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Bush White House Could Benefit Airline Deals

An effort to merge Delta Air Lines (DAL - Get Report) and Northwest Airlines (NWA) would clearly benefit from being reviewed while the Bush administration is still in office, says a recently departed Transportation Department official.

"The advantage to going now is that you have an administration that is not running for anything," says Andrew Steinberg, who stepped down last month after two years as the DOT's assistant secretary for aviation, in an interview. "Decisions can be made solely on the basis of merit. Nobody will be concerned, even at the political level, about the perception of challenging or not challenging a particular transaction."

Delta and Northwest are close to a merger deal, which could be followed by an arrangement to join UAL's (UAUA) United Airlines with Continental (CAL - Get Report), sources say.

Perhaps adding to the likelihood of a Delta and Northwest pact, The Wall Street Journal reports that Delta CEO Richard Anderson told the board he would forego millions of dollars in compensation he could receive if a deal is reached.

"It would be helpful to get it done now," says Steinberg, who was previously chief counsel for the Federal Aviation Administration.

In particular, he says, Attorney General Michael Mukasey is "very independent, which is good from the point of view of the parties" seeking approval. By contrast, going forward, "some of the populist rhetoric you are hearing in the campaign for president would make me more concerned if I were thinking about a transaction, because of the perception that there is an anticorporate bias on the part of some of the Democratic candidates."

At the same time, Steinberg notes, the administration is only one factor.

"These decisions are heavily driven by a dedicated career staff [which] doesn't change, so it matters who controls the White House, but not nearly as much as people think." He also challenged the suggestion that no decision could be made during a transition between administrations, noting that the staff in the current administration will work right up until inauguration of the next president.

Typically, airline mergers are reviewed by both the DOT and the Justice Department, with the former making a recommendation to the latter. The Justice Department may prevent a merger during a waiting period, but once that period expires, it must go to court to contest the deal.

The Justice Department's primary concern is route overlap, Steinberg says. "They look at whether, in relevant markets, a merger is likely to produce a price increase over a horizon of about two years. In my experience, they don't care that the baseline from which prices would go up is below cost. I'm not criticizing them, but that's how they do their analysis."

At the same time, the department is strongly aware of recent growth by low-cost carriers, and of the impact of those carriers' pricing on markets, which "could help a merger pass scrutiny," he says.

Neither Delta/Northwest nor Continental/United appear to have significant overlap, Steinberg said. The latter deal may have some issues involving the trans-Atlantic and competing hubs at Newark Liberty and Washington Dulles, but Steinberg believes both mergers "are quite plausible and would not rule out any of them."

It may, however, be important which merger is first to be judged by the Justice Department.

"If there is more than one merger proposed, whoever gets to the finish line sooner has an advantage because once the market is more concentrated it becomes harder," Steinberg said. Still, "it's not like a race to the courthouse," he says, but rather a matter of which transaction is the first to be fully investigated.

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