Monday, February 11, 2013

U.S. Likely to Clear Airline Deal

Updated February 10, 2013, 7:25 p.m. ET

The Wall Street Journal

U.S. antitrust authorities over the past year have been particularly active, blocking acquisitions in industries from beer to e-books. But the potential deal to create the world's biggest airline likely would fly clear of government objections, experts said.

American Airlines parent AMR Corp. and US Airways Group Inc. are in final negotiations on a marriage that could be announced as early as this week. The combined company would surpass United Continental Holdings Inc. as the No. 1 carrier by traffic and control about one-quarter of U.S. domestic capacity.

But the deal involves only about a dozen overlapping routes, similar to the number in the most recent three big airline mergers, according to research by J.P. Morgan. Those transactions were cleared by the Justice Department, with the carriers in only one deal required to relinquish takeoff and landing slots to maintain competition.

"The government has tended to regard some overlaps as not problematic," said Alison Smith, an antitrust lawyer at McDermott Will & Emery LLP in Houston who isn't involved in the AMR deal. "If a merger combines complementary networks, that could bring benefits to consumers."

Ms. Smith, who once worked in the Justice Department's antitrust division, said the key question is whether regulators believe the airline industry already is sufficiently concentrated. "The going thought is that this will be approved," she said.

At congested airports where American and US Airways together would exert an outsize presence, the Justice Department could require the sale of takeoff and landing slots. New York's LaGuardia Airport and Reagan National Airport near Washington are two locations that other carriers are watching closely, people familiar with the matter said.

"Anytime you have slot-constrained airports, you're talking about significant barriers to entry," said Kenneth Quinn, co-leader of the aviation-law practice at Pillsbury Winthrop Shaw Pittman LLP in Washington. But he said an enlarged American could "counterbalance" Delta Air Lines Inc., which has bulked up at LaGuardia. And the Washington market has alternative airports, which keep prices in check, said Mr. Quinn, who isn't involved in the AMR deal.

The Justice Department declined to comment.

The agency is litigating seven antitrust cases—the most ever at one time—in areas as diverse as beer, electronic books, health insurance and recruiting practices in the technology industry.

The department last month sued Anheuser-Busch InBev NV to stop its plan to acquire full control of Mexican brewer Grupo Modelo SA. Regulators also recently upended AT&T Inc.'s deal to buy T-Mobile USA Inc., and blocked H&R Block Inc.  from purchasing a digital tax-preparation service.

The department "has been extraordinarily active in other industries lately," Mr. Quinn said. But "they would be hard-pressed not to approve [the AMR deal] because they allowed other megaairline mergers to occur."

Research has shown that U.S. airline fares have declined in recent years, despite the spate of mergers.

Consolidation has made the industry healthier, in part by strengthening some of the largest players, said Clifford Winston, a Brookings Institution economist who studies airlines. Mergers have eliminated airlines that kept prices in check by offering excess capacity, he said. But "there's really very little evidence, historically, that mergers have done anything to raise fares" overall because competition remains "very intense."

US Airways, the nation's fifth-largest carrier by traffic, has been pursuing No. 3 American for more than a year, beginning shortly after AMR filed for bankruptcy-court protection late in 2011. The proposed merger, which would create a company with a combined market value of more than $10 billion, is shaping up to be AMR's more likely route out of bankruptcy court than its plan to emerge on its own.

With an AMR marriage in mind, US Airways has retained antitrust counsel for nearly a year, people familiar with the matter said. The Tempe, Ariz., company has prepared an application for review under federal antitrust law and has informally briefed Justice Department officials regarding its plans, the people said.

American, which is based in Fort Worth, Texas, declined to comment.

If both companies' boards approve the deal, the pair would want to expedite the review process to avoid extending American's stay in bankruptcy-court protection. The Hart-Scott-Rodino antitrust law provides for an abbreviated review for companies in bankruptcy court. But in a complex case like this one, the Justice Department likely would request more information and could spend months looking at the transaction route by route, experts said.

The 2008 acquisition of Northwest Airlines by Delta took six months to get the green light. The 2010 deal that created United Continental required four months. Southwest Airlines Co.'s  22011 purchase of AirTran Airways cleared in about seven months. United controls 19.3% of U.S. domestic capacity, Delta 19.2% and Southwest 15.9%, according to aviation data provider Innovata LLC.

While the Justice Department is the deal's main regulatory hurdle, the transaction also would require the approval of European Union officials because of American's large trans-Atlantic presence.

Also, the joint ventures American has with airlines in Europe, Japan and Latin America would need to be vetted by the U.S. Department of Transportation, experts said.


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