The collapse of the ambitious but stillborn plan by US Airways to merge into United Airlines has left Washington wondering how closely to read the tea leaves of the antitrust objections that killed the $4.3 billion proposal.

The deal died in late July, having been born in May last year when Washington was pondering another mystery: would the Democrats be returned to the White House in the November 2000 elections, or would the presidency go to one of the Republicans such as maverick Senator John McCain?

When Stephen Wolf revealed that he had signed up United to buy US Airways at a premium, he seemed to be placing his money on the Republicans, on the assumption that a change of administration would bring along with it a change in antitrust attitudes toward the mega-mergers.

After all, Wolf and United's Jim Goodwin must know something, because there was no way their deal could pass the muster of the Democratic trustbusters who were then moving to split up Microsoft. They may just have been betting that Clinton would be out and that their deal would sail through in the same way that mergers had sailed through the administrations of Reagan and of Reagan's successor, his former vice president, George Bush.

However, the Republicans may have won, and this president may well be another Bush, but this is not his father's Department of Justice. "Much to my surprise, I think we will have vigorous antitrust enforcement under Bush, perhaps not of the Clinton era but nowhere near that of either Father Bush/ Reagan," Norman Hawker, a Western Michigan University antitrust expert, says of the Justice Department's suit to end the merger. Within hours of that move, the two airlines abandoned it, and US Airways has since announced a stand-alone survival plan.

That is no surprise, but antitrust observers were caught off guard by other developments. Spencer Waller, an antitrust expert at Loyola University Chicago, says the administration's decision to appeal the American Airlines predatory pricing case "is both the most surprising antitrust decision of the Bush administration and perhaps the most significant".

The case, brought in 1999, claimed that American had offered fares at less than its own costs so that it could drive three low-fares competitors, Western Pacific Airlines, Vanguard Airlines, and SunJet International, out of certain markets. The case, brought with huge public attention, asserted that it could show that American's reputation for tough responses to competition had dissuaded other would-be low-fare competitors from entering new markets in a direct challenge to American.

A federal judge summarily threw it out in April, before it went to trial. By summer, the government decided to appeal. Some could interpret the decision as a case of institutional pride, that the agency is appealing because it wants to avoid such an abrupt defeat and save face even it does not win the case. Others disagree.

"I think they want to pursue the issues," Waller says, in particular the issue of a reputation as a tough competitor being a deterrent or barrier to entry. The appeal will also raise the issue of aircraft size as well as that of fare levels, and so the case may provide a test ground for charges of "capacity dumping".

The judge who dismissed the case had held that American was not operating at a loss simply because it was not extracting maximum profit.

He said that if courts were to accept that theory, called the theory of the "suspicious sacrifice", then they would be placed in the role of business price monitor, which would be an inappropriate role for a court. This could allow appeals courts to refine their thinking on below-cost pricing. "Antitrust is sending out vibes to everyone and I don't think they would have appealed the AMR pricing case if [antitrust chief] Charles James was not sending out signals," says Hawker, although he acknowledges that James played no direct role in either the US Airways or the appeal decisions.

Source: Airline Business