Last updated: August 13, 2013 11:30 pm

Department of Justice takes wind from under airlines’ wings

United Continental Holdings Inc. planes sit at a terminal at Newark Liberty International Airport in Newark, New Jersey U.S., on Monday, Sept. 17, 2012. Newark Liberty International Airport, first named Newark Metropolitan Airport and later Newark International Airport, was the first major airport in the United States and is the New York-New Jersey metropolitan area's busiest in terms of flights©Bloomberg

As they negotiated their complex merger plan last year, Doug Parker and Tom Horton, the chief executives respectively of US Airways and American Airlines’ parent, were clear about a potential deal’s benefits.

Both touted the advantages of a wave of consolidation over recent years that has cut the number of large carriers in the US market from eight to five. Both said the curtailing of previously ruinous competition had allowed airlines to operate more reliably profitably, earning far better returns for investors – and that their merger, which would leave only four big carriers, would improve matters still further.

The suit that the US Department of Justice issued on Tuesday agreed with much of the two men’s analysis of the deal and past mergers, but with a crucial difference – the DoJ says the consolidation wave has served consumers poorly, costing them hundreds of millions of dollars extra annually. The suit quotes extensively from the men’s own claims about the deal.

The looming battle between the DoJ, US Airways and AMR Corporation, American’s bankrupt parent, promises to revolve around that central point. The airlines are set to argue that the merger would improve service for customers while earning them only reasonable returns.

Tom Horton told his staff in a letter that the company had worked hard at making that case to the DoJ.

“We have maintained that the merger is complementary (only 12 overlapping routes), that it provides significant customer benefits and that it enhances competition,” Mr Horton wrote.

However, Bill Baer, assistant attorney-general for the DoJ’s antitrust division, insisted both airlines were in a position to be “competitive, aggressive and successful” on their own and passengers would suffer if they merged.

“We have no problem with airlines being profitable,” Mr Baer said. “What drives this challenge is the risk that consumers will be paying a lot more if these two airlines are allowed to combine.”

Among the clearest examples of a market that might suffer in the event of a merger is an airport just across the Potomac River from the offices of the DoJ staff deciding on the merger’s fate. A merged new American Airlines would control 63 per cent of the nonstop routes served from Washington’s Reagan National Airport and 69 per cent of the take-off and landing slots.

“By allowing control of that many slots, a merger would prevent other carriers such as Jet Blue from competing at national airport,” Mr Baer said.

Yet Mr Baer made clear that the DoJ was unlikely to approve a merger if the parties simply came up with a plan to increase competition at Reagan Airport and other problem areas after a merger.

Asked about why the DoJ had approved previous mergers – including the combination in 2008 of Delta and Northwest Airlines and the 2010 merger between United and Continental – Mr Baer said the DoJ had learnt more during its investigation of the latest request about the previous mergers’ effects.

Those deals mean that the US domestic airline market is far more concentrated than the international markets where the two airlines also operate. The European Commission ruled on August 5 that the merged company would have continued to face robust competition on transatlantic routes, its most important international market.

The European Commission approved the merger on August 5 with only minor conditions about control of landing slots at London Heathrow and the future of direct London to Philadelphia market.

“As we look at the market as it’s functioning today, it’s not functioning as competitively as it ought to be,” Mr Baer said of the US domestic market.

Such language suggests a change in climate for airline mergers after years when the DoJ largely accepted airlines’ pleas to be allowed to merge to benefit from economies of scale.

The DoJ had made some “very strong arguments,” Carl Tobias, a professor at the University of Richmond School of Law, said.

He doubted the airlines’ lawyers would succeed in combating the DoJ’s case.

“There have probably already been negotiations, so I’m not optimistic,” he said.

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