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Why did US Airways and American Airlines executives express such confidence that their merger was totally on track to be completed, providing no hint of substantial issues, in the weeks and days before the U.S. government lowered the boom?
Antitrust attorneys representing American Airlines and US Airways vigorously defended their “pro-competitive” merger today in a joint conference call, but they seemed to disagree about whether the Justice Department’s lawsuit to block the merger took them by surprise.
Joe Sims, an attorney representing American parent AMR Corp., said the way a DOJ probe works is that investigators ask the airlines questions, the airlines answer them, eventually the carriers meet with decision-makers, and they don’t tip their hands until they’ve made a decision.
“Until you get to the end, as long as there are concerns on the table, you don’t know what the answer will be,” Sims said.
Attorney Paul Dennis, representing US Airways, had a somewhat different view, saying whenever an antitrust investigation lasts seven months, you are never surprised about a lawsuit.
“If you were surprised, you weren’t paying attention,” Dennis said.
At any rate, the lawyers said they learned that the Justice Department was suing to block the merger from a phone call Tuesday morning, the day the DOJ filed suit.
Of course, the fact that a hearing on approving AMR Corp.’s reorganization plan is slated for tomorrow was critical in the timing of the lawsuit, the attorneys acknowledged. The merger is an integral part of the reorganization plan.
Antitrust attorney Rich Parker, representing US Airways, made the obligatory kiss-up to the DOJ, saying the two airlines have “great respect” for the department.
“What we are saying today is that they got this wrong,” Parker said. “They got this very wrong.”
The attorneys noted that the burden of proof is on the DOJ and state attorneys general to show that the merger would be anticompetitive, that the U.S. government has only blocked a merger once in the past eight years, and although the two airlines are open to a settlement, they are looking forward confidently to their day in court.
The airlines, of course, are hoping for a settlement, and Sims pointed out that there will be a very large number of interactions between the airlines and DOJ before the issue gets to a court hearing (if it ever does).
The attorneys defended the merger on numerous fronts:
- Since the antitrust issue largely hinges on how the merger would impact consumers, the lawyers argued that it would lead to more flights to more communities, that lower costs to the airlines would translate into some fare reductions, and that business travelers would benefit because of the increased strength of the merged airline’s long-haul network.
Clearly, though, the thrust of their arguments was that the synergies would make the new American more competitive as it competes against United, Delta and foreign carriers.
Sims said both airlines believe the merger would lower their costs, and the savings “in large part” would be passed along to consumers in lower fares, and would provide better services.
Of course, the track record on airline mergers doesn’t support the lower-fares pledge.
- Rich Parker (the antitrust attorney, not US Airways CEO Doug Parker) contended that the DOJ’s argument that the merger would bolster major airlines’ ability to control fares has no merit because fares change so much they are impossible to control. He added that Southwest Airlines has more clout in controlling fares than do American or US Airways.
“This is not an industry that is subject to effective coordination,” agreed Sims, representing AMR Corp.
- Sims said although it is “technically true” that the two airlines could operate as standalone businesses, he said it’s “irrelevant” to the lawsuit. The DOJ has to prove that the merger would be anticompetitive, he said.
- The government’s lawsuit also extensively quotes past statements from the two airlines’ executives on how airline consolidation would enable them to raise fares and fees, but Dennis said this, too, is irrelevant.
Dennis argued that the lawyers don’t have to defend statements that the executives made “five years ago.” A resolution of the lawsuit would instead revolve around the competition impacts of the merger.
- The lawsuit contends that the two airlines have overlap on 1,044 city pairs, harming competition. Sims said it was “odd and interesting” that the DOJ would put so much weight on the issue since although there is overlap on hundreds of connecting routes, there are only 12 nonstop routes where American and US Airways compete.
Dennis agreed with this analysis and alleged that the overlap would be a pro-consumer benefit because the merged airlines would be able to create new connecting flights, increasing the number of alternatives for customers. Eight flights a day to a particular city, he said, are better than four.
- The attorneys were adamant that the transaction will eventually close, and they left hangar-wide room for a settlement.
Here are some of the best quotes from the conference call:
Parker: “Both of these companies are looking forward with confidence to our day in court.”
Sims: “The government has laid down a marker. It is a very long marker, 56 pages.”
Sims: “This is a pro-competitive merger, not an anti-competitive merger.”
Sims: “We are always ready to sit down with the government to resolve this transaction,” but the airlines are prepared to litigate.
Sims: “This is a kitchen sink kind of complaint. It looks like they pulled up every vegetable in the garden and put it in the sink.”
Parker: “If the government has a creative (alternative) we’ll certainly listen to it.”