DOJ “a day late and a dollar short” on merger concerns

The US Department of Justice’s lawsuit to block the merger of American Airlines and US Airways displays a concern that comes a little late.

As far back as the Reagan Administration, DOJ had ample opportunity to take aggressive action to block mergers. It’s concerned now about hub concentration? The Northwest Airlines-Republic Airways merger eliminated competition at the Detroit and Minneapolis hubs, where both carriers competed. The TWA-Ozark merger eliminated Ozark’s hub at St. Louis.

The new American would control 69% of the slots at Washington Reagan National Airport, and this is a concern? Consider:

  • American is the only hub carrier now at DFW Airport.
  • Southwest Airlines monopolizes Dallas LUV Field and nearly so at Houston Hobby Airport and Chicago Midway.
  • United Airlines dominates Houston Bush Intercontinental Airport and Newark Airport.
  • Delta Airlines controls Detroit, Minneapolis and Atlanta airports with a lop-sided market share.

And so on.

There are actually few directly overlapping routes and no competitive hubs between US Airways and American.

DOJ is concerned about job losses? Even the unions support this merger.

DOJ is concerned about the effect on consumers? Welcome to the club. All the previous mergers mentioned above were detrimental to consumers, but these cleared DOJ.

If United-Continental and Delta-Northwest were OK, this merger is, too.

21 comments on “DOJ “a day late and a dollar short” on merger concerns

  1. So the DOJ is going against what management want AND against what the unions want. Seems they’re doing they’re job, then, which is to protect customers, not management, nor unions.

    As for the oft-repeated argument that it allowed previous mergers to go through: So what? If you simply apply that “logic”, it would mean that once one large merger has been approved, there is no way of blocking another large merger at any point thereafter.
    That logic then going “They approved CO/UA, so they have to approve US/AA, so they’ll have to approve newAA/newUA, and so on”. Which is obviously nonsense.

    As a reminder: A merger should be assessed based on the market conditions at the time of the merger proposal. Market conditions (and the number of market participants) obviously changed between the UA/CO merger and now, and any assessment of mergers in the airline industry will have to take this into account. The DOJ does NOT have to give a blank check to AA/US, nor agree to whatever AA/US were prepared to offer in terms of concessions.

    Furthermore, the task of assessing a merger proposal also involves re-assessing how previous mergers worked out and how effective the measures and conditions placed on them at the time worked out. It would be pretty stupid for the DOJ to not be allowed to learn from past experience.

    • As a PS to my previous comment: The principle of assessing proposed takeovers/mergers at the time they (are supposed to) happen doesn’t just mean that a previous merger being allowed guarantees a later one also going through: It also means that if a merger/takeover was nixed once, it may still be allowed later one as market conditions change.
      Otherwise, the EU would have just pointed to their previous decision in the FR/EI saga, instead of conducting a completely new, extensive analysis. The reason they nixed it again was that the new analysis still showed significant competition issues, NOT that they had already nixed it previously.

  2. Just a few questions as a non-American:
    Is such a lawsuit a pre-condition to get an approval under conditions, such as that new AA has to give some slots at Reagan to its competitors?
    Is the DoJ one “party” of the current procedure or the decision making body and then there is a possibility to appeal to a court?
    What is the role of the US Federal Trade Commission ?
    Can AA now make an offer, to sell some slots or do they have to wait a decision?

    • As I understand it, the DOJ (and some US states, including Texas and Arizona) file a suit on the grounds of (alleged) antitrust violations. This will go in front of a court which will then hear both sides and make a ruling based on evidence and statements brought forward from both sides. Which is exactly what it should be like – the DOJ doesn’t get to decide on its own, just like FR was still able to take the EU Commission’s decision to court to try and have it reverted.

      My prediction is that the court is going to find in neither party’s failure, i.e. the merger will probably allowed to go through, but with concessions imposed on US/AA that exceed what they so far agreed on with the DOJ.

      • ok, but does that mean that the DoJ does not make a decision that is legally binding for the airline?
        In Europe the system is like this: The Commission makes a decision, that is legally binging for the company, but the company can make an appeal to the court. If they don t make an appeal the decision gets executed.
        Same as if you get a fine by a policeman for driving too fast (legally binding for you), but you can go to a court, claiming that there was no traffic sign indicating the speed limit, you were not driving fast, it was justified because your wife was giving birth on the backseat etc (appeal to the court). If you don t make an appeal in time, however, the original decision enters into legal force and you must pay (gets executed)

      • “ok, but does that mean that the DoJ does not make a decision that is legally binding for the airline?
        In Europe the system is like this: The Commission makes a decision, that is legally binging for the company, but the company can make an appeal to the court.”

        In the US, it’s somewhat back to front to the European system – the DOJ can’t make a unilateral decision that can then be challenged in the courts. Instead, the DOJ has to go to a court to begin with and argue its case.
        I assume that even after a court ruling has been made, either party can challenge this, but maybe somebody from the US can clarify this?

    • It appears the FTC analyzes, and if competitive issues are found to a degree they deem “excessive” the DOJ sues in court to stop or change the merger agreement.

      http://www.ftc.gov/bc/mergers.shtm
      http://www.ftc.gov/bc/hsr/
      http://en.wikipedia.org/wiki/Clayton_Antitrust_Act

      leehamnet’s characterization of this process as “legal blackmail” is imbalanced as it suggests, at the extreme, all laws are “legal blackmail,” and more specifically, monopolistic behavior should be condoned. As history has shown, capitalistic markets have a tendency to be monopolistic, so it is government, even with it inconsistencies and flaws, that makes the markets “fair.”

      Yes, the USA is a common law nation (verses civil law, like in Europe, etc) using legal precedent to make legal decisions. Yet, prior airline mergers each have their own unique character, and those not taken to court (like UA/CO) have no bearing on the AA/USA merger figuratively or legally.

  3. Each merger is a separate entity. Once cannot say “DL/NW, UA/CO, WN/FL merged so we should let AA/US merge too”. If the DOJ believes that competition (pax) is going to get hurt, then its their job to make sure it doesn’t happen. Whether the DOJ was “sleeping at the wheel” for other mergers is non squi.

    Regarding pseudo-monopolies in certain airports such as MDW, EWR, etc. is irrelevant to this merger as well.

    Lets not forget, DCA like LHR, etc. is a slot-restricted airport.

  4. Respectfully, I disagree. Just because the merger between UAL and Continental was allowed doesn’t make the case that this merger should be. By that logic then Delta and UAL should merge next to create the next worlds-biggest-airline. After that, why not just merge all the carriers to create one single “legacy” carrier and one “single” LCC carrier?

    The regulators have done the job in analyzing the data and have concluded that 3 major carriers would create a defacto oligarchy in the United States. Need evidence? Competition has nearly dried up as-is – witness the lock-step increase in fees the carriers have been able to impose recently. Then read the complaint and note the intent of the US Airways management team to remove the remaining so-called inefficiencies (read: competition) from the marketplace. Perhaps DOJ merely wants to extract concessions. But they would be severe based on the reading of the complaint.

    Finally, it appeared to me that the AA unions that favored this deal brokered a self-serving bargain that left out their US Airways compatriots in order to stick it to AA’s management. If only they had looked upon examples such as the experience of the Frontier employees after they struck a bargain with Republic to repudiate the Southwest Airlines overture. They would see that deals brokered in fear or for retribution rarely work out.

    I don’t expect this deal to die without a fight though. US Airways biggest boosters came from Wall Street. The parties involved have salivated over this deal even it was brokered in anticipation of the fee income that would be generated for the various investment banks and law firms involved.

  5. As usual, DOJ is out to lunch.
    It is harder to fathom the objections of the 6 states who joined the DOJ complaint.
    Their cited concerns that the merger will reduce widespread competition are rather hollow, given that the approved mergers of DAL and NW, and UAL and CAL reduced competition far more.
    Closing the barn door after the horse is gone?
    Per WSJ statistics, where AAL has a commanding presence, US Air has a negligible presence – as in LAX, DFW, MIA, ORD, and JFK, all where US Air’s market share is about 2 % or less.
    And where US Air dominates at CLT and PHX, AAL only has about 5 % market share or less.
    Only at DCA do both airlines have sizeable shares, pre-merger.
    From a market share perspective this was the merger made in consumer heaven.
    Airline management and unions are in rare agreement that the merger is good for workers.
    There is little doubt that AAL unions will suffer more without the merger.
    Given the market share distribution why would one believe that overall competition will be substantially affected, except in the singular case of DCA?
    So why did DOJ seek a full stop injunction rather than one targeted at legitimate consumer concerns?
    Who knows, but with these cats one looks for political motives.
    Maybe those airlines did not offer enough campaign contributions to the Nationalist Socialist – er Democratic Party.

    • “Maybe those airlines did not offer enough campaign contributions to the Nationalist Socialist – er Democratic Party.”

      I find it very hard to take a comment like that (and its author, to be honest) seriously, and I’ll explain why:
      a) The Democrats=NSDAP comparison is completely ridiculous to begin with (just like the USA=USSR comaprison somebody drew on a.net)
      b) The comment’s author has obviously not even bothered to read the complaint, otherwise they would have known that the DOJ is just one of eight plaintiffs that filed the complaint. The other plaintiffs are the following seven US states:
      Arizona (R)
      DC (D)
      Florida (R)
      Pennsylvania (R)
      Tennessee (R)
      Texas (R)
      Virginia (R)

      In other words: of the eight plaintiffs (seven states plus the DOJ), six are governed by Republicans.
      Maybe it’s time to revise the usual black-and-white view of partisan lines in this case?

      By the way, the full complaint can be read here:
      http://www.scribd.com/doc/159988211/US-Airways-American-Airlines-Complaint

  6. My goodness. – I m so offended.
    He doesn’t take me seriously.
    Someone’s buttons are very easy to push.
    He might want to concentrate on the DOJ proclaimed issue – reduced competitiveness.

    • @Fred Bearden:
      It would be my pleasure – as soon as you start addressing the points from the actual complaint.
      By the way – if the complaint is such a load of rubbish as you suggest, what are you worried about? In that case it’ll never hold up in court anyway.

      “From a market share perspective this was the merger made in consumer heaven.
      Airline management and unions are in rare agreement that the merger is good for workers.”
      …as it is a well-established fact that management and unions have nothing in mind but the good of the consumer. Hey, wait…

      • Once again, for the benefit of anfromme:

        In the major domestic hubs of LAX, PHX, DFW, ORD, JFK, CLT and MIA one merger partner has a very large market share and the other partner has a very minimal market share.
        Surely you can see that when one either dominates or has a major share of the market, the addition of a few percents of market share are unlikely to change the dominant partner’s competitive tactics.
        Hence the competition in these market is not likely to be affected.
        Only at DCA do both merger partners combine to change the market share significantly.
        DOJ could have focused on that one DCA element but chose not to, and instead used a shotgun approach to try to derail the entire merger.
        The question is – why?

        I have no dog in the fight.
        I see little effect on consumers either way it goes.
        As energy costs, environmental concerns and taxes rise, ticket prices will rise, while domestic service levels will continue at their present low levels simply because they cannot get much lower.

      • “In the major domestic hubs of LAX, PHX, DFW, ORD, JFK, CLT and MIA one merger partner has a very large market share and the other partner has a very minimal market share.”
        Yes, which is why you won’t find a mention of these airports in the complaint, as there is no antitrust issue there. In other words: these airports are immaterial to the antitrust case. Remember it’s not just major international hubs that play a role when considering antitrust issues.
        More material is Washington, and the over 1000 city pairs where, post-merger, market concentration would be exceptionally high, not least because of that merger.
        To draw a quick comparison: The various dozens of airports where EI and FR have no or very little shared presence were immaterial to the decision to not let the FR/EI takeover go through (pending FR’s appeal, obviously). What was very material was the market niche called Ireland (substitute for DCA in the case of US/AA) where there was significant overlap and where FR was not prepared to offer sufficient concessions. The European system here seems a bit more transparent in that the EU Commission will actually outline and address the concessions offered, while there is to my knowledge not so much public talk about previous negotiations between the DOJ and US/AA; I have no doubt, though that plenty of talks were held behind closed doors on this between US/AA, the DOJ and quite likely representatives of the co-plaintiffs as well.

        “Only at DCA do both merger partners combine to change the market share significantly.
        DOJ could have focused on that one DCA element but chose not to, and instead used a shotgun approach to try to derail the entire merger.
        The question is – why?”
        Well, one focus of the complaint is market share at DCA. Almost all of section IV deals with this.
        But the DOJ are not only concerned with particular sub-markets, but also with the market overall. Creating the largest airline in the world will come under antitrust scrutiny no matter what, and reducing the number of network (aka “legacy”) carriers from four to three in the US warrants further scrutiny. So besides market share at particular airports (i.e. particular niche markets) they’ll have to look at the overall situation and market concentration (see section V in the complaint). This seems to be what you call the “shotgun approach” – the fact that the DOJ and the seven state attorneys general don’t just see market share at DCA as a problem, but also the overall situation of the US airline industry and its further cartelisation should the US/AA merger go through. It would be silly to not consider the probable effects of reducing the number of legacy carriers to three, though. Their believe is that further consolidation to just four carriers will harm consumers by leading to less choice and higher fares – and they can point to quotes from Doug Parker in particular that this is exactly what he expects to get out of further consolidation, i.e. the AA/US merger. They can also point to executives from AA and US stating that neither carrier needs the merger in order to survive. They can furthermore refer to past experience with mergers (CO/UA) where fares have gone up and service has been scaled back. While it’s not that easy (but not impossible) to undo CO/UA, I would certainly expect this experience to play into decisions regarding future mergers. It’s only if the DOJ did not take this into account that I think it would be justified to say they were out to lunch and not doing their jobs.

        I’m not saying that every single point in the complaint has sufficient merit to be upheld in court. The same goes for AA/US’s case, though. I.e. US/AA will have to offer significant concessions (that they have apparently been unwilling to offer so far) in order for the court to allow the merger.

        Just to clarify – I, too, have no dogs in the race, but the scorn heaped over the DOJ and the bare fact they so much as dare to put AA/US under scrutiny does not stop to surprise me.

        “I see little effect on consumers either way it goes.
        As energy costs, environmental concerns and taxes rise, ticket prices will rise, while domestic service levels will continue at their present low levels simply because they cannot get much lower.”
        That’s all fine and well, but none of the DOJ’s concern. Fares rising because of environmental pressures (of the economic and the, well, environmental kind) is not their domain. Fares rising because of less competition and more coordination between market participants is.

  7. Competition law is supposed to protect competition for the benefit of consumers.
    If the airlines want to do a merger that doesn’t promote competition in the benefit of consumers, they will need to make concessions and modifications until the merger actually does benefit consumers. What’s surprising about that? That the law has not always been equivalently applied in the past doesn’t mean much, the U.S. had the exact same Constitution all thru Jim Crow segregation and Japanese internment camps, doesn’t mean that courts should accept that sort of stuff today. Courts overturn previous rulings (or go against previous administrative decisions that weren’t disputed in the courts) all the time.

  8. Fred; there is only one mechanism to address a monopolistic merger when the merging parties cannot agree to a strategy; invoke the Sherman Act and file suit to stop the merger.

    They are using the only mechanism available because it is the only mechanism available. The government does not have the almighty force of God to reach into the merging airlines mainframes computers and fix things for the consumer. As a Republican, you should be happy that we have a limited government

  9. Fromme and Garrett:
    My concern is not for the AAL /US Air merger.
    That will eventually work its way out in what approximates a capitalistic free market.
    My concern and the concern of many others today is for the arbitrariness of our current DOJ (see WSJ, other Leeham articles)
    DOJ has a shabby record of exceeding its limitations under our constitution, highly selective enforcement of our laws and political bias.
    When the administration of justice is biased there is no justice.
    Fromme, you win the award for the most verbose, most boring respondent.
    Perhaps you should be a publisher.
    Garrett, you miss the point entirely.
    I have no quibble with the Sherman Act lawsuit, just the DOJ’s shotgun approach.
    It is as though DOJ is deliberately reaching for overkill to obscure the issues rather than defining the issues it really considers vital to the public interest so that the lawsuit can be prosecuted with efficiency.
    When this occurs there is usually a political agenda somewhere.
    And, please: I am not a Republican.

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