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From Antitrust Law Daily,September 11, 2013

American, US Airways respond to merger challenge, question government’s analysis

By Jeffrey May, J.D.

US Airways Group, Inc. and AMR Corporation, the parent company of American Airlines, Inc., responded to the federal/state complaint challenging their proposed merger yesterday. Both companies contended in their answers that a combination of US Airways and American Airlines would increase competition and benefit consumers. They asked the federal district court in Washington, D.C. to summarily deny the request of the U.S. Department of Justice and the attorneys general of seven states and the District of Columbia for an injunction blocking the $11 billion merger (U.S. v. US Airways Group Inc., Case No. 1:13-cv-01236).

The Justice Department Antitrust Division—together with the States of Arizona, Florida, Pennsylvania, Tennessee, Texas, and Virginia, and the District of Columbia—filed a complaint seeking to block the planned merger of two of the nation’s five major airlines in August. An amended complaint, adding the State of Michigan as a plaintiff, was filed last week.

The government alleged that the proposed transaction would eliminate actual and potential competition between US Airways and American Airlines and would increase coordinated behavior among the remaining carriers. In addition to noting the potential anticompetive impact on airline travelers going to and from the Washington, D.C. area, the government expressed concern that post-merger the remaining “legacy” airlines—Delta, United, and the new American—would be able to exercise “capacity discipline” by restraining growth or reducing established service. The government’s complaint suggested that Southwest and JetBlue, which had less extensive domestic and international route networks than the legacy airlines, would be unable to disrupt the coordination among the legacy carriers.

In its answer, US Airways questioned why the plaintiffs were fixating on maintaining the number of “legacy” carriers. According to US Airways, the government’s focus on legacy airlines caused it to ignore the most meaningful competitive development in the airline industry since deregulation: the emergence of low cost carriers (LCCs), such as Southwest Airlines. US Airways also suggested that it and American are at a “competitive disadvantage which cannot be overcome on a standalone basis,” as a result of the government’s recent decisions to allow Delta to merge with Northwest (2008) and United to merge with Continental (2010). US Airways and American Airlines seek to merge to create an “effective third competitor” capable of competing with the new Delta and new United.

American, in its answer, questioned the government’s heavy focus on the existence of “more than 1,000” overlapping routes between the two airlines with high Herfindahl-Hirschman Index (HHI) numbers. The government had contended that the transaction would be presumptively illegal in markets identified as more than 1,000 city pair markets in which American and US Airways currently compete head-to-head, based on HHI increases.

According to American, the number of nonstop and connecting overlaps in this merger is comparable to those in recently approved transactions. “Of the 623 domestic nonstop routes currently flown by American and US Airways, the two airlines directly compete on only 17, and DOJ’s list includes only 14,” American asserted. American went on to say that most of these overlaps were also served nonstop by other airlines, including LCCs Southwest and JetBlue.

“[T]he notion that LCC competition and potential entry are not the dominant competitive fact in the industry is out of touch with market realities,” according to American.

Both carriers noted that the proposed merger would create new routes, improve service on existing routes, and result in cost synergies and other efficiencies that would greatly outweigh the alleged anticompetitive effects.

Attorneys: Richard G. Parker (O’Melveny & Myers LLP), Paul T. Denis (Dechert LLP), and Charles F. Rule (Cadwalader, Wickersham & Taft, LLP) for US Airways Group, Inc. John M. Majoras (Jones Day) and Mary Jean Moltenbrey (Paul Hastings LLP) for AMR Corp.

Companies: AMR Corp.; American Airlines, Inc.; US Airways Group, Inc.

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