U.S. Files Suit to Block Northwest Air Alliance With Continental

The federal government filed suit Friday to block Northwest Airlines Corp.’s plan to buy a controlling stake in Continental Airlines Inc., saying it would unlawfully limit competition in the U.S. airline industry.

The suit, filed in federal court in Detroit, charges that the plan would effectively merge the nation’s No. 4 and No. 5 carriers, even though each says it would remain independent.

The Justice Department also said it has “competitive concerns” about the airlines’ plans to link their sales and marketing programs, although the government isn’t challenging that aspect of the plan in the lawsuit.

The alliance Northwest and Continental announced in January sent other major airlines scrambling to craft their own “virtual mergers.”

“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,” department antitrust chief Joel Klein said.

Northwest and Continental said they would pursue their alliance despite the government’s action, noting that Justice Department attorneys so far had not asked the court to temporarily block Northwest’s stock purchase while a judge hears the merits of the case.

“We do believe Justice has a very weak legal case, a very weak factual case and a very weak economic case,” Continental General Counsel Jeff Smisek said. “We expect this litigation to drag out for years to come,” he told reporters.

“This is a pro-consumer transaction,” Northwest general counsel Douglas M. Steenland said. It “produces $1.4 billion in consumer value and benefits per year. This transaction unquestionably preserves long-term independence of Continental Airlines.”

Justice Department official John Nannes said the companies would “assume that risk” if they complete the acquisition.

Under the alliance announced in January, Northwest said it would buy a 14% stake in Continental from Air Partners, which would give it voting control. Northwest and Continental also said they would keep their separate names, fleets and employees, but combine their route networks and frequent-flier programs.

Both airlines said the arrangement would provide more choices and improved service to consumers, while maintaining the independence of both companies for at least 10 years. But the nation’s other major airlines rushed to form various kinds of partnerships, or “virtual mergers,” which prompted fears in Congress and among travelers that service would suffer and fares would rise.

In its suit, the government said Northwest and Continental were each other’s most significant competitors--if not the only competitors--for nonstop service between the cities where the two carriers operate their hubs.

Northwest has hubs in Detroit, Memphis, Tenn., and Minneapolis; Continental in Cleveland, Houston and Newark, N.J.

Although Northwest promised to place its Continental stake in a voting trust for six years, the government charged that the trust would not prevent the harm likely from the merger.

Northwest said it was mystified by the lawsuit because it has made a number of concessions to the Justice Department during negotiations and believed the department’s concerns had been resolved. Northwest nevertheless will comply with the restrictions it agreed to during the talks, Steenland said.

“When you cut through it, it seems that the Department of Justice’s claim is that potentially, 10 years from now, Northwest may gain control of Continental,” Steenland said. “We think that’s highly speculative, and at the end of the day, no court will find merit with respect to that claim.”

John Gardner, a transportation analyst at Charles Schwab & Co.’s Washington Research Group, said the Justice Department has a “pretty good case.”

“You would have Continental and Northwest not technically ‘merged,’ but also not competing,” he said.