Those Giant Airline Mergers Will Likely Take Off

Restrictions may apply, but the Bush Justice Dept. is expected to clear American's and United's big deals

Microsoft won't be the only big issue on the new U.S. Justice Dept.'s agenda in 2001. Bush's legal eagles have inherited twin megamergers: American Airline's $4 billion combined purchase of Trans World Airlines and 20% of U.S. Airways' assets and the $4.3 billion United Airlines-U.S. Airways merger.

All the dealmaking has lawmakers, travel groups, and competing airlines fuming. Their beef: If Justice gives its O.K., United and American will fly 50% of all U.S. air travelers annually. Other carriers would have to bulk up to compete, and inevitably a merger wave would build. "Eventually, only three airlines would control U.S. skies. It would be a travesty for the new Administration to let this go forward," says Representative Louise M. Slaughter (D-N.Y.). Delta and Continental say they aren't ruling out plans to merge with other airlines.

So what will Bush's legal team do? Most experts believe they'll allow the deals to go through -- but probably with some restrictions. U.S. Airways and TWA -- the two airlines to be acquired -- are in desperate financial straits, and unless they're taken over by a major carrier both say they can't survive. Some believe the prospect of 20,000 TWA and 45,000 U.S. Airway employees losing their jobs may nudge regulators to approve the mergers. Says former Justice staffer Robert Litan: "There may be more conditions attached to the deals. But I find it hard to believe they will be blocked."


  The main reason: Antitrust regulators don't look at national levels of consolidation during merger reviews. Instead, they concentrate on the impact a merger would have on specific city-hub pairs. In isolation, the United-U.S. Airways merger -- announced on May 24, 2000 -- would have reduced competition in 290 markets. But that landscape changed on Jan. 10, when American announced its merger plans. American's proposed acquisition of TWA as well as 20% of U.S. Airways' assets would mean that neither American nor United would dominate in key markets such as Philadelphia, Charlotte, N.C., and Pittsburgh.

That doesn't mean the feds won't put conditions on the deal. American and United have agreed to share revenues 50-50 from U.S. Air's Northeast shuttle. It's the first time two airlines have agreed not to compete in a lucrative market, and no one is quite sure how regulators will interpret that. Another possible red flag: D.C. Air, in which American would acquire a 49% stake in under the proposed deal. That part of the deal could put American in a position to possibly dominate Washington's Reagan National Airport. United already rules at neighboring Dulles Airport in Virginia. That means United and American would have much stronger positions on the East Coast than other carriers.

Airlines not involved in either deal are hoping that Justice officials will require American and United to divest more assets before giving approval. Low-cost carrier Airtran is already poised to bid for take-off and landing slots at Reagan National airport.


  But hubs and spokes aside, both President Bush and Attorney General-designate John Ashcroft have an interest in seeing both American and TWA prosper. American Airlines is based in Texas, where Bush was governor, and the Dallas company contributed considerably to his election campaign. And worries about TWA's collapse and its impact on St. Louis' main airport -- which is the hub for the airline -- is a big issue in Missouri, home of Attorney General-designate and former Republican Senator John Ashcroft.

As a senator, Aschcroft's showed his allegiances over airline mergers last year, when he refused to endorse a Senate Commerce Committee resolution against the United-U.S. Airways deal. "Given the amount of controversy Attorney General-designate John Ashcroft has already received, [approving the airline mergers] is not something he's necessarily going to fall on his sword for," says Paul Demsey, University of Denver law professor and board member of Frontier airlines.

High-profile lawmakers such as Senator John McCain (R-Ariz.) are already raising a ruckus over airline consolidation. McCain will hold hearings beginning on Feb. 1, exploring the implications of industry consolidation. In the House, ranking member of the House Transportation Committee Representative James L. Oberstar (D-Minn.) has introduced a bill that would cap ticket prices if the industry is ever reduced to three air carriers. "We would lose the low fares and consumer benefits we gained from deregulation," he says.


  Meanwhile, New York Representative Slaughter is drafting legislation aimed at trumping these merger attempts. Her bill would place a one-year moratorium on all airline mergers, giving Bush's new Justice and Transportation officials have more time review the deals -- and give opponents more time to lobby against them. But concedes one Senate aide: "Really, no matter how much Congress hollers, the ball is in Justice's lap."

A decision on the United-U.S. Airways merger is expected Apr. 2, although American's subsequent merger proposal means both probably will take longer to review. And if Justice gives its official nod, 12 state attorney generals are poised to bring lawsuits against the megacarriers. Most worry that their states will lose valuable hubs and that residents will be forced to swallow higher fares. Says Paul Hudson, the Director of the Aviation Consumer Action Project: "It will be the end of airline competition as we know it."

It's doubtful that federal regulators would ever allow that to happen. But make no mistake, Bush's legal team -- philosophically predisposed to laissez faire antitrust policy to begin with -- probably won't stand in the way of saving cash-strapped TWA and U.S. Airways. The deals may be tweaked, and the new giants may have to divest some assets. But don't be surprised if their deals are approved.

By Nicole St.Pierre, with Dan Carney, in Washington

Edited by Douglas Harbrecht

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