AMR-US Airways Merger Faced Antitrust Opposition From the Start
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U.S. antitrust chief Bill Baer had been heard talking tough in Washington about going after the nation’s largest companies days before he slapped AMR Corp. and US Airways Inc. (LCC) with a lawsuit to block their merger, a person familiar with his comments said.
Airline executives and lawyers found out what Baer was really thinking when he said Aug. 13 that he went to court because “we think a full-stop injunction is the right outcome for consumers.”
The airlines saw signs during the seven months of talks with Baer’s staff that their proposed deal, which needed his approval, was meeting resistance. Staff discussions with lawyers grew hostile, said a second person familiar with the talks who asked not to be named because the discussions were private.
An offer to give up slots at Reagan National Airport went nowhere. Final meetings with a front office official and with Baer himself were inconclusive, the person said. The agency eventually used the airlines’ own words against them to argue the proposed tie-up would lead to less competition and higher prices for consumers.
“The bottom line is, if you get a meeting with Bill Baer, you know things aren’t going well,” said Andre Barlow, a lawyer with Doyle, Barlow & Mazard PLLC in Washington, who worked at the Justice Department’s antitrust division in the late 1990s. “You’re going to get a lawsuit, and they don’t give you a heads up until five minutes before.”
The airlines and the antitrust officials were talking past each other. The carriers, aware that the last big airline merger had been approved, thought they had fully explained why the merger was good for competition and consumers, and were prepared to make their case to the division’s top enforcers, one of the people said. However the staff, many of whom worked on Delta Air Lines Inc.’s 2008 merger with Northwest Airlines Corp., recommended filing a suit to block the deal, the two people said.
In early August, lawyers for the carriers met with Deputy Assistant Attorney General Renata Hesse, a veteran who worked on the division’s litigation against American Airlines in 2001 for alleged predatory pricing before a judge dismissed the case.
A few days later, they met with Baer himself. The following week, Baer dropped his bomb. The carriers weren’t told they were getting sued until the morning the case was filed, lawyers for the airlines said on a conference call yesterday.
Since Baer took the helm of the antitrust division in January, he has sued Anheuser-Busch InBev NV over its purchase of Grupo Modelo SAB. He secured a heftier settlement than the companies initially proposed, and won a lawsuit against Apple Inc., the world’s biggest technology company, for orchestrating a scheme with publishers to fix the prices of electronic books.
Baer, named one of the “Decade’s Most Influential Lawyers” by the National Law Journal in 2010, is a former director of the Federal Trade Commission’s competition bureau and has represented corporate clients including General Electric Co. (GE), Intel Corp. and Cisco Systems Inc. (CSCO) in private practice, where he headed the antitrust group at Arnold & Porter LLC.
When he was at the FTC, Baer’s decision to block a proposed merger between Staples Inc. and Office Depot in 1997 was viewed as risky at the time, yet set the FTC on a path as an aggressive enforcer, according to Seth Bloom, founder of Bloom Strategic Counsel PLLC and former general counsel of the Senate Antitrust Subcommittee.
“Baer is a strong antitrust enforcer and really believes the mission of the agency is standing up for consumers,” said Bloom. “He is on solid ground challenging this merger, not that it will be a slam-dunk to prove.”
Attorneys for the carriers said on the conference call yesterday the Justice Department made a mistake to bring the case and they looked forward to prevailing in court.
“They got this one very wrong,” Rich Parker, an attorney for US Airways and a partner at O’Melveny & Myers LLP, told reporters and analysts on the call. “Both of these companies are looking forward with confidence to our day in court.”
The lawyers argue that the merger, which would bring American Airlines out of bankruptcy and create the world’s largest airline, will be good for consumers.
That was hardly Baer’s view. In its complaint, the Justice Department used the airlines’ own words against them. The department cited internal e-mails and documents, citing comments from US Airways Chief Executive Officer Doug Parker about the airlines’ ability to introduce fare increases after consolidation.
The merged airline would have no incentive to keep offering US Airways’ lower ‘Advantage Fares,’ the department said in the complaint, citing internal analysis from American Airlines. It concluded the discount fares could be eliminated because “American’s large non-stop markets would not be susceptible to reactionary pricing from Delta and United,” the merged airlines’ main rivals.
The complaint, laying out a pattern of coordinated decisions on pricing of fares and fees, also cites an e-mail chain forwarded by Parker about a rival airline that had introduced a “triple miles” promotion “that set off a market share battle among legacy carriers.”
“US Airways senior management debated over e-mail how to best to get the rival airline’s attention and bring it back in line with the rest of the industry,” according to the complaint. Parker urged the other executives to “portray these guys as idiots to Wall Street and anyone else who’ll listen,” according to an excerpt from the e-mail cited in the complaint.
When Parker forwarded the e-mail to the chief executive of the rival airline, the executive responded that it was “an inappropriate communication that he was referring to his general counsel,” according to the complaint.
In the conference call yesterday, Joe Sims, an AMR attorney and partner at Jones Day, said that the merger will result in lower operating costs at the combined airline that “will in large part be passed on to consumers in the form of lower prices.”
The government’s argument that American and US Airways would survive without a merger is irrelevant, as are the e-mails cited in the complaint, airline attorneys said.
The U.S. must “prove this merger is anti-competitive,” Sims said. “I don’t think anyone should assume that this transaction is not going to happen.”
Increased consolidation has also allowed airlines to introduce ancillary fees that are costly to consumers, the Justice Department said in the complaint.
“The levels of the ancillary fees charged by the legacy carriers have been largely set in lockstep,” the Justice Department said in the complaint. “One airline acts as the ‘price leader’ with the others following soon after.”
According to the complaint, in a 2011 e-mail exchange lamenting the need for US Airways to deploy wireless Internet on all of its planes, a senior US Airways executive groused, “Next it will be more legroom. Then industry standard labor contracts. Then better wines. Then the ability to book on Facebook. Penultimately, television commercials. Then, finally, we will pay the NYSE an exorbitant fee to change our ticker symbol [from LCC].”
The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp. (AAMRQ), 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).