Few industries can match aviation’s current pace of consolidation. Over the last 18 months, Delta has absorbed Northwest, United has merged with

Continental, and Southwest has sought government approval to acquire AirTran. Airline names long familiar to passengers already have vanished or will soon disap-pear from the skies. Two recent developments highlight the government’s response to this wave of consolidation and the unique competition analysis that applies to the aviation industry.

United/Continental MergerThe United/Continental merger will create the largest airline by traffic, surpassing the combination of Delta and Northwest that was completed at the end of 2009. The merged entity will start out with a route network reaching 370-plus destinations, a flight schedule with over 5,800 daily departures, and a workforce of more than 86,000 employees.1 Given the size of the combined enterprise and its presumed market power, one may wonder what persuaded the federal government to allow such a large merger to occur.

By agreement with the Federal Trade Commission, the review of airline mergers is conducted exclusively by the Department of Justice (DOJ).2 The starting point for DOJ’s analysis of a proposed airline combination is an examination of the “city-pairs” served by each carrier. A “city-pair” is the service operated by an airline between one city and another. Where the parties to a proposed airline merger have a large number of overlapping city-pairs, i.e., city-pairs where they both provide service, a combination of those carriers will reduce the number of competing airlines in that market diminishing the fare and service options available to pas-sengers. Absent competition from other airlines in the same city-pair, DOJ will generally take a negative view of the merger’s effect with respect to that market. An unfavor-able assessment is particularly likely in city-pairs where DOJ perceives barriers to entry that make compe-tition from new entrants unlikely. Too many overlapping city-pairs, and DOJ is likely to oppose a

proposed airline merger or require it to be modified. After reviewing the merger plans of United and Con-

tinental, DOJ determined that the networks of the two carriers were largely complementary but would still result in overlap on a limited number of routes where United and Continental offer competing nonstop service. Most problematic from DOJ’s perspective was the overlapping service at Newark Liberty Airport, where Continental has a hub and operates a substantial share of all flights.3 A merger with United meant an even greater share of the market would be controlled by a single airline. DOJ’s competitive concerns were compounded by the restric-tions placed on landing and takeoff operations—or “slots”—at Newark by the Federal Aviation Administra-tion (FAA) in an effort to reduce airspace congestion in the New York metropolitan area. The limited availability of slots at Newark made new entry by other carriers particularly difficult.

Due to its concerns over the merger’s competitive impact at Newark, DOJ was prepared to object to certain aspects of the United-Continental transaction. However, DOJ decided to terminate its investigation after United and Continental announced the transfer of 36 land-ing/takeoff slots at Newark to Southwest Airlines.4 The slot transfer allowed Southwest to introduce service to

Antitrust Developments in the Aviation IndustryBy Malcolm L. Benge

Malcolm L. Benge is a partner with the law firm of Zuckert, Scoutt & Rasenberger, L.L.P., in Washington, D.C.

Malcom L.

Benge

Published in Infrastructure, Volume 50, Number 2, Winter 2011 © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 1

Newark, addressing DOJ’s concerns about new entry at Liberty Airport in the wake of the merger. With the only basis for objection to the United-Continental merger eliminated, DOJ had no choice but to allow the United-Continental deal to proceed.

The merger drew a rapid competitive response as its approval was quickly followed by Southwest’s announce-ment that it would acquire AirTran. The United-Continen-tal combination leaves just four legacy airlines with hub-and-spoke route networks: United/Continental, Delta Air Lines, Ameri-can Airlines, and US Airways. Fearing domination of the aviation market by a small number of mega-carriers, some members of Congress criticized DOJ’s decision not to oppose the United-Continental merger and even called for reregulation of the airline industry.5

Delta-US Airways Slot ExchangeDOJ’s hands-off approach to the United-Continental combination was in marked contrast to its forceful response to a recent airline industry transac-tion involving Delta and US Airways. Delta and US Airways proposed to swap landing and takeoff slots at LaGuardia and Washing-ton Reagan National airports. As agreed by the parties, US Airways would transfer 280 slots at LaGuar-dia in exchange for 84 slots at Reagan National.6 Because the transfer of slots at LaGuardia is currently restricted by the FAA, the parties to the New York-Washington slot exchange needed a waiver from the FAA’s slot rules.

Airport Slot Restrictions and the Proposed Slot ExchangeLimited runway capacity at LaGuardia and Reagan National as well as congested airspace in the Northeast led the FAA over the years to impose a series of limi-tations on the number of landing and takeoff slots at both airports.7 In addition, operations at LaGuardia and Reagan National are subject to “perimeter” rules that limit the number of nonstop flights to and from each air-port longer than an established distance (1,500 miles at LaGuardia and 1,250 miles at Reagan National). Although Congress had ordered a phase-out of slot restrictions at LaGuardia,8 the FAA retained its authority to regulate the “safety and movement of air traffic.”9

Airspace congestion in the New York metropolitan area created such a severe impact on airline operations nationwide that in 2006 the FAA imposed restrictions on airline operations at all three major New York airports, including LaGuardia.10 Exercising its authority to regulate the use of navigable airspace, the FAA assigned slots at LaGuardia to the carriers operating there and authorized

them to lease or trade slot authorizations while the restrictions remained in effect. The FAA’s order allocat-ing slots at LaGuardia does not allow for the purchase or sale of slot interests to other carriers, and transfers can occur only through trades or leases. Consequently, the only way for a carrier to purchase or sell a slot is by obtaining a waiver from the FAA.

The slot exchange proposed by Delta and US Airways was deemed by the FAA to involve a sale of LaGuardia

slots under the rules limiting airline operations at that airport.11 The pro-posed transaction had the potential for enormous impact on competi-tion at both LaGuardia and Rea-gan National: it affected almost 10 percent of the total number of slots at Reagan National and more than 20 percent of all LaGuardia slots.12 Approval of the transaction would make Delta’s operations at LaGuardia two-and-a-half times larger than its nearest competitor and would allow US Airways to become three times the size of its closest rival at Reagan

National.13 The waiver request was there-fore accompanied by competitive concerns not usually presented by the ordinary slot transfer.

The FAA’s Tentative Decision and DOJ’s CommentsThe FAA maintained that it could grant the requested waiver only by finding that the proposed transfer “is in the public interest.”14 Its public interest inquiry is guided by several principles, including “avoiding unreasonable indus-try concentration, excessive market domination, monopoly powers and other conditions”15 leading to an increase in fares, “encouraging . . . an air transportation system relying on actual and potential competition,”16 and “encouraging entry into air transportation markets.”17 Based on these public interest considerations, the FAA was only willing to approve the slot exchange subject to certain conditions. Chief among these conditions was a requirement that US Airways and Delta divest slots at LaGuardia and Reagan National that the FAA would then reallocate through a bid-ding process to other airlines. The FAA’s determination was set forth in a tentative decision, which it published in the Federal Register for public comment.18

DOJ weighed in with comments supporting the FAA’s preliminary determination.19 In DOJ’s view, the Delta/US Airways slot deal was a thinly disguised attempt to buttress their respective competitive positions at LaGuar-dia and Reagan National in order to forestall inroads by low-cost carriers. According to DOJ’s analysis, follow-ing the slot exchange Delta’s share of slots at LaGuardia would increase from 24 percent to 49 percent, making it the dominant slot holder at that airport. US Airways also

Purchase or sale of a slot requires an FAA waiver.

Published in Infrastructure, Volume 50, Number 2, Winter 2011 © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 2

stood to benefit as its slots at Reagan National—where it already has the largest share of slots—would increase from 44 percent to 54 percent. Under the DOJ/FTC Hori-zontal Merger Guidelines, the increase in market concen-tration produced by the proposed slot exchange resulted in a presumption of enhanced market power.20

DOJ was most concerned about the effect of the slot deal on market entry at LaGuardia and Reagan National by low-cost carriers (LCCs). Due to a long history of slot controls at both airports, the vast majority of slots were controlled by legacy carriers. At the time of the Delta/US Airways slot exchange announcement, LCCs held fewer than 7 percent of the slots at LaGuar-dia and only 3.3 percent of Reagan National slots.21 According to DOJ’s analysis, limited LCC presence and slot controls translated into higher fares and profits for incumbent carri-ers such as Delta and US Airways.

The proposed slot deal threatened to perpetuate in several respects what DOJ perceived as an anticompeti-tive environment at LaGuardia and Reagan National. Should the slot transfer proceed, DOJ was concerned that Delta and US Airways would engage in “slot hoarding” at LaGuardia and Reagan National, with little or no incentive to lease any of their large portion of slots to LCCs because of the threat to their rev-enues and profits. Conversely, because the slot exchange would result in reduced slot holdings for US Airways at LaGuardia, and for Delta at Reagan National, they would be likely to use their smaller slot portfolios to operate on routes with higher profit margins and less competition.

DOJ essentially concluded that Delta and US Airways were using the slot exchange to ensure that they would only face competition from other, higher-fare carriers at slot-controlled airports rather than from LCCs. By effec-tively locking up slots at LaGuardia and Reagan National, the slot deal appeared to DOJ as a way for each car-rier to forestall entry by LCCs and create the conditions where they could maintain a fare premium.22

Under the FAA’s tentative decision, the Delta-US Airways slot exchange would have been allowed to proceed but only on the condition that the parties to the deal dispose of 14 slot pairs at Reagan National and 20 slot pairs at LaGuardia by leasing them to “eligible new entrant and limited incumbent carriers.”23 DOJ supported the FAA’s determination mandating the divestiture of slots and offered recommendations on the manner for distrib-uting those slots to other carriers. DOJ examined three different options for reallocating slots suggested by the FAA in its request for public comments, each of which was intended to increase the number of slots available

for new service at LaGuardia and Reagan National: (1) private sales with biweekly reports to the FAA on details of the sales efforts; (2) anonymous, cash-only sales in which the FAA awards slots to the highest bidder, and (3) a hybrid process where the FAA would manage the sell-ing process but the terms and conditions of the slot sale would be negotiated by the buyer and the seller. DOJ strongly favored the second method as a way of avoiding any ability on the part of the seller to control the type of

airline buying the slots.24 The FAA subsequently finalized

its determination that it would grant the necessary waiver for the Delta/US Airways slot exchange only if the parties to the transaction agreed to the proposed slot divestitures at LaGuardia and Reagan National.25 The final decision adopted DOJ’s recommendation that any ensuing slot sales be conducted on a cash-only, carrier-blind basis. Although Delta and US Airways had previ-ously announced agreements with several carriers for the sale of 15

slot pairs at LaGuardia and 4.5 slot pairs at Reagan National in order to address con-cerns regarding entry by smaller airlines,26 they were unwilling to agree to the number of slot divestitures mandated by the FAA and supported by DOJ.

Appeal of the FAA’s DeterminationDelta and US Airways have challenged the FAA’s final decision by filing a petition for review of the agency’s action with the US Court of Appeals for the District of Columbia Circuit.27 The petitioners have raised multiple objections to the FAA’s determination, including both its refusal to approve the transaction and the requirement for the divestiture of slots at LaGuardia and Reagan National.

The parties to the proposed slot exchange have chal-lenged the FAA’s decision on the basis that the appli-cable regulations governing slot restrictions at LaGuardia allow the FAA only to consider safety matters in decid-ing whether or not to grant a request for a waiver from those rules. In their view, Congress has not authorized the FAA to consider what effects a transaction may have on competition when examining a waiver request from the slot regulations. The slot exchange should have been approved under this interpretation of the applicable legal criteria, because the FAA found that the proposed transac-tion does promote safety and the efficient use of airspace, and no other factors are permitted to be taken into con-sideration by the FAA when ruling on a waiver request.

The petitioners also allege that Congress expressly considered and rejected granting any authority to the Department of Transportation and its component

Other airlines have not been neutral in the dispute.

Published in Infrastructure, Volume 50, Number 2, Winter 2011 © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 3

agencies (such as the FAA) that would allow for the review of asset transfers on the basis of their competi-tive effects. Under their interpretation, such authority was conferred exclusively on DOJ. The FAA’s attempt to con-dition its approval of the slot exchange on divestitures is therefore beyond its regulatory powers. The parties get around the fact that DOJ also opposed the merger by arguing that they submitted their transaction to DOJ for approval and DOJ allowed the statutory period for review to pass without blocking the deal.

The appeal to the D.C. Circuit includes a constitu-tional challenge to the FAA’s determination. Delta and US Airways argue that the forced divestiture of their slots at LaGuardia and Reagan National would result in the disposal of the slots at below-market rates, resulting in a “taking” of those slots without just compensation in violation of the Fifth Amendment. Essential to this claim is a determination that slot interests represent a property right subject to the takings clause, and not an operating privilege subject to absolute FAA control.

Other airlines have not been neutral in this dispute. Southwest Airlines has sought, and been granted, the right to intervene in the proceedings before the D.C. Circuit.28 As the largest potential beneficiary of the FAA’s determination, Southwest is seeking an outcome uphold-ing the slot divestiture, thereby enhancing its prospects for access to LaGuardia and Reagan National.

With Southwest’s intervention in the court challenge to the FAA’s determination, what began as a relatively straightforward request for a waiver from the FAA’s slot rules has become a full-fledged donnybrook. At stake is the competitive structure of two of the country’s most lucrative aviation markets, where limits on operations in the form of slot restrictions create the circumstances allowing airlines to reap a fare premium. It remains to be seen whether DOJ’s involvement in the dispute over the Delta/US Airways slot exchange portends a more activist stance with respect to airline competition. Given the cur-rent pace of consolidation among airlines, DOJ is almost certain to face additional developments requiring a deci-sion as to how and to what degree it will need to shape competitive conditions in the aviation industry.

Endnotes1. United Continental Holdings Corporate Fact Sheet, at

http://www.unitedcontinentalholdings.com/index .php? section=media.

2. Memorandum of Agreement between the Federal Trade Commission and the Antitrust Division of the United States Department of Justice Concerning Clearance Proce-dures for Investigations, Appendix A (March 5, 2002).

3. Remarks of Carl Shapiro, Deputy Assistant General for Economics, Antitrust Division, U.S. Department of Justice, as prepared for the American Bar Association Section of Anti-trust Law Fall Forum (November 18, 2010), p. 30.

4. Press Release, United Airlines and Continental Airlines

Transfer Assets to Southwest Airlines in Response to Depart-ment of Justice’s Antitrust Concerns (Aug. 27, 2010), avail-able at http://www.justice .gov/atr/public/press_releases/ 2010/262002.htm.

5. Statement of Congressman James L. Oberstar, Chair-man of the Committee on Transportation and Infrastructure (Aug. 28, 2010).

6. Joint Request of Delta and US Airways for a Waiver, letter dated August 24, 2009 to J. David Grizzle, Esq., Chief Counsel, Federal Aviation Administration, from Ben Hirst, Senior Vice President and General Counsel, Delta Airlines, Inc. and Stephen L. Johnson, Executive Vice President, Cor-porate, US Airways, Inc.

7. See, e.g., The High Density Rule codified at 14 C.F.R. Part 93, Subparts K and S.

8. 49 U.S.C. § 41715(a)(2).9. 49 U.S.C. § 41715(b)(1).10. Operating Limitations at New York LaGuardia Airport,

71 Fed. Reg. 77,854 (Dec. 27, 2006).11. Petition for Waiver of the Terms of the Order Limiting

Scheduled Operations at LaGuardia Airport, 75 Fed. Reg. 7306 (Feb. 18, 2010).

12. Notice on Petition for Waiver of the Terms of the Order Limiting Scheduled Operations at LaGuardia Airport, 75 Fed. Reg. 26322, 26323, n.8.

13. Id. at 26323.14. Id. at 26323 (citing 49 U.S.C. § 40109).15. 49 U.S.C. § 40101(a)(10).16. 49 U.S.C. § 40101(a)(12).17. 49 U.S.C. § 40101(a)(13).18. 75 Fed. Reg. 7306.19. Comments of the United States Department of Justice

(Docket No. FAA-2010-0109) (March 24, 2010) (“DOJ Com-ments”).

20. DOJ Comments, p. 5 (citing U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, § 1.51(1992).

21. DOJ Comments, p. 7.22. In reaching this conclusion, DOJ noted that the

presence of an LLC on a nonstop route reduces fares by “roughly 25 percent.” DOJ Comments, p. 7.

23. 75 Fed. Reg. 7306, 7310.24. DOJ Comments, p. 21.25. 75 Fed. Reg. 26322. The decision was issued as a joint

determination of the Department of Transportation and the FAA.

26. Comments of Delta Air Lines, Inc. and US Airways, Inc., p. 5, n.1 (Docket No. FAA-2010-0109) (March 22, 2010).

27. Delta Airlines, Inc. and US Airways, Inc. v. Federal Aviation Administration and U.S. Department of Transporta-tion, (No. 10-1153).

28. Motion for Leave to Intervene of Southwest Airlines Co. (Case No. 10-1153) ( July 30, 2010).

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