Sues to Bar Northwest Air From Key Stake in
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
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.
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
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.
also did not address an alliance agreement between the two airlines that
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
the equity investment and the alliance pro-competitive and pro-consumer,
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.
were puzzled that the government did not seek a temporary order to stop
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,"
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
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.
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.
United Airlines, the country's largest, agreed to link its domestic network
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
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.
is: If you permit this one, how do you stop United, Delta, and so on,"
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."
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
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.
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,
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.
general counsel Douglas Steenland said that negotiations with the government
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
had offered the government, which meant that many of the issues outlined in Friday's lawsuit will be
"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.