The Department of Justice Tuesday approved Alaska Air Group's (ALK) $4 billion acquisition of Virgin America (VA) .

As a condition of approval, Alaska Air must significantly reduce the scope of its codeshare agreement with American Airlines (AAL) .

The merger of Alaska and Virgin would combine the nation's sixth- and ninth-largest airlines, respectively, to create the fifth-largest U.S. carrier.

"Smaller airlines, such as Alaska and Virgin, provide a critical competitive check on the larger carriers," said acting Assistant Attorney General Renata Hesse of the Justice Department's Antitrust Division. "Although this merger offers hope that a strengthened Alaska can be an even stronger competitor than before, because of Alaska's extensive codeshare agreement with the world's largest airline, the merger threatened to blunt important competition and reduce choices for consumers. Today's settlement ensures that Alaska has the incentive to take the fight to American and use Virgin's assets to grow its network in ways that benefit competition and consumers."

The DOJ said that the codeshare agreement, which allows Alaska to market American flights on more than 250 routes, creates incentives for Alaska to compete less aggressively on routes both carriers serve and to forgo launching new service in competition with American. As a result of these incentives, the complaint alleged that Alaska and American often behave more like partners than competitors.

Virgin, by contrast, has a network that extensively overlaps with American's network. It has competed aggressively with American, particularly on 20 nonstop routes served by both airlines, the DOJ said.

According to the DOJ, the significant head-to-head competition between Virgin and American on these routes is due in part to the fact that Virgin holds essential and scarce assets, including airport gates and takeoff and landing rights known as "slots," at key American strongholds. Several of these, including gates at Dallas Love Field Airport and slots at Washington Reagan National Airport and New York's LaGuardia Airport, Virgin acquired as part of the settlement of the department's lawsuit challenging the 2013 merger of American and US Airways.

The DOJ added that the extensive codeshare relationship between Alaska and American would cause Alaska to compete less vigorously with American than does Virgin today, resulting in lower quality service and/or higher prices on the routes where Virgin and American currently compete. The complaint also alleged that the codeshare would make Alaska less likely than Virgin to launch new service in direct competition with American.

Tuesday's proposed settlement requires Alaska to significantly reduce the scope of the codeshare agreement by prohibiting Alaska and American from codesharing on routes where Virgin and American compete today and on routes where Alaska would otherwise be likely to launch new service in competition with American following the merger.

Alaska and American, however, would be allowed to continue codesharing in limited circumstances where it is unlikely to lead to competitive harm and may offer some benefits to consumers such as to serve destinations Alaska would otherwise be unlikely to serve on its own in the near term.

The proposed settlement also requires Alaska to obtain the department's approval before selling or leasing any of the gates or slots that were divested to Virgin and expressly prohibits Alaska from transferring any interest in the assets to American. This requirement ensures that American does not directly or indirectly regain control of the assets it divested to Virgin to settle the department's challenge to the American-US Airways merger.

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