BATTEN DOWN THE HATCHES!! Airlines’ Antitrust Lawyers: “We’re Litigating, Period”

 15 August 2013–  Ummm … not to put too fine a point on it but where was the DOJ when Continental Airlines announced the merger between Continental and United Airlines in 2010? So now the government is putting its foot down on rising airfares and fees by blocking the latest airline merger?  For fliers, it’s already too late.

The timing is cool, though.  On Tuesday we attended a briefing held by McKinsey on the merger and we got a nice “history of the U.S. airline industry and antitrust” in a nutshell. The American-US Airways merger would create the world’s biggest airline and help propel American out of bankruptcy court protection. For smaller US Airways, the deal represents a chance to be a significant player in global aviation and to better compete with the larger airlines that now dominate the market.

The latest round of consolidation started in 2005, when America West bought US Airways out of bankruptcy, taking its name. Then Delta and Northwest merged in 2008, followed by United and Continental, and Southwest and AirTran. All of those easily won the blessing of antitrust regulators. The government approved those deals to save the then-struggling industry. Now that the airlines’ health has improved, regulators are more concerned about airfares.

The past decade has seen the largest transformation of the airline industry in a generation. Prior to 2005, there were nine major U.S. airlines. Today, just five. The merger of American Airlines and US Airways would bring that number down to four.

In brief, it rolls out like this:

* Consolidation has made the airlines more stable, provided job security for thousands of employees and rewarded Wall Street investors.

*Business travelers have benefited from more flight options and easier connections. But families looking to go on vacation face higher fares and fewer airlines to choose from.

* In seeking to stop the American-US Airways deal, the government contends that airlines already follow each other’s moves in setting prices and adding new fees. They even bully each other out of offering sales.

* Example: on April 18, United Airlines increased its fee for changing a reservation from $150 to $200. Like lemmings, American, Delta Air Lines and US Airways all matched the higher fee within two weeks. Even JetBlue Airways — which has largely resisted change fees — increased its change fee by 50 percent.

* In the past, passengers might have balked at such fees and boycotted a particular airline. Today, they have no choice but to pay because of fewer options.

* The airlines instituted many of the fees in 2008, when the price of fuel spiked 46 percent and the Great Recession sharply curtailed travel. Fuel prices are slightly lower today and travelers have returned to the skies. But airlines rely even more heavily on fees as a source of revenue, while increasingly catering to the highest-paying customers.

So …. this past Tuesday, the DOJ moved the block the deal saying it would cost consumers hundreds of millions of dollars a year in higher fares and extra fees. But even before this, the cost of flying had gone up for consumers as the industry consolidated. The average cost of a roundtrip domestic ticket — including baggage and reservation change fees — grew to $378.62 last year, up from $351.48 in 2008, when adjusted for inflation.

So … BRING ON THE LAWYERS!!!  (oh, and the accountants and the e-discovery vendors, too).  The following analysis comes from law360.com:

US Airways Group Inc. and American Airlines Inc. aren’t interested in settling a federal antitrust lawsuit aimed at blocking their $11 billion merger, three lawyers for the carriers said Wednesday, laying out pieces of a defense they say they’re eager to air at trial.

“We’re litigating this case, period,” said Paul Denis of Dechert LLP, who, along with Richard Parker of O’Melveny & Myers LLP and Joe Sims of Jones Day, responded to Tuesday’s lawsuit from the U.S. Department of Justice.

The government claims the merger, which would create the world’s largest airline, will lead to fewer flights, higher fares and more fees on everything from checked bags to ticket changes. Attorneys general from six states and the District of Columbia joined the suit, which throws also American’s bankruptcy case — set to wrap up at a hearing Thursday — into a chaotic limbo.

The lawyers — Parker and Denis for US Airways and Joe Sims for American, with Parker leading the defense — said they weren’t surprised by the filing after nearly seven months of tough negotiations with DOJ staffers, but believe the government’s case has holes.

“If you look in those 56 pages, it’s hard to find much actual meat on those bones,” Sims said.

Parker — who led AT&T Inc.’s defense of its ill-fated acquisition of T-Mobile USA Inc. in 2011, a case that bears some similarities to this one — said the DOJ’s complaint doesn’t account for Southwest Airlines Corp., which last year flew more miles than either US Airways or American, according to federal data. It also discounts the gains made by JetBlue Corp., Spirit Airlines Inc. and other regional fliers, he said.

The government has defined the market narrowly, as the four legacy carriers — Delta, United Continental, US Air and American — that would dwindle to three if the merger goes through. It argues that Southwest never factored into internal views of the market at US Airways or American and hasn’t been the disciplining force a true competitor would be. For example, Southwest not charging for checked bags hasn’t discouraged the four national carriers from doing so.

But the airlines are expected to argue that Southwest is a bigger player than it gets credit for.

“More people are choosing to fly on them than any other airline, so they must be doing something right,” a source close to the situation said. “You simply cannot talk about airline competition today and exclude Southwest.”

The airlines also said the DOJ is too focused on more than 1,000 city pairs accessible only via connecting routes, rather than on the 12 routes where American and US Air compete for nonstop service.

“There are any number of connecting flights that are at least in theory competitive, but that’s true of any transaction in the airline industry,” said Sims, who characterized the government’s focus on the city pairings as “odd.”

The three lawyers also took aim at the government’s emphasis of a US Air discounted one-stop fare program. The seats, known as advantage fares, are hundreds of dollars less than nonstop flights from Delta, United and American. Without ever using the word, the government suggests that on these routes, US Airways is acting as a “maverick,” a player that keeps competitors honest by cutting prices or offering more options.

Denis said the complaint fundamentally misunderstands where the seats come from, and hasn’t made a compelling case that the program would disappear if the merger happens.

It was a common theme in the hour-long conference call: The burden of proof is on the DOJ to show the merger would hurt competition, not on the companies to show it wouldn’t.

“[DOJ] has to ask a federal judge to rule in their favor, and that is something that has happened exactly once in the last 8 years,” Parker said.

That would be the merger of H&R Block Inc. and TaxAct, which a federal judge blocked on antitrust grounds in 2011.

Plenty of other deals have fallen apart before a final ruling, though. AT&T Inc. abandoned its plan to buy T-Mobile amid a tough DOJ battle, a big win for the newly aggressive agency. And others, like AB InBev NV’s deal for Mexican beer giant Grupo Modelo SAB de CV last year, have seen the DOJ wring tough concessions from companies.

The lawyers noted that the DOJ has been less successful in other instances, pointing to cases like Oracle/PeopleSoft in 2004, a tough loss that was seen to make regulators a bit gun-shy.

When asked for a response to DOJ Antitrust Division head Bill Baer’s comments that this case required a complete injunction rather than a negotiated settlement, Parker dug in.

“You heard Bill on that, we’d let his statement stand,” he said. “We’re always prepared to listen to any ideas that DOJ may have to resolve this, but right now we are working very hard to get ready for court, and looking forward to that date with confidence.”

Parker will be lead litigation counsel, supported by Dechert’s Denis and Rick Rule of Cadwalader Wickersham & Taft LLP for US Airways, and Jones Day’s Sims and M.J. Moltenbrey of Paul Hastings LLP for American.

US Airways is also represented by Latham & Watkins LLP as lead M&A counsel and O’Melveny & Myers LLP on labor issues.

American is represented by Weil Gotshal & Manges LLP as lead M&A and bankruptcy counsel, K&L Gates LLP, and Debevoise & Plimpton LLP as special aircraft counsel.

American’s ad hoc committee, mostly comprised of bondholders, is represented by Milbank Tweed Hadley & McCloy LLP.

Skadden Arps Slate Meagher & Flom LLP partner James Keyte and counsel Kenneth Schwartz, and attorneys from Togut Segal & Segal LLP are serving as the unsecured creditors committee’s legal counsel. Moelis & Co. and Mesirow Financial are serving as financial advisers to the unsecured creditors committee.