What Happened to Gov't's Case Against AMR-US Air?

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Nov. 12 (Bloomberg) -- Bloomberg's Cristina Alesci, former Assistant Attorney General Donald Baker and Capello Group's Gene Urcan discuss American Airlines and US Airways reaching an agreement with the U.S. Justice Department over the government’s bid to block their merger. (Source: Bloomberg)

Carter.

He counsels clients on all aspects of the antitrust process.

Lay out exactly what it is that happened today.

This deal was approved i the justice department, or rather, they came to an agreement between the justice department and u.s. airways and american.

Remember, the justice department had taken issue with this combination, basically saying it would eliminate competition and drive prices higher for consumers.

Now they've reached a settlement in which us airways and american basically have to shed some of the flights they have an reagan international airport and other airports.

Presumably, that would increase competition at those airports.

At least, that is the way the justice department is framing it, but having covered this deal a little bit in-depth, i can tell you it does certainly seem like the justice department kind of had to back off a little bit, because the other side did have a pretty strong case.

It was hard for the justice department to go ahead and really block this merger.

Now we have the number one airline in the world.

We've really concentrated a lot in the top three airlines at this point.

Don baker, i wonder if you can come in on this decision and approval by the court.

Was this a surprise?

I'm not so sure that the government's antitrust case struggled so much as its political case.

It faced a huge amount of opposition, governors, mayors, unions, and so forth.

I thought it was an important step forward in the airline industry, because it looked at the broader issues of the way the airlines, as they have merged, are able to coordinate on capacity and prices.

I was fairly optimistic that the government could win, but obviously, i haven't seen the evidence or the testimony.

What does this mean for the airline industry?

More consolidation.

This is a trend.

I think so.

I think stability in the airline space is always a good thing.

When you look at the reason american is doing this deal, it is for scale.

For survival?

Survival and scale.

They are operating under bankruptcy protection.

That is correct.

You get stability, and theoretically, profitability going into the future.

Part of the reason they are doing this deal is for scale so they can compete with delta and united for these corporate clients, which are so important to them, and to compete effectively with those airlines, they need scale.

Part of the problem american was having was the fact it couldn't get the high-margin business, the business traveler, and the thinking is, by combining it, maybe they can bolster that business and provide enough routes and enough options for the business travelers.

Remember, the business traveler isn't as price-sensitive as the average consumer.

A want more options, and they want the most flexible options.

The thinking is that this will produce that kind of competitive advantage.

On the flip side, you said they were operating under bankruptcy.

Let's not forget who the real winner is in this.

It is u.s. airways.

They were number five.

This effectively bumps them up to number three.

There are a lot of smart analysts out there that said american could have emerged from bankruptcy pretty successfully and operated a decent business, that this puts u.s. airways on a completely different playing field.

That is what the ceo has always wanted.

Don baker, i want to come to you about the slots that will be divested as part of this agreement.

Part of the government's argument, as i recall, had to do not necessarily with competition , but had to do with nonstop and one-stop flights and fares and what that would mean to increased competition for the actual price of an airline seat.

Come in on the slots.

First of all, on the slots, this has been the traditional remedy in these various airline merger cases.

In this case, u.s. airways overwhelmingly dominated washington's reagan national airport.

They're going to have to give up some slots.

I think what we have learned is that while forcing the carriers to give up some slots will help deal with competitive issues, the increased concentration -- these airlines can keep a close eye on each other, and i'm sure others -- i'm not a unique consumer -- as you've seen the delta merger, the united merger, the planes are getting fuller and fuller and the prices are getting more and more expensive.

The carriers are able to keep an eye on each other as they cut capacity, which makes them -- their operations more profitable, but it makes a good service for us as consumers.

What about this consolidation, the fact that you've got these mega-hubs where one airline controls at least 50% of the air traffic?

I think it is not a bad thing.

The small consumers still has a lot of options out there.

You have southwest, jetblue, spirit, guys like that.

The smaller consumer, i think, is still fine.

Domestically.

Internationally, it is a totally different ballgame.

To biggie back what she was -- to piggyback on what she was saying earlier, when you look at business travelers, american airlines, delta, they are going to go after these corporate contracts.

The people issuing the contracts want to select a provider that provides them with the most possible hubs for their employees.

By consummate it -- consummating this merger, it allows american and us airways to complete more effectively -- compete more effectively with united and delta.

Does it also let them compete more effectively when they want to buy new aircraft?

At least with american airlines, hasn't the issue been that the equipment is old, they didn't have the money to replace it, and they are increasingly competing with the likes of delta and united, and they are buying new planes?

I think that is a great point.

I think a lot of people have found the airline travel experience to be terrible.

With this merger, they are trying to make that more a pleasant experience for everyone and to try to draw in more customers.

Don baker, if the airline industry is run by the airlines, but yet when you go to the airport, the airport itself is really run by regional authorities, what gives and take to the airlines have to change the level of service?

What you have in some of the very important airports is a limited number of landing slots, which control the situation.

In the fully utilized capacity, you would have to force some divestiture of airline slots to get competitors in.

We will get some new competition into reagan national as a result of this, and i assume into look or you.

-- into laguardia.

I'm thinking about express airlines, the smaller jets, the smaller turbo jets that are being flown.

They are being introduced into service to replace bigger jets.

In some cases, yes.

To go back to this idea of airline mergers and the challenges ahead, a lot of people are going to be popping champagne tonight, but there is going to be a lot of work ahead for these two companies to come together.

We have seen other airline mergers really hit some rough patches.

United and continental is the perfect example.

These massive technological systems that have to come together -- labor contracts.

It is a huge issue.

U.s. airways labor has historically been paid much less than the industry, and their labor has been accustomed to that.

Now we know that american labor,

This text has been automatically generated. It may not be 100% accurate.

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