Alaska Airlines Must Scale Back Codeshare Agreement with American Airlines to Proceed with Virgin America Acquisition
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Alaska Airlines Must Scale Back Codeshare Agreement with American Airlines to Proceed with Virgin America Acquisition

The modifications will ensure that Alaska will have the incentive to vigorously compete with American as Virgin does today

December 6, 2016

The U.S. Department of Justice (USDOJ) has announced that it will require Alaska Air Group Inc. to significantly reduce the scope of its codeshare agreement with American Airlines, the world's largest airline, in order for Alaska to complete its $4 billion acquisition of Virgin America Inc. The Justice Department said that these modifications will ensure that Alaska will have the incentive to vigorously compete with American as Virgin does today.

The USDOJ's Antitrust Division filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia to block the merger, along with a proposed settlement that, if approved by the court, would resolve the competitive harm alleged in the lawsuit. The merger of Alaska Airlines and Virgin America would combine the nation's sixth- and ninth-largest airlines, respectively, to create the fifth-largest U.S. carrier.

"Smaller airlines, such as Alaska and Virgin, provide a critical competitive check on the larger carriers," said Acting Assistant Attorney General Renata Hesse of the Justice Department's Antitrust Division. "Although this merger offers hope that a strengthened Alaska can be an even stronger competitor than before, because of Alaska's extensive codeshare agreement with the world's largest airline, the merger threatened to blunt important competition and reduce choices for consumers. Today's settlement ensures that Alaska has the incentive to take the fight to American and use Virgin's assets to grow its network in ways that benefit competition and consumers."

Alaska and American have both tended to offer lower prices and better service than the larger airlines. However, the complaint alleges that the codeshare agreement between the two airlines, which currently allows Alaska to market American flights on over 250 routes, creates incentives for Alaska to compete less aggressively on routes both carriers serve and to forgo launching new service in competition with American. As a result of these incentives, the complaint alleges that Alaska and American often behave more like partners than competitors.

In contrast to Alaska Airlines, Virgin America, which has a network that extensively overlaps with American Airlines' network, has competed aggressively with American. In particular, the USDOJ says, Virgin has vigorously competed with American on 20 nonstop routes served by both airlines. This competition has forced American to offer consumers lower prices and better service on some of the most traveled routes in the country. According to the USDOJ's complaint, the significant head-to-head competition between Virgin and American on these routes is due in part to the fact that Virgin holds essential and scarce assets, including airport gates and takeoff and landing rights known as "slots," at key American strongholds. Virgin acquired some of these assets, including gates at Dallas Love Field Airport and slots at Washington Reagan National Airport and New York's LaGuardia Airport, as part of the settlement of the department's lawsuit challenging the 2013 merger of American and US Airways. The department's complaint alleges that the extensive codeshare relationship between Alaska and American would cause Alaska to compete less vigorously with American than does Virgin today, resulting in lower quality service and/or higher prices on the routes where Virgin and American currently compete. The complaint also alleges that the codeshare would make Alaska less likely than Virgin to launch new service in direct competition with American.

To address the transaction's likely competitive harm, the proposed settlement requires Alaska Airlines to significantly reduce the scope of the codeshare agreement with American Airlines. 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.

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.

To preserve the competitive benefits brought about by the divestures to Virgin as part of the American-US Airways settlement, the proposed settlement requires Alaska to obtain the department's approval before selling or leasing any of the gates or slots that were divested to Virgin and expressly prohibits Alaska from transferring any interest in the assets to American. This requirement ensures that American does not directly or indirectly regain control of the assets it divested to Virgin to settle the department's challenge to the American-US Airways merger.

As required by the Tunney Act, the proposed settlement, along with the department's competitive impact statement, will be published in the Federal Register. Any person may submit written comments concerning the proposed settlement within 60 days of its publication to Kathleen O'Neill, Chief, Transportation, Energy, and Agriculture Section, Antitrust Division, U.S. Department of Justice, 450 Fifth Street, N.W., Suite 8000, Washington, D.C. 20530. At the conclusion of the 60-day comment period, the court may enter the final judgment upon a finding that it serves the public interest.