Nearly ten months after American Airlines and US Airways first announced their plans to merge and form the world's largest airline, AMR Corporation (the holding company for American and other airlines) announced the completion of the merger. In a press release, AMR stated that it officially combined with US Airways Group, Inc. to form American Airlines Group Inc. ("New American"). While investors, employees, and customers of the airlines hope that New American will have the "scale, breadth and capabilities to compete more effectively and profitably in the global marketplace," it is this anticipated competitive advantage which has subjected the companies to two lawsuits since last February, one by the Department of Justice and another by private parties.
The complications resulting from the proposed merger expose the complexity and opaqueness of federal antitrust regulations, particularly as applied to a deregulated industry such as air travel. During the 1950s and 1960s, as airline travel boomed, the federal government attempted to regulate the industry [PDF] as it had regulated similar high-investment, monopolistic industries such as railroads and public utilities. Economists' concerns about inefficient government regulation and higher costs, however, resulted in the Airline Deregulation Act of 1978. Legislators hoped that deregulating the airline industry would increase competition, lower prices, improve customer service and allow more Americans access to air travel. While the act debatably accomplished these goals, it also led to a period of extreme financial instability, volatility and inefficiency for airlines and their customers, employees and investors. Over the past decade, nine major airlines have consolidated via acquisitions and mergers into four airlines out of business necessity, recreating de facto the big multiplayer system of the regulated period. While the Department of Justice (DOJ) made a number of persuasive antitrust arguments [PDF] in its case against the American Airlines merger, I argue that the nature of the airline industry, including the high entry costs, economies of scale, and elasticity of demand, makes it possible and even desirable for large airlines to merge and compete with other large airlines without raising serious monopoly concerns.
AMR filed for bankruptcy reorganization in November 2011 in the US Bankruptcy Court for the Southern District of New York when the merger was announced. Since filing for bankruptcy, AMR successfully implemented a number of programs to revitalize the company and regain competitiveness in the air travel market. By 2013, both American Airlines and US Airways recognized AMR's progress and conceded that while the merger would be good for business, it was not a step necessary for the survival of either company. The proposed merger would combine the two airlines under US Airways leadership but assume the American Airlines brand name.
On August 13, 2013, the DOJ and several state attorneys general filed a complaint [PDF] in the US District Court for the District of Columbia to block the proposed merger. The government determined that consolidation of the two airlines would reduce competition and force consumers to pay higher fares and settle for fewer options in air travel. Without the competition between American Airlines and US Airways, the market would be dominated by only three large carriers (United, Delta and the New American), which the DOJ complaint argued would "cooperate, rather than compete, on price and service." The monopoly would be especially apparent at Washington Reagan National Airport, where New American would control 69 percent of take-off and landing slots and 63 percent of the nonstop routes.
The major issue of law and fact in this controversy, the merger's potential to create a monopoly and lessen competition, stems from the Clayton Antitrust Act of 1914. Section 7 of the Clayton Act prohibits, in certain cases, a corporation's acquisition of stock in another corporation where "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." Because Section 7 is preventative and not remedial, the government need only establish a "reasonable probability" that the anticipated harm to competition will occur should the merger take place. Courts have interpreted the statutory term "lessen," not as a diminution of existing competition, but as preventative of increasing competition. Thus, the government shouldered the burden of establishing a reasonable probability that the proposed merger would substantially prevent the increase of competition in the air travel industry. In their amended complaint, the government argued that the increased market concentration due to the reduction in the number of major airlines would cause Section 7 harm, as "the more concentrated a market, and the more a transaction would increase concentration in a market, the more likely it is that a transaction would result in in a meaningful reduction in competition." The government requested an injunction against the two airlines.
AMR, represented by Jones Day, and US Airways, represented by O'Melveny & Myers, defended the merger as necessary to allow the airlines to remain competitive in the rapidly changing air travel industry. Citing $14 billion in losses over the last 12 years by the two airlines, two bankruptcies by US Airways and the current bankruptcy of American Airlines, the defendants asserted that the merger was crucial to their future viability as a business. The volatility, economies of scale and enormous asset investments of the airline industry necessitate consolidation to prevent wasteful and inefficient business practices, which lead to bankruptcies and hurt investors, employees and consumers. The airlines also claimed that the merger would benefit consumers by providing expanded flight options and benefit airline employees with improved pay and job stability.
The government submitted a proposed final judgment on November 12, 2013, which would allow the merger with certain conditions to "remedy the harm to competition that was likely to result from the proposed merger." The settlement requires New American to sell 104 carrier slots at Reagan National, 34 slots at New York's LaGuardia Airport and rights to some other slots at various other airports. The parties agreed that the transfer of those slots would strengthen other airlines' capacity and incentive to compete with New American. New American is prohibited from reacquiring ownership in the slots during the term of the final judgment and must notify the DOJ if they intend to acquire any slots at Reagan National in the future.
After the settlement of the DOJ lawsuit, the US Bankruptcy Court judge approved the merger. Another challenge to the merger by private airline passenger plaintiffs failed to halt the integration of the two corporations. The future looks bright for New American: shares of the combined company rose 2.7 percent on their first day of trading on the NASDAQ and the two-year integration plan promises to repay AMR's creditors and provide stability for consumers, employees and investors.
However, there are several lessons that attorneys can draw from the short-lived American airlines litigation. Anti-competition concerns with regard to airline conglomerates may be inappropriate so long as there remain at least three major competitors in the field (United, Delta, and New American). While concerns about collusion between the major airlines may be valid, the success of smaller alternative airlines, such as Southwest, show that newer and more streamlined companies can still enter and compete in the market. Competitors such as Southwest keep the big three major airline conglomerates from hurting consumers by unreasonably raising ticket prices or reducing services provided. Finally, opponents of the merger should keep in mind that all US-owned airlines (Delta, United, New American, and others) not only compete with one another for domestic flights, but also with international airline companies for transnational flights. Denying homegrown airlines the ability to act in the best interests of their business and expand cripples their competitiveness with foreign airlines and hurts long-term US world market participation.
Laura Gallagher is a Staff Editor for the UC Davis Business Law Journal. She previously worked as a Summer Associate for Meade & Schrag, LLP and as a Law Clerk for the Community Legal Services in East Palo Alto. She graduated from Georgetown University in 2011.
Suggested citation: Laura Gallagher, World's Largest Airline Gets the Green Light , JURIST - Dateline, Jan. 18, 2014, http://jurist.org/dateline/2014/01/lauara-gallagher-airline-merger.php
This article was prepared for publication by Endia Vereen, an associate editor for JURIST's student commentary service. Please direct any questions or comments to her at email@example.com