DOJ’s Justification Of American Airlines-US Airways Settlement Identifies Competitive Benefits But Leaves Some Questions Unanswered

By Ankur Kapoor

The Antitrust Division of the U.S. Department of Justice (the “DOJ”) is highlighting the competitive benefits to the settlement of its challenge of the American Airlines-US Airways merger in the DOJ’s Response to Public Comments on the Proposed Final Judgment filed on Monday in the United States District Court for the District of Columbia.

The DOJ’s Response heralds the Proposed Final Judgment as “a major victory for American consumers” because “[i]t will enable Low Cost Carriers (‘LCCs’)” such as JetBlue, Southwest, and Virgin America “to fly millions of new passengers per year to destinations throughout the country” and because, by requiring divestiture of 104 slots at Ronald Reagan Washington National Airport to these three LCCs, it “fully addresses the harm that would have resulted from New American’s control of nearly 70% of the limited takeoff and landing slots” at Reagan National.

The DOJ’s Response also highlights that the proposed judgment requires divestiture of 34 slots to Southwest and Virgin America at New York LaGuardia International Airport and divestiture of fewer, other rights and interests at five other airports.  To support its claim of victory, the DOJ points to its conditioning the United-Continental merger in 2010 on the divestiture of 36 slots to Southwest at Newark Liberty International Airport and the fact that, since then, prices for certain nonstop routes from Newark have decreased substantially.

In contrast, the DOJ’s complaint challenging the merger viewed competition from LCCs in more modest terms.  Although the DOJ acknowledged in its complaint that LCCs offer “important competition on the routes they fly,” the DOJ qualified this statement by limiting the LCCs’ competitive constraint on legacy carriers to those specific routes in light of LCCs’ less extensive networks.

Yet in its Response to public comments, the DOJ touts the benefits of the proposed judgment’s divestitures at Reagan National and LaGuardia as giving LCCs “stronger positions at strategically important destinations” which will provide LCCs “with the incentive to invest in new capacity and position them to offer more meaningful competition system-wide, forcing legacy carriers to respond to that increased competition.”  The DOJ does not explain how stronger positions at Reagan and LaGuardia will facilitate or enable greater system-wide competition, and does not identify which routes would supposedly be the beneficiaries of such increased competition.  The DOJ further suggests that these unspecified system-wide benefits justify “the loss of head-to-head competition between US Airways and American” on the more than 1,000 city-pair routes identified in Appendix A to the DOJ’s complaint.

As for the US Airways one-stop “Advantage” fares, which the DOJ alleged in its complaint showed US Airways’s “maverick” pricing status (because they were substantially and sometimes dramatically lower than competitors’ fares), the DOJ’s Response states:  “The Advantage Fare program is targeted at a narrow segment of passengers, namely, price-sensitive business passengers who purchase less than fourteen days prior to departure and are willing to take connecting instead of nonstop service.”  This narrow segment represents only about 4% of the roundtrip passengers who traveled on routes where Advantage fares were offered in 2012.  This blog previewed this analysis in a previous post, which noted that the competitive significance of US Airways’s Advantage fares could be limited because they may be offered only on less traveled routes where US Airways had excess seats to fill at the last minute while its competitors did not, and so had the incentive and ability to offer last-minute, cut-rate seats.

So, did the DOJ just abandon the 1,000-plus routes for which it claimed competition would be substantially impaired by the loss of head-to-head competition between American and US Airways?

The DOJ’s Response does not address this seemingly important question, and instead falls back on how courts “must accord deference to the government’s predictions about the efficacy of its remedies” and on how the market-concentration statistics presented in Appendix A would have been disputed at trial as “not indicative of competitive harm on all 1,000 routes.”  While both of these points are certainly correct (as this previous post discusses, market-concentration statistics may not accurately portray the state of competition given the facts and economics unique to the airline industry), some explication by the DOJ concerning competition on these 1,000 routes would have been welcome guidance to the industry as it assesses possible future mergers of LCCs and airline joint ventures.

While an evidentiary hearing to air these issues (no pun intended) is unlikely, further development of these issues may prove essential for future analyses of airline competition in domestic routes in the U.S.

– Edited by Gary J. Malone