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From Antitrust Law Daily, December 6, 2016

Alaska Air must reduce codeshare agreement with AA to complete Virgin America acquisition

The Department of Justice announced today that it will require Alaska Air Group to significantly reduce the scope of its codeshare agreement with American Airlines, the world’s largest airline, before Alaska Air can complete its $4 billion acquisition of Virgin America. A Department new release explained that those modifications would ensure that Alaska Air would have the incentive to vigorously compete with American Airlines, as Virgin does today.

The news release noted that, to block the merger, the Justice Department’s Antitrust Division today filed a civil antitrust complaint against Alaska Air in the U.S. District Court for the District of Columbia. The Antitrust Division also filed a proposed final judgment that would resolve the competitive harm that was alleged in the complaint, a memorandum that summarized the procedures regarding the judgment, and a stipulated agreement that was signed by counsel for Alaska Air and the Justice Department.

"Smaller airlines, such as Alaska and Virgin, provide a critical competitive check on the larger carriers," said Acting Assistant Attorney General Renata Hesse of the Justice Department’s Antitrust Division. "Although this merger offers hope that a strengthened Alaska can be an even stronger competitor than before, because of Alaska’s extensive codeshare agreement with the world’s largest airline, the merger threatened to blunt important competition and reduce choices for consumers. Today’s settlement ensures that Alaska has the incentive to take the fight to American and use Virgin’s assets to grow its network in ways that benefit competition and consumers."

Alaska Air and American have both tended to offer lower prices and better service than the larger airlines, the Justice Department noted. However, the complaint alleges that the codeshare agreement, which allows Alaska Air to market American flights on over 250 routes, creates incentives for Alaska Air to: (1) compete less aggressively on routes that both carriers serve and (2) forgo launching any new service in competition with American. As a result of those incentives, the complaint alleged that Alaska Air and American often behave more like partners than competitors.

Unlike Alaska Air, Virgin—which has a network that extensively overlaps with American’s network—has competed aggressively with American. In particular, Virgin has vigorously competed with American on 20 nonstop routes that are served by both airlines. This competition has forced American to offer consumers lower prices and better service on some of the most traveled routes in the country, the news release explained.

According to the Antitrust Division complaint, the significant head-to-head competition between Virgin and American on those routes was due in part to the fact that Virgin held essential and scarce assets—including airport gates and takeoff and landing rights known as "slots"—at key American strongholds. Virgin acquired some of those assets, including gates at Dallas Love Field Airport and slots at Washington Reagan National Airport and New York’s LaGuardia Airport, as part of the settlement of the Department’s lawsuit challenging the 2013 merger of American and US Airways.

The complaint alleged that the extensive codeshare relationship between Alaska Air and American would cause Alaska Air to compete less vigorously with American than Virgin does today, resulting in lower quality service and/or higher prices on the routes over which Virgin and American currently compete. The complaint also alleged that the codeshare would make Alaska Air less likely than Virgin to launch new service in direct competition with American.

To address the transaction’s likelihood of competitive harm, the proposed settlement requires Alaska Air to significantly reduce the scope of the codeshare agreement. Specifically, to reduce Alaska’s overall dependence on the codeshare and to limit Alaska’s incentives to cooperate with American, the proposed settlement prohibits Alaska Air and American from codesharing on: (1) routes over which Virgin and American compete today and (2) routes in which Alaska Air would otherwise be likely to launch new service in competition with American following the merger.

At the same time, the settlement permits Alaska Air and American to continue codesharing in limited circumstances if it is unlikely to lead to competitive harm and may offer some benefits to consumers. For example, either airline could rely on the codeshare to serve destinations it would otherwise be unlikely to serve on its own in the near term. The department explained that this type of codesharing was less likely to lead to anticompetitive harm and could potentially benefit consumers by extending each carrier’s network.

To preserve the competitive benefits provided by the divestures to Virgin as part of the American-US Airways settlement, the proposed settlement requires Alaska Air to obtain the department’s approval before selling or leasing any of the gates or slots that were divested to Virgin, and it expressly prohibits Alaska Air from transferring any interest in the assets to American. This requirement ensures that American neither directly nor indirectly regains control of the assets that it divested to Virgin to settle the Department’s challenge to the American-US Airways merger.

Attorneys: Renata B. Hesse, Acting Assisting Attorney General, for U.S. Department of Justice. Katherine Celeste for Department of Justice, Antitrust Division. Courtney B. Dyer (O’Melveny & Myers LLP) for Alaska Air Group, Inc.

Companies: Alaska Air Group Inc.; American Airlines; Virgin America Inc.

MainStory: TopStory AcquisitionsMergers AntitrustDivisionNews

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