|November 22, 2013|
Previously published on November 19, 2013
On November 12, 2013, US Airways, American Airlines, the U.S. Department of Justice (“DOJ”), and several state Attorneys General announced an agreement to settle the antitrust litigation challenging the merger of the two carriers. Cadwalader, Wickersham & Taft LLP acted as antitrust counsel to our long-standing client US Airways Group, Inc. in connection with the proposed merger.
The US Airways/American deal highlights a number of aspects of the changing antitrust landscape that parties to mergers should keep in mind:
Parties must be prepared to litigate against the government. US Airways/American continues the trend of recent cases (including Anheuser-Busch Inbev/Grupo Modelo and Pinnacle Entertainment/Ameristar Casinos) that demonstrate that litigation is not always used because enforcers believe the deal cannot be fixed and must be blocked. Rather, it appears that in some cases enforcers may believe they are in a better position to negotiate remedies by bringing suit.
Parties must be alert to potential nationwide oligopoly theories. US Airways/American, Anheuser-Busch Inbev/Grupo Modelo, and AT&T/T-Mobile each involved claims by DOJ that the merger would facilitate oligopoly behavior among the leading industry players at a nationwide level.
Parties cannot assume consistency with past enforcement decisions. The analysis of US Airways/American by DOJ differed from that applied in Delta/Northwest, United/Continental, and Southwest/AirTran. DOJ alleged that the deals it previously cleared had “hurt passengers.” Similarly, AT&T/T-Mobile involved an industry that was long evaluated by examining competitive effects in local markets, but DOJ looked to establish a national market.
Parties should be aware that enforcers will rely on contemporaneous business documents. As opposed to the agencies’ historic focus on a merger’s impact on market structure, DOJ in this case (and in other recent challenges) depended heavily on contemporaneous business documents from the parties, their investment bankers, and third parties to state its case. Not surprisingly, DOJ has put those statements in their worst possible light to support its allegations.
Additional background on the US Airways/American merger and the settlement is provided below.
On August 13, 2013, after a lengthy investigation, the DeOJ and several state Attorneys General filed suit in federal court in Washington, DC to block the US Airways/American merger.
The complaint generated substantial interest in the press and contained many allegations. Perhaps most interestingly - and continuing an approach taken in DOJ’s challenges of the AT&T/T-Mobile and Anheuser-Busch Inbev/Grupo Modelo deals - the DOJ’s complaint was premised on the allegation that the merger would facilitate oligopoly behavior among the leading industry players.
In its complaint, DOJ alleged that the legacy airlines (the merging carriers plus United and Delta) are an imperfect oligopoly today and that the merger would eliminate those imperfections. In particular, the complaint alleged that US Airways’ practice of discounting its one-stop service close to the day of departure disrupted the other legacy airlines’ ability to charge high fares on their non-stop flights. According to the complaint, the merger would change the new American’s incentives, the discounts on connecting flights would cease, and the ability of the three remaining legacy carriers to charge high non-stop fares would increase.
More generally, the complaint alleged that after the merger the remaining three airlines would be better able to coordinate capacity, fares, and ancillary fees, such as fees charged for checked bags and flight changes. The complaint also included allegations that the deal would entrench the merged airline as the dominant carrier at Washington Reagan National Airport and eliminate the head-to-head competition between the carriers on overlapping routes.
The allegations in the complaint were also interesting for what they ignored. Beyond 9/11 and the “Great Recession,” the most important trend affecting the airline industry since 2000 has been the growth of the so-called LCCs (low-cost carriers) like Southwest and JetBlue. While legacy carriers have had to shed excess and inefficient capacity over the last decade, the LCCs have grown - doubling their capacity since 2000 and currently accounting for about 40% of domestic airline capacity. Perhaps because the growth of LCCs was so incongruous with the DOJ’s “imperfect oligopoly” theory, the LCCs were largely dismissed and ignored in the complaint.
In their defense, US Airways and American responded that, rather than perfecting an oligopoly, the merger would enable a new American to compete more effectively. By creating a better, more complete domestic and international network, the new American would be better able to compete for corporate and business travelers. At the same time, the airlines argued that, as they have in the past, LCCs will ensure the public of competitive fares and prevent any possibility of a legacy “oligopoly.”
The trial, which was scheduled to begin November 25th, would have raised several significant issues of antitrust policy and law. However, resolution of those issues will have to wait because on November 12th, the parties announced a comprehensive settlement.
Under the terms of the settlement, the airlines are required to divest so-called “slots” (the right to take off or land) and gates at Washington Reagan National Airport and at New York LaGuardia Airport. In addition, the new American will be required to divest two gates at each of Boston Logan International Airport, Chicago O'Hare International Airport, Dallas Love Field, Los Angeles International Airport, and Miami International Airport. According to DOJ, “The proposed remedy . . . promises to impede the industry’s evolution toward a tighter oligopoly by requiring the divestiture of critical facilities to carriers that will likely use them to fly more people to more places at more competitive fares.” It seems clear that DOJ expects the diverted slots and gates will go to LCCs allowing “them to provide greatly expanded service on numerous routes.”1
1 The settlement with the DOJ is subject to the notice and comment provisions of the Tunney Act. In a separate settlement agreement with various state Attorneys General, the new American agreed to maintain hubs in Charlotte, New York (Kennedy), Los Angeles, Miami, Chicago (O'Hare), Philadelphia, and Phoenix for three years, and with limited exceptions, continue for five years to provide daily service to each plaintiff state airport that has scheduled daily service from either American or US Airways. Finally, the companies also announced an agreement with the U.S. Department of Transportation whereby the combined carrier will use all of its DCA commuter slot pairs for service to small- and medium-sized markets.