JURIST Guest Columnist Laura Gallagher, University of California, Davis School of Law Class of 2014, discusses the complexity resulting from the American Airlines-US Airways merger and argues that the nature of the airline industry makes it desirable for large airlines to merge without raising serious monopoly concerns…

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 Endia Vereen, an associate editor for JURIST’s student commentary service. Please direct any questions or comments to her at studentcommentary@jurist.org