Successful Merger of American Airlines and US Airways Shows Facts, Facts, Facts Critical to Antitrust Review
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SERVING BUSINESS LAWYERS IN TEXAS
Successful Merger of American Airlines and
US Airways Shows Facts, Facts, Facts Critical
to Antitrust Review
By J. Bruce McDonald
Getting this deal past the government and ready
Special Contributing Writer to The Texas Lawbook
to close highlights important lessons for any
June 25, 2014 – The merger of American Airlines merger that may face antitrust opposition.
and US Airways may be the last combination
of large U.S. air carriers for a long time. First, the resulting lawsuit illustrated the contrast
But had the Justice Department been successful between a Washington agency investigation and
in its challenge to their deal, these airlines still SOD\WRZLQOLWLJDWLRQDJDLQVWWKHJRYHUQPHQW
would be separate. Preventing this merger Second, it shows the importance for each side
actually would have left passengers with less to have the facts that support its vision of why
competition, not more. the proposed transaction is procompetitive
© Dallas Morning News
for consumers (for the merging parties) or an
anticompetitive menace (for the government)
– because the litigation outcome will turn on
the facts.
Third, especially because in a complex industry
being scrutinized under a specialized legal
regime, success for the airlines absolutely
GHSHQGHG RQ D XQL¿HG H̆RUW DPRQJ FOLHQWV
inside counsel, and outside counsel.
This transaction brought a little of everything Background
one might see in a government merger review. Since the United States deregulated its airline
The combination was proposed in an industry industry in 1978, the industry has changed
that already had seen several mergers. It was dramatically. The “legacy” airlines have
intensely investigated by the U.S. Department GHYHORSHG KXEDQGVSRNH QHWZRUNV DOORZLQJ
of Justice. Several State attorneys general joined them to serve passengers from more cities to
the investigation. The European Union also more destinations. A number of these merged
ORRNHGLQWRLWVH̆HFWRQ86(XURSHFRPSHWLWLRQ to expand their networks and reduce costs:
The U.S. and States brought a lawsuit to challenge Delta/Northwest and United/Continental were
the deal and were prepared to litigate. the most recent of those mergers.
After a very fast pretrial schedule, the case New competition has entered in the form of
settled with an agreement that the airlines would “low cost carriers” (LCCs), so called because they
divest some assets at certain airports. On top do not carry the historical labor and network
of this, one of the airlines was in bankruptcy costs of the legacy airlines; Southwest Airlines
and every event was closely watched in the has been the most successful of the LCCs.
SUHVV 0HDQZKLOH D JURXS RI SODLQWL̆V ¿OHG D In the face of high labor costs, rising fuel
private action challenging the merger, and that SULFHV DQG ORZFRVW FRPSHWLWLRQ QHDUO\ DOO WKH
litigation continues. legacy carriers have reorganized in bankruptcy,
some more than once. >
© 2014 The Texas Lawbook 1
SERVING BUSINESS LAWYERS IN TEXAS
The Department of Justice’s Antitrust Division 8QGHUWKH+65$FWSDUWLHVWRDSURSRVHGPHUJHU
is responsible for reviewing airline mergers. PXVWGHOD\FORVLQJIRUGD\VDIWHU¿OLQJDQ+65
DOJ opposed some of the proposed mergers QRWL¿FDWLRQDQGLI'2-PDNHVD³VHFRQGUHTXHVW´
of the last twenty years, such as Continental for documents and information with which to
with Northwest and United with US Air. PDNHDQLQGHSWKLQYHVWLJDWLRQWKHQGHOD\XQWLO
But DOJ allowed Delta/Northwest and they have responded to that extensive discovery
United/Continental, based on its analysis that request plus another 30 days.
WKH EHQH¿WV WR SDVVHQJHUV IURP H[SDQGHG
An investigation is conducted by the career
“anywhere to everywhere” networks outweighed
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possible fare increases due to a loss of competition
VXSHUYLVLRQRIWKH$QWLWUXVW'LYLVLRQ³IURQWṘFH´
on the routes where the merging carriers
SROLWLFDODSSRLQWHHVZKRPDNHWKH¿QDOGHFLVLRQ
overlapped. Using this analysis that undergirded
on whether to allow or challenge a merger. State
DOJ’s decisions in the prior two airline mergers,
attorneys general sometimes conduct parallel
the combination of American and US Airways
investigations that are coordinated with DOJ’s.
would have been approved.
Neither DOJ nor FTC has the authority on their
Based at DFW, American was the last legacy own to block a merger, but must seek a federal
carrier to have avoided bankruptcy. But in court injunction and prove the combination may
November 2011, its parent, AMR Corporation, “substantially lessen competition.”
¿OHG IRU &KDSWHU LQ WKH 6RXWKHUQ 'LVWULFW
of New York.
American anticipated that, after emerging
from bankruptcy, it would consider merging
with another carrier, to expand its network
and make it more competitive with the newly
expanded United and Delta. Nevertheless,
with the encouragement of creditors and labor,
while still in bankruptcy it began discussions
with US Airways. In early 2013 the two © Dallas Morning News
airlines announced their agreement to merge,
which was proposed to the bankruptcy court as By August 2013, the merger had been approved by
the business plan that would allow it to emerge US Airways’ stockholders, AMR’s creditors, and
from bankruptcy. WKH (XURSHDQ 8QLRQ DIWHU WKH DLUOLQHV R̆HUHG
WR VXUUHQGHU D VORW SDLU DW /RQGRQ +HDWKURZ
DOJ initiated an investigation of the American/ $LUSRUWWRDOORZQHZFRPSHWLWLRQRQWKH/RQGRQ
US combination even before the airlines made Philadelphia route).
WKHLU IRUPDO QRWL¿FDWLRQ XQGHU WKH +DUW6FRWW
5RGLQR +65 $FWLQ)HEUXDU\7KLVVWDWXWH On Aug. 13, DOJ and several States and the
requires that certain transactions be reported 'LVWULFW RI &ROXPELD ¿OHG VXLW LQ WKH 8QLWHG
to these agencies and then closing delayed to States District Court for the District of Columbia,
give the government time to make an initial seeking to block the merger. The complaint stated
review, conduct a thorough investigation, and WKDW'2-¶VJRDOZDV³DIXOOVWRSLQMXQFWLRQ´
decide whether to seek to modify or block the DOJ alleged that, following the merger of other
combination through an enforcement action. legacy carriers – most recently Delta/Northwest >
© 2014 The Texas Lawbook 2
SERVING BUSINESS LAWYERS IN TEXAS
and United/Continental – this merger would merger will not substantially lessen competition.
leave the industry with too little competition. In the context of deciding whether a merger
The only remaining legacy airlines would be should be allowed, the government relies
Delta, United, and American/US, and heavily on economic arguments, its analysis of
competition from Southwest and the other prior mergers in the same industry, and a cool
LCCs would not keep the legacy carriers in line. headed review of the facts. The merging parties
respond accordingly, often presenting lengthy
In particular DOJ asserted that this “4 to 3”
white papers, prepared with the assistance of
combination would make the postmerger
economists, supporting their presentations with
industry more susceptible to coordinated pricing
an objective evaluation of the facts.
QRWH[SOLFLWFRRUGLQDWLRQRUSULFH¿[LQJEXWWKH
tacit coordination that can result when there © Dallas Morning News
are few competitors and their actions more
predictable). DOJ also alleged that airlines would
engage in “capacity discipline,” which DOJ
GH¿QHG DV FXWWLQJ WKH QXPEHU RI DLUSODQH VHDWV
available to reduce capacity and increase prices.
Pivot from investigation to litigation If the government decides to oppose the merger,
As American and US Airways anticipated a PXFK RI WKLV IDOOV DZD\ +DYLQJ LWVHOI GHFLGHG
possible government challenge to the merger, the combination will substantially lessen
they began to move from trying to convince competition, DOJ’s lawyers then will employ
DOJ that it should not challenge the merger whatever evidence is relevant to proving that in
to building a courtroom defense for why DOJ court. No disparagement intended; DOJ likes
should not have challenged the merger. to win. And merging parties too should respond
There is a marked contrast between a aggressively, to hold DOJ to its burden of proof
government investigation and an enforcement and present the strongest case of why their deal
action that results from the investigation. DFWXDOO\ LV SURFRPSHWLWLYH 7KH JORYHV DUH R̆
More than in a business dispute that devolves Both sides will try to develop the case that will
into litigation, between a merger review and be best received by a generalist district judge.
litigated challenge the parties’ approach and This will not be a dry presentation of antitrust
standards the government applies change theory and economic models, which has some
drastically. Merging companies should YDOXH ZKHQ WKH DQWLWUXVW DJHQF\ VWLOO LV RSHQ
anticipate this and be prepared to pivot from minded about the deal, but documentary
investigation to lawsuit to clear the path to evidence and testimony on internal predictions
complete their transaction in the end. of the merger’s likely outcome, business motives,
and the evil or virtue of how the transaction will
A DOJ merger investigation begins cooperatively. D̆HFWFRQVXPHUV
The parties are eager to show DOJ why their
proposed merger is procompetitive, share One example. In its evaluation of prior airline
evidence needed to convince the agency, deals, DOJ has decided to allow mergers to
and quickly get past the review and close on proceed based in part on an economic model
schedule. The agency rarely will have prejudged that puts a dollar value to passengers on the
a transaction, and the parties’ goal is to present quality improvements created by combining
facts to help the government decide that the two airline networks into one; for example, >
© 2014 The Texas Lawbook 3
SERVING BUSINESS LAWYERS IN TEXAS
SRVWPHUJHUFXVWRPHUVFDQÀ\RQDVLQJOHDLUOLQH DOJ and the airlines saw this merger
WR PRUH GHVWLQDWLRQV DQG ZLWK PRUH ÀLJKWV SHU YHU\GL̆HUHQWO\
day scheduled at more convenient times. In this merger, DOJ saw an anticompetitive
plan to prevent American from growing, reduce
If the dollar value of the network improvements
industry wide capacity and increase prices.
exceeds the likely fare increases on routes
The airlines in contrast expected the combination
where the parties overlap, one could say the
to create a carrier with improved service,
merger on balance is procompetitive. In AA/US,
better able to compete against rivals. The airlines
the analysis submitted by the parties showed the
also saw a highly competitive marketplace
merger’s quality improvements far outweighed
with low barriers to entry, as evidenced by the
SULFH H̆HFWV %XW LQ WKH IHGHUDO FRXUW OLWLJDWLRQ
persistent growth of LCCs and the introduction
competing economic models, while important,
RI QHZ EXVLQHVV PRGHOV VXFK DV XOWUD/&&V
would have been viewed alongside the testimony
OLNH 6SLULW DQG KLJKVHUYLFH /&&V OLNH 9LUJLQ
and documents on the business rationale and
America). The outcome of the litigation would
plans for the merger.
have turned on which vision of this extraordinary
This merger is a great example of why it is transaction would be adopted by the court.
so important for merging companies (and
© Dallas Morning News
the government) successfully to pivot from
investigation to litigation.
Proving the merger will enhance
competition with facts, facts, and facts
Throughout the investigation that led to DOJ’s
enforcement action, American and US Airways
had been focused on developing the facts that
supported their belief that the merger would
enhance competition even though it reduced
the number of competitors on some routes.
This attention to the facts, not to mention that
the facts supported our view of the merger’s
H̆HFWV SXW WKH GHIHQVH LQ D VWURQJ SRVLWLRQ American and US Airways employees rallied outside
leading up to the trial date. the White House in September, hoping to push the DOJ
to settle its lawsuit.
7KLVWUDQVDFWLRQH[HPSOL¿HGKRZWKHJRYHUQPHQW
and merging companies can see the same merger Where DOJ saw less competition, American and
YHU\GL̆HUHQWO\(YHQLQDFRQFHQWUDWHGPDUNHW US Airways saw more. These airlines overlapped
RQHLQZKLFKDVLJQL¿FDQWVKDUHRIFDSDFLW\LVKHOG on only 17 nonstop routes. Prior airline mergers,
by a few companies, predicting whether a merger which DOJ had allowed, had produced stronger
ultimately will lessen or enhance competition airlines better able to serve passengers.
is not simple, creating the opportunity for United/Continental and Delta/Northwest had
disagreement. On one hand, every merger combined to create networks with much greater
between competitors reduces competition. reach, giving them the ability to provide service
The question is, how much competition WRPRUHDLUSRUWVZLWKPRUHIUHTXHQWÀLJKWVDQG
remains after the merger. On the other hand, improved schedules, features that especially
combining the capabilities of two companies business passengers demand. >
can produce a stronger competitor, introducing
more competition into the market.
© 2014 The Texas Lawbook 4
SERVING BUSINESS LAWYERS IN TEXAS
In contrast, American and US separately had $ORQJ ZLWK -HW%OXH 9LUJLQ $PHULFD DQG RWKHUV
incomplete but complementary domestic the LCCs have 40% of the U.S. domestic market.
networks: US had a strong presence only on the These nimble rivals keep the network carriers
East Coast, which is where American was lacking. RQWKHLUJDPHDQGQHZHUXOWUDORZFRVWDLUOLQHV
We were prepared to show how merging them like Spirit and Allegiant are taking share
ZRXOGEXLOGDVLQJOHIXOOVHUYLFHQHWZRUNEHWWHU from everyone.
able to attract passengers and compete against
Like any lawsuit, here there was a contrast
United and Delta.
between visions. The key to the defense’s
Where DOJ now asserted the prior mergers courtroom presentation would have been the
had resulted in less service, American and US facts that showed how this merger, despite DOJ’s
Airways developed the facts to show the prior claims, will be pro competitive.
mergers actually were increasing service over the
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long run.
inside counsel, and outside counsel
Taking the long view of how 9/11, the recession, Lawyers who have worked on complex litigation
DQG KLJKHU IXHO FRVWV KDG D̆HFWHG DLUOLQHV appreciate that behind every crisp courtroom
the evidence showed the industry had cut presentation there is enormous preparation,
VHDWV WKDW ZHUH À\LQJ HPSW\ EXW WKHQ EHJDQ sometimes creativity, and usually a little chaos.
expanding capacity as demand returned. The potential for chaos is enhanced in merger
)ROORZLQJ PHUJHUV DLUOLQHV KDG VKLIWHG WUḊF litigation, where inherently there are two parties
patterns and temporarily reduced capacity on the defense side, each with its own views
DV ÀHHWV ZHUH LQWHJUDWHG EXW WKHQ UHVWRUHG of the merger and of course each with its own
service. And American had made commitments lawyers. Success in creating a courtroomworthy
to extraordinary new aircraft purchases, for presentation therefore requires extraordinary
airplanes that the combined company now is cooperation and coordination of client and
DGGLQJWRLWVÀHHW counsel resources.
Where DOJ saw a consolidating industry leading In the AA/US litigation, it was
to coordination and higher prices, the defendants apparent DOJ was committed
were ready to show how average fares have fallen to litigating, the issues were
almost 50% in real terms since deregulation. complex, and between the two
DLUOLQHV WKHUH ZHUH PXOWLSOH ODZ ¿UPV HDFK
&RRUGLQDWLRQLQIDFWZRXOGEHGL̇FXOW DOWKRXJK
of course with its own views. The companies
airlines may have identical list prices, a close look
and counsel addressed these challenges by
at pricing evidence shows carriers actually have
establishing clear lines of command, reaching
KXQGUHGV RI GL̆HUHQW IDUHV WKDW YDU\ IUHTXHQWO\
a common vision of how to respond to DOJ’s
and obviously are not coordinated. The Internet
claims, and utilizing the clients’ internal
KDVPDGHLWHDV\IRUSDVVHQJHUVWR¿QGWKHORZHVW
resources to the fullest.
fares. And nothing in this particular merger was
OLNHO\WRD̆HFWWKHSULFLQJHQYLURQPHQW The clients each chose lead trial counsel
(John Majoras from Jones Day for American,
Where DOJ characterized the LCCs as not
Richard Parker from O’Melveny & Myers for
FRPSHWLWLYH EHFDXVH RI WKHLU ³GL̆HUHQW EXVLQHVV
US Airways) and relied on them to prepare for
PRGHO´ $PHULFDQ DQG 86 VDZ KRZ ORZHUFRVW
trial. The other lawyers who had been involved
competitors that had expanded, taking share
in the DOJ investigation contributed greatly to
from the legacy carriers. Texas’ own Southwest
trial preparation, but the lead trial counsel had
Airlines is the nation’s largest domestic airline.
WKH¿QDOVD\>
© 2014 The Texas Lawbook 5SERVING BUSINESS LAWYERS IN TEXAS
The two trial teams developed a common vision One reason that smooth coordination among
of how to respond to DOJ. Although each of the the defense team was so important is that
airlines had approached the deal with a slightly the court set a trial date just 104 days from
GL̆HUHQW EXVLQHVV UDWLRQDOH WKH\ KDG D VLQJOH ¿OLQJ WKH FRPSODLQW 7KH DLUOLQHV UHTXHVWHG D
YLHZ RI KRZ WKH PHUJHU EHQH¿WHG FRQVXPHUV ± quick trial date; as the merger was the plan for
by creating an airline with an improved network exiting bankruptcy, any delay would only
that could provide passengers with a strong prolong AMR’s stay in Chapter 11.
alternative to United and Delta and compete
DOJ resisted a short schedule; a long period of
DJDLQVWORZFRVWFDUULHUV$FNQRZOHGJLQJYDULRXV
uncertainty can put a transaction at business
business approaches is credible, but presenting a
risk of being abandoned, in which case DOJ wins
single antitrust argument is essential.
by default. This was such a critical issue that
Most importantly, the clients themselves numerous amici¿OHGEULHIVMXVWRQWKHVFKHGXOLQJ
were closely involved in the litigation, as they decision, urging the court to set a quick trial date.
had been in the DOJ investigation. Senior
Settlement
management were involved in strategy decisions,
Two weeks before trial, in November 2013,
and both airlines made executives and other
American and US Airways reached a settlement
knowledgeable employees available.
with the United States. The settlement required
Inside counsel were committed to the project, the airlines to divest certain slot holdings and
devoting endless time and their experience other assets Reagan National and at LaGuardia
WR WKH H̆RUW 7KH YDOXH RI WKH LQYROYHPHQW RI Airport in New York.
inside counsel cannot be overstated. Commercial
Additionally, American and US Airways were
aviation is a complex business, and even outside
required to divest some gates at Boston Logan,
counsel familiar with the industry do not bring
&KLFDJR 2¶+DUH 'DOODV /RYH )LHOG /RV $QJHOHV
the same experience and quick familiarity with
International, and Miami International. All these
the history, concepts, and information sources
assets had to go to LCCs, not other legacy carriers.
needed to understand the business.
The DOJ settlement raised some controversy,
At American, general ZLWKWKLUGSDUWLHVFODLPLQJLWGLGQRWVẊFLHQWO\
counsel Gary Kennedy address the allegations in DOJ’s complaint;
and antitrust counsel nevertheless, after thorough review the district
Bruce Wark and James court approved the settlement.
Kaleigh were very engaged
At the same time the airlines made settlement
– preparing witnesses,
agreements with Arizona, Florida, Michigan,
drafting briefs, securing
7HQQHVVHH 3HQQV\OYDQLD 9LUJLQLD DQG WKH
data – as on the US
District of Columbia (and before had settled with
Airways side were general
Gary Kennedy Texas) that required the combined airline to
counsel Steve Johnson and
maintain certain service levels in those states for
DQWLWUXVW FRXQVHO +RZDUG
several years.
Kass. This was important to putting us in
strong pretrial position. Clients and inside Both sides got something from the settlement.
counsel bring resources that give a trial team an The airlines closed their transaction in December
edge; not only do outside counsel not have these 2013, while DOJ hailed the settlement as
resources, neither does the government. disrupting the coordinated conduct alleged in >
© 2014 The Texas Lawbook 6SERVING BUSINESS LAWYERS IN TEXAS
the complaint, increasing access to congested diligent development of the facts, and close
airports, and bringing more choices to consumers. cooperation among clients and counsel. These
are good lessons for the parties to any
Lessons
merger that may face opposition in
As usual, the trial teams were eager to
Washington.
present their cases in the courtroom.
Bruce McDonald is an antitrust
“We would have won,” both sides still
partner in Jones Day’s Houston and
say today, although obviously there was
:DVKLQJWRQ ṘFHV DQG ZDV SDUW RI
HQRXJKXQFHUWDLQW\ DQGWLPLQJEHQH¿W
the team that represented American in
for the airlines) that all litigants were
the DOJ investigation and litigation.
willing to settle.
From 2004-2007 he served as Deputy
J. Bruce McDonald
In my view, American and US had Assistant Attorney General in the DOJ
put themselves in a strong position to secure a Antitrust Division.
settlement that timely cleared the way for their
Please visit www.texaslawbook.net IRU PRUH DUWLFOHV
merger with an aggressive focus on the litigation,
on business law in Texas.
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