Senator Kohl on Antitrust, Part I — Airline Mergers

Cite this Article
Thomas A. Lambert, Senator Kohl on Antitrust, Part I — Airline Mergers, Truth on the Market (May 08, 2007),

One nice thing about being a legal academic is that you can diversify your political portfolio. By that, I mean that you become somewhat indifferent to who’s in office. If it’s folks you agree with, then you’re happy because your preferred policies are being implemented. If it’s folks with whom you disagree, then you’re happy because your job (criticizing bad policy) becomes easier.

I was reminded of this ability to “make lemonade” as I perused the latest issue of Antitrust, the magazine of the ABA’s Antitrust Section. That issue, which is dedicated to “Antitrust in the New Congress,” is chock full of interesting stuff. Among the most intriguing pieces is an interview with Senator Herb Kohl (D-WI), the new chairman of the Judiciary Committee’s Antitrust Subcommittee.

Senator Kohl, it seems, is going to make my job easier.

Over the next few days, I’ll highlight a few of Senator Kohl’s thoughts on antitrust policy. (There’s too much here for a single blog post.) We begin with airline mergers.

Orlando-based AirTran, a discount airline, has been trying for quite some time to acquire Midwest Airlines, a Milwaukee-based airline known for its fantastic service. Midwest has repeatedly rebuffed AirTran’s offers, so AirTran has made a tender offer for Midwest stock. (The current offer expires on May 16.)

Senator Kohl is opposed to the merger and plans to use his antitrust influence to try and thwart it. He explains:

In the case of AirTran’s acquisition plans, I think we have been very clear that if they follow through with their intent to purchase Midwest, they will face hearings in our committee. Midwest is my home state’s local airline. It is headquartered and has its main hub in Milwaukee. And the quality of service they offer to travelers is superior. Their service are [sic] considered to be among the very best in the industry and they have devoted customers like you rarely see in most businesses and certainly not in the airline business. People who use Midwest Airlines truly appreciate the quality of their service in every way — from the type of airplane that they use with only two seats across to the frequency and numbers of destinations they serve from their hubs, which is so important to those of us who live in Milwaukee, to their competitively priced air fares.

So here we have an airline that offers reasonable prices, excellent service in terms of the pilots and the attendants, and gives Wisconsin residents like me excellent connections to the major business centers around the country. Most important to Wisconsin’s economy, Midwest Airlines is a local business, employing thousands of people in high quality jobs, so this airline is really appreciated by all of us in our state.

And now AirTran wants to buy it. And so, we wrote a letter to AirTran, just a couple of days ago. I wrote not only as a Senator, but also as a consumer. We think this would be a bad deal for consumers. We understand it might be good for AirTran’s own business interests and bottom line, but it would harm many thousands of travelers in Wisconsin and elsewhere in terms of quality of service. And in fact, the merger is being opposed by Midwest management.

So as the head of the Antitrust Subcommittee, you can be sure that I’m going to be looking at this deal very carefully should it go forward, including having hearings at our Subcommittee regarding what this deal would mean for consumers and the thousands of people that rely on this excellent airline.

In general, we care about competition in aviation because this industry is so critical to our country’s economy. Airlines are America. America is airlines. Of course, you can say that about other industries, too. But, with respect to airlines, in our modern economy and society, people have to travel. In today’s modern times, the airlines are the lifeblood for our nation’s commerce and our citizen’s [sic] travel.

And therefore, those of us who regulate the industry or have oversight over the industry have to do everything we can to see to it that there is sufficient competition in this industry.

Sen. Kohl’s comments sound like the sort of thing I hear from my non-lawyer friends when I tell them I teach antitrust law. The remarks demonstrate almost no understanding of antitrust’s role and purpose and instead treat antitrust as a just another tool for protectionism.

Sen. Kohl never says a word about the only real point of competition between Midwest and AirTran — i.e., the routes served by both airlines. That’s probably because the airlines compete on so few routes. Comparing the Midwest route map (click on “Midwest Airlines Route Map”) with the AirTran route map (run your cursor over the cities to see the routes from each) reveals minimal competition between these two airlines. Almost all Midwest flights originate or terminate in Milwaukee or Kansas City. AirTran, which has dozens of routes from Atlanta and Orlando, appears to offer only six flights from Milwaukee and four from Kansas City. Midwest flies one Atlanta route and two Orlando routes. Because the two airlines serve different areas (and the areas where there’s significant overlap are subject to intense competition from other airlines), a combined AirTran/Midwest would not have the power to reduce output and raise price above competitive levels. That is all antitrust cares about.

It is not, however, the only concern of politicians who would use antitrust law to achieve non-antitrust ends. Sen. Kohl emphasizes a number of other concerns. For example:

The merger might result in a change to Midwest’s fancy service. Sen. Kohl is exactly right that Midwest offers superior service — e.g., all business class seats, warm chocolate chip cookies, etc. Midwest has become a takeover target, though, because its stock price appears to be low relative to what it could be if it were run differently. In other words, the current service/price combination is not squeezing the maximum amount of value out of Midwest’s assets. AirTran believes, and is willing to bet money on the fact, that it can generate more profit from Midwest’s assets. Absent some ability to charge supracompetitive prices (and, for reasons stated above, this merger would not create such ability), AirTran could do this only if it offered a service/price combination that is more desirable to consumers than that being offered by Midwest. So, while the level of service on Midwest flights might fall post-merger, the total consumer surplus (including that which would be created by eliminating the all-business seating and thereby increasing the number of consumers on each flight) would increase. Antitrust law should not bar this expansion of overall consumer surplus.

The merger might reduce jobs in the Milwaukee area. At least Sen. Kohl is frank about his real concern: “Most important to Wisconsin’s economy, Midwest Airlines is a local business, employing thousands of people in high quality jobs….” The problem is that antitrust is not aimed at protecting jobs. It is an incredibly blunt job-protection tool. Moreover, if antitrust recognized potential job losses as grounds for blocking a merger, practically every merger could be barred. After all, it is the elimination of redundancies that creates the efficiencies that make mergers attractive in the first place.

The merger is opposed by Midwest’s management. Duh. AirTran wants to buy Midwest because it perceives Midwest’s stock price to be low relative to the value that could be produced if the firm were managed differently. That means that AirTran believes Midwest management is doing a bad job, and that current Midwest management will almost certainly be replaced in the merged company. Of course Midwest management opposes this merger! Opposition by a laggard management, though, provides no reason for antitrust authorities to block a corporate combination.

The merger involves a crucial industry. This is the argument of last resort for antitrust interventionists: Even if antitrust intervention would not normally be appropriate here, we must step in in this case because the industry at issue is just so important! We’ve recently seen the argument in connection with oil and gas mergers, but I’ve never seen it applied to airlines — especially in such dramatic terms: “[W]e care about competition in aviation because this industry is so critical to our country’s economy. Airlines are America. America is airlines.” C’mon.

Just imagine what Sen. Kohl will have to say about this.