Keith Sharfman —  14 November 2007

Yet another major airline merger appears to be in the works: United and Delta. This calls for some antitrust analysis. A few months ago, Thom did a thorough job analyzing the antitrust aspects of AirTran’s proposed takeover of Midwest. The key point in Thom’s analysis was that assessment of an airline merger’s economic effects properly centers not on the merging parties’ overall market shares but rather on the extent to which the two firms compete head-to-head.

United and Delta are large carriers, the second and third largest in the industry. If one uses overall industry market shares to calculate HHI in the merger analysis, the transaction would seem presumptively unlawful. But if one looks at the actual routes on which the two airlines compete and the level of competition currently present on those routes from other carriers, the picture may look very different. If it is the case that the two firms now compete head-to-head only (or largely) on routes that are are served by a large number of carriers, then the firms’ high overall market shares may not matter very much.

That said, a note of caution. In a major airline asset acquisition some years ago, American/TWA, the firms argued that the transaction should be permitted on the ground that TWA (then in bankruptcy) was a “failing firm” and that therefore the transaction’s effect on HHI was not dispositive. The enforcement authorities (wrongly) bought into this argument and permitted the transaction, even though TWA’s airplanes would not have “left the industry” (the relevant standard under a failing firm theory) if they had been sold to the second highest bidder rather than to American. Commercial airplanes are a long term, durable capital good that can’t easily be converted into other uses. Sure TWA’s creditors wanted to maximize the value of TWA’s assets. But that’s not a reason to relax the requirements of antitrust law any more than it would be to permit a bankruptcy debtor to violate the Clean Water Act.

As with TWA, neither United’s nor Delta’s planes will disappear from the market if the deal is blocked, nothwithstanding the firms’ recent bankruptcies and the financial woes that chronically plague the industry. The United/Delta deal should be assessed solely on the basis of its competitive effects. The failing firm argument has no place here, and the parties should not assume that the enforcement authorities will treat them as generously as they treated American and TWA.