United Airlines and Continental Airlines Inc. may need to cede some flights to win U.S. approval for the first proposed airline merger reviewed by the Obama administration.
The U.S. Justice Department may question whether the deal announced today would limit competition on routes to China and Japan and from New York to Europe, prompting the airlines to give up routes or airport takeoff and landing slots, Mike Goldman, a Washington aviation attorney, said in an interview.
United parent UAL Corp. and Continental agreed to merge in a stock swap valued at more than $3 billion that will create the world’s biggest airline. The combination may test President Barack Obama’s antitrust policies after the Bush administration cleared three mergers, most recently Delta Air Lines Inc. and Northwest Airlines Corp. in 2008.
Democrat Obama’s Justice Department is “likely to be somewhat more skeptical” than George W. Bush’s was, said James Burnley, a partner at Venable LLP in Washington and transportation secretary under Republican President Ronald Reagan. “It’s by no means going to get automatic approval.”
The department may require the carriers to yield some take- off and landing slots at airports such as Liberty in Newark, New Jersey, where competition is restricted because total flights are capped, Burnley said.
The Justice Department is “looking at the proposed transaction,” spokeswoman Gina Talamona said today in an e- mail.
United’s name and Chicago headquarters will be retained, the companies said today in a statement. Each Continental share will be exchanged for 1.05 UAL shares. United and Continental had almost $29 billion in combined revenue last year.
Paul Mifsud, a Washington consultant and former airline executive, said he doesn’t “see the antitrust issues as very serious.”
While the Justice Department will examine routes for overlapping service, Mifsud said, “I would see this approved in fairly short order, 30 to 60 days.”
United, based in Chicago, and Houston-based Continental are the third- and fourth-largest U.S. airlines by traffic. Antitrust authorities have previously approved Delta-Northwest, buyout firm TPG Inc.’s takeover of Midwest Air Group Inc. in 2008 and US Airways Group Inc.’s merger with America West Holdings Corp. in 2005.
The Justice Department’s antitrust division, now led by Christine Varney, has raised questions about airline alliances that stop short of mergers. Last June the department called for limits on Continental’s request to coordinate flights overseas with United, saying the plan was “unprecedented in scope and breadth, sanctioning collusion.”
The department “signaled quite strongly, in my view, that it would be very skeptical of a complete merger between United and Continental,” said Mark Popofsky, co-head of antitrust at Ropes & Gray in Washington and a senior counsel in President Bill Clinton’s Justice Department.
The Transportation Department approved the Continental- United alliance in July, with limits sought by the Justice Department. Varney’s agency in December also urged limits on British Airways Plc’s alliance with AMR Corp.’s American Airlines.
“I come to this job not timid about using antitrust authority,” Varney said in a February interview.
Among United-Continental domestic routes that may draw scrutiny are Chicago-Houston, Cleveland-Washington and New York- Chicago, said Goldman, a partner at Silverberg Goldman and Bikoff LLP.
“The concern is that we are consolidating to an industry with three big network carriers” and low-fare airlines, said Goldman, whose clients include European carriers SAS Group and Spanair SA. “The question is whether that is good for competition. Will it result in higher prices?”
Of the 100 largest U.S. cities, the merger would increase market concentration in four — Washington, San Diego, Seattle and New Orleans, according to an April 19 note by Jamie Baker, a JPMorgan Chase & Co. analyst in New York.
The two carriers have overlapping non-stop flights in 13 markets, one more than Delta and Northwest had when their merger was proposed, according to Baker.
“The precedent of Delta and Northwest will have an impact,” said Mifsud, former vice president of government and legal affairs for Dutch carrier KLM. The growth of low-fare carriers such as Southwest Airlines Co. also will help assuage concerns, he said.
Continental has U.S. hubs in Newark, Houston and Cleveland, while United’s are in Chicago, San Francisco, Denver and Washington.
“The scrutiny will be the effect of the hub cities on competition domestically,” said Makan Delrahim, an attorney with Brownstein Hyatt Farber Schreck in Washington. “One potential area could be the effect of the merger with respect to Newark,” said Delrahim, a deputy assistant attorney general in the antitrust division under George W. Bush.
A United-Continental combination would surpass Delta for the top spot among U.S. airlines for flights across the Atlantic, with 40 percent of passenger traffic, and would handle 53 percent of traffic across the Pacific, where United leads, based on data compiled by Bloomberg.
“Even if the government determines that certain aspects of the transaction are anticompetitive, the parties will have the opportunity to offer a settlement,” said Andre Barlow, a partner at Doyle, Barlow & Mazard LLC in Washington and a former Justice antitrust lawyer. “That could possibly remedy those antitrust concerns.”
