The U.S. Department of Justice today filed a lawsuit that says the proposed merger between AMR Corp. and could be illegal on more than 1,000 domestic city pairs and must be dismantled to stop a small group of national carriers from manipulating services and ticket prices.
In a scathing review of the proposed merger, Justice’s lawsuit with the District Court for the District of Columbia cites numerous public comments and internal communications by senior US Airways executives—some dating to 2006—that the regulator says prove competition between U.S. airlines would be weakened should the merger be approved.
Both airlines reacted immediately, issuing a joint statement calling the DOJ’s assessment “wrong,” and that “[b]locking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices.”
A “vigorous defense” will be mounted, the airlines added, although they accept that the proposed third quarter completion of their merger is now impossible. The airlines also point to support from labor, creditors and shareholders for the merger as proof that the deal is in the best interests for AMR’s Chapter 11 reorganization.
That argument faces a tough battle in the courts. Opposition from the Justice Department was expected, with concessions at US Airways’ Washington National Airport hub the most likely target. And while the lawsuit duly contains arguments that competition to the nation’s capital would be adversely affected by the merger, Justice goes far beyond any request for a deal, instead demanding “that [the] Defendants [the airlines] be permanently enjoined from and restrained from carrying out the planned merger of US Airways and American or any other transaction that would combine the two companies,” as the deal violates U.S. antitrust law.
The lawsuit lists 1,044 city pairs it deems “where the merger is presumptively illegal” to prove its argument. This is in stark contrast to the “12 overlapping routes” mentioned by AMR Chairman and CEO Tom Horton in an Aug. 13 message to employees.
One key DOJ objection is the likely end to US Airways’ current pricing strategy that undercuts competitors’ fares on nonstop routes, at times up to 40%, for passengers that are prepared to travel through one of its hubs. Justice, citing unattributed comments made by US Airways, says the Tempe, Ariz.-based airline’s strategy gains most from AMR’soperation and so it “would make no sense” for the fare type to be retained after a merger.
Justice’s lawsuit regularly refers to comments made by US Airways management, and uses statements by Chairman and CEO Doug Parker and President Scott Kirby to illustrate the anti-competitive nature of the merger. The DOJ puts particular weight on comments made by Parker that consolidation—which he has championed for many years—financially benefits the airline industry, noting that the CEO has said that mergers have allowed the U.S. airline industry to control capacity, and that there is an “inextricable link” between reduced supply and higher prices.
During a conference call today, William Baer, assistant attorney general for Justice’s antitrust division, said his concern stems in part from the result of previous airline mergers—namely’ consolidation with Northwest Airlines, ’ with Continental Airlines and ’ with AirTran Airways—that have closed hub operations or focus cities.
During the call, Baer, who was confirmed to his position in January, “candidly” acknowledged that this opposition is due, in part, to the limited competition created by previous airline mergers. He notes, however, that this lawsuit “is fully consistent with what we have done in the past.” A similar decision was issued in 2000 when a proposed merger between US Airways and United Airlines was rejected by the regulator, Baer said, noting that similar rejections were considered by the DOJ in 2007 when US Airways made an unsolicited bid for Delta and in 1998 when Northwest wanted to buy a controlling stake in Continental.
Since then, however, Justice has approved the merger of three significant mergers, two of which at the time created the world’s largest operator.
Baer also noted that while Justice would consider a concessions package, “the degree of competitive overlap” between US Airways and AMR leaves little option but to seek a full dismissal of the merger agreement. “Consumers will get the shaft,” he added.
According to Baer, if either airline can prove its future is in jeopardy, the objection could be lifted, but he notes that the two airlines currently are posting record profits, proof alone that they both are viable entities and necessary to maintain competition. Indeed, Baer says AMR’s pre-merger restructuring plan is favored above consolidation because the operator planned to increase both domestic and international capacity and had placed a record order withand to facilitate that growth. In contrast, the merged airline, run by US Airways senior management, plans to cut capacity 10%, he notes.
Baer also targeted US Airways’ apparent fervor for ancillary fees—a major contributor to U.S. airline revenues—and that “[p]ost-merger, the new American would likely lead new fee increases.” He also criticized US Airways’ “tendency” to signal price and fee increases to its competitors, and noted that a “tacit coordination” between the few remaining legacy carriers would only increase if US Airways and AMR merged.
The lawsuit was jointly filed by Justice, six states and the District of Colombia. The states include Texas, where AMR is based, and US Airways’ home state of Arizona.