U.S. Opposes Merger of Northwest and Republic Airlines
The Justice Department voiced its total opposition Monday to the proposed merger of Northwest and Republic airlines on the grounds that it would suppress competition.
If approved by the government and shareholders, the merger would create the nation’s third-largest carrier behind United and American airlines. Under terms of the agreement, NWA Inc., the parent of Northwest, would pay $884 million for Republic.
“There is a significant probability that it will substantially reduce competition in a number of non-stop passenger airline markets in violation of Section 408 of the Federal Aviation Act,” the Justice Department said in a 38-page filing with the Department of Transportation. The DOT has final authority to accept or reject any airline mergers. Justice acts only in an advisory capacity in such matters.
“All other things being equal,” the filing said, “increases in concentration increase the probability that the firms remaining in the market after the merger will be able, either collectively or unilaterally, to exercise market power.”
Observers said it is unusual for the Justice Department to absolutely oppose a merger. It usually resists only certain aspects of consolidations.
For instance, in the recent sale of Pan American World Airways’ Pacific routes to United, Justice urged that United be required to sell one route between an American gateway and Tokyo. The matter has not been decided, but it looks as if United will stop serving the Seattle-to-Tokyo route.
According to the Justice Department, the two carriers control 51 of the 63 gates at the airport in Minneapolis, where both have their headquarters.
The department said there are 42 markets where Northwest and Republic provide a large share of the competing non-stop service. In 26 of these 42 markets, “the merger would consolidate the only two airlines providing non-stop service, thereby eliminating all present competition. . . . The elimination of competition between Northwest and Republic creates a significant probability that the merger will have substantial anti-competitive effects in up to 86 markets unless other factors, in particular ease of entry, indicate otherwise,” the department said.
However, it added that it is unlikely that other airlines would enter a market served by the combined carrier.
The Transportation Department must now decide whether it will hold hearings on the proposed merger. It must make its ruling on the merger by July--within six months following the announcement of the agreement between the two airlines.
Spokesmen for Northwest and Republic said Monday that they expect the merger to be approved regardless of the Justice Department’s opposition.
Steven M. Wolf, president of Republic, said: “We believe (that) the logic of the merger is in the best interest of the traveling public, the employees of Republic and Republic shareholders and that the Department of Transportation, recognizing this, will approve the merger.”
‘No Big Surprise’
William Wren, a spokesman for Northwest, said the Justice Department’s opposition “comes as no big surprise to us, nor do we view it as a setback. It also does not necessarily mean that it (the merger) will be slowed down. The DOT has the authority . . . and they are the ones that will make the final determination. Justice has historically opposed every merger that has been proposed.”
Louis Marckesano, airline analyst with Janney Montgomery Scott, a Philadelphia brokerage, said in a telephone interview that the Justice Department, because of the stand it took in Monday’s filing, must now oppose on similar grounds other proposed mergers, such as those of Eastern Airlines and Texas Air and of Ozark and Trans World Airlines.
He criticized Justice for its stand, saying: “They are taking a parochial look at the loss of competition between two city pairs. They should be looking at Northwest’s inability to compete with United Airlines.” United, he said, has a vast domestic network feeding passengers into its newly acquired transpacific routes.
Domestic System Key
A combined Northwest-Republic would be able to compete with United, he said, because the merger would give Northwest the Republic domestic system.
If Northwest is not allowed to merge with Republic, he added, “it would have to take over some other domestic carrier and will end up having the same problems with Justice.”
A combined Northwest-Republic would have 298 planes, 30,000 employees and a route system of 100 domestic and 25 overseas cities, including 11 in the Asia-Pacific area.