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From Antitrust Law Daily, April 28, 2014

Final judgment in challenge to American-US Airways merger approved over objections

By Jeffrey May, J.D.

Rejecting the numerous objections raised by commenters, the federal district court in Washington, D.C. has approved the proposed final judgment resolving the federal/state antitrust challenge to US Airways Group, Inc.’s $11 billion acquisition of the parent company of American Airlines. The court concluded that the final judgment was "within the reaches of the public interest" and was entered as proposed (U.S. v. US Airways Group Inc., April 25, 2014, Kollar-Kotelly, C.).

The final judgment resolves an August 2013 complaint, alleging that the combination of American and US Airways would eliminate actual and potential competition between these carriers and increase coordinated behavior among the remaining carriers. As proposed, the transaction would have been presumptively illegal in markets identified as more than 1,000 city pair markets in which American and US Airways compete head-to-head, particularly on flights to and from Washington’s Reagan National Airport, it was alleged.

The court identified the several harms to competition that would allegedly result from the merger:

  1. the elimination of two independent competitor airlines, ending head-to-head competition between US Airways and American on numerous nonstop and connecting routes;

  2. the creation of a tighter oligopoly, making it easier for the three remaining "legacy" airlines—Delta, United, and the merged airline—to cooperate, rather than compete, on price and service; and

  3. entrenching the merged airline as the dominant carrier at Washington's Reagan National, where it would control 69 percent of the take-off and landing slots, foreclosing entry or expansion by other airlines.

Remedies. The final judgment is intended to address both the harm resulting from increased slot concentration at Reagan National and the broader harms alleged in the complaint by requiring the divestiture of facilities at seven important airports—Reagan National, LaGuardia, O’Hare, LAX, Boston Logan, Miami International, and Dallas Love Field—including substantial divestitures at Reagan National and LaGuardia, the court explained.

Specifically, under the terms of the final judgment, announced in November 2013 to end the litigation, the merged entity was required to divest:

  1. 104 air carrier slots at Reagan National (i.e., all of American’s pre-merger air carrier slots) and rights and interests in any associated gates or other ground facilities to support the use of the divested slots;

  2. 34 slots at New York LaGuardia International Airport and rights and interests in any associated gates or other ground facilities to support the use of the divested slots; and

  3. rights and interests to two airport gates and associated ground facilities at each of the following airports: Chicago O’Hare International Airport, Los Angeles International Airport, Boston Logan International Airport, Miami International Airport, and Dallas Love Field.

These slots and facilities had been or were in the process of being divested to low-cost carriers (LCCs) Southwest Airlines, JetBlue Airways, and Virgin America.

The divestiture of slots at Reagan National to the LCCs addressed the localized competitive concern at that airport, in the court's view. In addition, LCCs also would enjoy a substantially increased presence at LaGuardia as a result of the divestitures.

The government had predicted that the divestitures to the LCCs would create incentives for LCCs to invest in new capacity, expand into new markets, and provide more meaningful system-wide competition to the three remaining legacy airlines, impeding the shift to oligopoly in the airline market. The government also believed that the divestitures would provide the LCCs with stronger positions at strategically important destinations, such as O'Hare, Logan, and Miami, where obtaining access had been especially difficult due to legacy airline entrenchment. "These predictions, which are founded on past experience and research, are entitled to the Court’s deference," the court concluded.

Objections to final judgment. The objections filed during the public comment period and by amici–the American Antitrust Institute and complaining air travelers and travel agents—did not dissuade the court from finding the settlement to be in the public interest. Some of the objectors had questioned whether the settlement addressed all of the harms alleged in the complaint. The complaint had cited the disruptive influence of US Airways’ "Advantage Fares" program, through which it offered discounts over other airlines’ nonstop fares with its own cheaper connecting service. However, the final judgment did not affirmatively preserve the Advantage Fares program or American’s capacity expansion plans for that matter.

"Perfect matching between remedies and alleged violations is not required for Tunney Act approval," the court explained. Moreover, despite concerns over the loss of specific routes flown by defendants, the government had concluded that "mandating that the merged airline continue specific routes or requiring an LCC to undertake a specific route would represent a solution that is neither feasible nor desirable."

The court found unavailing contentions that the settlement should be rejected because the United States and the defendants failed to comply with the procedural requirements of the Tunney Act. For instance, it was argued that defendants' closing of their merger prior to entry of the final judgment was in contravention of the Tunney Act. However, the text of the Tunney Act did not require a district court’s approval of a settlement prior to closing a merger, according to the court. Also rejected were arguments that the settlement should be rejected because it was the product of improper political pressure and because the government failed to include substantive economic analysis and cost-benefit analysis in support of the settlement. The court dispensed with an objecting airline’s contention that certain settlement terms were ambiguous.

Several commenters and amici raised objections that fell outside the scope of review applicable under the Tunney Act. The court explained that it could not look beyond the complaint in making the public interest determination unless the complaint was drafted so narrowly as to make a mockery of judicial power.

Department of Justice response. "We’re pleased that the court agreed that the department’s remedy will enhance system-wide competition in the airline industry," said Bill Baer, Assistant Attorney General in charge of the Department of Justice Antitrust Division, in response to the decision. "By increasing the presence of low cost carriers at key constrained airports across the country—through significant divestitures of slots at Ronald Reagan Washington National and New York LaGuardia International and gates at five other important airports—consumers will have more choices to fly at more competitive airfares. History has shown that when low cost carriers have entered the market, consumers benefit. With the settlement, the department is requiring an unprecedented number of divestitures in this industry that will provide enhanced competition across the nation."

This is Case 1:13-cv-01236-CKK.

Attorneys: Mark William Ryan for U.S Department of Justice. Richard G. Parker (O'Melveny & Myers LLP) for US Airways Group Inc. John M. Majoras (Jones Day) for AMR Corp.

Companies: US Airways Group Inc.; AMR Corp.

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