Latest Airline Merger Challenged in Court
The Department of Justice brought an action to block the proposed merger of American Airlines and US Airways, surprising some observers of the airline industry, which has seen significant mergers approved with limited route divestitures in the last decade. The U.S. Court of Appeals for the Eleventh Circuit rejected monopolization claims in a market limited to black hot rolled coil steel because the market definition failed to properly consider supply substitution by producers of other kinds of steel.
Other antitrust developments of note included the New York Attorney General's requirement that an online food-delivery service forgo exclusive arrangements with Manhattan restaurants before it could merge with a rival, the dismissal of conspiracy claims against three private equity funds because the evidence against them did not exclude the possibility of independent action and a ruling that refusal to include cloned horses in a registry violated antitrust law.
The U.S. Department of Justice and several states filed a suit to halt the proposed merger of American Airlines and US Airways, alleging that the combination would substantially eliminate competition for commercial air travel in many local markets and lead to higher prices and less service. The department stated that if the merger is permitted to proceed it would form the world's largest airline and would result in four airlines controlling 80 percent of domestic commercial air traffic.
The department asserted that US Airways offers significant discounts for connecting (one-stop) flights that compete with rival airlines' nonstop service and that the merger would eliminate US Airways' structural incentive to continue to offer these discounts by adding major hubs and more popular non-stop routes to the airline's network. The complaint also quoted US Airways executives' past statements that the airlines were able to pass along fare increases to customers "because of consolidation." The complaint went on to posit that the merger would make it easier for the remaining airlines to cooperate, rather than compete.
In addition to listing hundreds of city pairs where both American and US Airways compete by offering connecting or direct service, the complaint alleged that the combined firm would control 69 percent of the takeoff and landing slots at Reagan National Airport. The district court in Washington, D.C., set a trial date of Nov. 25, 2013.
The government's analysis arguably deviated from prior airline merger reviews, where the principal focus of the inquiry was on overlapping non-stop service between particular city pairs and where combining complementary networks was deemed to enhance efficiency. As US Airways and American pointed out in their answers, mergers reviewed and approved by the department in recent years created the two largest airlines, Delta and United. But while past administrative decisions provide vital guidance to counselors and the business community, unlike court decisions, they (especially settlements or decisions not to bring a challenge) do not have binding precedential value. In addition, in a consolidating industry, later proposed mergers may face heightened scrutiny because the market has become more concentrated.
United States v. US Airways and AMR, 13-cv-01236-CKK (amended complaint filed Sept. 5, 2013)
Cross-Elasticity of Supply
The Eleventh Circuit rejected a claim that Nucor, a leading steel manufacturer, conspired to monopolize the black hot rolled coil steel market because plaintiff's definition of the relevant product market was "too restrictive" given the high cross-elasticity of supply in that market, affirming the lower court's grant of summary judgment in favor of Nucor.
In 1999, Gulf States Steel, one of Nucor's main competitors in the southeastern region of the United States, filed for bankruptcy, and as part of the bankruptcy proceedings, Gulf States Steel's assets were put up for sale. GSRG, a newly-formed entity hoping to enter the black hot rolled coil steel market, contracted with the bankruptcy trustee to purchase Gulf States Steel's steel-producing assets unless a higher bid was submitted, whereupon a public auction would be held. Nucor then formed a new entity with another company to acquire the assets. At a public auction, GSRG's bid was rejected because it didn't conform with the auction's rules, and Nucor's bid was accepted. GSRG then brought suit against Nucor and others, alleging, inter alia, that they conspired to monopolize the black hot rolled coil steel market in violation of Section 2 of the Sherman Act.
The appellate court noted that to establish a violation under Section 2, a plaintiff must properly define the relevant market. GSRG asserted that the relevant market was the market for black hot rolled coil steel. The Eleventh Circuit rejected this definition as too limited and went on to specify why cross-elasticity of supply is critical to defining the relevant market in this case.
Steel can have a variety of forms, depending on the treatment process that it undergoes. When black sheet steel is rolled into a coil, making it easier to store and transport, the result is known as black hot rolled coil steel. When black hot rolled coiled steel is submerged in acid and then coated in oil, it is known as pickled and oiled steel.
The court noted that GSRG's contention that, from the perspective of purchasers, pickled and oiled steel "is not the equivalent" of black hot rolled coil steel "misses the point" as product markets are not defined solely on the basis of consumer demand, but rather must take into consideration the elasticity of supply in appropriate cases.