






Going into the deal industry players had plenty of reason to assume the government would not intervene. For all of the political bluster that typically accompanies airline M&A, only one deal -- United Continental Holdings Inc. predecessor UAL Corp.'s proposed purchase of US Air in 2001 -- has been scuttled due to antitrust concerns, and a stalling economy and internal issues may have had more to do with UAL's decision to abandon that transaction than did antitrust concerns.

More recently deals including UAL's purchase of Continental Airlines ( CAL - Get Report) and Southwest Airlines's ( LUV - Get Report) acquisition of AirTran Holdings received less regulatory scrutiny than expected, leading many in the industry to conclude that the government had signed off on the airlines' thesis that consolidation was to be encouraged to create a healthier, more stable industry.

Justice in filing suit against AMR and US Airways made it clear that assumption was wrong. But there remains a widely held belief inside the industry that the DOJ has a weak case. Attorneys for the airlines, echoed by industry analysts and pundits, have loudly trumpeted what they see as flaws in the government's arguments that they say make going to court a poor option for regulators.

That was certainly the position of Richard Parker, the airlines' lead litigator, when he spoke to reporters on Aug. 14. "They got this one wrong, very wrong," the O'Melveny & Myers LLP partner said. The DOJ's prediction of higher fares and coordination on pricing does not take into account the benefits to consumers that will come from joining the fourth- and fifth-largest domestic carriers and creating an airline comparable in size and network to those operated by United Continental and Delta Air Lines Inc. "There will be more flights to more destinations, domestic and international. And communities, including smaller communities, will be better served."

And, the thinking goes, the DOJ will not be able to prove the harms the government said will be posed by the merger. "At trial the evidence is going to show the industry is uniquely difficult, impossible, to coordinate because fares are changing every day," Parker said.

Conventional wisdom among transportation sources is that the government's best chance to prevail in the US Airways/AMR case was to run out the clock, postponing the trial to early 2014 and forcing AMR to forego a merger and instead emerge from bankruptcy as a standalone airline. But the court's decision to schedule a trial in November, according to that line of thought, puts Justice in a bind and makes it more likely the government would be willing to compromise and avoid defeat.

Wolfe Research LLC senior airline analyst Hunter Keay argued in August that much of the DOJ's case relies on "anecdotal and vignette-driven arguments," saying it is reminiscent of the Oracle Corp./PeopleSoft case, which Justice "lost in an embarrassing fashion."

Keay has since said he received pushback from antitrust sources on the comparison, but stands by his conclusion. "With the caveat that we probably know as much about antitrust law as the DOJ seems to know about airlines, we believe the proposed merger ... will go through," he said.

Aviation analysts said the DOJ was overstating its case when it said there are more than 1,000 markets where the merger threatens competition, saying that most of those markets are third-tier city pairs like Austin, Texas, and Riverside, Calif., a route that serves fewer than a dozen passengers daily.

Hong Kong-based aviation consultancy Aspire Aviation said the government analysis also counts flights to two airports in the same market, for example, flights to both Los Angeles and Orange County, Calif., as separate markets. Counting markets instead of airports reduces the list from more than 1,000 to 700 potential competitive issues, and Aspire said that in only 17 of those routes the merger would combine the market share leader and the low fare leader.

And experts warn that while both US Airways and a restructured American are well positioned to compete today, over time their independent positions are likely to erode and leave Justice without the two vigorous competitors it hopes for.

US Airways' recent success, they argue, is built on unsustainably low wage rates that were a product of past bankruptcies. American, meanwhile, in a standalone scenario would likely emerge from Chapter 11 burdened by significant debt and would be unable to expand to rival Delta and United.










One source said the DOJ would rather risk losing a trial than drop its concerns about lost network competition in order to win a few slot and city pair divestitures. "It would be such a black eye to file a challenge on those grounds and then walk away," the source said. "I can't imagine them doing that."

How strong the DOJ's case will be in court is harder to predict, the antitrust lawyers said. Although the DOJ has a cohesive theory of how consumers will be harmed, whether U.S. District Judge Colleen Kollar-Kotelly buys it will depend on evidence contained in company documents and the impact of depositions -- all factors that won't be known until they are presented at trial.

-- Written by Lou Whiteman and Bill McConnell