DOJ Files Suit To Block AA-US Airways Merger

The U.S. Department of Justice on Tuesday filed an antitrust suit challenging the proposed merger of American Airlines and US Airways. DOJ joined with several state attorneys general to prevent the tie-up after determining it would "substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service." The suit at least complicates and could delay AA's emergence from bankruptcy protection. AA and US Airways unsurprisingly responded to the suit by announcing their intention "to mount a vigorous and strong defense."

DOJ said it seeks to "preserve the existing head-to-head competition" on thousands of routes (connecting and/or nonstop) on which the two carriers currently compete, and minimize "the incentive and ability" of U.S. carriers to coordinate fare hikes and raise ancillary fees.

Based partly on comments from the carriers' own executives, DOJ also asserted that American and US Airways each are well-positioned to succeed on a standalone basis.

Participating attorneys general are from Arizona, Florida, Pennsylvania, Tennessee, Texas, Virginia and the District of Columbia.

Filed in the U.S. District Court for the District of Columbia, the complaint contended that the merger "will leave three very similar legacy airlines—Delta, United and the new American—that past experience shows increasingly prefer tacit coordination over full-throated competition."

Such coordination, the complaint continued, "is unlikely to be significantly disrupted by Southwest and JetBlue, which, while offering important competition on the routes they fly, have less extensive domestic and international route networks than the legacy airlines."

DOJ also suggested the new American would have no incentive to continue US Airways' Advantage Fares program, described in the complaint as "an aggressive discounting strategy aimed at undercutting the other legacy airlines' nonstop fares with cheaper connecting service."

DOJ specifically pointed to Washington Reagan National Airport, where it claimed the merged airline would control 69 percent of take-off and landing slots, and monopolize 63 percent of nonstop routes.

Bill Baer, assistant attorney general for DOJ's Antitrust Division, during a Tuesday press briefing pointed out that "we have multiple concerns nationally, locally, big city, small and medium-size communities. ... We have strong concerns that are not at all limited to National."

DOJ also complained that the merger likely would lead to additional "capacity discipline," whereby industry seats are diminished, while AA's standalone plan for emerging from bankruptcy protection calls for a substantial expansion of capacity. More capacity benefits consumers by providing more choice and, in many cases, lower fares. Conversely, by exerting capacity discipline, airlines cut unprofitable flights.

'Each Merger On Its Own Merits'  

According to a Tuesday research note from Daniel McKenzie, analyst at The Buckingham Research Group, "The situation is fluid and somewhat unusual given the DOJ's track record of approving end-to-end airline mergers."

When asked about any inconsistency between this suit and previous DOJ decisions not to oppose proposed airline mergers, Baer said, "We take each merger on its own merits. If you look at this one, the degree of competitive overlap, at the financial ability for these airlines to thrive as independent entities, at what we have seen over the past number of years [of] the increased tendency—led often by US Airways—of these airlines to try to coordinate on fares and ancillary fees, this one is problematic. ... We have looked very carefully for six months at this deal, and we think it's pretty messed up."

When asked whether the string of airline mergers during the past decade compelled DOJ to finally attempt to put the brakes on consolidation by opposing the AA-US Airways deal, Baer acknowledged that "as we look at the market today, it's not functioning as competitively as it ought to be. It is absolutely clear to us and the seven states that if this merger goes through, it's going to be much worse."

McKenzie's note also suggested that, "at a minimum, the DOJ move could be a posturing move to extract carve-outs from US Airways/American. At most, it reflects a philosophical bias against further consolidation in the industry. Either way, the move upends AA's prospects of exiting Chapter 11 anytime soon."

When asked about carve-outs or concessions (such as those set forth by the European Commission), Baer said, "If anyone wants to come to us and propose a settlement, we are always prepared to listen, but our view, looking at the evidence before us, is that the right outcome is a full-stop injunction."

DOJ and the state attorneys general requested that the court find the proposed merger in violation of the Clayton Antitrust Act, and that American and US Airways "be permanently enjoined from and restrained from carrying out the planned merger."

When asked when an injunction hearing may be scheduled, Baer replied, "Don't know, we are just at the beginning of this process, and as of the start of this call we didn't have a judge assigned yet."

McKenzie lowered the probability of the merger being consummated to a 40 percent to 50 percent range from a previous estimate of "closer to 99 percent."

"We would expect US Airways/American to countersue the DOJ," he wrote, "and while court battles are difficult to analyze and predict, they of course consume merger synergies."

Cowen and Company airline analyst Helane Becker in a Tuesday research note wrote that "if the merger is blocked, AMR will need to go back to the drawing board and come up with a new plan to emerge from bankruptcy … likely through capacity and headcount reduction." She added that "we continue to believe the deal will eventually get done, with the combined company giving up slots at airports like Washington National," though the carriers' intention to close the merger in third quarter "clearly is no longer achievable."

In their response, AA and US Airways reiterated their view of the "complementary" nature of the their networks and the "pro-competitive" impact of the planned merger.