Airline mergers: a guide to the antitrust landscape

Any prospective airline merger will have no small obstacle in the Justice Department’s Antitrust Division, which assesses the potential competitive effects of tie-ups. If it finds fault with a coupling, its threat to sue is usually enough to deep-six the merger plan.

DOJ reviews every proposed merger according to its Horizontal Merger Guidelines:

The Guidelines describe the analytical process that the Agency will employ in determining whether to challenge a horizontal merger. First, the Agency assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured. Second, the Agency assesses whether the merger, in light of market concentration and other factors that characterize the market, raises concern about potential adverse competitive effects. Third, the Agency assesses whether entry would be timely, likely and sufficient either to deter or to counteract the competitive effects of concern. Fourth, the Agency assesses any efficiency gains that reasonably cannot be achieved by the parties through other means. Finally the Agency assesses whether, but for the merger, either party to the transaction would be likely to fail, causing its assets to exit the market.

In 2005, just after the US Airways-America West merger (which did not raise regulatory hackles), then-deputy assistant attorney general Bruce McDonald offered a helpful explanation of how the Justice Department applies these guidelines. First, it identifies the city-pairs served by each airline in the mix, then calculates the share that a merged airline would have. It focuses on specific markets in which competition is likely to be constrained (usually hub cities or markets close to the airlines’ hubs).

But to stop there assumes that the air service remains static. If a merged airline enjoyed a near monopoly in a particular market, it might be ripe for new entrants to reintroduce successful competition. It might not be either. The department weighs several factors affecting the likelihood of new entrants.

The department also makes special considerations. For example, it might be more willing to approve a questionable merger if one of the parties is near bankruptcy–like when American bought TWA.

Over the next couple weeks, I’ll be looking at some of the proposed mergers, especially Delta-Northwest and Delta-United, in the context of these conditions. Will they pass the antitrust test?

Posts in this series:

• Delta-Northwest
• United-Continental
• United-US Airways