The American/US Airways Merger and the Antitrust Process: A lawyer answers my questions

The Supreme Court

I understand that antitrust laws are supposed to promote and protect competition, but beyond that, I know very little about the subject.

GVM is a reader and friend of the blog who also happens to be a lawyer and an aviation geek. I reached how to him last week with a few questions about the Department of Justice’s antitrust lawsuit challenging the proposed merger between US Airways and American Airlines.

He was kind enough to let me interview him and to explain how the antitrust process works.

Thanks GVM for agreeing to answer some question for me.

I am happy to answer your questions, but first, I have to disclose that while a corporate lawyer, I am not an antitrust lawyer. This area is highly specialized, particularly with multi-billion mergers as this one and when the litigation department of the Department of Justice (DOJ) is involved.

The timing of the DOJ lawsuit surprised me. American and US Airways seemed to be just months away from completing their merger. Were you surprised by the timing?

The Hard-Scott-Rodino pre-merger approval process is a complex one, especially if the merger is as big and complex as this one. The timing parameters are set by law, including when the DOJ is permitted to request information.

During what is called a “second request” the DOJ probably engaged in complex economic/antitrust analysis, depositions, evaluation of thousands of documents, memos, presentations, e-mails, etc. That evaluation included a Task Force of several dozens attorneys general.

Both US Airways and American were part of the process and their “top-notch” antitrust lawyers knew or should have known that this was coming all along when the DOJ engaged in very broad confidential investigation.

This complaint was “new” to the public, but not the parties.

Does the matter need to be settled before AA can emerge from bankruptcy?

Absolutely yes. Either the DOJ and US Airways/AMR agree to a settlement or this matter will go to trial and a judge will decide. Moreover, the merger is the centerpiece of AMR Plan or Reorganization.

If the merger is blocked, AMR will need to draft a new plan and a start new confirmation process. Although, it is probable that the bankruptcy judge will approve the current plan, the consummation of the plan will be subject to the final resolution of the antitrust suit.

From what both sides have said and the nature of the complaint (not solely based on the DCA slots issue), I think a judge will decide this. A final decision may take from 3-4 months.

Is the DOJ complaint a matter for the bankruptcy court or is it litigated in another court?

This issue will be litigated in the Federal District Court in Washington D.C. The Bankruptcy Court has no jurisdiction over this antitrust proceeding.

In an antitrust case does the burden of proof fall to the DOJ?

Yes. The DOJ will present evidence (witnesses, economic models, documents, etc.) and they will have to convince the judge with a preponderance of the evidence (“more likely than not”) that the proposed merger will “substantially lessen competition”.

I am not competent enough in antitrust law to fully analyze how courts have interpreted that standard, but I am confident that multiple approaches may exist and lawyers will spend a lot of time on this.

Finally, obviously American and US Airways will present their case to counter argue the DOJ.

How does a judge decide the case? Does the Court weigh the likelihood of reduced competition against any other benefits to the market or the economy?

This is the most complicated question. The judge may use several factors to analyze past, present and future competition. In my opinion, the more scientific and empirical the analysis, the more weight it will have on a final determination.

What I could see as less important are considerations such as labor concerns, creditors’ recovery during bankruptcy, investor returns, or future less profit to other competitors.

An interesting issue in this particular case is whether the fact that AA was planning to expand is relevant. I have read articles that clearly supports that it is relevant.

If AA grows, it will presumably compete against Delta/United and others. If the merger is approved, that prospective aggressive competition will be eliminated.

These cases are litigated by pieces of evidence that create a big picture/argument. Don’t expect a particular fact/issue to be particularly determinant.

What does it mean that six states have joined the challenge? Does it make a difference?

This just means that they have also evaluated the merger and concluded with the DOJ that it violates antitrust law. All those states will have a lawyer at the trial and may be able to also present evidence, etc.

In terms of what difference does it make, it could be technically none. But, in my opinion, this may further sustain two points: 1) they also see a more broader anti-trust problem than just DCA; 2) AA and US didn’t prepare enough for this suit.

They clearly should have used they government affairs executives to lobby state governments to support the merger or make concessions to gain their support.

Do AA and US also have to fight a challenge in these state courts?

No, all proceedings will be held in the Federal District D.C. Court.

Many people have criticized the DOJ’s actions calling it unfair to block the American and US Airways merger when in the past years the DOJ have approved multiple mergers. Your thoughts?

Well, life is unfair. Antitrust law looks for competition, not fairness. The market may or should consist of big participants and smaller participants. The fewer and bigger participants remain, the possibility of less competition increases. To that extent, the DOJ has the responsibility to analyze each merger on its own merits when it happens.

Is it possible that the DOJ is just playing games; they just want a settlement on the DCA issue?

I could be true. I don’t work at the DOJ, but just from the complaint, they seem to be really concerned about lack of current or future competitiveness among the carriers, especially US Airways.

An evidence of this concern is the inclusion of US Airways emails implying tacit industry coordination and aversion to competition with Delta and others. Although not conclusive evidence, it will certainty give a bad impression to the judge.

Some have said that the complaint is a fiasco because the DOJ used an analysis (city pairs through connecting cities) that has never been used before. Is this true?

Because it was not used during previous mergers it doesn’t mean that either is not a valid method of antitrust evaluation, or that is more or less proper to evaluate the merger.

It could be that because nearly all big airlines have a hub system, only direct routes is not a good parameter anymore? The judge will decide.

Thanks GVM for your time and thanks for the overview!

Photo: The Supreme Court
Credit: Charles Prince on Flickr

Comments

  1. I’d really love to know if the exclusivity period has expired. Plain letter law would indicate it’s only valid for 20 months from filing, tops, including extensions, which would have expired at the end of July. That could make things interesting in BK court if someone has a different plan.

  2. FINALLY a blogger asking for a “more” expert opinion to understand why the DOJ as filed suit to block and why this is not a negotiating mechanism; the DOJ doesn’t file suit to negotiate, they file suit when they believe it is bad for the consumer.

    Everyone that has said it’s not fair needs to understand it’s “you snooze, you lose” there was only going to be so much industry consolidation before the DOJ said that’s enough. After seeing the UA/CO fiasco, I think they understand this is bad for consumers and it is.

    US/AA will do fine on their own w/ the right leadership, the problem is these airlines run on the old boys club rules and they fail to find the right leadership, ie., UA board filled with Cronies/Yes Men.

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