AAI Criticizes U.S. Department of Justice for Approving Merger of Northwest Airlines and Delta Airlines

The American Antitrust Institute (AAI) today criticized the U.S. Department of Justice (DOJ) Antitrust Division’s decision to close its investigation into the proposed merger of Northwest Airlines and Delta Airlines.  The merger, announced in April 2008, would combine the two carriers into the largest airline in the U.S.

 

“The DOJ’s explanation of their decision is a model of opacity and extraordinarily unhelpful in assisting outside observers in understanding the agency’s reasoning for approving this behemoth merger,” stated AAI Vice President and Senior Fellow Diana Moss.  “We are disturbed by what appears to be unsupported reasoning for the DOJ’s decision not to block the merger or at least to require divestitures to address clear competitive problems.”

 

In a tersely-worded statement released on October 29, the DOJ explained that Northwest and Delta currently compete with other legacy and low cost airlines on the vast majority of routes.  The statement goes on to say that the merger would likely result in efficiencies relating to airport operations, information technology, supply chain economics, and fleet optimization.  Finally, consumers would likely benefit from improved service resulting from combining the complementary aspects of the carriers’ networks.

 

The AAI originally urged the DOJ to block the proposed deal in a White Paper issued in July 2008. The analysis detailed the numerous competitive problems raised by combining the two legacy carriers, including reducing competition on specific routes (including hub-to-hub routes) and eliminating Delta or Northwest as a network or system competitor in the Midwest and eastern parts of the U.S.

 

“The DOJ fails to address the huge increases in market concentration on specific routes where both Northwest and Delta compete.  This conflicts with the requirements of its own merger guidelines,” Moss said. “Even if low cost carriers provide competition on those routes, the DOJ must address the fact that the merger will leave some markets seriously impaired.”  In its statement, the DOJ also sidesteps the merger’s effect on reducing competition in the network or system market—something the agency has focused on in previous airline merger cases.

 

The AAI has also expressed strong skepticism that larger networks will generate efficiencies or that entry by low cost carriers (LCCs) or other legacy airlines would be successful in disciplining post-merger fare increases, reductions in seat availability, potential hubs closures, and loss of choice for consumers.

 

“We continue to be skeptical of the DOJ’s liberal use of entry and efficiencies defenses to avoid blocking problematic mergers or to require rigorous remedies. We’ve seen it in Whirlpool/Maytag and XM/Sirius and now we see the same rationales in Northwest/Delta,” Moss explained.

 

The AAI’s skepticism about the weight placed by the DOJ on LLCs stems from the fact that legacy carriers and LLCs are fundamentally different kinds of competitors.  Legacy carriers operate hub-and-spoke networks while LLCs operate point-to-point systems.  Only two new major carriers have challenged the established legacy airlines in recent years—Southwest Airlines and Jet Blue.  But both took considerable time to develop into important competitive factors.  And, there has been more failure of LLCs than entry.

 

“These factors do not support the DOJ’s conclusion that entry by low cost carriers diminishes the harm to competition and consumers that is likely to result from the merger,” Moss concluded.

 

The AAI notes that the DOJ statement ignores clear evidence that combining large networks is not likely to produce greater cost-savings. The DOJ statement ignores the higher labor costs from integrating two very different labor forces that previous airline mergers had to face.  “Those costs are likely to be larger than all the claimed cost savings noted in the DOJ statement,” Moss noted.

 

The DOJ statement appears to be based on a very different forecast for the future. “DOJ thinks that as airlines get bigger, they get more efficient.  The AAI believes that, if anything, the reverse is true based on our reading of the performance of legacy airlines as they have become larger,” explained AAI President Albert Foer.

 

The AAI also takes issue with the DOJ’s claim that combining the “complementary aspects of the airlines’ networks” will result in improved services.  “What this really means is that a merged Northwest/Delta will likely reduce flights which would have competed on the same route without the merger.  This reduction in service and the high prices that would accompany it represents clear harm to competition and consumers,” Moss explained.

 

Foer put the DOJ decision on Northwest/Delta in the context of the current economic crisis.  “As we have seen from the current financial crisis, society cannot rely entirely on private firms to insure their own survival.  Government oversight is important to protect competition and consumers,” Foer explained.  “The AAI forecasts that a few years down the road, the costs of the merged carrier will not have fallen relative to the other carriers, but that prices and profit margins will have risen. We intend to monitor the situation and issue a report three years from now about whether, in fact, the merger was anti-competitive.”

Download the press release.