Airline Mergers
Issues Raised by the Proposed Merger of United and Continental Airlines
Gao ID: GAO-10-778T May 27, 2010
Earlier this month, United Air Lines (United) and Continental Airlines (Continental) announced plans to merge the two airlines and signed a merger agreement. This follows the acquisition of Northwest Airlines by Delta Air Lines (Delta) in 2008, which propelled Delta to become the largest airline in the United States. This latest merger, if not challenged by the Department of Justice (DOJ), would surpass Delta's merger in scope to create the largest passenger airline in terms of capacity in the United States. The passenger airline industry has struggled financially over the last decade, and these two airlines believe a merger will strengthen them. However, as with any proposed merger of this magnitude, this one will be carefully examined by DOJ to determine if its potential benefits for consumers outweigh the potential negative effects. At the Committee's request, GAO is providing a statement for the record that describes (1) an overview of the factors that are driving mergers in the industry, (2) the role of federal authorities in reviewing merger proposals, and (3) key issues associated with the proposed merger of United and Continental. To address these objectives, GAO drew from previous reports on the potential effects of the proposed merger between Delta and Northwest and the financial condition of the airline industry, and analyzed Department of Transportation (DOT) airline operating and financial data.
As GAO has previously reported, airlines seek to merge with or acquire other airlines to increase their profitability and financial sustainability, but must weigh these potential benefits against operational costs and challenges. The principal benefits airlines consider are cost reductions--by combining complementary assets, eliminating duplicate activities, and reducing capacity--and increased revenues from higher fares in existing markets and increased demand for more seamless travel to more destinations. Balanced against these potential benefits are operational costs of integrating workforces, aircraft fleets, and systems. DOJ's antitrust review is a critical step in the airline merger and acquisition process. DOJ uses an integrated analytical framework set forth in the Horizontal Merger Guidelines to determine whether the merger poses any antitrust concerns. Under that process, DOJ assesses the extent of likely anticompetitive effects of reducing competition in the relevant markets--in this case, between cities or airports. DOJ further considers the likelihood that airlines entering these markets would counteract any anticompetitive effects. It also considers any efficiencies that a merger or acquisition could bring--for example, consumer benefits from an expanded route network. Finally, it examines whether one of the airlines proposing to merge would fail and its assets exit the market in the absence of a merger. One of the most important issues in this merger will be its effect on competition in the airline industry. For example, GAO's analysis of 2009 ticket data showed that combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total traffic between airports) in 1,135 markets (called airport pairs) affecting almost 35 million passengers while creating a new effective competitor in 173 airport pairs affecting almost 9.5 million passengers. However, in all but 10 of these airports pairs there is at least one other competitor.
GAO-10-778T, Airline Mergers: Issues Raised by the Proposed Merger of United and Continental Airlines
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Testimony:
Before the Committee on Commerce, Science, and Transportation, U.S.
Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, May 27, 2010:
Airline Mergers:
Issues Raised by the Proposed Merger of United and Continental
Airlines:
Statement for the Record by Susan Fleming:
Director, Physical Infrastructure Issues:
GAO-10-778T:
GAO Highlights:
Highlights of GAO-10-778T, testimony before the Committee on Commerce,
Science, and Transportation, U.S. Senate.
Why GAO Did This Study:
Earlier this month, United Air Lines (United) and Continental Airlines
(Continental) announced plans to merge the two airlines and signed a
merger agreement. This follows the acquisition of Northwest Airlines
by Delta Air Lines (Delta) in 2008, which propelled Delta to become
the largest airline in the United States. This latest merger, if not
challenged by the Department of Justice (DOJ), would surpass Delta‘s
merger in scope to create the largest passenger airline in terms of
capacity in the United States. The passenger airline industry has
struggled financially over the last decade, and these two airlines
believe a merger will strengthen them. However, as with any proposed
merger of this magnitude, this one will be carefully examined by DOJ
to determine if its potential benefits for consumers outweigh the
potential negative effects.
At the Committee‘s request, GAO is providing a statement for the
record that describes (1) an overview of the factors that are driving
mergers in the industry, (2) the role of federal authorities in
reviewing merger proposals, and (3) key issues associated with the
proposed merger of United and Continental. To address these
objectives, GAO drew from previous reports on the potential effects of
the proposed merger between Delta and Northwest and the financial
condition of the airline industry, and analyzed Department of
Transportation (DOT) airline operating and financial data.
What GAO Found:
As GAO has previously reported, airlines seek to merge with or acquire
other airlines to increase their profitability and financial
sustainability, but must weigh these potential benefits against
operational costs and challenges. The principal benefits airlines
consider are cost reductions”by combining complementary assets,
eliminating duplicate activities, and reducing capacity”and increased
revenues from higher fares in existing markets and increased demand
for more seamless travel to more destinations. Balanced against these
potential benefits are operational costs of integrating workforces,
aircraft fleets, and systems.
DOJ‘s antitrust review is a critical step in the airline merger and
acquisition process. DOJ uses an integrated analytical framework set
forth in the Horizontal Merger Guidelines to determine whether the
merger poses any antitrust concerns. Under that process, DOJ assesses
the extent of likely anticompetitive effects of reducing competition
in the relevant markets”in this case, between cities or airports. DOJ
further considers the likelihood that airlines entering these markets
would counteract any anticompetitive effects. It also considers any
efficiencies that a merger or acquisition could bring”for example,
consumer benefits from an expanded route network. Finally, it examines
whether one of the airlines proposing to merge would fail and its
assets exit the market in the absence of a merger.
One of the most important issues in this merger will be its effect on
competition in the airline industry. For example, GAO‘s analysis of
2009 ticket data showed that combining these airlines would result in
a loss of one effective competitor (defined as having at least 5
percent of total traffic between airports) in 1,135 markets (called
airport pairs) affecting almost 35 million passengers while creating a
new effective competitor in 173 airport pairs affecting almost 9.5
million passengers (figure). However, in all but 10 of these airports
pairs there is at least one other competitor.
Figure: Change in Effective Competitors for Airport-Pair Markets from
United-Continental Combination, 2009:
[Refer to PDF for image: vertical bar graph]
Change in number of competitors: 2-1;
Number of competitors decreased: 10 markets.
Change in number of competitors: 3-2;
Number of competitors decreased: 120 markets.
Change in number of competitors: 4-3;
Number of competitors decreased: 454 markets.
Change in number of competitors: 5-4;
Number of competitors decreased: 387 markets.
Change in number of competitors: 6-5;
Number of competitors decreased: 143 markets.
Change in number of competitors: 7-6;
Number of competitors decreased: 21 markets.
Change in number of competitors: 1-2;
Number of competitors increased: 13 markets.
Change in number of competitors: 2-3;
Number of competitors increased: 61 markets.
Change in number of competitors: 3-4;
Number of competitors increased: 73 markets.
Change in number of competitors: 4-5;
Number of competitors increased: 22 markets.
Change in number of competitors: 5-6;
Number of competitors increased: 4 markets.
Source: GAO analysis of DOT Origin and Destination Ticket Data.
[End of figure]
View [hyperlink, http://www.gao.gov/products/GAO-10-778T] or key
components. For more information, contact Susan Fleming at (202) 512-
2834 or flemings@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
We appreciate the opportunity to provide a statement for the record on
the potential implications of the merger proposal recently announced
by United Air Lines (United) and Continental Airlines (Continental).
Earlier this month, these two airlines announced plans for United to
merge with Continental through a stock swap the airlines valued at $8
billion. This follows the acquisition of Northwest Airlines
(Northwest) by Delta Air Lines (Delta) in 2008, which propelled Delta
to become the largest airline in the United States. The United-
Continental merger, if not challenged by the Department of Justice
(DOJ), would surpass Delta's in scope to create the largest passenger
airline in terms of capacity in the United States. However, as with
any proposed merger of this magnitude, this one will be carefully
examined by DOJ to determine if its potential benefits for consumers
outweigh the potential negative effects.
Extensive research and the experience of millions of Americans
underscore the benefits that have flowed to most consumers from the
1978 deregulation of the airline industry, including dramatic
reductions in fares and expansion of service. These benefits are
largely attributable to increased competition from the entry of new
airlines into the industry and established airlines into new markets.
At the same time, however, airline deregulation has not benefited
everyone; some communities--especially smaller communities--have
suffered from relatively high airfares and a loss of service. We have
been analyzing aviation competition issues since the enactment of the
Airline Deregulation Act of 1978.[Footnote 1] Our work over the last
decade has focused on the challenges to competition and industry
performance, including the financial health of the airline industry,
the growth of low-cost airlines, changing business models of airlines,
and prior mergers.[Footnote 2] In the airline context, DOJ has the
primary responsibility to evaluate most mergers in order to carry out
its antitrust responsibilities.[Footnote 3] In its review, DOJ
considers a number of factors, including increases in market
concentration; potential adverse effects on competition; the
likelihood of new entry in affected markets and possible counteraction
of anticompetitive effects that the merger may have posed; verified
"merger specific" efficiencies or other competitive benefits; and
whether, absent the merger, one of the airlines is likely to fail and
its assets exit the market.
This statement presents (1) an overview of the factors that are
driving mergers in the airline industry, (2) the role of federal
authorities in reviewing merger proposals, and (3) key issues
associated with the proposed merger of United and Continental. This
statement is based on two previously issued reports--our 2008 report
for this Committee on airline mergers and our 2009 report on the
financial condition of the airline industry and the various effects of
the industry's contraction on passengers and communities[Footnote 4]--
as well as our other past work on aviation issues. In addition, we
conducted some analysis of the proposed United and Continental merger,
including analysis of the airlines' financial, labor, fleet, and
market conditions.
To identify the factors that help drive mergers in the airline
industry, we relied on information developed for our 2008 and 2009
reports on the airline industry, updated as necessary. To describe the
role of federal authorities, in particular DOJ and the Department of
Transportation (DOT), in reviewing airline merger proposals we relied
on information developed for our 2008 report, also updated as
necessary.[Footnote 5] To identify the key issues associated with the
proposed merger of United and Continental, we reviewed airline merger
documents and financial analyst reports and analyzed data submitted by
the airlines to DOT (Bureau of Transportation Statistics financial
Form 41, origin and destination ticket, and operations data). We also
analyzed airline schedule data. We assessed the reliability of these
data by (1) performing electronic testing of required data elements,
(2) reviewing existing information about the data and the system that
produced them, and (3) interviewing agency officials knowledgeable
about the data. We determined that the data were sufficiently reliable
for the purposes of this report. We conducted this audit work in May
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
On May 3, 2010, United and Continental announced an agreement to merge
the two airlines. The new airline would retain the United name and
headquarters in Chicago while the current Continental Chief Executive
Officer would keep that title with the new airline. The proposed
merger will be financed exclusively through an all-stock transaction
with a combined equity value of $8 billion split roughly with 55
percent ownership to United shareholders and 45 percent to Continental
shareholders. The airlines have not announced specific plans for
changes in their networks or operations that would occur if the
proposed merger is not challenged by DOJ.
The airline industry has experienced considerable merger and
acquisition activity since its early years, especially immediately
following deregulation in 1978 (fig. 1 provides a timeline of mergers
and acquisitions for the seven largest surviving airlines). A flurry
of mergers and acquisitions during the 1980s, when Delta Air Lines and
Western Airlines merged, United Airlines acquired Pan Am's Pacific
routes, Northwest acquired Republic Airlines, and American Airlines
and Air California merged. In 1988, merger and acquisition review
authority was transferred from the Department of Transportation (DOT)
to DOJ. Since 1998, despite tumultuous financial periods, fewer
mergers and acquisitions have occurred. In 2001, American Airlines
acquired the bankrupt airline TWA, in 2005 America West acquired US
Airways while the latter was in bankruptcy, and, in October 2008,
Delta acquired Northwest. Certain other attempts at merging in the
last decade failed because of opposition from DOJ or from employees
and creditors. For example, in 2000, an agreement was reached that
allowed Northwest to acquire a 50 percent stake in Continental (with
limited voting power) to resolve the antitrust suit brought by DOJ
against Northwest's proposed acquisition of a controlling interest in
Continental.[Footnote 6] A proposed merger of United Airlines and US
Airways in 2000 also resulted in opposition from DOJ, which found
that, in its view, the merger would violate antitrust laws by reducing
competition, increasing air fares, and harming consumers on airline
routes throughout the United States. Although DOJ expressed its intent
to sue to block the transaction, the parties abandoned the transaction
before a suit was filed. More recently, the 2006 proposed merger of US
Airways and Delta fell apart because of opposition from Delta's pilots
and some of its creditors, as well as its senior management.
Figure 1: Highlights of Domestic Airline Mergers and Acquisitions:
[Refer to PDF for image: illustrated timeline]
Airline: Alaska;
1934: McGee Airways;
1937: Renamed Star Airlines;
1942: Renamed Alaska Airlines;
1968: Alaska Coastal-Ellis, Cordova (Acquisition or merger);
1986: Horizon Air, Jet America Airlines (Acquisition or merger).
Airline: American;
1934: Other event;
1970: Trans Caribbean Airways (Acquisition or merger);
1986: Air California (Acquisition or merger);
1990: Eastern Airlines Latin American routes (Acquisition or merger);
1999: Reno Air (Acquisition or merger);
2001: TWA (Acquisition or merger).
Airline: Continental;
1934: Varney Speed Lines;
1937: Renamed Continental;
1953: Pioneer Airlines (Acquisition or merger);
1968: Air Micronesia subsidiary formed;
1982: Acquired by Texas International Air (Acquisition or merger);
1986: People Express (Frontier) (Acquisition or merger);
1987: New York Air(Acquisition or merger).
Airline: Delta;
1929: Other event;
1953: Chicago and Southern Air Lines (Acquisition or merger);
1972: Northeast Airlines (Acquisition or merger);
1987: Western Airlines (Acquisition or merger);
1991: Pan Am trans-atlantic routes and shuttle (Acquisition or merger);
2000: ASA and Comair (Acquisition or merger);
2008: Northwest (Acquisition or merger).
Airline: Southwest;
1971: Other event;
1994: Morris Air (Acquisition or merger).
Airline: United;
1934: Other event;
1962: Capital Airlines (Acquisition or merger);
1986: Pan Am Pacific routes (Acquisition or merger);
1990: Pan Am London routes (Acquisition or merger);
1991: Pan AM Latin American routes (Acquisition or merger).
Airline: US Airways;
1937: All-American Airways;
1953: Renamed Allegheny Airlines;
1968: Lake Central Airlines (Acquisition or merger);
1972: Mohawk (Acquisition or merger);
1986: Empire Airlines acquired by Piedmont (Acquisition or merger);
1988: PSA (Acquisition or merger);
1988: Piedmont Airlines (Acquisition or merger);
2005: America West merger (Acquisition or merger).
Sources: Cathay Financial and airline company documents.
[End of figure]
Since deregulation in 1978, the financial stability of the airline
industry has become a considerable concern for the federal government
owing, in part, to the level of financial assistance it has provided
to the industry by assuming terminated pension plans and other forms
of assistance. Between 1978 and 2008, there have been over 160 airline
bankruptcies. While most of these bankruptcies affected small airlines
that were eventually liquidated, 4 of the more recent bankruptcies
(Delta, Northwest, United, and US Airways) are among the largest
corporate bankruptcies ever, excluding financial services firms.
During these bankruptcies, United and US Airways terminated their
pension plans and $9.7 billion in claims was shifted to the Pension
Benefit Guarantee Corporation (PGBC).[Footnote 7] Furthermore, to
respond to the shock to the industry from the September 11, 2001,
terrorist attacks, the federal government provided airlines with $7.4
billion in direct assistance and authorized $1.6 billion (of $10
billion available) in loan guarantees to six airlines.[Footnote 8]
Although the airline industry has experienced numerous mergers and
bankruptcies since deregulation, growth of existing airlines and the
entry of new airlines have contributed to a steady increase in
capacity, as measured by available seat miles. Previously, we reported
that although one airline may reduce capacity or leave the market,
capacity returns relatively quickly.[Footnote 9] Likewise, while past
mergers and acquisitions have, at least in part, sought to reduce
capacity, any resulting declines in industry capacity have been short-
lived, as existing airlines have expanded or new airlines have
expanded. Capacity growth has slowed or declined just before and
during recessions, but not as a result of large airline liquidations.
Airline Mergers Are Driven by Financial and Competitive Pressures, but
Challenges Exist:
Volatile earnings and structural changes in the industry have spurred
some airlines to explore mergers as a way to increase their
profitability and financial viability. Over the last decade, the U.S.
passenger airline industry has incurred more than $15 billion in
operating losses. Several major airlines went through bankruptcy to
reduce their costs and restructure their operations, while others
ceased to operate or were acquired. Most recently, U.S. airlines
responded to volatile fuel prices and then a weakening economy by
cutting their capacity, reducing their fleets and workforces, and
instituting new fees, but even with these actions, the airlines
experienced over $5 billion in operating losses in 2008 before posting
an operating profit of about $1 billion in 2009.[Footnote 10]
Furthermore, over the last decade, airfares have generally declined
(in real terms), owing largely to the increased presence of low-cost
airlines, such as Southwest Airlines, in more markets and the
shrinking dominance of a single airline in many markets.
One of the primary financial benefits that airlines consider when
merging with another airline is the cost reduction that may result
from combining complementary assets, eliminating duplicative
activities, and reducing capacity. A merger or acquisition could
enable the combined airline to reduce or eliminate duplicative
operating costs, such as duplicative service, labor, and operations
costs--including inefficient (or redundant) hubs or routes--or to
achieve operational efficiencies by integrating computer systems and
similar airline fleets. Other cost savings may stem from facility
consolidation, procurement savings, and working capital and balance
sheet restructuring, such as renegotiating aircraft leases. Airlines
may also pursue mergers or acquisitions to more efficiently manage
capacity--both to reduce operating costs and to generate revenue--in
their networks. Given recent economic pressures, particularly
increased fuel costs, the opportunity to lower costs by reducing
redundant capacity may be especially appealing to airlines seeking to
merge. Experts have said that industry mergers and acquisitions could
lay the foundation for more rational capacity reductions in highly
competitive domestic markets and could help mitigate the significant
impact that economic cycles have historically had on airline cash flow.
The other primary financial benefit that airlines consider with
mergers and acquisitions is the potential for increased revenues
through additional demand, which may be achieved by more seamless
travel to more destinations and increased market share and higher
fares on some routes.
* Increased demand from an expanded network: An airline may seek to
merge with or acquire an airline as a way to generate greater revenues
from an expanded network, which serves more city-pair markets and
better serves passengers. Mergers and acquisitions may generate
additional demand by providing consumers more domestic and
international city-pair destinations. Airlines with expansive domestic
and international networks and frequent flier benefits particularly
appeal to business traffic, especially corporate accounts. Results
from a recent Business Traveler Coalition (BTC) survey indicate that
about 53 percent of the respondents were likely to choose a particular
airline based on the extent of its route network.[Footnote 11]
Therefore, airlines may use a merger or acquisition to enhance their
networks and gain complementary routes, potentially giving the
combined airline a stronger platform from which to compete in highly
profitable markets.
* Increased market share and higher fares on some routes: Capacity
reductions in certain markets after a merger could also serve to
generate additional revenue through increased fares on some routes.
Some studies of airline mergers and acquisitions during the 1980s
showed that prices were higher on some routes from the airline's hubs
soon after the combination was completed.[Footnote 12] Several studies
have also shown that increased airline dominance at an airport results
in increased fare premiums, in part because of competitive barriers to
entry.[Footnote 13] At the same time, though, even if the combined
airline is able to increase prices in some markets, the increase may
be transitory if other airlines enter the markets with sufficient
presence to counteract the price increase. In an empirical study of
airline mergers and acquisitions up to 1992, Winston and Morrison
suggest that being able to raise prices or stifle competition does not
play a large role in airlines' merger and acquisition decisions.
[Footnote 14]
Cost reductions and the opportunity to obtain increased revenue could
bolster a merged airline's financial condition, enabling the airline
to better compete in a highly competitive international environment.
Many industry experts believe that the United States will need larger,
more economically stable airlines to be able to compete with the
merging and larger foreign airlines that are emerging in the global
economy. The airline industry is becoming increasingly global; for
example, the Open Skies agreement between the United States and the
European Union became effective in March 2008.[Footnote 15]
Despite these benefits, there are several potential barriers to
successfully consummating a merger. The most significant operational
challenges involve the integration of workforces, aircraft fleets, and
information technology systems and processes, which can be difficult,
disruptive, and costly as the airlines integrate.[Footnote 16]
* Workforce integration: Workforce integration is often particularly
challenging and expensive and involves negotiation of new labor
contracts. Labor groups--including pilots, flight attendants, and
mechanics--may be able to demand concessions from the merging airlines
during these negotiations, several experts explained, because labor
support would likely be required for a merger or acquisition to be
successful. Some experts also note that labor has often opposed
mergers, fearing employment or salary reductions. Obtaining agreement
from each airline's pilots' union on an integrated pilot seniority
list--which determines pilots' salaries, as well as what equipment
they can fly--may be particularly difficult. According to some
experts, as a result of these labor integration issues and the
challenges of merging two work cultures, airline mergers have
generally been unsuccessful. For example, although the 2005 America
West-US Airways merger has been termed a successful merger by many
industry observers, labor disagreements over employee seniority, and
especially pilot seniority, are not fully resolved. More recently,
labor integration issues derailed merger talks--albeit temporarily--
between Northwest and Delta in early 2008, when the airlines' labor
unions were unable to agree on pilot seniority list integration.
Furthermore, the existence of distinct corporate cultures can
influence whether two firms will be able to merge their operations
successfully. For example, merger discussions between United and US
Airways broke down in 1995 because the employee-owners of United
feared that the airlines' corporate cultures would clash.
* Fleet integration: The integration of two disparate aircraft fleets
may also be costly. Combining two fleets may increase costs associated
with pilot training, maintenance, and spare parts. These costs may,
however, be reduced after the merger by phasing out certain types of
aircraft from the fleet mix. Pioneered by Southwest Airlines and
copied by other low-cost airlines, simplified fleets have enabled
airlines to lower costs by streamlining maintenance operations and
reducing training times. If an airline can establish a simplified
fleet, or "fleet commonality"--particularly by achieving an efficient
scale in a particular aircraft--then many of the cost efficiencies of
a merger or acquisition may be set in motion by facilitating pilot
training, crew scheduling, maintenance integration, and inventory
rationalization.
* Information technology integration: Finally, integrating information
technology processes and systems can also be problematic and time-
consuming after a merger. For example, officials at US Airways told us
that while some cost reductions were achieved within 3 to 6 months of
its merger with America West, the integration of information
technology processes took nearly 2 ½ years. Systems integration issues
are increasingly daunting as airlines attempt to integrate a complex
mix of modern in-house systems, dated mainframe systems, and
outsourced information technology. The US Airways-America West merger
highlighted the potential challenges associated with combining
reservation systems, as there were initial integration problems.
The Department of Justice's Antitrust Review Is a Critical Step in the
Airline Merger and Acquisition Process:
DOJ's review of airline mergers and acquisitions is a key step for
airlines hoping to consummate a merger. For airlines, as with other
industries, DOJ uses an analytical framework set forth in the
Horizontal Merger Guidelines (the Guidelines) to evaluate merger
proposals. Footnote 17] In addition, DOT plays an advisory role for
DOJ and, if the combination is consummated, may conduct financial and
safety reviews of the combined entity under its regulatory authority.
Most proposed airline mergers or acquisitions must be reviewed by DOJ
as required by the Hart-Scott-Rodino Act. In particular, under the
act, an acquisition of voting securities or assets above a set
monetary amount must be reported to DOJ (or the Federal Trade
Commission (FTC) for certain industries) so the department can
determine whether the merger or acquisition poses any antitrust
concerns.[Footnote 18] To analyze whether a proposed merger or
acquisition raises antitrust concerns--whether the proposal will
create or enhance market power or facilitate its exercise[Footnote
19]--DOJ follows an integrated five-part analytical process set forth
in the Guidelines.[Footnote 20] First, DOJ defines the relevant
product and geographic markets in which the companies operate and
determines whether the merger is likely to significantly increase
concentration in those markets. Second, DOJ examines potential adverse
competitive effects of the merger, such as whether the merged entity
will be able to charge higher prices or restrict output for the
product or service it sells. Third, DOJ considers whether other
competitors are likely to enter the affected markets and whether they
would counteract any potential anticompetitive effects that the merger
might have posed. Fourth, DOJ examines the verified "merger specific"
efficiencies or other competitive benefits that may be generated by
the merger and that cannot be obtained through any other means. Fifth,
DOJ considers whether, absent the merger or acquisition, one of the
firms is likely to fail, causing its assets to exit the market. The
commentary to the Guidelines makes clear that DOJ does not apply the
Guidelines as a step-by-step progression, but rather as an integrated
approach in deciding whether the proposed merger or acquisition would
create antitrust concerns.
In deciding whether the proposed merger is likely anticompetitive DOJ
considers the particular circumstances of the merger as it relates to
the Guidelines' five-part inquiry. The greater the potential
anticompetitive effects, the greater must be the offsetting verifiable
efficiencies for DOJ to clear a merger. However, according to the
Guidelines, efficiencies almost never justify a merger if it would
create a monopoly or near monopoly. If DOJ concludes that a merged
airline threatens to deprive consumers of the benefits of competitive
air service, then it will seek injunctive relief in a court proceeding
to block the merger from being consummated. In some cases, the parties
may agree to modify the proposal to address anticompetitive concerns
identified by DOJ--for example, selling airport assets or giving up
slots at congested airports--in which case DOJ ordinarily files a
complaint with the court along with a consent decree that embodies the
agreed-upon changes.
DOT conducts its own analyses of airline mergers and acquisitions.
While DOJ is responsible for upholding antitrust laws, DOT conducts
its own competitive analysis and provide it to DOJ in an advisory
capacity. DOT reviews the merits of any airline merger or acquisition
and submits its views and relevant information in its possession to
DOJ. DOT also provides some essential data that DOJ uses in its
review. In addition, presuming the merger moves forward after DOJ
review, DOT can undertake several other reviews if the situation
warrants. Before commencing operations, any new, acquired, or merged
airlines must obtain separate authorizations from DOT--"economic"
authority from the Office of the Secretary and "safety" authority from
the Federal Aviation Administration (FAA). The Office of the Secretary
is responsible for deciding whether applicants are fit, willing, and
able to perform the service or provide transportation. To make this
decision, the Secretary assesses whether the applicants have the
managerial competence, disposition to comply with regulations, and
financial resources necessary to operate a new airline. FAA is
responsible for certifying that the aircraft and operations conform to
the safety standards prescribed by the Administrator--for instance,
that the applicants' manuals, aircraft, facilities, and personnel meet
federal safety standards. Also, if a merger or other corporate
transaction involves the transfer of international route authority,
DOT is responsible for assessing and approving all transfers to ensure
that they are consistent with the public interest.[Footnote 21]
In Creating the Largest U.S. Passenger Airline, a United-Continental
Merger May Face Integration Challenges and Analysis of Some
Overlapping Markets:
If not challenged by DOJ, the merged United-Continental would surpass
Delta as the largest U.S. passenger airline. As table 1 indicates,
combining United and Continental Airlines would create the largest
U.S. airline based on 2009 capacity as measured by available seat
miles, and a close second based on total assets and operating revenue.
The combined airline would also have the largest workforce among U.S.
airlines based on March 2010 employment statistics, with a combined
76,900 employees as measured by full-time-equivalent employees (table
2). The airlines' workforces are represented by various unions, and in
some cases the same union represents similar employee groups, such as
the union for the pilots (table 3). Finally, the combined airline
would need to integrate 692 aircraft (table 4). The two airlines share
some of the same aircraft types, which could make integration easier.
Table 1: Total Assets, Operating Revenue, and Capacity of Major U.S.
Airlines (2009):
United-Continental;
Capacity as measured by available seat miles (thousands): 217,166,074;
Total assets: $125,742,402;
Total operating revenue: $28,720,624.
Delta;
Capacity as measured by available seat miles (thousands): 197,701,800;
Total assets: 195,546,148;
Total operating revenue: 28,909,882.
American;
Capacity as measured by available seat miles (thousands): 151,772,113;
Total assets: 89,629,364;
Total operating revenue: 19,898,245.
Southwest;
Capacity as measured by available seat miles (thousands): 98,170,797;
Total assets: 55,190,553;
Total operating revenue: 10,350,338.
US Airways;
Capacity as measured by available seat miles (thousands): 70,721,007;
Total assets: 28,901,241;
Total operating revenue: 10,780,838.
Airtran;
Capacity as measured by available seat miles (thousands): 23,304,612;
Total assets: 8,649,482;
Total operating revenue: 2,341,442.
Alaska;
Capacity as measured by available seat miles (thousands): 23,148,960;
Total assets: 18,045,385;
Total operating revenue: 3,005,999.
Source: GAO analysis of Bureau of Transportation Statistics Form 41
data.
[End of table]
Table 2: Full-Time-Equivalent Employees of Top U.S. Airlines (March
2010):
Rank: 1;
Airline: Delta;
Total full-time-equivalent employees (thousands): 74.7.
Rank: 2;
Airline: American[A];
Total full-time-equivalent employees (thousands): 75.2.
Rank: 3;
Airline: United;
Total full-time-equivalent employees (thousands): 43.7.
Rank: 4;
Airline: Southwest;
Total full-time-equivalent employees (thousands): 34.6.
Rank: 5;
Airline: Continental;
Total full-time-equivalent employees (thousands): 33.2.
Rank: 6;
Airline: US Airways;
Total full-time-equivalent employees (thousands): 29.5.
Rank: 7;
Airline: JetBlue;
Total full-time-equivalent employees (thousands): 11.2.
Rank: 8;
Airline: Alaska;
Total full-time-equivalent employees (thousands): 9.2.
Source: GAO analysis of Bureau of Transportation Statistics data.
[A] Includes American Eagle.
[End of table]
Table 3: Union Representation for Various Employee Groups:
United;
Employee groups: Pilots: Air Line Pilots Association (ALPA);
Employee groups: Flight attendants: Association of Flight Attendants
(AFA);
Employee groups: Mechanics: International Brotherhood of Teamsters
(IBT);
Employee groups: Public contact, ramp and stores, and other workers:
International Association of Machinists (IAM);
Employee groups: Dispatchers: Professional Airline Flight Control
Association (PAFCA).
Continental;
Employee groups: Pilots: ALPA;
Employee groups: Flight attendants: IAM;
Employee groups: Mechanics: IBT;
Employee groups: Fleet service: IBT;
Employee groups: Ticket agents: Nonunion;
Employee groups: Dispatchers: Transport Workers Union (TWU).
Source: United Air Lines and Continental Airlines.
Note: In addition, The International Federation of Professional and
Technical Engineers (IFPTE) represent more than 260 United engineers
and related employees.
[End of table]
Table 4: United and Continental Aircraft Fleet:
Aircraft: Boeing 737;
United: [Empty];
Continental: 226;
Merged: 226.
Aircraft: Boeing 747;
United: 24;
Continental: [Empty];
Merged: 24.
Aircraft: Boeing 757;
United: 96;
Continental: 61;
Merged: 157.
Aircraft: Boeing 767;
United: 35;
Continental: 26;
Merged: 61.
Aircraft: Boeing 777;
United: 52;
Continental: 20;
Merged: 72.
Aircraft: Airbus 319/320;
United: 152;
Continental: [Empty];
Merged: 152.
Aircraft: Total;
United: 359;
Continental: 333;
Merged: 692.
Source: United Air Lines.
[End of table]
If not challenged by DOJ, the airlines would attempt to combine two
distinct networks, United with major hubs, where the airline connects
traffic feeding from smaller airports, in San Francisco (SFO), Los
Angeles (LAX), Denver (DEN), Chicago O'Hare (ORD), and Washington DC
Dulles (IAD) and Continental with hubs in Houston Intercontinental
(IAH), Cleveland (CLE), Guam (GUM), and New York Newark (EWR), as
shown in figure 2.
Figure 4: United and Continental Domestic Route Maps (May 2010):
[Refer to PDF for image: route maps]
Route maps depict routes flown for:
Continental (excluding Guam);
United.
Source: agpDat, Diio LLC.
[End of figure]
The amount of overlap in airport-pair combinations between the two
airlines' networks is considerable if considering all connecting
traffic; however, for most of the overlapping airport-pair markets
there is at least one other competitor. Based on 2009 ticket sample
data, for 13,515 airport pairs with at least 520 passengers per year,
there would be a loss of one effective competitor in 1,135 airport-
pair markets[Footnote 22] affecting almost 35 million passengers by
merging these airlines (see fig. 3).[Footnote 23] However, only 10 of
these airport-pair markets would not have any other competitors in it
after a merger. In addition, any effect on fares would be dampened by
the presence of a low-cost airline in 431 of the 1,135 airport pairs
losing a competitor.[Footnote 24] The combination of the two airlines
would also create a new effective competitor in 173 airport-pair
markets affecting almost 9.5 million passengers.
Figure 3: Change in Effective Competition from United-Continental
Combination (2009):
[Refer to PDF for image: vertical bar graph]
Change in number of competitors: 2-1;
Number of competitors decreased: 10 markets.
Change in number of competitors: 3-2;
Number of competitors decreased: 120 markets.
Change in number of competitors: 4-3;
Number of competitors decreased: 454 markets.
Change in number of competitors: 5-4;
Number of competitors decreased: 387 markets.
Change in number of competitors: 6-5;
Number of competitors decreased: 143 markets.
Change in number of competitors: 7-6;
Number of competitors decreased: 21 markets.
Change in number of competitors: 1-2;
Number of competitors increased: 13 markets.
Change in number of competitors: 2-3;
Number of competitors increased: 61 markets.
Change in number of competitors: 3-4;
Number of competitors increased: 73 markets.
Change in number of competitors: 4-5;
Number of competitors increased: 22 markets.
Change in number of competitors: 5-6;
Number of competitors increased: 4 markets.
Source: GAO analysis of DOT Origin and Destination Ticket Data.
Note: All origin and destination airport pairs with at least 520
passengers. A competitor holds at least 5 percent of market share.
[End of figure]
In examining nonstop overlapping airport pairs between United and
Continental, the extent of overlap is less than for connecting
traffic. However, the loss of a competitor in these nonstop markets is
also more significant because nonstop service is typically preferred
by some passengers. For example, based on January 2010 traffic data,
the two airlines overlap on 12 nonstop airport-pair routes, which are
listed in figure 4.[Footnote 25] For 7 of these 12 nonstop overlapping
airport-pair routes (generally between a United hub and a Continental
hub), there are currently no other competitors. However, of these 7
airport-pair markets, all but the Cleveland-Denver market may have
relevant competition between other airports in at least one of the
endpoint cities. For example, passengers traveling from San Francisco
(SFO) to Newark (EWR) could consider airlines serving other airports
at both endpoints--Oakland or San Jose instead of SFO and John F.
Kennedy (JFK) or LaGuardia instead of EWR.
Figure 6: Total Passengers on Overlapping Nonstop Airport Pairs
(January 2010):
[Refer to PDF for image: horizontal bar graph]
Route: Honolulu to Los Angeles International;
American: 26% (37,034);
Continental: 5% (7,116);
Delta: 23% ; (32,966);
Frontier: 0;
Hawaiian: 19% (27,495)
United: 27% (36,674).
Route: Denver International to George Bush Intercontinental (Houston);
American: 0;
Continental: 54% (49,141);
Delta: 0;
Frontier: 16% (14,603);
Hawaiian: 0;
United: 30% (27,827).
Route: Newark Liberty International to O‘Hare International (Chicago);
American: 27% (20,598);
Continental: 33% (25,538);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 40% (31,154).
Route: George Bush Intercontinental (Houston) to San Francisco
International;
American: 0;
Continental: 90% (51,549);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 10% (5,997).
Route: Newark Liberty International to San Francisco International;
American: 0;
Continental: 74% (40,395);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 26% (14,072).
Route: Cleveland to O‘Hare International (Chicago);
American: 30% (14,225);
Continental: 23% (10,788);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 47% (22,153).
Route: Denver International to Newark Liberty International;
American: 0;
Continental: 54% (21,297);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 46% (17,811).
Route: Newark Liberty International to Dulles International
(Washington DC);
American: 0;
Continental: 40% (6,264);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 60% (9,436).
Route: Dulles International (Washington DC) to George Bush
Intercontinental (Houston);
American: 0;
Continental: 43% (6,157);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 57% (8,166).
Route: Cleveland to Denver International;
American: 0;
Continental: 52% (6,848);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 48% (6,374).
Route: Cleveland to Dulles International (Washington DC);
American: 0;
Continental: 15% (1,215);
Delta: 0;
Frontier: 0;
Hawaiian: 0;
United: 85% (6,844).
Route: George Bush Intercontinental (Houston) to O‘Hare International
(Chicago);
American: 13% (9,951);
Continental: 64% (48,597);
Delta: 0;
Frontier: 0;
Hawaiian: 23% (17,666);
United: 0.
Source: DOT T-100 data.
[End of figure]
If not challenged by DOJ, the combined airline could be expected to
rationalize its network over time, including where it maintains hubs.
Currently, the two airlines do not have much market share that
overlaps at their respective hubs (see table 5). However, it is
uncertain whether the combined airline would retain eight domestic
hubs. There is considerable overlap between markets served by United
out of Chicago (ORD) and Continental out of Cleveland (CLE). For
example, 52 out of 62 domestic airports served by Continental from
Cleveland are also served by United from Chicago (ORD).
Table 5: Passenger Market Share at Hub Airports (2009):
Continental hub airports: Houston (IAH);
Continental share: 72%;
United share: 5%;
Total: 77%.
Continental hub airports: Newark (EWR);
Continental share: 68%;
United share: 5%;
Total: 73%.
Continental hub airports: Cleveland (CLE);
Continental share: 53%;
United share: 6%;
Total: 59%.
United hub airports: Washington Dulles (IAD);
United share: 51%;
Continental share: 1%;
Total: 52%.
United hub airports: Chicago (ORD);
United share: 38%;
Continental share: 4%;
Total: 42%.
United hub airports: San Francisco (SFO);
United share: 33%;
Continental share: 6%;
Total: 39%.
United hub airports: Denver (DEN);
United share: 29%;
Continental share: 4%;
Total: 33%.
United hub airports: Los Angeles (LAX);
United share: 17%;
Continental share: 6%;
Total: 23%.
Source: GAO analysis of DOT Origin and Destination ticket data.
[End of table]
Both United and Continental have extensive world wide networks and
serve many international destinations. Between the two airlines, over
100 international cities are served from the United States. The two
airlines do not directly compete on a city-to-city route basis for any
international destinations. Nevertheless, for international routes,
airlines aggregate traffic from many domestic locations at a hub
airport where passengers transfer onto international flights. In other
words, at Newark, where Continental has a large hub, passengers
traveling from many locations across the United States onto
Continental's international flights. Likewise, United aggregates
domestic traffic at its Washington Dulles hub for many of its
international flights. Hence, a passenger traveling from, for example
Nashville, may view these alternative routes to a location in Europe
as substitutable. Continental and United serve many of the same
international destinations in Europe and the Americas from their
Newark and Dulles hubs, respectively. These destinations include
Amsterdam, Brussels, Frankfort, London, Montreal, Paris, Rome, Sao
Paulo, and Toronto. Similarly, both airlines also serve many
international destinations from their Midwest hubs--most notably
United's hub at Chicago and Continental's hub at Houston. Such
destinations include Amsterdam, Cancun, Edmonton, London, Paris, San
Jose Cabo, Tokyo, and Vancouver. In total, according to current
schedules, they serve 30 common international destinations,
representing 65 percent of their total international seat capacity.
Whether service to international destinations from different domestic
hubs will be viewed as a competitive concern will likely depend on a
host of factors, such as the two airlines' market share of traffic to
that destination and whether there are any barriers to new airlines
entering or existing airlines expanding service at the international
destination airports.
To compete internationally, both Continental and United are part of
the Star Alliance, one of the three major international airline
alliances.[Footnote 26] In 2009, Continental left the SkyTeam Alliance
and joined the Star Alliance. As part of joining this alliance, the
Star Alliance members, including Continental, applied for antitrust
immunity, which allows the member airlines to coordinate schedules,
capacity, and pricing in selected markets. DOT has authority to
approve these antitrust immunity applications,[Footnote 27] but DOJ
may also comment if it has antitrust concerns. On June 26, DOJ filed
comments that objected to immunity for the alliance in some markets
and requested some conditions, called carve-outs, in which the
immunity would not be granted. On July 10, 2009, DOT approved the Star
Alliance application for antitrust immunity but with special
conditions, including carve-outs.[Footnote 28] Among the markets not
granted immunity were New York-Copenhagen, New York-Lisbon, New York-
Geneva, New York-Stockholm, Cleveland-Toronto, Houston-Calgary,
Houston-Toronto, New York-Ottawa, and U.S.-Beijing.[Footnote 29]
Contact and Acknowledgments:
For further information on this testimony, please contact Susan
Fleming at (202) 512-2834.
Individuals making key contributions to this statement include Paul
Aussendorf (Assistant Director), Amy Abramowitz, Lauren Calhoun,
Elizabeth Eisenstadt, Delwen Jones, Mitch Karpman, Heather Krause,
Sara Ann Moessbauer, Dominic Nadarski, and Josh Ormond.
[End of section]
Related GAO Products:
Airline Industry: Airline Industry Contraction Due to Volatile Fuel
Prices and Falling Demand Affects Airports, Passengers, and Federal
Government Revenues. [hyperlink,
http://www.gao.gov/products/GAO-09-393]. Washington, D.C.: April 21,
2009.
Airline Industry: Potential Mergers and Acquisitions Driven by
Financial Competitive Pressures. [hyperlink,
http://www.gao.gov/products/GAO-08-845]. Washington, D.C.: July 31,
2008.
Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of
Underlying Structural Issues. [hyperlink,
http://www.gao.gov/products/GAO-05-945]. Washington, D.C.: September
30, 2005.
Commercial Aviation: Preliminary Observations on Legacy Airlines'
Financial Condition, Bankruptcy, and Pension Issues. [hyperlink,
http://www.gao.gov/products/GAO-05-835T]. Washington, D.C.: June 22,
2005.
Airline Deregulation: Reregulating the Airline Industry Would Likely
Reverse Consumer Benefits and Not Save Airline Pensions. [hyperlink,
http://www.gao.gov/products/GAO-06-630]. Washington, D.C.: June 9,
2005.
Private Pensions: Airline Plans' Underfunding Illustrates Broader
Problems with the Defined Benefit Pension System. [hyperlink,
http://www.gao.gov/products/GAO-05-108T]. Washington, D.C.: October 7,
2004.
Commercial Aviation: Legacy Airlines Must Further Reduce Costs to
Restore Profitability. [hyperlink,
http://www.gao.gov/products/GAO-04-836]. Washington, D.C.: August 11,
2004.
Transatlantic Aviation: Effects of Easing Restrictions on U.S.-
European Markets. [hyperlink, http://www.gao.gov/products/GAO-04-835].
Washington, D.C.: July 21, 2004.
Commercial Aviation: Despite Industry Turmoil, Low-Cost Airlines Are
Growing and Profitable. [hyperlink,
http://www.gao.gov/products/GAO-04-837T]. Washington, D.C.: June 3,
2004.
Commercial Aviation: Financial Condition and Industry Responses Affect
Competition. [hyperlink, http://www.gao.gov/products/GAO-03-171T].
Washington, D.C.: October 2, 2002.
Commercial Aviation: Air Service Trends at Small Communities since
October 2000. [hyperlink, http://www.gao.gov/products/GAO-02-432].
Washington, D.C.: March 29, 2002.
Proposed Alliance Between American Airlines and British Airways Raises
Competition Concerns and Public Interest Issues. [hyperlink,
http://www.gao.gov/products/GAO-02-293R]. Washington, D.C: December
21, 2001.
Aviation Competition: Issues Related to the Proposed United Airlines-
US Airways Merger. [hyperlink,
http://www.gao.gov/products/GAO-01-212]. Washington, D.C: December 15,
2000.
[End of section]
Footnotes:
[1] Pub. L. No. 95-504, 92 Stat. 1705.
[2] A list of related GAO products is attached to this statement.
[3] Under the Hart-Scott-Rodino Act, an acquisition of voting
securities and/or assets above a set monetary amount must be reported
to DOJ (or the Federal Trade Commission for certain industries) so the
department can determine whether the merger or acquisition poses any
antitrust concerns. 15 U.S.C. § 18a(d)(1). Both DOJ and the Federal
Trade Commission have antitrust enforcement authority, including
reviewing proposed mergers and acquisitions. DOJ is the antitrust
enforcement authority charged with reviewing proposed mergers and
acquisitions in the airline industry.
[4] GAO, Airline Industry: Potential Mergers and Acquisitions Driven
by Financial and Competitive Pressures, [hyperlink,
http://www.gao.gov/products/GAO-08-845] (Washington, D.C.: July 31,
2008); and Commercial Aviation: Airline Industry Contraction Due to
Volatile Fuel Prices and Falling Demand Affects Airports, Passengers,
and Federal Government Revenues, [hyperlink,
http://www.gao.gov/products/GAO-09-393] (Washington, D.C.: Apr. 21,
2009).
[5] [hyperlink, http://www.gao.gov/products/GAO-08-845].
[6] GAO, Aviation Competition: Issues Related to the Proposed United
Airlines-US Airways Merger, [hyperlink,
http://www.gao.gov/products/GAO-01-212] (Washington, D.C.: Dec. 15,
2000) p. 10, footnote 6.
[7] PBGC was established under the Employee Retirement Income Security
Act of 1974 (ERISA) and set forth standards and requirements that
apply to defined benefit plans. PBGC was established to encourage the
continuation and maintenance of voluntary private pension plans and to
insure the benefits of workers and retirees in defined benefit plans
should plan sponsors fail to pay benefits. PGBC operations are
financed, for example, by insurance premiums paid by sponsors of
defined benefit plans, investment income, assets from pension plans
trusted by PBGC, and recoveries from the companies formerly
responsible for the plans.
[8] The six airlines receiving loan guarantees were Aloha, World,
Frontier, US Airways, ATA, and America West.
[9] GAO, Commercial Aviation: Bankruptcy and Pensions Problems Are
Symptoms of Underlying Structural Issues, [hyperlink,
http://www.gao.gov/products/GAO-05-945] (Washington, D.C.: Sept. 30,
2005).
[10] Collectively, U.S. airlines reduced domestic capacity, as
measured by the number of seats flown, by about 12 percent from the
fourth quarter of 2007 to the fourth quarter of 2009. As we reported
in April 2009, to reduce capacity, airlines reduced the overall number
of active aircraft in their fleets by eliminating mostly older, less
fuel-efficient, and smaller (50 or fewer seats) aircraft. Airlines
also collectively reduced their workforces by about 38,000 full-time-
equivalent positions, or about 9 percent, from the first quarter of
2008 to the first quarter of 2010. In addition to reducing capacity,
most airlines instituted new fees, such as those for checked baggage,
which resulted in $3.9 billion in added revenue during 2008 and 2009.
[11] Respondents were travel managers responsible for negotiating and
managing their firms' corporate accounts.
[12] See Severin Borenstein, "Airline Mergers, Airport Dominance, and
Market Power," American Economic Review, Vol. 80, May 1990, and Steven
A. Morrison, "Airline Mergers: A Longer View," Journal of Transport
Economics and Policy, September 1996; and Gregory J. Werden, Andrew J.
Joskow, and Richard L. Johnson, "The Effects of Mergers on Price and
Output: Two Case Studies from the Airline Industry," Managerial and
Decision Economics, Vol. 12, October 1991.
[13] See Severin Borenstein, 1989, "Hubs and High Fares: Dominance and
Market Power in the U.S. Airline Industry," RAND Journal of Economics,
20, 344-365; GAO, Airline Deregulation: Barriers to Entry Continue to
Limit Competition in Several Key Markets, [hyperlink,
http://www.gao.gov/products/GAO/RCED-97-4] (Washington, D.C.: Oct. 18,
1996); GAO, Airline Competition: Effects of Airline and Market
Concentration and Barriers to Entry on Airfares, [hyperlink,
http://www.gao.gov/products/GAO/RCED-91-101] (Washington, D.C.: Apr.
16, 1991).
[14] See Steven A. Morrison, and Clifford Winston, "The Remaining Role
for Government Policy in the Deregulated Airline Industry."
Deregulation of Network Industries: What's Next? Sam Peltzman and
Clifford Winston, eds. Washington, D.C., Brookings Institution Press,
2000 pp. 1-40.
[15] Open Skies seeks to enable greater access of U.S. airlines to
Europe, including expanded rights to pick up traffic in one country in
Europe and carry it to another European or third country (referred to
as fifth freedom rights). Additionally, the United States will expand
EU airlines' rights to carry traffic from the United States to other
countries.
[16] Airlines also face potential challenges to mergers and
acquisitions from DOJ's antitrust review, which is discussed in the
next section.
[17] The Guidelines were jointly developed by DOJ's Antitrust Division
and the Federal Trade Commission and describe the inquiry process the
two agencies follow in analyzing proposed mergers. The most current
version of the Guidelines was issued in 1992; Section 4, relating to
efficiencies, was revised in 1997. DOJ has proposed some changes in
the Guidelines to better reflect its merger review process and the
public comment period on these changes has been extended to June 4,
2010.
[18] See 15 U.S.C. § 18a(d)(1). Both DOJ and FTC have antitrust
enforcement authority, including reviewing proposed mergers and
acquisitions. DOJ is the antitrust enforcement authority charged with
reviewing proposed mergers and acquisitions in the airline industry.
Additionally, under the Hart-Scott-Rodino Act, DOJ has 30 days after
the initial filing to notify companies that intend to merge whether
DOJ requires additional information for its review. If DOJ does not
request additional information, the firms can close their deal (15
U.S.C. § 18a(b)). If more information is required, however, the
initial 30-day waiting period is followed by a second 30-day period,
which starts to run after both companies have provided the requested
information. Companies often attempt to resolve DOJ competitive
concerns, if possible, before the second waiting period expires. Any
restructuring of a transaction--e.g., through a divestiture--is
included in a consent decree entered by a court, unless the
competitive problem is unilaterally fixed by the parties before the
waiting period expires (called a "fix-it first").
[19] Market power is the ability to maintain prices profitably above
competitive levels for a significant period of time.
[20] United States Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines (Washington, D.C., rev. Apr. 8, 1997).
[21] 49 U.S.C. § 41105. DOT must specifically consider the transfer of
certificate authority's impact on the financial viability of the
parties to the transaction and on the trade position of the United
States in the international air transportation market, as well as on
competition in the domestic airline industry.
[22] It is generally preferable, time permitting, to assess city-pair,
rather than airport-pair, changes in competition. Some larger U.S.
cities (New York, Chicago, Los Angeles, Washington D.C.) have more
than one commercial airport that can compete for passenger traffic.
DOJ generally considers the relevant market to be a city-pair
combination.
[23] For this airport-pair analysis, we considered any airport-pair
market with less than 520 annual passengers to be too small to ensure
accuracy. We defined an effective competitor as having at least 5
percent of total airport-pair traffic. This is the same minimum market
share that we have previously applied to assess whether an airline has
sufficient presence in a market to affect competition. See GAO-08-845,
p. 21 and 42.
[24] We defined low-cost airlines as JetBlue, Frontier/Midwest,
AirTran, Allegiant, Spirit, Sun Country, and Southwest.
[25] In March 2010, Continental initiated nonstop service between Los
Angeles (LAX) and Kahului Airport (OGG) in Hawaii, which is also
served by United. This compares to 12 nonstop overlaps (7 highly
concentrated) in the Delta-Northwest merger.
[26] An airline alliance is an agreement between two or more airlines
to cooperate on a substantial level. The three largest passenger
airline alliances are the Star Alliance, SkyTeam and Oneworld.
Alliances provide a network of connectivity and convenience for
international passengers. Alliances also provide a marketing brand to
passengers making interairline codeshare connections within countries.
[27] 49 U.S.C. §§ 41308, 41309.
[28] Department of Transportation, Joint Application of Air Canada, et
al., Final Order, to Amend Order 2007-2-16 under 49 U.S.C. §§ 41308,
41309, DOT-OST-2008-0234 (July 10, 2009).
[29] In addition, the order modified and placed conditions on pre-
existing carve outs for this alliance.
[End of section]
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(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: