ANALYSIS: EC decision on American shows flexible approach

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The European Commission may have allowed the American Airlines-US Airways merger to proceed, but uncertainty remains over how much applicants must prove that proposed remedies will actually work.

In the American-US Airways case, the Commission knew that US Airways plans to switch from the Star Alliance to Oneworld once the merger is complete. So the Commission scrutinised route overlaps between US Airways and the transatlantic alliance of American, British Airways, and Iberia. It found 66 routes where US Airways and the Oneworld alliance overlap either on a non-stop on one-stop basis, but the Philadelphia-London Heathrow non-stop is the only one where the merger would create a monopoly. US Airways operates daily on this route; BA is double daily.

In response to the Commission's concerns, American and US Airways offered a comprehensive commitment to relinquish this route to a competitor with related promises on prorates, loyalty programme access, and transferring slot grandfather rights to that competitor. No one has revealed how much negotiating occurred between the airlines and Commission staff over these commitments, but they take the final form of a signed 24-page document that reads like a contract.

With these commitments, the Commission cleared the proposed merger in what it calls its first phase - ie, without more probing investigation. It did not require American or US Airways to find or propose a specific competitor to take over the route; nor did the Commission mention any search on its own for such a competitor. Now it is up to a potential rival to apply for and satisfy the requirements to take over the Philadelphia-London route.

Contrast this with other cases where the Commission has gone much further. In a group of mergers that include Lufthansa/Brussels Airlines and Lufthansa/Austrian Airlines, the Commission not only required merging airlines to release slots, but also that those fall within a 20 minute window of the new entrant's requested time, alongside other requirements that varied from slot-restricted to less congested airports. Sven Volcker, lawyer in the Brussels office of WilmerHale, noted in an article published in Air & Space Lawyer that the proposed remedy was thus "driven by the new entrant's business decisions". The more that the Commission insisted that a remedy be designed to suit a new competitor, Volcker warned, the more merger applicants "may become hostage to the strategic behaviour of their fiercest rivals".

Volcker's comments were in the context of intra-European mergers, but more recently James Dick and Marshall Sinick, antitrust lawyers in the Washington-based firm of Squire Sanders, echoed the same theme. They argue in a recent article that the EC is placing a higher burden on applicants to prove that carve-outs or concessions will offset a merger's anti-competitive effects. This higher burden essentially requires merger applicants "to create a 'pre-packaged' competitor to replace an alliance partner or merged carrier". In their view, this poses "an insurmountable problem".

Clearly, the Commission did not require this of American and US Airways and understandably they are grateful. But aviation lawyers remain perplexed about how to predict when the Commission will take a more flexible or more demanding approach.

Law professor Brian Havel, director of DePaul University's International Aviation Law Institute in Chicago, says: "Historically, the EC has been criticised for its remedies not working. The slot divestures and other remedies it required in alliance and merger decisions failed to generate increased competition or to attract new entrants into the markets in question." As a result, Havel says, "the EC has been market testing its proposed remedies in advance to ascertain that interested competitors exist and will take advantage of the opportunities made available by the proposed remedies."

Yet, in the American-US Airways case, the Commission did not appear to go this far. Nothing suggests that it canvassed other airlines to find one willing to take up the Philadelphia-London route.

"With only one overlap route," notes Marshall Sinick. "it is quite possible that the Commission adopted a new entrant approach more consistent with that of the US Departments of Justice and Transportation." Sinick refers to the US tendency to let markets decide such issues. He adds: "the degree of controversy surrounding and national importance of the objectors in the UPS-TNT proceeding was far different than in the US-AA merger."

In United Parcel Service's proposed take-over of TNT Express, the Commission, in Sinick's view, "essentially required UPS to create a new pre-packaged competitor through a combination of asset divestment and financing."

As these decisions suggest, the degree of proof that the Commission requires may depend on the overall competitive effect of a merger, who is objecting, how much controversy it generates, and the like. The burden on the applicant may vary from tough requirements such as those imposed on UPS in its attempted takeover of TNT Express, to market testing by the Commission itself, or, as in the case of US Air, simply relinquishing one route.