In their answer to the government’s complaint challenging their proposed merger, US Airways and American Airlines (the “Airlines”) tout the “immense benefits to the traveling public” that the combined “US Airways and American Airlines will offer” with “more and better travel options for passengers through an improved domestic and international network, something that neither carrier could provide on its own.”
The Airlines say that models “routinely used by the airlines in their businesses demonstrate that these positive network effects” of “a unified network” would “attract millions of additional passengers to the merged airline” and that methods used by the government “conservatively demonstrate that the value of these consumer benefits would exceed $500,000,000 every year, net of any fare effects.” That is, the Airlines believe the benefit from the merger in “markets” where there is no likely competitive harm outweighs the harm in those “markets” where there might be competitive harm. To help prove their case, the Airlines are seeking access to the government’s analysis of prior airline mergers. But what is this fight really about?
A recent speech by FTC Commissioner Joshua Wright sheds light on this battle, which is all about something called “out-of-market” efficiencies analysis. First, to be clear, Commissioner Wright does not mention the Airlines’ merger in his speech and, to date, the Airlines have not referenced the speech. So, what is “out-of-market” efficiencies analysis?
According to Commissioner Wright, it is “an approach to efficiencies analysis that consider the competitive benefits from a merger that are outside the relevant product market.” As Commissioner Wright correctly points out, “the antitrust agencies recognized the potential important of out-of-market efficiencies in the 2010 Guidelines by providing that efficiencies not strictly in the relevant market, but so inextricably linked with it, can make a difference in whether a merger is challenged when those out-of-market efficiencies ‘are great and the likely anticompetitive effect in the relevant market(s) is small so the merger is likely to benefit customers overall.” Commissioner Wright does not think the agencies’ guidelines “go far enough” because “they do not commit the agencies to not challenging mergers when the out-of-market efficiencies outweigh the competitive harms.” That is why the Airlines are crying foul.
But even if the Airlines succeed in claiming out-of-market benefits are fair game, current merger law may still doom their merger. As Commissioner Wright further explains with a hypothetical merger involving firms A and B where “a narrow group of customers in a relevant product market” are harmed and “the benefits of the merger are significantly greater than the harms,” “[u]nder current antitrust doctrine, the merger of Firm A and Firm B will violate Section 7 of the Clayton Act despite the fact that it increases consumer welfare because current law precludes counting efficiencies outside the relevant market.” That is, “the merging parties cannot rely upon consumer gains outside of the narrowly defined product market to defend the merger, even if the increase in consumer welfare is huge and dominates any potential anticompetitive effects.”
As may well be the case with the Airlines’ proposed merger, and despite their claim of overall consumer benefit from the transaction, under existing case law the merger may be “challenged successfully because of its harms in a relevant market” as Commissioner Wright explains using his hypothetical. All of this, of course, assumes that the Airlines’ claimed benefits are real and can be accurately measured. In the end, Judge Kollar-Kotelly will have the final say.
Drawing on the complementary experience of members of our business group, our team of antitrust lawyers has the depth and experience to handle the most significant transactions. If you have any questions regarding this matter, or would like to learn more about our antitrust capabilities, please contact Jonathan L. Lewis, email@example.com.