Politics in the American Airlines-U.S. Airways Merger and Antitrust Settlement

Fordham Journal of Corporate & Financial Law Volume 20, Number 1 2014 Article 5 Politics in the American Airlines-U.S. Airways Merger and Antitrust Settlement Michelle Chan∗ ∗ Copyright c 2014 by the authors. Fordham Journal of Corporate & Financial Law is produced by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/jcfl Politics in the American Airlines-U.S. Airways Merger and Antitrust Settlement∗ Michelle Chan Abstract American Airlines was one of the airline industry’s darlings. A legacy airline, it was a household name, a massive entity, employed thousands, and commanded a fearsome presence among other industry players like unions and airport terminals. However, with ballooning costs and the red ocean airline industry’s evolution, American Airlines’ parent company, AMR, was forced into bankruptcy in November 2011. To emerge from Chapter 11, American Airlines and U.S. Airways announced plans to merge and come out a stronger, larger airline in February 2013. The Department of Justice Antitrust Division shortly thereafter filed a lawsuit opposing the merger, alleging it would have anticompetitive effects by decreasing the number of industry competitors and increasing prices. However, the lawsuit, despite having substantial reasons to move forward to trial, settled in November 2013. This Note will discuss the potential motivations behind this settlement, ultimately arguing that political considerations, which normally do not play a role in antitrust enforcement, were the driving factor. KEYWORDS: Airline Industy, Aviation Law, Antitrust, Merger, Chapter 11, Bankruptcy, Anticompetitive ∗ J.D. Candidate, 2015, Fordham University School of Law; B.A. in Journalism & B.S. in International Business at the University of Maryland, College Park. I would like to thank my family and my friends for their support while writing this Note. In addition, I would like to thank Professor Richard Squire for his guidance and mentorship and the staff and Editorial Board of the Fordham Corporate & Financial Law Journal for their assistance POLITICS IN THE AMERICAN AIRLINES–U.S. AIRWAYS MERGER AND ANTITRUST SETTLEMENT Michelle Chan* ABSTRACT American Airlines was one of the airline industry’s darlings. A legacy airline, it was a household name, a massive entity, employed thousands, and commanded a fearsome presence among other industry players like unions and airport terminals. However, with ballooning costs and the red ocean airline industry’s evolution, American Airlines’ parent company, AMR, was forced into bankruptcy in November 2011. To emerge from Chapter 11, American Airlines and U.S. Airways announced plans to merge and come out a stronger, larger airline in February 2013. The Department of Justice Antitrust Division shortly thereafter filed a lawsuit opposing the merger, alleging it would have anticompetitive effects by decreasing the number of industry competitors and increasing prices. However, the lawsuit, despite having substantial reasons to move forward to trial, settled in November 2013. This Note will discuss the potential motivations behind this settlement, ultimately arguing that political considerations, which normally do not play a role in antitrust enforcement, were the driving factor. TABLE OF CONTENTS INTRODUCTION .................................................................................... 177 I. GENERAL APPLICATIONS OF § 7 OF THE CLAYTON ACT AND THE INDEPENDENCE OF THE DEPARTMENT OF JUSTICE ANTITRUST DIVISION AND FEDERAL TRADE COMMISSION ............................ 179 * J.D. Candidate, 2015, Fordham University School of Law; B.A. in Journalism & B.S. in International Business at the University of Maryland, College Park. I would like to thank my family and my friends for their support while writing this Note. In addition, I would like to thank Professor Richard Squire for his guidance and mentorship and the staff and Editorial Board of the Fordham Corporate & Financial Law Journal for their assistance. 175 176 FORDHAM JOURNAL OF CORPORATE & FINANCIAL LAW [Vol. XX A. The Antitrust Division’s complaint was based upon a violation of § 7 of the Clayton Act. ....................................... 179 B. In the past, the government’s antitrust enforcers had a reputation for political independence. .................................... 180 C. The Antitrust Division is often only willing to settle an antitrust lawsuit when it thinks the settlement addresses its anticompetitive concerns. ...................................................... 184 II. THE ANTITRUST DIVISION’S COMPLAINT SHOULD HAVE BEEN PROSECUTED ON THE MERITS BECAUSE OF TWO MAJOR CONCERNS: THE STAND-ALONE THEORY AND THE ADVANTAGE-PRICING THEORY. ................................................... 184 A. The Stand-Alone Theory ......................................................... 184 B. The Advantage-Pricing Theory ............................................... 185 III. THERE ARE THREE POTENTIAL REASONS THE ANTITRUST DIVISION HAD TO SETTLE THIS LAWSUIT, BUT ONLY THE POLITICAL MOTIVATION IS PERSUASIVE. ..................................... 187 A. Option 1: A settlement was the Antitrust Division’s strategy all along. ................................................................................. 187 B. Option 2: Another potential explanation for parties’ settlement is the Antitrust Division’s fear of fully pursuing the suit. ................................................................................... 192 C. Option 3: Rather than a long-term strategy or a feeble fear of litigation failure, political forces may have more likely than not been the driver behind the settlement of this lawsuit. ................................................................................... 195 1. Lobbying is quite commonplace throughout much of the government’s decision-making, but what is significant in this settlement is who lobbied and with whom the lobbying had traction. ...................................................... 195 2. The competitive impact statement stated that the settlement failed to resolve the Antitrust Division’s concerns with the stand-alone and advantage pricing theories, making the settlement highly unusual. .............. 198 3. Attorney General Eric Holder made a statement that was out of step and not in conjunction with the Antitrust Division, stating that the suit could likely be settled depending on what concessions were reached. ................ 199 CONCLUSION ........................................................................................ 200 2014] POLITICS IN THE AMERICAN AIRLINES–U.S. AIRWAYS MERGER AND ANTITRUST SETTLEMENT 177 INTRODUCTION The AMR bankruptcy, merger, and antitrust suit depict the story of a legacy airline seeking rescue from financial disaster by agreeing to merge with U.S. Airways, only to be surprised by the Department of Justice Antitrust Division’s lawsuit. In November 2011, the parent company of (...truncated)