Feds Demand Concessions for Airline Merger

WASHINGTON (CN) – Federal antitrust regulators cleared the $4 billion acquisition of Virgin America by Alaska Air Group on Tuesday, so long as the latter scales back its partnership with American Airlines.

The merger of Alaska and Virgin, which are the nation’s sixth- and ninth-largest airlines alone, would create the fifth-largest U.S. carrier. American, the largest, meanwhile enjoys a “codeshare agreement” that allows Alaska to market American flights on over 250 routes.

Claiming that Alaska and American “often behave more like partners than competitors,” the Justice Department noted that the two have a codeshare agreement that incentivizes Alaska to compete less aggressively on routes both carriers serve and to forgo launching new service that might compete with American.

Virgin, on the other hand, has competed aggressively with American, with whose network Virgin’s extensively overlaps.

The Justice Department attributes the lower prices and better service that American now offers to Virgin’s vigorous competition on 20 nonstop routes that both airlines serve.

Virgin’s threat to American comes from its “essential and scarce assets, including airport gates and takeoff and landing rights known as ‘slots,’ at key American strongholds,” according to a statement from prosecutors.

Gates at Dallas Love Field Airport and slots at Washington Reagan National Airport and New York’s LaGuardia Airport were among the perks that Virgin picked up as part of the settlement to the government’s challenge of a 2013 merger, this one between American and US Airways.

Filing suit this morning in U.S. District Court for the District of Columbia, the United States says Alaska would pose less competition to American than does Virgin because of the extensive codeshare relationship.

This would result in lower-quality service or higher prices on the routes where Virgin and American compete, according to the complaint.

Regulators also worry that Alaska would be less likely than Virgin to launch new service in direct competition with American.

If approved by the court, the government says its proposed settlement will resolve the potential for competitive harm.

“Specifically, in order to reduce Alaska’s overall dependence on the codeshare and limit Alaska’s incentives to cooperate with American, the proposed settlement prohibits 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,” the Justice Department said in a statement. “At the same time, the settlement permits Alaska and American to continue codesharing in limited circumstances where it is unlikely to lead to competitive harm and may offer some benefits to consumers.  For example, the settlement would permit either airline to rely on the codeshare to serve destinations it would otherwise be unlikely to serve on its own in the near term.  The department explained that this last type of codesharing can potentially benefit consumers by extending each carrier’s network and is less likely to lead to anticompetitive harm.”

Alaska will also be required to obtain government approval before selling or leasing any of the gates or slots that were divested to Virgin, and Alaska will be “expressly prohibited” from transferring any interest in the assets to American.

A Delaware corporation headquartered in Seattle, Alaska noted in a statement that the settlement does not require it to divest any assets.

“The majority of Alaska and American codeshare flights will remain intact,” the airline added, noting as well that Alaska’s other airline partnerships remain unchanged, as do the other agreements between Alaska and American, including interline or reciprocal loyalty agreements.

A federal lawsuit by private plaintiffs in San Francisco still stands in the way of the merger, but Alaska notes that those “claims are without merit.”

“We remain confident in the merits of this transaction,” Alaska Air CEO Brad Tilden said in a statement. “The expanded West Coast presence and larger customer base create an enhanced platform for growth, which is good for investors, employees and especially customers – who benefit from more choices, increased competition and low fares.”

Alaska flew more than 31 million passengers to approximately 112 locations worldwide last year, taking in more than $5.5 billion in revenue.

Virgin, also Delaware-based, is headquartered in Burlingame, California. This airline flew more than 7 million passengers to approximately 24 locations worldwide last year, taking in more than $1.5 billion in revenue. Parent company Virgin Group owns approximately 18 percent of Virgin’s outstanding voting common stock. Virgin Atlantic Airways is one of several airlines that bear the Virgin name but operate separately from Virgin America.

The Justice Department’s proposed settlement and competitive impact statement are set to appear in the Federal Register, where they will face a 60-day period of public comment.

The court-filed stipulation includes signatures by Justice Department attorney Katherine Celeste, as well as attorneys for Virgin America and Alaska Air. Virgin America is represented by William Stallings at Mayer Brown. Alaska Air is represented by Courtney Dyer at O’Melveny & Myers.