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Continued: Antitrust review is the next step for Delta and NWA

  • Article by: KEVIN DIAZ , Star Tribune
  • Last update: May 14, 2008 - 11:12 PM

WASHINGTON - After four crowded hearings with more than a dozen witnesses, most of what Congress has to say about the hotly contested Delta-Northwest merger has been said.

Now, the experts say, comes the real test: the Justice Department's antitrust review.

"We have to lock the doors and pull down the blinds and make a decision based on economic theory," said aviation expert Darryl Jenkins, who has studied Northwest's flying strategy for years.

The consensus among industry analysts -- even those who oppose the merger -- is that the Justice Department is unlikely to block the proposed union on antitrust grounds, no matter how much Congress rattles its rhetorical sabers about lost jobs and service.

With few overlapping routes, sky-high fuel prices, and low-cost and foreign airlines nibbling at their tails, No. 6-ranked Northwest and No. 3 Delta have never been in a more competitive environment than they're in now, some experts say.

"This is as clean a merger as you're going to see," Jenkins said.

While the newly merged Atlanta-based Delta would become the world's biggest airline, its share of the U.S. domestic market would be 19 percent, still just a tick below that of No. 1 Southwest Airlines.

But that doesn't mean it's widely agreed that the Delta-Northwest merger will be beneficial to the traveling public, which most analysts say is the first question that government regulators must answer.

One school of thought is that the whole point of a merger is to give the new consolidated airline more pricing power over customers.

"These mergers are explicitly designed to screw consumers," said Hubert Horan, a former Northwest executive who testified Wednesday before a House aviation panel including Rep. Jim Oberstar, D-Minn., a merger opponent.

Oberstar, addressing the companies' two top executives, made clear that he sees the merger's impact as "reduced competition, limited consumer choice and higher fares."

But the opposing camp sees no other hope for a pair of leading air carriers in an industry that has lost close to $30 billion since 2001. "The industry will have to restructure one way or the other," said Ray Neidl, an analyst with Calyon Securities, an industry research firm. "Either through the relatively organized regulatory oversight of mergers, or in the more risky and disorganized guise of bankruptcy."

'Will not lessen competition'

That's also been the argument of the airlines' chief executive officers, Richard Anderson of Delta and Doug Steenland of Northwest, who faced off with Oberstar Wednesday in the last of the four scheduled congressional hearings.

"This merger will not lessen competition," said Steenland, arguing that consumers will also benefit from the projected $1 billion in annual cost savings.

Anderson reminded lawmakers that nine air carriers have ceased operations or gone into bankruptcy this year, "directly as a result of fuel prices."

Oberstar, Congress' leading expert on aviation, opposes the merger largely on his belief that it will have a "cascading" effect of "defensive" mergers by other top airlines. United Airlines and US Airways already are reported to be in talks. What that would mean, Oberstar fears, is a domestic industry contracting not just from six major airlines to five (after Delta buys Northwest), but to four (if United and US Airways join, as well).

Many observers say that's a valid concern, but it's unclear whether it's something the Justice Department can consider in its review, which began in late April when Northwest and Delta first brought their merger proposal to Congress.

"Ordinarily, the department isn't going to look into its crystal ball and say, 'I wonder what the next merger is going to be?'" said Richard Duncan, a Faegre & Benson lawyer in Minneapolis who specializes in antitrust and trade regulation. "What [it] would look at is what's the effect of this merger on market concentration."

But with two potential airline mergers to review simultaneously, Duncan added, "this is kind of uncharted territory."

Looking at current trends

The Justice Department's mandate is enforcement of the Clayton Act, which prohibits business transactions that may "substantially ... lessen competition, or tend to create a monopoly."

The view of some antitrust lawyers is that this opens the door to some analysis of the current trends in airline consolidation. "There's no doubt that past, present and future are all likely to be considered," said Larry Scarborough, an expert in antitrust law in the Phoenix office of Bryan Cave. But if the Delta-Northwest merger otherwise passes antitrust muster, Scarborough said government regulators hardly can challenge the deal in court on the grounds that other airlines might follow suit.

"It's all about the effect of the merger before them," he said.

On that score, Delta and Northwest's best argument is that they fly head-to-head on only 12 of more than 800 domestic nonstop routes. Among the overlaps are flights from the Twin Cities to Salt Lake City and Cincinnati, affecting a combined 75,000 passengers, according to congressional researchers.

Steenland told Congress that most of those routes "enjoy substantial competition from other carriers."

But applying the Herfindahl-Hirschman Index, a leading measure of market concentration, the anticompetitive effects in those regional markets "are off the charts," said Kevin Mitchell, chairman of the Business Travel Coalition.

Some believe that those routes will attract low-cost carriers, which have grown in reach in the past decade even as so-called legacy airlines have shrunk domestically. Patrick Murphy, a former U.S. Transportation Department official, has testified that no-frills discounters now serve markets that account for 75 percent of all U.S. air passengers. "The U.S. domestic airline industry is more competitive than at any time in history," he said.

The broader question at Justice will be whether the Delta-Northwest pairing reduces consumer choice not just in markets here and there, but across the nation. "The missing piece," Duncan said, "is whatever happened to the idea that we're supposed to be fostering not just a network in the Northwest versus one in the Southeast, but rather that these guys are supposed to compete across the network?"

In the end, many analysts speculate that the Delta-Northwest merger is really a bet on expanded international operations, which are more profitable than domestic routes.

But if domestic air travelers still have reason to worry about rising airfares, the prospect of one or two more mergers in the coming months also raises the question of declining service.

"If six systems is not giving us very good service," said University of Houston law professor Darren Bush, "will four likely improve the situation?"

Kevin Diaz • 202-408-2753

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