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Why DOJ might reject the Alaska-Virgin America merger

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A contingent at DOJ may want to stop the airline consolidation train from going any further down the tracks.

The US Department of Justice (DOJ) may be trapped in an airline consolidation paradox: It will be almost impossible for it not to approve a fifth merger of US airlines in eight years since it has already approved four others. But there are likely to be voices at DOJ wanting to block the Alaska Airlines-Virgin America merger precisely because there have already been four other airline mergers in the US since 2008.

Particularly because there is very little route overlap between Alaska and Virgin America, I can only think of one reason why DOJ would object to the two airlines merging: A contingent at DOJ has misgivings about the recent round of airline consolidation and may want to simply stop the consolidation train from going any further down the tracks.

Loretta Lynch was sworn in as attorney general in April 2015, meaning she was not heading DOJ when the department approved the prior four airline mergers (Delta-Northwest, United-Continental, Southwest-AirTran and American-US Airways). Bill Baer, the head of DOJ’s antitrust division and the most significant figure in reviewing the merger, didn’t ascend to his post until January 2013. The only airline merger approved since then, American-US Airways, occurred only after DOJ and American reached a settlement on the verge of a courtroom standoff. If Lynch and Baer want to send a signal that too much airline industry consolidation was approved by their predecessors, they may find a reason to disapprove of Alaska-Virgin America.

The late Jim Oberstar, the former chairman of the House of Representatives Transportation and Infrastructure Committee, was perhaps the most vocal critic of the recent round of US airline industry consolidation. He believed DOJ should take into consideration “whether a merger will inevitably trigger others, ultimately reducing the industry to a few large carriers, each of which is unwilling to compete seriously in markets dominated by one of the others.”

Even if a given merger didn’t necessarily raise antitrust concerns on its own, Oberstar believed stopping a merger could be legitimate if that merger was viewed as a domino that would inevitably lead to a string of future mergers. That’s how he felt about Delta-Northwest, United-Continental and Southwest-AirTran, arguing in each case that approval by DOJ would make it harder for DOJ to reject the next merger and inevitably lead to a level of consolidation that would be bad for consumers.

“Airline consolidation brings consumers and communities fewer choices and less competition, usually leading to increased fares and reduced levels of service,” Oberstar argued. “That runs directly counter to the promise of [airline] deregulation.”

In the dispute between United and DOJ over Newark International slots (recently dropped because FAA decided to “de-slot” Newark), Baer made it clear that he felt DOJ had been duped by United and Continental. While the airlines had agreed to divest slots to get their merger approved by DOJ in 2010, the post-merger United systematically tried to reacquire those assets, Baer contended.

My guess is that Baer would prefer not to approve another airline merger. Especially if he can get Lynch on his side, here’s the case he would likely make (call it the “Oberstar argument”): While the Alaska-Virgin America merger doesn’t raise any overt competition concerns at specific airports, Baer may say it would create an airline industry that would be much too consolidated and would inevitably consolidate further, leading to less choice and higher fares for consumers. If this merger goes through, he could argue, then an ultra low-cost carrier merger proposal (some combination of Spirit, Frontier and Allegiant) will closely follow and DOJ will be poorly positioned to reject it. That would then leave the Big 4 (Delta, United, Southwest and American), Alaska-Virgin America, a mega ULCC and essentially JetBlue Airways, meaning JetBlue would then seek a merger to survive, Baer could say. Even niche operators Hawaiian Airlines and Sun Country Airlines might seek to get in on the consolidation game, he could argue.

Baer could say that either a line is drawn now or the 12 mainline US airlines still in service could soon become eight or seven or even fewer.

In my view, this would overstate the case. But that’s exactly the point. Since there is no specific reason to reject Alaska-Virgin America, DOJ’s potential case against it wouldn’t hinge on divestments here or there. Instead, Baer and Lynch would likely make a sweeping case that airline industry consolidation has gone too far in the US.

It would be unfair to Alaska and Virgin America (they would, of course, have the recourse of federal court). But DOJ might argue that it would be more unfair to American consumers to let consolidation keep moving forward. Alaska executives should be prepared to face this argument from regulators.

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