	Background

On May 3, 2010, United and Continental announced an agreement to merge  the two airlines. In 1988, merger and  acquisition review authority was transferred from the Department of  Transportation (DOT) to DOJ. A proposed merger of  United Airlines and US Airways in 2000 also resulted in opposition from  DOJ, which found that, in its view, the merger would violate antitrust laws  by reducing competition, increasing air fares, and harming consumers on  airline routes throughout the United States. Airline Mergers Are Driven by Financial and Competitive Pressures, but Challenges Exist

Volatile earnings and structural changes in the industry have spurred some  airlines to explore mergers as a way to increase their profitability and  financial viability. Over the last decade, the U.S. passenger airline industry  has incurred more than $15 billion in operating losses. One of the primary financial benefits that airlines consider when merging  with another airline is the cost reduction that may result from combining  complementary assets, eliminating duplicative activities, and reducing  capacity. The other primary financial benefit that airlines consider with mergers and  acquisitions is the potential for increased revenues through additional  demand, which may be achieved by more seamless travel to more  destinations and increased market share and higher fares on some routes. The airline industry is  becoming increasingly global; for example, the Open Skies agreement  between the United States and the European Union became effective in  March 2008. The Department of Justice’s Antitrust Review Is a Critical Step in the Airline Merger and Acquisition Process

DOJ’s review of airline mergers and acquisitions is a key step for airlines  hoping to consummate a merger. For airlines, as with other industries,  DOJ uses an analytical framework set forth in the Horizontal Merger  Guidelines (the Guidelines) to evaluate merger proposals. To analyze whether a  proposed merger or acquisition raises antitrust concerns—whether the  proposal will create or enhance market power or facilitate its exercise— DOJ follows an integrated five-part analytical process set forth in the  Guidelines. Third, DOJ  considers whether other competitors are likely to enter the affected  markets and whether they would counteract any potential anticompetitive  effects that the merger might have posed. Fifth, DOJ considers whether, absent the merger or  acquisition, one of the firms is likely to fail, causing its assets to exit the  market. In Creating the Largest U.S. Passenger Airline, a United-Continental Merger May Face Integration Challenges and Analysis of Some Overlapping Markets

If not challenged by DOJ, the merged United-Continental would surpass  Delta as the largest U.S. passenger airline. The amount of overlap in airport-pair combinations between the two  airlines’ networks is considerable if considering all connecting traffic;  however, for most of the overlapping airport-pair markets there is at least  one other competitor. Based on 2009 ticket sample data, for 13,515 airport  pairs with at least 520 passengers per year, there would be a loss of one  effective competitor in 1,135 airport-pair markets affecting almost 35  million passengers by merging these airlines (see fig. However, only  10 of these airport-pair markets would not have any other competitors in after a merger. The combination of the two airlines would also create a new  effective competitor in 173 airport-pair markets affecting almost 9.5  million passengers.
Why GAO Did This Study

Earlier this month, United Air Lines (United) and Continental Airlines (Continental) announced plans to merge the two airlines and signed a merger agreement. This follows the acquisition of Northwest Airlines by Delta Air Lines (Delta) in 2008, which propelled Delta to become the largest airline in the United States. This latest merger, if not challenged by the Department of Justice (DOJ), would surpass Delta's merger in scope to create the largest passenger airline in terms of capacity in the United States. The passenger airline industry has struggled financially over the last decade, and these two airlines believe a merger will strengthen them. However, as with any proposed merger of this magnitude, this one will be carefully examined by DOJ to determine if its potential benefits for consumers outweigh the potential negative effects. At the Committee's request, GAO is providing a statement for the record that describes (1) an overview of the factors that are driving mergers in the industry, (2) the role of federal authorities in reviewing merger proposals, and (3) key issues associated with the proposed merger of United and Continental. To address these objectives, GAO drew from previous reports on the potential effects of the proposed merger between Delta and Northwest and the financial condition of the airline industry, and analyzed Department of Transportation (DOT) airline operating and financial data.

What GAO Found

As GAO has previously reported, airlines seek to merge with or acquire other airlines to increase their profitability and financial sustainability, but must weigh these potential benefits against operational costs and challenges. The principal benefits airlines consider are cost reductions--by combining complementary assets, eliminating duplicate activities, and reducing capacity--and increased revenues from higher fares in existing markets and increased demand for more seamless travel to more destinations. Balanced against these potential benefits are operational costs of integrating workforces, aircraft fleets, and systems. DOJ's antitrust review is a critical step in the airline merger and acquisition process. DOJ uses an integrated analytical framework set forth in the Horizontal Merger Guidelines to determine whether the merger poses any antitrust concerns. Under that process, DOJ assesses the extent of likely anticompetitive effects of reducing competition in the relevant markets--in this case, between cities or airports. DOJ further considers the likelihood that airlines entering these markets would counteract any anticompetitive effects. It also considers any efficiencies that a merger or acquisition could bring--for example, consumer benefits from an expanded route network. Finally, it examines whether one of the airlines proposing to merge would fail and its assets exit the market in the absence of a merger. One of the most important issues in this merger will be its effect on competition in the airline industry. For example, GAO's analysis of 2009 ticket data showed that combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total traffic between airports) in 1,135 markets (called airport pairs) affecting almost 35 million passengers while creating a new effective competitor in 173 airport pairs affecting almost 9.5 million passengers. However, in all but 10 of these airports pairs there is at least one other competitor.