The Deal: Gauging the Benefits of Airline Mergers

NEW YORK ( TheStreet) -- Officials at US Airways ( LCC) and American Airlines parent AMR Corp. (AAMRQ) say they are eager to take on the Department of Justice after the antitrust agency announced Aug. 13 it would try to block the carriers' planned $11 billion merger. The outcome of the case will likely depend on how Judge Colleen Kollar-Kotelly of the U.S. District Court in Washington views the airlines' claim that the stronger route network and improved financial health the merger would give them will translate into benefits for consumers.

A big problem for the airlines is that the federal government's merger guidelines have a high bar for proving that those kinds of efficiencies will outweigh the harm of lost competition. The DOJ's Antitrust Division and the Federal Trade Commission have historically been wary of efficiency claims and a 2010 revision of the agencies' horizontal merger guidelines increased the level of proof that merging parties must demonstrate to show that benefits of merger will offset any damage to consumers.

"There is a heavy burden for showing the agencies that efficiency claims can overcome competitive effects and I've never known a case to come out well for merging parties when it comes to efficiency claims," said one antitrust practitioner.

"The government is usually skeptical of predicted claims of efficiencies," added Bert Foer, president of the American Antitrust Institute, a think tank advocating strong merger enforcement. "The guidelines are narrow on what is a cognizable claim, especially when an industry is highly concentrated like air travel."

But a source familiar with the airlines' thinking predicted that in defending the merger they will argue that the benefits consumers would receive don't have to be proven according to the general guidelines but instead should be measured according to an economic methodology used in the DOJ's 2009 approval of Delta Air Lines Inc.'s acquisition of Northwest Airlines Corp. and spelled out in a paper published later that year by DOJ economists Ken Heyer, Carl Shapiro and Jeffrey Wilder.

The economic analysis allowed DOJ economists to place a dollar value on schedule improvements and other service enhancements that could make the merged carriers more attractive to consumers. The methodology also allowed agency economists to compare the forecasted demand for the combined carriers' likely post-merger schedules to the forecasted demand for Northwest and Delta flights if the airlines remained separate. In that merger the model showed that the merged carrier was likely to attract more customers and therefore increase consumer welfare.

If you liked this article you might like

Cramer: Wall Street's Game du Jour, Leapfrogging

Halliburton-Baker Hughes Merger Has Fair Shot at Regulatory Approval

Donald Trump: 'I Ran a Great Airline.'

Jim Cramer's Take on Comcast's Dead Merger Deal With Time Warner Cable

One Reason American Airlines (AAL) Stock Is Up Today