Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Experts, Stakeholders Dispute Benefits of American Airlines-U.S. Airways Merger During House Antitrust Law Subcommittee Hearing , (Feb 26, 2013)

By Tobias J. Gillett, J.D., LLM.

The Regulatory Reform, Commercial and Antitrust Law Subcommittee of the U.S. House of Representatives’ Judiciary Committee today heard testimony from experts and stakeholders presenting opposing views regarding the potential benefits and costs of the proposed merger between American Airlines and U.S. Airways. The hearing featured testimony from representatives for the airlines, from an organization representing the interests of the managed business travel industry, from antitrust law professor Christopher L. Sagers, and from Clifford Winston, a Senior Fellow at the Brookings Institution.

The American Airlines and U.S. Airways representatives defended the proposed merger, claiming it would improve their financial stability and enhance their ability to compete with the entities formed from the mergers of United Airlines and Continental Airlines, Delta Airlines and Northwest Airlines, and Southwest Airlines and AirTran Airways. Stephen L. Johnson, Executive Vice President, Corporate and Government Affairs of U.S. Airways, discussed the benefits to competition, consumers, and airline employees and shareholders that he claimed would flow from the merger. He pointed to the allegedly complementary networks of the two airlines, to the merger’s ability to permit the combined network to compete with other domestic and international airlines and airline alliances, and to the financial stability it would provide for the airlines and their employees, among other factors, as supporting the merger.

“The creation of the New American Airlines will be good for competition, consumers and choice,” Johnson said. “Expanding our network for the benefit of our customers, our employees, our shareholders and our communities was the motivation for bringing these companies together. Integration of the complementary service of American Airlines and US Airways will enhance competition in what are already vigorously competitive markets and, in doing so, significantly benefit each of these constituencies.”

Gary F. Kennedy, Senior Vice President, General Counsel and Chief Compliance Officer for American Airlines, echoed Johnson’s sentiments, and reviewed the history of American’s recent bankruptcy, emphasizing that the merger would place American on a stronger financial footing

“This transaction will give us the opportunity to become a stronger competitor, one with a degree of financial stability that we have not experienced in many years,” Kennedy stated. “We will be a company that is better positioned to deliver for customers and its people.”

However, Kevin Mitchell, Chairman of the Business Travel Coalition, an organization representing the interests of the managed travel community, argued against the merger. Mitchell expressed skepticism about merger-related cost savings to consumers and pointed to declining competition from low-cost carriers. Mitchell placed the merger in the context of the International Air Transport Association’s New Distribution Capability (NDC), which he claimed represented collusion “to substantially eliminate price competition by reducing airfare and ancillary fee transparency and comparison shopping for consumers and corporate travel departments.”

Mitchell suggested that the merger would eliminate a possible challenger to the NDC arrangement in U.S. Airways, and called for Justice Department review of the proposal. He also contended that the merger could lead to monopsony power for the combined entity over suppliers of airline services, reduce airline price transparency, and make explicit or tacit agreements between the remaining airlines easier.

“From a consumer standpoint—individual traveler or corporate travel department—there are few benefits to offset the negative impacts of this proposed merger that include reduced competition, higher fares and fees and diminished service to small and mid-size communities,” Mitchell said. “Now through NDC, airlines are jointly seeking to kill off transparency and comparison-shopping—this at a time when they are needed more than ever as we have gone since 2008 from 6 network carriers to 5, then to 4 and now potentially to 3. Congress needs to keep its guard up, and intervene as necessary, before consumers are really harmed.”

Christopher L. Sagers, James A. Thomas Distinguished Professor of Law at Cleveland State University, also spoke against the merger. Sagers reviewed the history of past airline mergers, concluding that they had not led to the efficiency-related price decreases and improved airline performance promised prior to the mergers. He referred to the efforts of legacy carriers to acquire or exclude low-cost carriers that could have challenged them and forced them to reduce price and improve performance and argued that the alleged financial difficulties suffered by the carriers did not justify the mergers. Sagers contended that the American-U.S. Airways merger would likewise lead to higher fares for consumers and job losses, and that their economic difficulties held little significance.

“Failure to enforce the antitrust laws against these many mergers, in other words, has preserved inefficient firms, kept them from performing adequately, and kept prices high, in just the way that basic economics would predict,” Sagers stated. “The great irony is that competitive markets, which the incumbent airlines have kept at bay by stressing their allegedly special problems, could have driven the very efficiencies needed for healthy economic performance.”

However, Clifford Winston, Senior Fellow, Economic Studies Program at the Brookings Institution, testified in favor of the merger. Winston claimed long-run trends in the airline industry have been positive since deregulation and argued that the American-U.S. Airways merger would preserve and extend those trends. Winston maintained that competition between airlines would remain intense, that entry and exit to airline markets would remain fluid, and that the merger would permit the combined entity to strengthen its international network. He suggested that Congress should permit foreign airlines to enter the U.S. market, to create a deregulated global airline industry with enhanced competitiveness.

“[P]olicymakers have been wise to allow consolidation to move forward and they should allow American Airlines and US Airways to continue the process,” Winston said. “Policymakers should also accelerate the airline industry’s contribution to globalization by creating a truly competitive deregulated environment that would benefit travelers in the United States and throughout the world.”

Following the hearing, House Judiciary Committee Chairman Bob Goodlatte (R-Virginia) released a statement, urging careful Justice Department review of the proposed merger.

“The basic question the Department should seek to answer is how this merger’s impacts on competition would affect consumer welfare,” Goodlatte stated. “Rather than rushing to judgment, my hope is that everyone involved will take care to evaluate the evidence and do what is best for competition and consumers.”

News: Antitrust