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The Deal: An Unscheduled Departure

Going into the deal industry players had plenty of reason to assume the government would not intervene. For all of the political bluster that typically accompanies airline M&A, only one deal -- United Continental Holdings Inc. predecessor UAL Corp.'s proposed purchase of US Air in 2001 -- has been scuttled due to antitrust concerns, and a stalling economy and internal issues may have had more to do with UAL's decision to abandon that transaction than did antitrust concerns.

More recently deals including UAL's purchase of Continental Airlines (CAL) and Southwest Airlines's (LUV) acquisition of AirTran Holdings received less regulatory scrutiny than expected, leading many in the industry to conclude that the government had signed off on the airlines' thesis that consolidation was to be encouraged to create a healthier, more stable industry.

Justice in filing suit against AMR and US Airways made it clear that assumption was wrong. But there remains a widely held belief inside the industry that the DOJ has a weak case. Attorneys for the airlines, echoed by industry analysts and pundits, have loudly trumpeted what they see as flaws in the government's arguments that they say make going to court a poor option for regulators.

That was certainly the position of Richard Parker, the airlines' lead litigator, when he spoke to reporters on Aug. 14. "They got this one wrong, very wrong," the O'Melveny & Myers LLP partner said. The DOJ's prediction of higher fares and coordination on pricing does not take into account the benefits to consumers that will come from joining the fourth- and fifth-largest domestic carriers and creating an airline comparable in size and network to those operated by United Continental and Delta Air Lines Inc. "There will be more flights to more destinations, domestic and international. And communities, including smaller communities, will be better served."

And, the thinking goes, the DOJ will not be able to prove the harms the government said will be posed by the merger. "At trial the evidence is going to show the industry is uniquely difficult, impossible, to coordinate because fares are changing every day," Parker said.
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