By Jeffrey I. Shinder and Ankur Kapoor
On November 20, 2013, U.S. District Judge Colleen Kollar-Kotelly set the stage for judicial review of the settlement that the U.S. Department of Justice (“DOJ”) has reached to resolve its challenge of the proposed merger of American Airlines and US Airways.
The court’s order sets the schedule for the Tunney Act procedure, which is the congressionally mandated judicial review process that is designed to ensure that the DOJ’s settlements are in the public’s interest of vigorous antitrust enforcement. Under this procedure, when the DOJ settles an antitrust case it must file a “competitive impact statement” justifying the settlement’s resolution of the competitive concerns raised by the DOJ. Interested parties are then given an opportunity to respond and comment. These materials are submitted to a federal judge who is empowered by the Act to reject the settlement if the court finds that it is not in the public interest.
For the controversial American Airlines-US Airways merger, this process will likely play out by the spring of 2014. The court has set deadlines of February 7, 2014, for public comment, and March 10, 2014, for the DOJ to respond to any such comments. At that time, the court will determine whether and when to hold a public hearing.
Since the Tunney Act’s standards were tightened by Congress in 2004, courts have generally deferred to the DOJ and played a modest role in reviewing antitrust settlements. Although most commentators expect this pattern of judicial deference to continue with the American Airlines-US Airways settlement, there are substantial reasons why this settlement should be subjected to searching scrutiny.
Some background is instructive. Initial market and antitrust expectations predicted that the merger would be cleared, possibly with substantial divestitures of take-off and landing slots at Washington, DC’s Reagan National Airport and with a few other divestitures of rights at certain airports. Industry commentators noted that the two airlines’ networks overlapped significantly only at Reagan National, and the airlines stated that there was overlap on only 13 non-stop routes (the DOJ said 17). To the surprise of the industry, and apparently to the two airlines as well, the DOJ filed suit in August while the parties were in the midst of settlement negotiations.
The DOJ’s well-drafted complaint elaborated in great detail how the proposed transaction threatened to reduce competition. First, the DOJ alleged that the merger would reduce competition not only at Reagan National and for a handful of non-stop routes, but for more than 1,000 city pairs (almost all of which involved one-stop routes) because of the high concentration in those markets that would result from the merger. Second, the DOJ alleged that the merger would reduce or eliminate US Airways’ incentive to continue to offer its “Advantage” fares, which are one-stop fares allegedly priced substantially lower—sometimes 50% or more—than other airlines’ one-stop and non-stop fares. Although the DOJ did not allege it explicitly, the DOJ clearly viewed US Airways as a pricing “maverick” under the federal antitrust agencies’ Horizontal Merger Guidelines and was proceeding under a theory that the merger would substantially reduce or eliminate US Airways’ disruption of certain city-pair markets. Third, the DOJ alleged that the merger would result in consolidation in domestic air transportation to the point where there would be only three remaining “legacy” carriers (i.e., carriers that existed prior to deregulation beginning in the late 1970s). The DOJ discounted competitive constraints by newer, lower-cost carriers with less extensive networks, such as JetBlue and Southwest, and alleged that an industry with only three legacy carriers would facilitate price coordination on both airfares and ancillary charges like baggage fees.
The DOJ settlement addresses only the competitive issues raised by the merger at Reagan National, New York’s LaGuardia International Airport, and to a lesser degree at five other airports (Chicago’s O’Hare International, Los Angeles International, Boston’s Logan International, Miami International, and Dallas Love Field). The settlement requires divestiture of: 104 air-carrier slots at Reagan National (slots are federally granted take-off and landing rights that must be obtained before an aircraft can operate at Reagan National, LaGuardia, JFK International, and Newark International, because of the heavy air traffic at those four airports); 34 slots at LaGuardia; and rights and interests with respect to two gates at each of the other five airports. The divestitures at Reagan National would result in the merged airline increasing its market share there by only 2%.
The DOJ settlement does not address any of the other competitive impacts alleged in the DOJ’s complaint. Given that the DOJ made these allegations after an exhaustive factual and economic investigation into the industry, generally, and into these two airlines, specifically, it begs the question why the DOJ would abandon these competitive issues in the settlement. The purpose of the Tunney Act proceeding is to answer this question. If the DOJ did indeed have sufficient facts and economic analyses to back these allegations, the settlement may, and should, be hard-pressed to survive judicial review—particularly given Judge Kollar-Kotelly’s reputation for deep and detailed analysis. Indeed, the DOJ ought to welcome rigorous scrutiny of the settlement given the unusual political pressure brought to bear in favor of the merger by state and city officials, airports, unions, and other groups.
To be sure, there are reasons why the competitive impacts alleged in the DOJ complaint may have been difficult to prove at trial. First, with respect to the high levels of market concentration for travel between the 1,000-plus city-pairs, the DOJ complaint used airlines’ revenues to calculate market shares and concentration. Revenues may not be a correct metric. To the extent that there is significant excess capacity on a given route, the fact that there are only two or three airlines operating that route need not result in high prices. Because the marginal cost of flying an additional passenger is so low, airlines on such routes do, and will continue to, cut prices in order to fill their planes as much as they can. Many of the 1,000-plus routes identified in the DOJ’s complaint are less-traveled routes for which excess capacity is a relatively greater possibility. Revenue shares arguably overstate legacy airlines’ market shares and understate low-cost carriers’ market shares.
Second, with respect to US Airways’ Advantage fares, the legacy airlines’ capacity cut-backs since 9/11—and US Airways’ possible relatively greater excess capacity given its relatively greater service on less-traveled routes—also could explain US Airways’ penchant to offer substantially lower prices at the last minute and for other airlines’ inability and disincentive to do so because their planes are already filled. With a fuller plane, it may be more profitable for an airline to charge higher prices to inelastic passengers on a tight schedule at the last minute. In short, US Airways’ “maverick” pricing may not be a disruptive price constraint on the other legacy airlines but instead is just a manifestation of excess capacity on a particular route at a particular time.
Third, with respect to competition by low-cost carriers like JetBlue and Southwest, the DOJ’s complaint is at odds with its statements concerning the settlement that divestiture of slots and gates to JetBlue and Southwest will ensure even more competition than a full stop to the merger would have done.
Whether the competitive impacts alleged in the DOJ complaint were merely theoretical or actually factual remains to be seen. Although a Tunney Act proceeding is not a forum to litigate the very issues that were settled, some analysis of the alleged competitive impact is necessary to ascertain whether the DOJ complaint’s alleged view of the domestic airline industry was correct. If the DOJ complaint had a substantial basis, then the settlement falls far short of addressing the competitive harms identified in the complaint, and the settlement should be rejected. If the complaint did not have a substantial basis, then the industry and the public need to know that in order to assess competition in the domestic airline industry in the future.
– Edited by Gary J. Malone