News Column

Airlines Expect Merger to Happen, but Experts Differ

Aug 15, 2013

The now-challenged merger of American Airlines and US Airways, which would create the world's largest airline, would be beneficial for consumers and wouldn't send fares and fees sky high, attorneys for the airlines said Wednesday.

The legal team that will fight the airlines' case against the U.S. Justice Department, which is seeking to block the $11 billion merger, expressed confidence that it would win in court.

"They got this one very wrong," Rich Parker, an attorney for US Airways -- Philadelphia International Airport's dominant carrier -- and partner at O'Melveny & Myers L.L.P., told analysts and reporters on a conference call. "Both of these companies are looking forward with confidence to our day in court."

The Justice Department filed a 56-page lawsuit Tuesday arguing that past mergers have left fewer airlines, making it easier for the remaining carriers to raise prices, impose higher fees, and reduce capacity and service.

The merger was part of American's plan to emerge from bankruptcy protection. Combining with US Airways would create an airline that could compete with currently larger rivals United and Delta.

The legal team for US Airways and American said the complaint misses the merger's benefits: more flights to more destinations, service to smaller communities, and benefits to airline employees, shareholders, and creditors.

"This is a pro-competitive merger and very positive for consumers and for the United States," Parker said.

Cautious optimism

What once looked inevitable is not anymore.

American and US Airways will have a challenging path resolving the Justice Department's objections, antitrust experts said.

Wall Street analysts who follow the industry remain cautiously optimistic that the airlines will pull off the deal. Antitrust experts said it could be difficult.

"At this stage, it's early. A lot can happen," said Jonathan Lewis, an antitrust lawyer with the firm Baker Hostetler in Washington.

The Justice Department suit relies on statements that US Airways executives have made -- in company memos, internal e-mails, and other documents -- to support the contention that the merger would stifle competition.

Executive comments

The suit quotes public comments by executives about how consolidation allowed the industry to raise fares and introduce "ancillary fees" for checked bags that changed flights.

It quotes US Airways president Scott Kirby as saying that three successful fare increases were passed on to consumers because of consolidation, and that it was "impossible to overstate the benefit" from industry consolidation and fewer airlines, making it easier to raise prices, and impose checked-baggage and ticket-change fees.

"It's going to be difficult for executives at the two companies to walk away from their own words," Lewis said. "They are going to have to convince the judge that what they said, when they said it, they didn't mean it, or it was taken out of context."

Herbert Hovenkamp, a professor and antitrust expert at the University of Iowa law school, wondered what the airlines will have to do to satisfy the government, and if it will be worth it.

If required to sell off numerous routes to third-party airlines or downsize at hub airports, he asked, will the airlines determine that what they are surrendering "is too valuable in relation to what they are getting?"

"It's not going to be easy for them to fix it," Hovenkamp said. "I'm not saying it would be impossible."

Although prior airline mergers were approved -- Delta-Northwest, United-Continental, and Southwest-Air Tran -- each "made the market more concentrated," Hovenkamp said. "There is no right to a merger today just because someone else did it two years ago. They did it when the market was less concentrated than it is now."

Assistant U.S. Attorney General William Baer said on a conference call Tuesday that the government was seeking a "full-stop injunction."

Airline analyst Hunter Keay of Wolfe Research L.L.C. said in a client note that the government focused on fares and fees, but not on specific routes or airports other than Reagan National in Washington, where the new American -- the name of the combined airline -- would control 69 percent of takeoff and landing slots.

"The lack of specifics in the complaint leads us to be concerned that it might be difficult for US Airways-American to find sufficient remedies to assuage DOJ," Keay wrote.

Airline analyst Jamie Baker at JPMorgan Chase said the Justice Department had altered its typical analysis, citing connecting flights and baggage fees. "If DOJ's objections were as straightforward as concentration at a single airport, we'd be able to envision a comparatively easy regulatory fix," Baker said. "It is hard for us to envision a meaningful regulatory appeasement."

Joe Sims, a Jones Day L.P. lawyer representing American, said no one should "assume this transaction is not going to happen."

"It won't happen only if the government does for the second time what they've only done once in the last eight years, and that is convince the judge to block the transaction," Sims said.

A hearing in bankruptcy court Thursday "is scheduled to go forward as planned," US Airways' antitrust attorney, Paul Denis of Philadelphia-based Dechert L.L.P., said on the call. The judge will consider "approval of the plan of reorganization which incorporates the merger agreement," Denis said.

Source: (c)2013 The Philadelphia Inquirer. Distributed by MCT Information Services.

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