American Submits Response to DOJ Merger Challenge

American filed their response with the Court defending the benefits of the proposed merger with US Airways and disputing the Department of Justice’s interpretation of industry data and statistics.

While I certainly have an opinion about the DOJ’s objection to a merger, I’m not an attorney so I’ll refrain from trying to provide any analysis.

Here, though, are some of the highlights from American’s argument:

…consumer benefits are not speculative. Indeed, the DOJ itself has repeatedly recognized them while approving recent industry mergers based on the same analytical approach. For instance, the DOJ hailed the consumer benefits created by the merger of Delta and Northwest as a result of “combining under single ownership the complementary aspects of the airlines’ networks.”

And while the Complaint now relies largely on mechanical recitations of “Herfindahl-Hirschman Index” numbers for individual city-pairs, it ignores that other recent airline mergers resulted in comparable HHI values and were nonetheless approved and lauded by the DOJ because across the entire network the net benefits stemming from the transactions were overwhelmingly positive. The DOJ’s approach in evaluating those earlier mergers – unlike in this transaction – was fully consistent with its own Merger Guidelines, which recognize that market shares and HHI numbers are merely starting points for analysis, not the decisive results portrayed in this Complaint.

The (DOJ) presents no coherent rationale supporting its challenge to the merger. Rather, it cobbles together a collection of ad hoc contentions based on anecdotes involving small numbers of passengers and historical e-mails and other documents irrelevant to this transaction, while ignoring the central facts and economic realities of today’s airline industry.

For instance, the Complaint focuses heavily on the existence of “more than 1,000” overlapping routes between the two airlines with high HHI numbers. But the number of nonstop and connecting overlaps in this merger is comparable to those transactions that the DOJ only recently agreed would increase competition. Of the 623 domestic nonstop routes currently flown by American and US Airways, the two airlines directly compete on only 17, and DOJ’s list includes only 14. Moreover, most of those overlaps are also served nonstop by other airlines, including Southwest and the LCCs, such as Spirit, and JetBlue, all very vigorous and active with their individual business approaches, but in the logic of this Complaint virtually irrelevant. The remaining routes in DOJ’s list are 994 one-stop connecting overlaps, a fraction of the more than 13,000 that American and US Airways serve.

And the merger would have very little effect on the bulk of even that minority of routes. Illustrating how little high HHIs reveal about the competitiveness of a market, most of these one-stop routes will remain very competitive after the merger:

• AA’s and US’s small shares. On almost half of the routes, either AA or US flies less than 10% of the passengers on the route.

• Postmerger competition. Almost 90% of the passengers on these routes will continue to be served by at least 3 airlines after the merger.

• LCC competition. About 85% of passengers on these routes will continue to be served by one of the LCCs. Since LCCs fly 40% of domestic airline passengers in the US, the notion that LCC competition and potential entry are not the dominant competitive fact in the industry is out of touch with market realities.

• No barriers. Virtually none of the routes have any barriers to new entry.

As this incomplete summary shows, the narrative weight this Complaint places on these “overlapping routes” is competitively misleading, and in fact illustrates the fragility of the Complaint’s allegations generally. Doing competitive effects analysis by simply counting competitors might have been accepted practice four decades ago, but seems quaint at best today. It is inconsistent with the state of the law and with the DOJ’s own Horizontal Merger Guidelines.

US Airways also filed their own response to the Government’s lawsuit.  Here’s an excerpt:

The Court’s review of the plaintiffs’ challenge to this merger should not be an evaluation of the few aspects of the intensely competitive airline industry plaintiffs do not like, or a comparison to some hypothetical state of the airline industry that plaintiffs would prefer.

It must be a determination of whether this airline merger would result in a “substantial lessening of competition” relative to what would happen absent the merger. But rather than considering how this merger will create robust competition in the future, or how blocking the merger will impede competitive forces, plaintiffs rely on rhetoric and innuendo.

The Complaint makes broad, unsupported claims about past industry coordination and cobbles together out-of-context statements in an effort to suggest by anecdote what the plaintiffs cannot support with analysis. This skewed and incomplete focus ignores the current realities of the airline industry.

I uploaded to Google Docs a copy of each airline’s response.

Here’s a link to American’s filing.

Go here to the read the US Airways response.

Photo: The Supreme Court
Credit: Charles Prince on Flickr