By Alex Kraik*
From 2008 to 2014, during the fallout from the financial crisis that roiled the U.S. and its markets, the domestic airline industry underwent a succession of mergers. These consolidated the industry into four dominant companies: American Airlines, Delta, United, and Southwest. These oligopolistic entities are now being sued for price-fixing and are under a Department of Justice (DOJ) investigation for conspiracy. Against this backdrop, it is significant just how far and how fast the airline industry has diverged from normative competition and regulatory oversight.
Moreover, politics appear to have played a potentially dispositive role. Reports suggest that lobbying from former insiders in Obama’s administration helped push through approval of these mergers despite the government’s public stance against corporate consolidation.
The Sherman Antitrust Act of 1890 was the first federal governmental effort at regulating anti-competitive business activities. The Clayton Antitrust Act of 1914 acted as a supplement. § 7 of the latter statute is currently the main federal law governing mergers and acquisitions. This section prohibits acquisitions where “the effect…may be substantially to lessen competition, or to tend to create a monopoly.”
In 1950, the Celler-Kefauver Act was enacted, allowing both vertical and horizontal mergers to fall under § 7’s purview. Previously, only horizontal mergers were regulated. § 7 lowered the standard for scrutiny by granting Washington the power to block mergers ex ante, whereas the Sherman Act required ex post harm to competition. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 amended the Clayton Act by requiring merging companies with more than a $78.2 million valuation to notify the Federal Trade Commission (FTC) and the DOJ’s Antitrust Division of their intentions. The Act creates waiting periods for mergers and authorizes the agencies to stay a merger pending further investigation.
In 1978, Congress passed the Airline Deregulation Act. This landmark legislation ended the government’s firm control over the industry in favor of a free market system. Constrained only by antitrust laws, airline carriers were suddenly permitted to set fares, routes, and geographic markets. The airline industry responded by replacing their point-to-point business model with a hub and spoke business system that remains industry standard today. In this system, a hub is a central airport through which flights are routed, and spokes are trips that the planes take out of the hub. These business practices have drawn the attention and ire of regulatory officials because airlines tend to have a preponderance of routes in and out of their hubs.
Beginning in 1989, the Antitrust Division assumed sole responsibility for evaluating airline mergers. In comparison, the FTC and the Division share responsibility for enforcement within this regulatory frame. Almost immediately, the tendency of the industry was to reduce the number of service providers. This accelerated after the financial crisis. In 2009, Delta merged with Northwest Airlines in a $2.6 billion deal, creating what was then the largest airline in the world. In 2010, United Airlines acquired Continental Airlines for $3 billion, overtaking Delta to become the world’s largest airline. In 2011, Southwest Airlines bought AirTran for $1.5 billion. Most recently, in 2014, American Airlines purchased U.S. Airways for $11 billion, replacing United as the world’s largest airline. Today, these four carries have approximately 69% of the domestic market share. The next leading carrier, JetBlue, has a relatively miniscule 5.4% of the market share. These major carriers posted a combined profit of $21.7 billion in 2015. This led to the entire American industry’s profit skyrocketing up 241% from 2014.
For airline industry regulators, market share analysis and hub economics are the most pertinent tools for evaluating potential airline mergers. Hub carriers can offer a greater number of flights and routes than point-to-point carriers. This means that they can attract more passengers and enter into a greater number of contracting arrangements with other businesses. Hub carriers can charge higher fares to their hub’s local passengers than they can in less concentrated markets.
Regulators also look at the number of low-cost carriers in the market, as these small players are seen as effective offsets to monopolistic tendencies. The Division also examines airline-specific practices like loyalty programs, which can make entry into market hubs more difficult, and the lack of transparency of fare data – which can result in systemic price increases.
In combatting monopolies in general, the Antitrust Division almost always seeks some form of divestiture to abate its concerns of reduced competition. Naturally, this proves difficult in practice. It is often problematic to assess which assets can be divested to sufficiently allow for proper competition. Consequently, the Division favors divestiture of an on-going business rather than the stripping of defined assets. Ultimately, after evaluating merger proposals, the DOJ can i) allow the merger; ii) settle with the companies, usually forcing divestment; or iii) file an injunctive action in a federal court.
The Delta-Northwest merger in 2009 gained regulatory approval due to the minimal overlap between the antecedent airlines’ routes. The United-Continental merger was similarly approved. In this instance, however, both carriers had a hub in Newark, so the agency forced the new operator to cede takeoff and landing slots to Southwest Airlines. The American Airlines-U.S. Airways merger resulted in the DOJ filing suit in federal court to stay the transaction. In response, the carriers settled and gave up access to certain airports (Reagan and LaGuardia) to low-cost carriers.
In late October 2016, a D.C. district court rejected a motion to dismiss an action brought against these four major airline carriers. The companies are being sued by passengers for conspiracy to raise fares by keeping seating capacity artificially low. The case combines 105 separate claims from across the country into one class action. The passengers allege that the price fixing began in 2009, immediately following the first wave of mega-mergers.
External to the courts, legal economists have long been instrumental in shifting legal and policy focuses away from company practices and towards what’s best for consumers. They see competition as fostering market efficiency. However, the trends in the airline industry are not consistent with past legislative actions and this utilitarian economic paradigm. With the cost of fuel having recently plummeted, variable expenses for these carriers are down. At the same time, the approval of their mega-mergers has led to record-breaking airline profits, the benefits of which have not been passed along to customers. The industry’s merger trends and results are antithetical to long established regulatory frameworks and legal discourse. In all, Washington’s explicit approval created the current state of affairs, which is an oligopolistic concentration of market share for the four major carriers.
The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.
*Alexander Kraik is a Junior Editor for MJEAL. He can be reached at firstname.lastname@example.org.
 CNN, The Runway to the Final Four, http://money.cnn.com/infographic/news/companies/airline-merger/ (last visited Jan. 22, 2017).
 David McLaughlin and Mary Schlangerstein, U.S. Looks at Airline Investors for Evidence of Fare Collusion, Bloomberg (Sept. 22, 2015, 5:00 AM), https://www.bloomberg.com/news/articles/2015-09-22/do-airfares-rise-when-carriers-have-same-investors-u-s-asks.
 Justin Elliott, The American Way, ProPublica (Oct. 11, 2016, 7:00 AM), https://www.propublica.org/article/airline-consolidation-democratic-lobbying-antitrust.
 Sherman Antitrust Act, 15 U.S.C. §§ 1-7 (2016).
 Clayton Antitrust Act, 15 U.S.C. §§ 12-27 (2016).
 Id. at 15 U.S.C § 18.
 Celler-Kefauver Act of 1950, Pub. L. No. 899, 64 Stat. 1225 (1950).
 Law Review Editors, Vertical Forestalling under the Antitrust Laws, 19 Univ. Chi. L. Rev. 583, 584 (1952).
 15 U.S.C. § 18; 15 U.S.C. § 2.
 Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (2016).
 Id at 15 U.S.C. § 18(b).
 Airline Deregulation Act of 1978, Pub. L. No. 95-904, 92 Stat. 1705 (1978).
 Gerald N. Cook and Jeremy Goodwin, Airline Networks: A Comparison of Hub-and-Spoke and Point-to-Point Systems, 17 Journal of Aviation/Aerospace Educ. & Research 51, 51 (2008).
 Anming Zhang, An Analysis of Fortress Hubs in Airline Networks, 30 Journal of Transp. Econ. and Policy 293, 293 (1996).
 Antitrust Analysis of Airline Mergers: Hearing Before the H. Comm. On Transp. & Infra., 106th Cong. 4 (2000) (statement of John M. Nannes, Deputy Asst Att’y Gen., Antitrust Division, Dep’t of Justice). [hereinafter Antitrust Analysis]
 John Crawley, Delta Buys Northwest to Create Biggest Airline, Reuters (Oct. 30, 2008, 7:32 AM), http://www.reuters.com/article/us-delta-northwest-idUSTRE49S8BA20081030.
 Jad Mouawad and Michael J. de la Merced, United and Continental Said to Agree to Merge, NY Times (May 2, 2010), http://www.nytimes.com/2010/05/03/business/03merger.html.
 Jad Mouawad, Southwest, Determined to Expand, Buys AirTran, NY Times (Sept. 27, 2010), http://www.nytimes.com/2010/09/28/business/28air.html.
 Chris Isidore, US Airways-American Airlines to Merge, CNN (Feb. 14, 2013, 12:32 PM), http://money.cnn.com/2013/02/14/news/companies/us-airways-american-airlines-merger/.
 Office of the Asst Sec’y for Research and Tech., Bureau of Transp. Stat.: Airline Domestic Market Share Aug. 2015-July 2015, http://www.transtats.bts.gov/.
 Office of the Asst Sec’y for Research and Tech., Bureau of Transp. Stat.: 4th Quarter 2015 Airline Fin. Data (2016).
 Antitrust Analysis, at 15-17.
 Id. at 17.
 Id. at 18.
 Id. at 8-9.
 Id. at 9.
 Federal Trade Comm’n, Merger Review: How Mergers are Reviewed, https://www.ftc.gov/news-events/media-resources/mergers-and-competition/merger-review.
 Crawley, supra.
 Jad Mouawad, United-Continental Merger Clears Federal Hurdle, NY Times (Aug. 27, 2010), http://www.nytimes.com/2010/08/28/business/28air.html.
 Press Release, Dep’t. of Justice, Justice Dep’t Requires US Airways and Am. Airlines to Divest Facilities at Seven Key Airports to Enhance System-wide Comp. and Settle Merger Challenge (Nov. 12, 2013).
 Jonathan Stempel, U.S. Airlines Lose Bid to Dismiss Price-Fixing Lawsuit, Reuters (Oct. 30, 2016), http://uk.reuters.com/article/airlines-lawsuit-idUKL1N1D00CR.
 See generally William E. Kovacic and Carl Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 Journal of Econ. Perspectives 43 (2000).
 Mary Schlangenstein and Michael Sasso, Airlines Reap Benefits from Cheaper Fuel, Consumers Not So Much, Bloomberg (Jan. 27, 2016, 5:01 AM), https://www.bloomberg.com/news/articles/2016-01-27/airlines-reap-benefits-from-lower-fuel-consumers-not-so-much.