Airlines and Antitrust

History of Antitrust Laws

During the early 20th century, President Theodore Roosevelt earned the title of "Trust-buster," as his administration vigorously pursued large corporations and assailed their anti-competitive behavior. The foundations of antitrust law developed during his presidency. The Gilded Age produced captains of industry, such as railroad barons with unprecedented individual and company wealth. Railroads, steel and banks represented a surging economy, but they acted without restraint until trust-busting. Antitrust remains in effect today, but a successor to Roosevelt's trust-buster title has not yet risen. The field is composed mainly of three laws - The Sherman, Clayton, and Federal Trade Commission Acts - and is enforced by the Department of Justice (DOJ) and Federal Trade Commission (FTC).

The Sherman Act exists as a legal bulwark against monopolization, which is deemed to be anticompetitive and harmful to consumers. Although all contracts require some degree of trade restraint, the Act protects against conspiracies that unreasonably restrain trade and involve interstate commerce. A judicial division has developed in analysis of Sherman violations, either through prima facie violations or rule of reason. A prima facie violation is an action taken that automatically satisfies an unreasonable restraint of trade without further analysis, such as market division and price-fixing. The rule of reason analysis is utilized in situations where a prima facie violation is not apparent, so the effects of the action are weighed and the law is deemed not to be violated if the pro-competitive aspects outweigh the anti-competitive. A recent middle-way analysis has chipped away at prima facie, as the quick look determines whether an action should receive rule of reason treatment or not, essentially through a cursory rule of reason analysis. Famous cases include CA Dental Association v. FTC and Federal Baseball Club v. M.L.B.

The Clayton Act is focused on preventing unfair mergers and acquisitions. Section 7 allows the government the authority to deny mergers deemed anticompetitive. Companies contemplating mergers must notify the FTC and Assistant AG if they meet the FTC's thresholds, as per the Hart-Scott-Rodino Act. The DOJ is responsible for civil and criminal enforcement, and the FTC prosecutes civil cases. Prominent cases implicating the Clayton Act are Standard Oil v. US and US v. Microsoft Corporation.

The Federal Trade Commission Act is only enforceable by the FTC, and it established its namesake agency for the purpose of forcing trusts to cease their unfair practices. Emerging out of the economically progressive Woodrow Wilson presidency, the agency is chaired by a bipartisan commission and focuses on consumer protection against monopolistic behavior.

Antitrust lawsuits have been brought in the airline and healthcare sectors, two industries in which mergers and consolidation dominate. The detrimental effects of trust-like behavior include higher barriers to entry for competition and the ability to charge consumers higher prices. In the airlines industry, the effects on consumers include [PDF] a reduced number of routes, higher fares and fewer airlines choices.

History of US Airways and American Airlines

Following the Wright brothers' successful first flight in 1903, business took to the skies. Some early companies, such as All American Aviation, provided mail courier service for specific regions of the US. All American Aviation, which would later become US Airways, was founded in 1939 as a courier service for the Western Pennsylvania-Ohio region. Another early company, The Aviation Corporation, started acquiring air couriers and other small aviation-related businesses in 1929. In 1930, these small companies became incorporated as American Airways, and in 1934 became American Airlines, Inc.

All American Aviation started providing passenger flight service in 1949, and changed its name to All American Airways. In 1953, All American Airways changed names once again to Allegheny Air and embarked on a massive expansion of its territory by merging with aviation corporations from other regions. It entered the Midwest in 1968 after merging with Lake Central Airlines, New York and New England after merging with Mohawk Airlines in 1972. After the US Congress passed the Airline Deregulation Act in 1978, existing aviation corporations could more easily enter new markets, and All American Aviation entered the US South and West in 1979 and changed its name to USAir. USAir completed one of the largest mergers of aviation corporations in US history when it merged with Piedmont Airlines in 1989, even though an administrative law judge from the US Department of Transportation ruled against the merger in 1987.

In the years following World War II, American Airlines underwent significant expansion and started offering passenger flights. American Airlines provided coast-to-coast flights across the US in 195, and transcontinental flights in 1959. It also offered in-flight meals and other services to its domestic flights and added jet aircraft to its fleet in the 1960s. Like USAir, American Airlines benefitted from airline deregulation in 1978 and provided more domestic and international destinations. During the 1980s, American Airlines continued to grow, by increasing the usage and availability of its travel-information SABRE computer program, allowed for its passenger aircraft to be used for freight transportation and added new flight destinations and travel hubs in the US.

Both USAir and American Airlines encountered fiscal troubles during the past two decades. Although USAir added European routes in 1996 and changed its name to US Airways, US Airways' ongoing financial troubles worsened in the aftermath of the September 11 terrorist attacks. The airline filed for Chapter 11 bankruptcy in 2002, filed for reorganization in 2005 and obtained a single operating certificate from FAA in 2007. Meanwhile American Airlines parent company, AMR, reported $2.1 and 1.5 billion losses for 2008 and 2009, respectively. AMR filed for bankruptcy in November 2011. After exiting bankruptcy in November 2013, American Airlines began the merger process with US Airways.

US Airways and American Airlines Merger

The American Airlines and US Airways merger to form the new American Airlines was first announced on February 14, 2013. Talks of this merger, which would form the largest airline in the United States, came on the heals of American Airlines pulling itself out of bankruptcy. The original plan called for completion of the merger by September 2013, but challenges and inquiries into the merger by state and federal agents delayed that plan. A group of as many as 19 state attorney generals and the US Department of Justice (DOJ) conducted investigations into the merger over concerns it would negatively affect jobs and regional economies. The merger also raised concerns over route coverage and the impact it would have on intra-continental travel and rate competition.

The Government Accountability Office (GAO) released [PDF] a report in June 2013 confirming some of these fears. The report stated that the newly formed carrier would be the only provider of nonstop service on seven of the twelve routes where the two airlines currently compete.
Following this report, the DOJ and the attorney generals from six states and the District of Columbia, brought an antitrust lawsuit challenging the merger on August 13, 2013. The challenge raised many of the previous concerns and highlighted the potential for higher prices due to market control and lowered competition. The majority market control by the proposed airline was considered a prima facie violation of antitrust law, and thus warranted judicial analysis. States involved included those most likely to be impacted by the merger, such as Arizona, the home of US Airways, and Texas, the home of American Airlines. A settlement was reached on November 12, 2013. This settlement requires the new airline to reduce flights out of certain airports, including Washington's Reagan Airport and New York's LaGuardia Airport, in an effort to nurture competition and dilute market control.

Justice Ruth Bader Ginsburg of the US Supreme Court denied an application to stay the merger on December 7, 2013. The complaint ruled on by Justice Ginsburg alleged, amongst other things, concern over 90 percent of all air routes in the United States being operated by the Big 4 airlines. On December 9, 2013, the merger was implemented, officially creating New American Airlines, the nation's largest airline with control over 57 percent of the nation's flights.


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