coordination among the remaining three legacy airlines, leading to higher prices and limited service. Among other evidence, the DOJ cites to transparent prices and past attempts at industry coordination to support its allegations.
Elimination of US Airways Discount Fares
The complaint alleges that the airline industry is predisposed to price coordination due to each airline's access to its competitors' publicly available fares or published fare structures through the Airline Tariff Publishing Company. Typically, legacy airlines similarly price their routes so as not to incite a price war on popular routes.
Because its hubs see less non-stop traffic than other airlines' hubs, US Airways is incentivized to offer discounted fares (known as Advantage Fares) on connecting routes to undercut its competitors' non-stop fares. The Advantage Fares are up to 40% cheaper than other airlines' non-stop prices for the same routes. In response, the other legacy airlines began offering discounted fares for their connecting service on routes where US Airways provided non-stop service. The DOJ argues that if US Airways and American are allowed to merge, US Airways will no longer be incentivized to continue its Advantage Fares due to its increased network of non-stop routes post-merger.
Decreased Capacity
In recent years airlines have recognized that reduction in flight capacity allows them to charge higher fares. The DOJ cites US Airways projections that the merger could allow them to reduce capacity by as much as 10% and consequently charge higher prices.
American's Abandoned Expansion Plans
After filing for bankruptcy in November 2011, American formulated a plan to exit bankruptcy that included making the largest order for new aircraft in airline history to greatly increase its domestic and international flight capabilities. The DOJ alleges that if the merger proceeds, American will no longer pursue its expansion plans, thereby harming consumers. The DOJ uses statements from US Airways' executives to show that US Airways believes a merger with American is a less risky alternative to allowing American to continue with its expansion plans, which may lead to other airlines expanding in response.
Ancillary Fees
The DOJ alleges that increased airline consolidation will lead to higher prices for checked baggage, flight changes and other non-ticket charges. The DOJ points to US Airways' documents that estimate raising American's ancillary fees to match their own would generate an additional $280 million in annual revenue.
Loss of Head-to-Head Competition
The DOJ explains that the merger would eliminate US Airways and American competition on 17 non-stop routes and over 1,000 city-to-city routes including connections, representing approximately $2 billion in annual industry-wide revenues. The DOJ alleges that each of these city pairs (markets) are highly concentrated as that terms is defined in the Horizontal Merger Guidelines.
The DOJ focuses on Reagan National Airport, where the combined entity would control 69% of available slots (government-issued rights to take off and land), nearly six times more than the nearest competitor. The DOJ argues that airlines would not switch to other local airports (Dulles and Baltimore) to service certain passengers. With almost 70% of the hard-to-obtain slots at Reagan, the DOJ argues that the merged firm would likely increase its prices. Further, the combined entity would have 59 routes out of Reagan National with no competition for non-stop routes.
Additionally, the DOJ alleges that because the airline industry has significant barriers to entry for new entrants and barriers to expansion for existing competitors, including limited availability of slots, new entry or expansion is unlikely to remedy the anticompetitive effects of the proposed merger.
Practical Considerations
Bad Documents
Counsel often advise their clients not to create bad documents or make bad statements (those that can indicate a competitive problem) during both:
- The due diligence stage of a merger or acquisition.
- The stage between signing and closing.
Here, the DOJ uses both statements made by US Airways executives in what appears to be ordinary course business documents and remarks not related to the merger with American Airlines as evidence of potential competitive harm. Therefore, counsel should advise that clients be wary of making bad documents and statements any time and should consider including this advice as part of the client's antitrust compliance program.
Market Definition
It is often typical for the DOJ to review non-stop routes as a separate market for certain customers (usually business travelers). However, here, the DOJ focuses on the price competition between non-stop and connecting flights, particularly the disruptive role that US Airways' Advantage Fares play.
Too Late to Consolidate
Much of the DOJ's complaint focuses on historical consolidation in the airline industry and the coordinated effects of the proposed merger, meaning that post-merger, it will be easier for the remaining legacy competitors to coordinate on fares, ancillary fees and other anticompetitive objectives. The DOJ argues that while Southwest offers lower fares and few if any ancillary fees, it does not constrain the legacy airlines' prices. Given that allegation in addition to allegations of price transparency, prior attempts at coordination and the anticompetitive effects of previous airline consolidations, it will be interesting to see whether there is a settlement package the DOJ would accept and what, if any, behavioral remedies (in addition to divestitures) might ease its concerns. This may be a case where US Airways and American are too late to consolidate.