The proposed merger of the bankrupt AMR Corporation (parent company of American Airlines – hereinafter American) with US Airways Group, Inc. (parent company of US Airways – hereinafter US Airways) to create the new American Airlines was announced in February 2013. 1 Despite the European Commission’s (EC) August 5 clearance of the merger with minimal commitments, the Antitrust Division of the U.S. Department of Justice (DOJ), joined by seven states and the District of Columbia, brought suit to permanently enjoin the merger on August 13. United States v. US Airways Group, Inc., 1:13-cv-01236 (D.D.C. Filed Aug. 13, 2013). The content of the DOJ’s complaint (Complaint) demonstrate the DOJ’s modus operandi for litigating a merger.
A private suit to enjoin the merger was filed immediately before the DOJ’s action and remains pending.
DOJ Sues to Enjoin the Merger
The DOJ seeks to enjoin a merger between the smaller two of the four remaining “legacy” airlines – the other two being United Airlines and Delta Airlines. If the merger went forward, the combined airline (Combined Firm) would become the largest airline in the world. Compl. ¶ 1. The Complaint alleges that the merger: (i) “would make it easier for the remaining airlines to cooperate, rather than compete, on price and service”; (ii) “continue the trend” of price increases, new fees, and capacity and service reductions; and (iii) eliminates existing disciplining mechanisms like US Airways’ “aggressive discounting strategy” leading to higher fares. Compl. ¶¶ 3-7. The DOJ also alleges that neither airline needs the merger to continue to be an effective competitor. Compl. ¶ 12.
The Complaint identifies two markets of concerns: (1) “scheduled air passenger service between cities” and (2) “takeoff and landing slots at Reagan National Airport.” Scheduled air passenger service between cities treats each city pair as the relevant geographic market, alleging that non-stop and one-stop service are competing products, though city pairs are non-substitutable. Compl. ¶¶ 27-28. According to the DOJ, the Reagan National Airport (DCA) slots market involves the limited number of takeoff and landing slots at the airport, a desirable location with difficult to obtain, expensive slots. Compl. ¶¶ 30-31. Sufficient market power in either market would purportedly allow a “hypothetical monopolist” to raise prices.
The main thrust of the DOJ’s complaint is that the merger would take an already concentrated industry and concentrate it further, pointing to presumptively-anticompetitive, posttransaction market concentration as evidence. The DOJ believes that the elimination of head-to-head competition between US Airways and American “on more than a thousand routes … would create strong incentives for the merged airline to reduce capacity and raise fares where they previously competed.” Compl. ¶ 82.2 At DCA, the DOJ specifically asserts that the Combined Firm’s 69% market share would allow it to foreclose rivals from entering or expanding service at that airport. Compl. ¶¶ 83, 89.
The DOJ also takes a broad view of the merger’s harms in the Complaint, focusing on coordinated effects. It states that the merger “would likely substantially enhance the ability of the industry to coordinate on fares, ancillary fees, and service reductions by creating, in the words of US Airways executives, a ‘level Big 3’ of network carriers, each with similar sizes, costs, and structures.” Compl. ¶ 46. Under such circumstances, the DOJ fears consumers would see price and fee increases, and service reductions, that have otherwise been held back by existing competition, such as US Airways’ “Advantage Fares” discounting program, which the DOJ expects the Combined Firm to discontinue. Compl. ¶¶ 48-54, 57, 71-81.
As evidence, the Complaint makes significant use of ordinary course documents and e-mails commenting on this and past mergers. For example, a 2012 US Airways presentation states that airline mergers have created “Fewer and Larger Competitors,” which enables airlines to “reap the benefits” of “capacity reductions” and new fees (ancillary revenues). Compl. ¶ 35. Multiple statements by US Airways
executives express preference for consolidation in order to reduce capacity and service, connecting these reductions either implicitly or explicitly to reduced competition. Compl. ¶¶ 4, 11, 61, 63-66. The Complaint quotes CEO Doug Parker as explaining the merger is “the last major piece needed to fully rationalize the industry.” Compl. ¶ 9. The DOJ also cites past mergers themselves as evidence of potential anticompetitive effects, particularly reduced capacity, higher fares, and reduced service, including to hubs, even when promises to the contrary were made. Compl. ¶¶ 59, 61-67. The Complaint here alleges that this merger would be no different. Compl. ¶ 67.
Finally, if the merger were to close, the DOJ alleges competition from Southwest and JetBlue, the two remaining large non-legacy carriers, or other airlines “would not be sufficient to prevent the anticompetitive consequences of the merger.” The Complaint points to the different business models and networks of these carriers and the passenger perception of “them as a less preferred alternative to the legacy carriers.” In this regard, the DOJ alleges that the legacy carriers will not be subject to price discipline by Southwest Airlines because of differentiated products. Compl. ¶¶ 47, 93.
Trial is set for November 25, 2013. A decision may be possible by the year’s end.
Lessons from the DOJ’s Suit
Though the ultimate outcome of the DOJ’s suit remains unknown, this litigation demonstrates that the DOJ now has a specific merger litigation playbook that draws on prior merger litigation, such as AT&T/T-Mobile or H&R Block/TaxACT. Its implementation here presents at least six implications for future merger litigation:
- Market structure remains a key factor in DOJ’s analysis. The Complaint begins with the allegation that the merger would reduce the number of major domestic airlines from five to four, and the number of “legacy” airlines from four to three. The Complaint also draws on the consolidation trend in the airline industry, looking at the structural effects of past mergers to predict the effects of this merger. This understanding of market structure is the key jumping off point for many of the allegations that the merger will therefore lead to price increases.
- Market definition, however, can be fluid. Although the Complaint focuses on the impact on national market structure, it alleges that the relevant markets are the city pairs served by the merging airlines. The Complaint alleges that hundreds of city pair markets are already highly concentrated and would become more so as a result of the merger. The Complaint uses this increased concentration as part of the rationale for the alleged harm to competition, but that is essentially unrelated to the “four-to-three” theme that otherwise pervades the Complaint. This is not necessarily a fatal inconsistency; the Complaint describes how overall industry structure has affected pricing on individual routes. But, it reflects the way in which market definition as a strict matter has been downgraded in the DOJ’s analysis of mergers and in their approach to merger litigation.
- “Hot” documents play a major role. As in other recent cases, notably H&R Block/TaxACT, the DOJ mined the parties’ documents for especially strong admissions that are likely to play well in court. While both sides are likely to make extensive use of economic evidence at trial, the DOJ is counting on inculpatory statements in the parties’ documents to tip the balance if the economists play to a draw.
- Past industry mergers can influence the DOJ’s perception of consumer harm. The Complaint does not evaluate the merger’s effects on the market, either national or city pair, in a vacuum, but instead focuses on the trend towards consolidation and the cumulative effects of airline consolidation at the national and more local levels. Additionally, the DOJ alleges that perceived competitive harms of prior mergers, though perhaps unknown at the time, were not unique to those earlier mergers and may even be amplified by the present merger. Though the DOJ may have approved the mergers, alleged harms and all, in the past, that does not mean that it will do so in the future, particularly where prior consolidation has made alleged competitive harms more salient and potentially more damaging to competition and consumers.
- Weakened financial condition of an acquired firm may have limited weight. It is often the case that the weakened financial condition of an acquired firm can help show that its current market share overstates its future competitive significance and, thus, a merger that might otherwise have a problematic impact on market concentration should be allowed. But this case – where the acquired firm is trying to emerge from bankruptcy reorganization – is a reminder that there are limits to those arguments. The Complaint alleges that American had a plan to emerge from bankruptcy as a stronger carrier with new aircraft and expanded routes. This is likely to be a contested issue at trial, but it is clear that the DOJ will investigate closely any contention that structural concerns should be disregarded due to financial weakness.
- There is not always an easy remedy. The Complaint alleges particular harm at DCA due to the Combined Firm’s 69% share of the available takeoff and landing slots. In isolation, that concern could likely have been addressed by an agreement to divest slots to an airline seeking to start service to DCA or an existing provider seeking to expand its DCA service. But, the DOJ’s focus on the broader concerns in the hundreds of city pairs and, essentially, at the national level, indicates that the DOJ may be reluctant to settle the case merely by addressing the concerns at DCA. This does not make a settlement impossible, but it does decrease the likelihood.
The upshot is that parties should expect future merger litigation by the DOJ to follow a similar pattern, especially the emphasis on a multifaceted market structure and the heavy reliance on “hot” documentary evidence. Consequently, parties considering a merger should keep these lessons in mind when considering the antitrust risks of the transaction. In particular, it is important to view a proposed transaction from all angles when assessing the market or markets that may be implicated. But whether or not a party is considering a merger today, the DOJ’s strategy, as exemplified by the Complaint, demonstrates how comments on industry action can be used against the commenter. It therefore should serve as a reminder that parties need to be mindful of how they comment, publicly or in internal documents, on industry actions.
Direct Purchaser Litigation Filed
One week before the DOJ filed its suit, a direct purchaser complaint was filed with the Bankruptcy Court. Fjord v. AMR Corp., No. 1:13-ap-01392 (Bankr. S.D.N.Y. Filed Aug. 6, 2013). The action was brought by passengers and travel agents alleging unlawful anticompetitive effects of the merger under § 7 of the Clayton Act. Compl. ¶ 5. The suit seeks to enjoin the merger or in the alternative to require unspecified divestitures. Compl. Prayer for Relief B-C.
Plaintiffs make many of the same claims as the DOJ. Among other things, Plaintiffs allege the merger will result in increased prices, fewer flights, curtailed service networks, and reduced plane and seat capacity as a result of reduced competition and a more concentrated market. Compl. ¶¶ 2-3. Plaintiffs also allege that “the transportation of airline passengers in the United States” is the relevant product and geographic markets. Compl. ¶¶ 26, 31-32, 37-39.
Like the DOJ, Plaintiffs point to prior airline mergers for evidence of anticompetitive effects, including reduced or eliminated service to hubs, Compl. ¶¶ 89, 92, 112-16, 119, highly concentrated city pair routes, Compl. ¶¶ 125-27, and market concentrations at airports of up to 92.1% (Charlotte) with Dallas-Fort Worth (86%), Philadelphia (78%), Miami (70%), Ronald Reagan Washington National (62%), and Phoenix (50%) all at or over 50% of all daily departures, Compl. ¶ 121. Oddly, Plaintiffs did not raise claims related to slots at DCA.
Plaintiffs, like the DOJ, also believe that US Airways and American could survive as standalone competitors. Plaintiffs argue that an unmerged American would be capable of operating independently, and competing as a stand-alone entity post-bankruptcy. Compl. ¶¶ 148-57. While Plaintiffs state that the barriers to entry of new airlines are substantial, Compl. ¶ 135, the barriers to existing airlines serving particular airports or flying particular routes are artificial, created by the airlines themselves to protect their “market share in specific regions or major airports … .” Compl. ¶¶ 158-60.
It is unclear whether these Plaintiffs, or any potential plaintiffs, will succeed on these claims, but they received a substantial boost from the DOJ suit filed a week later. Though the pattern often goes the other way, parties should be mindful that high-profile antitrust suits by private plaintiffs often accompany suits by the government.
EC Clears Merger
The EC did not have the same concerns in the EU that the DOJ alleged in the U.S. On August 5, 2013, the EC cleared the merger with certain conditions, the commitments in Case COMP/M.6607 - US AIRWAYS / AMERICAN AIRLINES (hereinafter Commitments). Because the operations of the two airlines are largely within the United States, the EC’s review focused on transatlantic routes. However, the EC took into consideration not only the joint operations of US Airways and American, but the operational affiliates in a revenue sharing joint venture among members of the oneworld Alliance (the Transatlantic Joint Venture), specifically British Airways.
The Commitments require that the parties release one slot pair per day on the London Heathrow (LHR) to Philadelphia International (PHL) route. Commitments Cl. 1.1. Notwithstanding the fact that of the two parties only US Airways offers a non-stop connection on this route, the EC determined the merger would create a monopoly on this route, because the only other non-stop flight on this route is operated by British Airways and post transaction US Airways would join American and British Airways in the Transatlantic Joint Venture.3 The released slot pair will be available to a prospective competitor carrier through the general slot allocation procedure provided by EU and IATA regulations. Commitments Cl. 1.3. The EC will determine which prospective competitor carrier will become the “New Air Services Provider” using the following criteria:
- Capacity by number of seats and/or flights;
- Year-round service versus seasonal; and
- Price and service options that provide the most robust competition to the Combined Firm between LHR and PHL.
Commitments Cl. 1.27. Once chosen, the New Air Services Provider will compete directly with the Combined Firm and its Alliance partners. The slot must be used for travel between LHR and PHL for six consecutive IATA operating seasons. Commitments Cl. 1.9. Grandfathering will allow the New Air Services Provider to change the city pairs after this period has elapsed. Commitments Cl. 1.10.
The Commitments allow the New Air Services Provider to request fare compatibility across all fares between LHR and PHL. Fare compatibility would allow passengers to fly non-stop one-way on the Combined Firm or an Alliance affiliate and fly back on the New Air Services Provider. Commitments Cl. 2.1. The EC’s reasoning is likely the need to ensure flight flexibility for passengers, which protects the competitiveness of the New Air Services Provider along this route. Any compatibility agreement, however, would be limited to published fares between LHR and PHL and is subject to EC approval. Commitments Cls. 2.2, 2.7.
Even so, the Commitments do not view the LHR-PHL route in a vacuum. Instead, they seem to recognize that many passengers on this route must travel to or from these airports. The Commitments provide for quite far-reaching feeder arrangements by allowing the New Air Services Provider to request a prorate agreement for any flights by the New Air Services Provider with a true origin/destination in Europe and a true destination/origin in North America, the Caribbean, and Central America that includes travel between LHR and PHL. Commitments Cl. 3.1. This would provide the New Air Services Provider with terms at least as favorable as those to the Combined Firm and its Transatlantic Joint Venture partners. The New Air Services Provider would have the same inventory access and reasonable connection times based on airport/terminal standards. Commitments Cl. 3.6. The Commitments limit prorating to 30 such routes of which 20 can start before or end after the stop at LHR. Commitments Cl. 3.3. The New Air Services Provider cannot have its own hubs or an Alliance partner’s hubs at both ends of the route. Commitments Cl. 3.2.
Finally, the Commitments allow the New Air Services Provider to request that the Combined Firm host the New Air Services Provider’s frequent flyer program for service between the two cities, provided the New Air Services Provider does not have a comparable or already compatible program. This must be on equal terms as the Combined Firm’s Alliance partners. Commitments Cl. 4.1.
The Commitments provide that a monitoring trustee will oversee compliance. Commitments Cl. 5.
Even though the EC’s concerns were largely limited to one route, they were significant enough to cause the parties to offer the Commitments described above. The decision confirms that the EC will take revenue sharing joint ventures into account when reviewing a merger involving one joint venture partner. While the EC seems to question the Combined Firm’s incentive to compete with British Airways on the LHR-PHL route because of the revenue sharing joint agreement, it would have found it more difficult to base its concerns solely on American’s and British Airways’ membership in the oneworld Alliance.