Wednesday, February 20, 2008

Antitrust Fears Few in Airline Deal

By SUSAN CAREY (Wall Street Journal)

A merger between Delta Air Lines Inc. and Northwest Airlines Corp. -- which could be announced as early as this week -- has less to fear from antitrust enforcers than past aviation deals, unless regulators grow uncharacteristically squeamish about the combination's sheer size. If the airlines can reach an accord with their unionized pilots and hammer out the final details of a deal to create the world's largest carrier by traffic, the U.S. Department of Justice will be the ultimate judge of whether the merger can proceed. The department, which would be likely to review the case before a new administration arrives in Washington in January, has been kind in the past to deals like this one that don't involve a lot of overlap. A transaction -- as well as any airline mergers that could follow a Delta-Northwest deal -- is certain to face political opposition from some members of Congress, and could run into turbulence with Northwest's other labor unions. Delta's pilots are its only major union. Rep. James Oberstar, a Minnesota Democrat who is chairman of the House Transportation and Infrastructure Committee, has warned that he will oppose big airline mergers. "We can't stop a merger ourselves," said Jim Berard, spokesman for the House committee. "But we can make a lot of noise." AFL-CIO union leaders met in Washington last week to develop strategies on possible mergers, and issued a statement saying they were "united in our commitment to protect airline employees from the severe harm that may stem from poorly conceived airline consolidations that ignore the needs of employees and the flying public." In assessing proposed airline mergers, the Justice Department reviews nonstop and connecting routes between cities where the two carriers overlap, as well as whether their respective hubs are close enough to make them dominant in a region. The department also weighs the likelihood of rivals starting service within two years on city-pairs where the merged airline would have increased market power, potentially reining in the new carrier's ability to raise prices.

Delta, the world's No. 3 airline by traffic, has a big market share in the Southeastern U.S., in New York, and on trans-Atlantic routes. Northwest, which is ranked sixth globally and fifth in the U.S., is strong in the upper Midwest and on trans-Pacific routes. "There isn't that much overlap between Northwest and Delta," said Andrew Steinberg, a former airline antitrust lawyer who recently stepped down as the Department of Transportation's assistant secretary for aviation and international affairs. If another airline merger is proposed soon, that doesn't mean the regulators will automatically reject the first, he said. "They analyze each transaction separately." The last time the Justice Department shot down a big merger proposal was in 2001, when it identified competitive problems in the proposed combination of UAL Corp.'s United Airlines and US Airways Group Inc. At the time, the government found the two were the only significant providers of nonstop flights from Washington, D.C., to a number of cities, were the most significant carriers on a number of nonstop routes between their hubs, and would have had undue concentration along the East Coast. The department in 2005 approved a merger of US Airways and America West Airlines, whose operations had little duplication. Delta and Northwest see their proposed marriage as a merger with little overlap domestically and none on overseas routes, said people familiar with the matter. The two also don't anticipate reducing a lot of capacity, shuttering existing hubs or laying off many front-line workers.

In the past, Justice Department officials have said that if a merger brings cost and operational efficiencies, regulators could perceive those benefits as outweighing a merger's anticompetitive impact. Diana Moss, vice president of the nonprofit American Antitrust Institute, which advocates aggressive antitrust enforcement, said that because the big carriers now have marketing alliances with rivals domestically and internationally, regulators "will need to look at claimed efficiencies closely in light of anticompetitive effects." William Swelbar, an airline researcher at the Massachusetts Institute of Technology, says there are parallels between the current merger fever and the wave of combinations that occurred in the late 1980s. "In 1985, the industry was in its infancy and the focus was on the domestic market," he said. The same is true today, "but now we're talking about network size in the global marketplace."

No comments: