The Department of Justice’s Last Stand in the Airline Industry — Did It Blink? | Commentary
While the American public may not be familiar with the intricacies of antitrust policy, they have direct, and painful, experience with the results of over a decade of lax antitrust enforcement in the airline industry: high fares, little competition and increasing ancillary fees that are the product of a hub system that facilitates tacit, if not overt, collusion amongst the legacy carriers. Against that backdrop, the Department of Justice’s antitrust challenge to American Airlines/US Airways was a breath of fresh air. Finally, we had antitrust enforcement that did not shy away from the tough challenges raised by the increasing consolidation of the airline industry.
Or so it seemed. What began as a strong antitrust case — and the most significant DOJ merger challenge since AT&T/T-Mobile — ended with a whimper last week with the announcement of a settlement that falls far short of the well-wrought DOJ complaint that initiated the action. The complaint asserted that the merger would eliminate competition in over 1,000 city pair (composed of arrival and destination cities) markets, and threaten to raise ticket, baggage, change fees and other prices for millions of passengers. It also focused on the elimination of the maverick competition that US Airways, the legacy carrier with the weakest hub system, supplied previously through its innovative Advantage Fare program.
Yet, after trumpeting these anticompetitive effects, the DOJ accepted a settlement that primarily focuses on two airports, Reagan National in Washington, D.C., and LaGuardia in New York, and requires the divestiture of 138 air carrier slots (takeoff and landing authorizations) at those airports only. The settlement also provides for the lesser relief of the divestiture of 10 airport gates in a handful of other airports — Chicago O’Hare, LAX, Boston Logan, Miami International and Dallas. These modest divestures are a far cry from relief that would match the magnitude of the anticompetitive effects (on over 1,000 city pair markets) the DOJ alleged only months before.
The DOJ glosses over these problems by touting the fact that the divested slots and gates will be diverted to low-cost carriers like JetBlue and Southwest. While that may benefit competition on a handful of routes — principally from D.C. and New York — that benefit will likely pale in comparison to the broader implications of permitting this deal to go forward relatively unscathed. This meager settlement is all the more troubling given that the DOJ had a promising case based on a complaint that was chock full of admissions from the merging parties, a compelling maverick theory, and hard data from city pairs across the country.
So what happened here? While the DOJ predictably says otherwise, it is hard to escape the conclusion that extralegal considerations had some influence on the DOJ’s willingness to pull the plug on the case. Whatever the case, the defendants appear to be the big winners here. As their statements regarding the settlement made crystal clear, the conditions being placed on the merger proceeding will not materially impact their ability to realize what they set out to do through this transaction. Wall Street apparently agrees with that conclusion. And, while the Obama administration will hail this settlement as a sign of its vigorous enforcement of the nation’s antitrust laws, the credibility of that claim ultimately will be determined by the merger’s impact on consumers. If, as many fear, the overall result will be higher prices, inferior service and a missed opportunity to reverse the airline industry’s descent into oligopoly, this settlement will be looked back on as another sad day for antitrust enforcement in this country.
So what, if anything, can Congress do about this? The answer, for airline customers who will be paying higher prices because of this settlement, is nothing. But Congress can do something to make such settlements harder to consummate going forward. Under the Tunney Act, the American Airline/US Airways settlement will be scrutinized by a federal judge, who will determine whether the settlement is in the public interest. Even though Congress amended the Tunney Act in 2004 to grant courts a more active role in reviewing antitrust consent decrees such as this one, courts are still disinclined to act as a vigorous check against weak antitrust enforcement. Unsurprisingly, most commentators anticipate this settlement to sail through the Tunney Act procedure. If Congress wants to do something positive in the aftermath of this settlement, it can make the Tunney Act process more rigorous. Then, at least something good may come out of this debacle.
Jeffrey I. Shinder is the managing partner of Constantine Cannon’s New York City office; Jean Kim is a partner there. Constantine Cannon is an antitrust firm with offices in New York City, Washington, D.C., and London.