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From Antitrust Law Daily, August 13, 2013

U.S., six states challenge American/US Airways deal "creating the world’s largest airline"

By Jeffrey May, J.D.

The U.S. Department of Justice, six state attorneys general, and the District of Columbia filed a complaint today in the federal district court in Washington, D.C., challenging the proposed $11 billion merger between US Airways Group Inc. and American Airlines’ parent corporation, AMR Corp. The proposed transaction would allegedly eliminate actual and potential competition between US Airways and American Airlines and would increase coordinated behavior among the remaining carriers (U.S. v. US Airways Group Inc., Case 1:13-cv-01236).

Emboldened by a string of recent victories, the Justice Department Antitrust Division—together with the States of Arizona, Florida, Pennsylvania, Tennessee, Texas, and Virginia, and the District of Columbia—is seeking to block the planned merger of two of the nation’s five major airlines. The plaintiffs include the home states for both carriers.

American is headquartered in Texas. It operates hubs in New York, Los Angeles, Chicago, Dallas, and Miami. US Airways, based in Arizona, has hubs in Charlotte, Philadelphia, Phoenix, and Washington, D.C.

“Passengers to and from the Washington, D.C. area are likely to be particularly hurt” by the merger, according to the complaint. The market for slots at Ronald Reagan Washington National Airport is defined as a relevant market that would be highly concentrated as a result of the merger. US Airways currently holds 55% of the “slots,” which are government-issued rights to take off and land, at Reagan National. The merger would increase the percentage of slots held by the combined firm to 69%, and the combined airline would have a monopoly on 63% of the nonstop routes served out of the airport, the plaintiffs allege.

The complaint also contends 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 increases in market concentration. The city pairs are identified in an appendix that—using the Herfindahl-Hirschman Index (HHI) for measuring market concentration—lists the post-merger HHI level of concentration and the HHI increase in concentration. The complaint cites the Charlotte-Dallas city route as an example, where the post-merger HHI will increase by 4,648 to 9,319 (out of 10,000).

Increased Coordinated Behavior. In addition to eliminating competition between the merging carriers, the transaction would increase the likelihood of cooperation, as opposed to competition, in an industry that is already conducive to such behavior, according to the government. The complaint details how the merger would result in the elimination of lower fares. Specifically, the merged entity would likely end the US Airways “Advantage Fares” program, an aggressive discounting strategy aimed at undercutting the other airlines’ nonstop fares with cheaper connecting service.

The Advantage Fares “have proven highly disruptive to the industry’s overall coordinated pricing dynamic,” the complaint alleges. Other airlines have chosen to respond to Advantage Fares with their own low connecting fares in markets where US Airways has nonstop service. That is, the other legacy airlines undercut US Airways’ nonstop fares the same way that US Airways undercuts their nonstop fares, the complaint explains.

Moreover, following the merger, the remaining “legacy” airlines—Delta, United, and the new American—would allegedly be able to exercise “capacity discipline” by restraining growth or reducing established service. Capacity increases might also be thwarted if the combined entity were to block American's post-bankruptcy plans for increases in both domestic and international flights. It is also alleged that the merger would likely lead to increases in existing fees, such as fees for checking bags or redeeming frequent flyer miles, as well as the imposition of new fees.

“If the planned merger is enjoined, both American and US Airways will have to compete against two larger legacy rivals, and against each other,” the government contends. “As the smallest of the legacy airlines, American and US Airways will have greater incentives to grow and compete aggressively through lower ancillary fees, new services, and lower fares.”

The complaint is peppered with quotes from US Airways executives—who would run the new American—that suggest that the merger is an attempt to deter aggressive competition in the industry.

European Commission Approval. The lawsuit comes just a little more than a week after the European Commission (EC) cleared the proposed merger, subject to the carriers' agreement to open up competition on the London-Philadelphia transatlantic route. The carriers agreed to release one daily slot pair at London Heathrow and provide further incentives, such as the possibility for a new entrant to acquire grandfathering rights after a certain period of time, the EC announced on August 5. The federal/state lawsuit does not identify any anticompetitive effects in transatlantic markets.

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

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