That Justice has approved the Delta/Northwest and United/Continental mergers, but not this one, is because “circumstances are different, the facts changed, they came too late,” Levine says. The government could live with having four network carriers with differing interests, but not with three that are so closely aligned.
That an administration changes its view is not without precedent. In 1998, after years of encouraging major defense contractors to consolidate, the Clinton administration's Justice Department, backed by the Pentagon, successfully filed a suit to block a proposed merger of Lockheed Martin and Northrop Grumman, arguing that the combination of the Defense Department's largest and third-largest suppliers would create “unprecedented anti-competitive concerns.” The suit came just a year after the government had OK'd Boeing's acquisition of McDonnell Douglas.
The future of American is indeed the wild card in the industry. Obviously, if Justice is successful in its opposition, that “would not lead to immediate elimination,” says Hamlin, of American or US Airways, but “it will be increasingly difficult for American to compete with giants [Delta and United].”
Baker points out a key difference: Having merged with US Airways, the new American would not be forced to make any risky capacity moves in order to be on a par with the other two big players. But without it, American “would have to grow (rather than merge) its way to competitive network parity with post-merger Delta and United.” Therefore, “we expect industry capacity to accelerate and longer-term earnings prospects to be diminished.”
In the longer term, according to Morgan Stanley's John Godyn, Delta and United would benefit if the merger did not happen because of “structural advantages that would generate outsize relative returns across cycles.” And US Airways? The Tempe, Ariz.-based airline would be by far the smallest of the Big Four. It currently has one key advantage over the others in that its stage-length-adjusted unit costs are much lower, so it can still make money at fare levels where its competitors cannot. But on the global stage, it would remain a niche player with major gaps in its domestic network, subscale transatlantic presence and no transpacific services.
Justice argues that the proposed merger could be illegal on more than 1,000 city pairs and must be dismantled to stop a clique of national carriers from manipulating services and ticket prices. It cites numerous public comments and internal communications by senior US Airways executives—some dating to 2006—that the regulator says prove competition between U.S. airlines would be weakened if the merger goes forth.
The Justice Department was expected to demand some conditions for the merger, with concessions at US Airways' Reagan Washington National Airport hub the most likely target. But the argument goes far beyond any request for a deal, instead demanding “that [the] defendants [the airlines] be permanently enjoined from and restrained from carrying out the planned merger of US Airways and American or any other transaction that would combine the two companies,” as the deal violates U.S. antitrust law.
The lawsuit's list of 1,044 city pairs “where the merger is presumptively illegal,” stands in stark contrast to the 12 overlapping routes cited by the airlines.
Justice's lawsuit regularly refers to comments made by US Airways management, and uses statements by CEO Parker and President Scott Kirby to illustrate the anti-competitive nature of the merger. The department puts particular weight on Parker's comments that consolidation—which he has championed for years—financially benefits the airline industry. The CEO has said mergers have allowed the U.S. airline industry to control capacity, and that there is an “inextricable link” between reduced supply and higher prices.