American, US Airways Outline Defense, Seek Speedy Trial to Revive Merger

Checkin at American’s Terminal 8 at JFK

On Wednesday, US Airways and American Airlines trotted out antitrust experts as they began to prepare the case they plan to make in defense of their proposed merger. One thing was clear: the airlines have no plans to immediately offer the Department of Justice any concessions and fully expect to go to court to see the merger through, although at the same time they are open to settlement talks down the road.

The suit, the lawyers contend, ignores several benefits that the merger would bring to the marketplace including more flights to more destinations, lower prices, and better service.

“They got this one wrong,” said Rich Parker, a partner at O’Melveny & Myers (hired by the two airlines to defend the lawsuit), on a conference call. “We are looking forward to our day in court and our opportunity to demonstrate that this is a pro-competitive merger.”

On Tuesday, the U.S. Department of Justice filed suit against the two airlines to block their planned merger, saying the merger would threaten competition and drive up the cost of tickets.  Consumers, the DOJ is predicting, will have fewer flight options minus one competitor in the market.

Airline executives and antitrust lawyers first learnt of the suit on Tuesday morning, said Paul Denis, a partner with Dechert, one of the firms retained by US Airways.

The suit threatens to undo a good part of the past 20 months of bankruptcy organization on American’s part and six months of merger planning by American and its merger partner US Airways.

Officials from the two airlines have argued that a merger between the fourth and fifth largest carriers in the U.S. will improve service and result in lower prices.  The combined company will become the nation’s largest airline, eclipsing both United and Delta, the current and former holders of that title.

The DOJ alleges reduced competition in an airline industry that has seen multiple mergers in the past decade, including United and Continental, Delta and Northwest, and Southwest and AirTran.  The American Airlines-US Airways merger would result in four airlines controlling more than 80% of the U.S. commercial air travel market, thereby leading to higher prices and reduced service.  The suit contends that the combination would hurt consumers who fly out of Washington’s Reagan National Airport, where the new American Airlines would control more than two-thirds of the takeoff and landing slots.  The DOJ also contends that the new American would abandon its so-called Advantage fares, lower fares on connecting routes, leaving fliers with only more expensive nonstop flights on many routes.

The lawyers have a fairly big task ahead of them but they outlined some of their thoughts and plans in a broad manner.

While the lawsuit contends that American and US Airways compete on thousands of routes, the fact is that the two airlines compete directly only on 12 non-stop routes.   “Of course,” the lawyers said, “there are connecting flights that are theoretically competitive but that’s true of any transaction in the airline industry.”

But the lawyers had two words for this contention: “odd” and “interesting,” publicly puzzling over the government’s putting so much weight on the connecting route overlap, “perhaps because 12 is not a big number.”

Prices in the airline industry change thousands of times a day.  “We plan to show in court that this is not an industry that is subject to effective coordination,” said the lawyers.

A consistent theme throughout the conference call was that the burden is on the government to show that the merger is anticompetitive.  “All the government has done here is lay down a marker,” said Joe Sims, a lawyer on the case for American Airlines. “They have to prove that this merger is anti-competitive.”

Indeed, if the merger does not take place both airlines will have “the gaps and weaknesses” that each has now.  Neither will individually be as effective as a competitor to Delta and United and Southwest separately, the lawyers said.

American will emerge from the bankruptcy process, but if this merger is blocked, it will take substantially longer, it probably won’t be as satisfactory to all parties, and it won’t be as effective a competitor, according to the attorneys.

Meanwhile, legal experts not connected to either party in the case said that the government has put together, from all appearances, a very strong case.

The Airlines’ lawyers said that they both expect and hope to get the case concluded by the end of 2013 and that they are working with the DOJ to set a court date at this time.  Meanwhile, American has a hearing on Thursday at which it will seek approval for its plan of reorganization that will allow it to exit bankruptcy.  The plan is predicated upon the merger’s closing.

(Photo: Accura Media Group)