A merger between the nation’s fifth- and tenth-largest airlines – Alaska Airlines and Hawaiian Airlines, respectively – likely would not have prompted aggressive scrutiny by the Department of Justice (DOJ) Antitrust Division just a few years ago. Indeed, the biggest airlines have long used mergers to increase market share. However, there is now considerable turbulence in the atmosphere as regulators try to stop mergers of smaller airlines seeking a competitive market advantage of their own. It is in this challenging environment that Alaska announced its plan to buy Hawaiian for $1.9 billion, assuming $900 million of Hawaiian’s debt but keeping the airlines separate, similar to how Alaska operates Horizon Air.
Hawaiian Airlines’ domestic market share is only a quarter that of Alaska Airlines’, operating flights throughout the island chain and to the U.S. mainland. Hawaiian isn’t even the biggest carrier to the islands – United operates more nonstop flights – and the airline has just two East Coast destinations: New York and Boston. Support from the Alaska Air Group would help beef up Hawaiian’s position, though the combined airline still would only capture 6.15% of the market. Compare this to the top four airlines, each with a 16-18% market share and a much more significant competitive footprint than either Alaska or Hawaiian.
However, these facts have been tossed aside in favor of anti-merger dogma. Recent efforts to block the JetBlue-Spirit tie-up – not to mention the American-JetBlue Northeast Alliance and now perhaps Alaska’s acquisition of Hawaiian – appear to have more to do with regret over allowing American, United, Delta and even Alaska Airlines to complete prior acquisitions. Last month, the government unveiled new merger guidelines that examine whether the transaction is pursuant to a “trend toward consolidation” in the industry. It seems regulators want to shut the hangar door after the planes have left – and the government may try to argue that the merger of Alaska and Hawaiian must be considered in the context of previous airline mergers.
What is the relevant market?
In any airline merger case, a key issue is the “relevant market” for determining the impact of the merger on competition. In the JetBlue-Spirit case currently on trial in Boston, the government asserts that the relevant markets are individual origination-and-destination city-pairs, such as Boston-Orlando. Meanwhile, JetBlue and Spirit contend, “Airlines compete at the route, airport, city, regional, and national levels. … Where a broader geographic market better illustrates a merger’s competitive effects, and narrower division does not aid the court, the broader market should be adopted.” (No. 1:23-cv-10511-WGY, Dkt. 450, at 15)
In the Alaska-Hawaii tie-up, a key issue could be whether the relevant market is generally flights between Hawaii and the U.S. mainland, as opposed to individual city-pairs such as Los Angeles-Honolulu. Alaska and Hawaiian have claimed the deal is unobjectionable because of limited route overlap and expanded reach. Alaska would access Hawaiian’s network in the Asia-Pacific region, and Hawaiian would expand its current reach with Alaska’s network throughout much of the U.S.
Hawaiian’s financial position
As with Spirit, Hawaiian faces financial challenges that could be remedied through the planned merger. The Maui wildfires, high fuel costs and Airbus SE engine recall issues have all hurt Hawaiian in recent months. Although the existence of a failing company can help clear a merger, the defendants need not demonstrate that the acquired entity will become bankrupt absent from the merger. In the JetBlue-Spirit case, the airlines argued, “To be clear, this Court need not resolve whether there is an applicable ‘weakened competitor defense,’ which the Government called a ‘Hail Mary’ in closing.” Rather, the point was ” … Spirit’s ever worsening finances show that its past competition and growth are not indicative of how it will compete or grow in the future.” (No. 1:23-cv-10511-WGY, Dkt. 450, at 44)
The court’s equitable powers
The government’s current stance on mergers is reflected in its stated position to the Boston judge handling the proposed JetBlue-Spirit tie-up: that he is powerless to condition approval on further slot or route divestitures. Instead, the court must either approve or reject the very idea of the merger, with zero ability to perform equity and impose conditions that will render the tie-up lawful.
By contrast, the airlines have argued vigorously that the judge’s equitable powers naturally include the ability to order additional slot and route divestitures as a condition of the merger being approved. The judge even cited the “enormous consumer benefit” that would result from the merger in terms of route availability” despite the government’s assertion that the resulting airline would be “anticompetitive.”
The DOT’s new anti-merger policy
Even if the Department of Justice (DOJ) does not challenge Alaska’s acquisition, state governments attacking the JetBlue-Spirit transaction are likely to file a case, as the Department of Transportation (DOT) announced in March 2023 it would independently try to block that deal by refusing regulatory approval. The DOT not only stated that it “fully supports the Justice Department’s lawsuit under the Clayton Act,” but that the DOT separately would “deny the exemption application” filed by the airlines for permission to operate under common ownership prior to the requested transfer. In other words, regardless of what the DOJ and the federal courts decide, the DOT could try to scuttle the deal if the agency independently decides the linkage hurts competition. This position appears to be based on a letter from Sen. Elizabeth Warren, D-Massachusetts, opposing the tie-up – and cannot be squared with the Airline Deregulation Act of 1978 or 40 years of DOT precedent.
The post Choppy Airspace Awaits Airlines Attempting Mergers in 2024 appeared first on Attorney at Law Magazine.