More info on why the Feds ax mergers
COMPETITION IN THE AIRLINE INDUSTRY
Testimony of
JOEL I. KLEIN
Assistant Attorney General
Antitrust Division
U.S. Department of Justice
Before the
Committee on Commerce, Science and Transportation
United States Senate
Charleston, SC
March 12, 1999
MERGER ENFORCEMENT
Since 1989, when airline merger review authority was turned over to the Antitrust Division, there have been relatively few mergers proposed among the major airlines. One exception is the proposal last year by Northwest Airlines to purchase a controlling stake in Continental Airlines, which we challenged in a suit filed in October under section 7 of the Clayton Act. Section 7 prohibits mergers and acquisitions that are likely to substantially lessen competition in any market. The courts have interpreted this to prohibit mergers that create or enhance market power or make it easier for a firm to exercise market power. Market power is the ability of a firm to successfully raise its price above the competitive level without that move being defeated by counteractive competitive responses by its rivals.Northwest and Continental are the fourth- and fifth-largest U.S. airlines, respectively, and compete to provide air transportation services on thousands of routes across the country. The proposed acquisition would allow Northwest to acquire voting control over Continental, as well as share in Continental's profits, diminishing substantially both Northwest and Continental's incentives to compete against each other. We concluded that the acquisition would lead to higher ticket prices and worse service for millions of passengers, especially those traveling on routes dominated by the two airlines.
Northwest and Continental are each other's most significant competitors -- if not only competitors -- for nonstop airline service between the cities where they operate their hubs. Northwest operates hubs at Detroit, Memphis, and Minneapolis. Continental operates hubs at Cleveland, Houston and Newark. The two airlines also have a dominant share of the traffic on connecting flights between numerous cities. Millions of passengers spend hundreds of millions of dollars each year traveling between these cities.
The stock Northwest acquired represents 51 percent of Continental's voting rights, as well as 14 percent of its equity, it represented. Although Northwest has placed that stock in a "voting trust" that places certain limits on its exercise of voting control for six years, and lesser restrictions for an additional four years, the Antitrust Division does not view that as a satisfactory answer to the long-term competitive concern. Continental is still fully aware that it is owned by Northwest, which can only discourage it from pursuing competitive strategies that benefit consumers but are adverse to Northwest. That is no substitute for the kind of competitive incentives that true independence provides.
Also in the merger enforcement area, the Antitrust Division has moved aggressively to block acquisition of gates or slots that would eliminate existing or potential hub competition, including Eastern's proposal to sell eight gates to USAir at the gate-constrained Philadelphia International Airport, and Eastern's proposed sale of slots and gates at Reagan Washington National Airport to United, which operated a significant hub out of nearby Dulles airport.
