U.S.
Sues to Bar Northwest Air From Key Stake in
Continental
By LAURENCE ZUCKERMAN
The Justice Department
filed suit Friday to prevent Northwest Airlines from buying a
controlling
stake in Continental Airlines, saying the deal would stymie airline competition
and
lead to higher
ticket prices for millions of Americans.
The lawsuit is
the first time that the government has tried to block a deal between two
major airlines
since the industry
was deregulated 20 years ago. It appears to signal that the Clinton administration,
which has stepped
up antitrust enforcement, will not permit further consolidation of the
airline
industry, which
has coalesced around a handful of large carriers in recent years.
"Affordable,
quality air transportation is critical to consumers both in their personal
lives and in their
businesses,"
said Joel Klein, assistant attorney general in charge of the Justice Department's
antitrust
division. "This
acquisition would lead to higher ticket prices and worse service for the
over 4 million
passengers traveling
on the routes dominated by the two airlines."
The heart of
the government's case is that control of Continental by Northwest would
diminish
competition
between the two airlines, especially on seven routes between their largest
hub airports.
Northwest, the
country's fourth-largest carrier, dominates air traffic in Detroit, Minneapolis
and
Memphis. Continental,
the nation's No 5 carrier, is now the single largest airline in the New
York
area operating
from its hub in Newark, N.J. It also dominates the airports in Houston
and Cleveland.
But it was not
immediately clear how effective Friday's action would be. The lawsuit,
filed in U.S.
District Court
in Detroit, seeks to block the Northwest-Continental transaction, but the
government
did not ask
the court to stop the two airlines from completing the deal while the case
is pending.
The complaint
also did not address an alliance agreement between the two airlines that
would enable
them to sell
seats on each others flights and engage in other joint marketing while
maintaining
separate managements,
employees and fleets. Continental has described the arrangement as a
"virtual merger."
Calling both
the equity investment and the alliance pro-competitive and pro-consumer,
Northwest
said Friday
that it will acquire the stake in Continental, "within weeks, if not days,"
while it prepares
to challenge
the government in court. If it loses, it will be forced to divest itself
of the Continental
shares, but
that might not be for awhile.
"This litigation could drag on for years to come," said Continental general counsel Jeffery Smisek.
Antitrust experts
were puzzled that the government did not seek a temporary order to stop
the
carriers. But
government lawyers said it would be possible for the Justice Department
to get a
decision from
the court relatively quickly, perhaps within a year, and that it could
still block the
alliance, which
it is still investigating.
"There is no
reason why it has to be a multiyear proceeding like the old IBM case,"
John Nannes,
the deputy assistant
attorney general in the antitrust division, said in an interview Friday.
"Merger
cases can be
brought to trial very promptly."
He said that
the government did not seek a temporary restraining order because Northwest
and
Continental
were not proposing to make changes that could not easily be undone.
The outcome of
the case promises to have far-reaching implications for the airline industry.
After
Northwest and
Continental announced their alliance in January, the country's other major
airlines
scrambled to
match them, fearing that the larger network of a combined Northwest and
Continental
would lure away
their customers.
Within weeks,
United Airlines, the country's largest, agreed to link its domestic network
with Delta
Air Lines, the
third-largest carrier. American Airlines, the second-largest, struck a
deal with US
Airways, the
sixth- largest.
Though none of
the agreements involved exchanges of stock, they alarmed lawmakers in Washington
who have grown
increasingly concerned about rising ticket prices and declining airline
competition.
Last month, United
and Delta were forced to scrap plans to jointly market their domestic flights
after
Delta's pilots
objected. But airline executives privately admit that if the Northwest-Continental
alliance is
permitted to go forward, the other alliances seek similar rights.
"The question
is: If you permit this one, how do you stop United, Delta, and so on,"
said Alfred
Kahn, who presided
over airline deregulation as head of the Civil Aeronautics board during
the
Carter administration
and is now an emeritus professor at Cornell University. "Maybe you can,
but it
is going to
be hard."
Northwest and
Continental said Friday that their alliance will result in an estimated
$1.4 billion in
consumer benefits,
while maintaining the independence of both carriers. Together, the two
carriers
account for
about 16 percent of domestic air traffic, enabling them, they argued, to
become a viable
fourth challenger
to United, American and Delta, which each have between 17 and 20 percent
of the
market.
In January, Northwest
agreed to buy 14 percent of Continental's shares, which represent 51 percent
of all voting
rights, from Air Partners, a Texas investment group controlled by financier
David
Bonderman, for
$311 million in cash and 4.1 million shares of Northwest stock.
To insure Continental's
independence, Northwest said that it would place the shares in a trust.
A set
of independent
directors on Continental's board would control the votes, though Northwest
would
retain the right
to vote the shares in the event of a takeover and a few other key circumstances
determining
Continental's future.
After the Justice
Department objected to the trust, which was to expire after six years,
Northwest
offered to extend
its life to 10 years. It also offered to submit to further restrictions
on when it would
vote the shares
and to remove a Northwest representative from Continental's board.
But Northwest
general counsel Douglas Steenland said that negotiations with the government
broke
down earlier
this week when the Justice Department refused to back down from its demand
that
Northwest give
up majority voting rights after the trust expired.
He added that
Northwest was planning to acquire the Continental shares on the more liberal
terms it
had offered
the government, which meant that many of the issues outlined in Friday's
lawsuit will be
addressed.
"This complaint challenges a transaction that doesn't exist anymore," he said.
But the government
obviously disagrees. "Anticompetitive acquisitions cannot be cured by long-term
voting trusts
or other artificial legal devices that leave one competitor in the hands
of another," Klein,
the antitrust
chief, said Friday.