Academic journal article Fordham Journal of Corporate & Financial Law

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

Academic journal article Fordham Journal of Corporate & Financial Law

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

Article excerpt

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.

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 American Airlines, AMR, filed for Chapter 11 bankruptcy.1 AMR was one of the last of the legacy U.S. airline carriers to file for bankruptcy.2 Legacy airlines include those that were founded earlier and traditionally known to provide better service (like free baggage and inflight catering).3 AMR suffered overwhelming cumulative losses of $10 billion since 2001,4 annual union costs of $600 million more than those of its rivals,5 and fierce competition from consolidated legacy-airline sharks that swam in its increasingly red ocean6.

Miraculously, in February 2013, AMR found a haven from the uncertainty of Chapter 11 through the opportunity to merge with U.S. Airways, a slightly smaller provider of domestic flights.7 Doug Parker, U.S. Airways' CEO, stated that the opportunity for a merger developed two years earlier, when AMR filed for bankruptcy.8 He said it was a logical partnership that would allow the new entity to be a contender against large legacy airlines, as opposed to the low-cost carriers.9 He did not see the bankruptcy as a large problem but rather as an advantage that would allow AMR to address its inflated operating expenses.10 The opportunity allowed the companies to take advantage of each other's best assets, and promised an additional $280 million each year in revenue."

The companies gave themselves until mid-December 2013 to finalize the proposed deal.12 They agreed to keep the American Airlines company name and the U.S. Airways CEO in office;13 it seemed as if everyone, including the employees' and pilots' unions, were pleased.14

In August 2013, however, the parties were shocked to discover that their merger was the target of a Department of Justice ("DOJ") Antitrust Division lawsuit.15 The suit threatened to disrupt AMR's intentions to complete its bankruptcy proceedings quickly.16 A prompt resolution of the bankruptcy issue was an essential cornerstone for the merger, and therefore, American Airlines and U.S. Airlines were relying upon the government's blessing to move forward.17

The Antitrust Division's intervention came about quite unexpectedly given the division's history of offering rapid approval of a number of similar mergers.18 In recent years, the airline industry had become a red ocean because the level of competition made it difficult for legacy carriers to turn a profit.19 They were left with two options: merge with one another or reorganize in Chapter 11.20

The surprise move by the Antitrust Division culminated in a settlement in November 2013.21 While the Antitrust Division has a reputation for not considering political factors when deciding whether to block corporate mergers,22 the American Airlines-U. …

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