A Department of Transportation hearing officer yesterday urged the agency to reject USAir Group Inc.'s proposed $1.59 billion acquisition of Piedmont Aviation and expressed a concern about concentration in the airline industry that could restrain future mergers.
The merger, if permitted, would create the nation's seventh-largest airline. The deal was designed to ensure USAir's survival in the rapidly concentrating airline industry by catapulting the airline into megacarrier status.
Administrative law judge Ronnie A. Yoder said that the merger would substantially reduce competition in numerous markets and raised a concern that there are barriers to entry in some markets that would prevent new competitors from springing up to challenge dominant carriers.
Officials of the two airlines and airline industry analysts said they were shocked by the recommendation, which proposes barring a smaller merger than those approved by the DOT over the past two years. In 1986, the Transportation Department approved mergers between Trans World Airlines and Ozark, Texas Air Corp. and Eastern (after initially rejecting it) and Northwest and Republic Airlines.
"The administrative law judge's recommendation is incomprehensible," said Edwin I. Colodny, chairman and president of USAir, which has its headquarters at Washington National Airport. "It would be a travesty if USAir and Piedmont were not allowed to merge after DOT has approved far larger mergers that have created some of the airline industry giants that are USAir's and Piedmont's major competitors."
However, Colodny and Piedmont both predicted that the recommendation would be rejected by the agency. The DOT is supposed to rule on the merger by Oct. 30
With the departure of Transportation Secretary Elizabeth Hanford Dole scheduled for Oct. 1, and no successor yet named, the final decision by DOT is expected to fall to Matthew V. Scocozza, DOT assistant secretary for policy and international affairs. Deputy Secretary Jim Burnley, who eventually plans to leave the agency to return to legal practice, has disqualified himself from the case because he has been negotiating with a firm involved in the proceedings for a job.
Industry analysts said yesterday that they were appalled by the decision and said they believed it was a political response to growing concerns about the impact of deregulation. If the decision is upheld, it would be devastating to both airlines, they said.
"It's as if 10 guys raided the candy store and took all the candy, and then one little guy goes in after the candy is gone and picks up a gum drop, and he's the one the cops caught," said John V. Pincavage, an airline analyst with PaineWebber Inc.
"It sure is a loud, clear message to the industry that it is heading for some politically difficult times," said Paul P. Karos, who follows the airline industry for L.F. Rothschild, Unterberg, Towbin Inc.
One solution to concerns about the merger's impact on competition might be to require the carriers to divest some landing and departure rights at certain airports.
Yoder based part of his decision on an argument by America West Airlines Inc. that the combined carriers would have substantial power in markets served from Washington National Airport and New York City's La Guardia Airport. Landing and departure rights, called "slots" in the industry, are restricted in number at those airports. Although a new competitor theoretically could buy slots from an airline already using the airport, some airlines have complained that it is impossible to buy enough slots at decent times to start a competing service.
Yoder said the hearings that led to his decision had not proved that the proposed merger would "be likely to reduce competition substantially in the national market, or in individual city-pair markets," assuming there was no barrier to entry. But Yoder said there appeared to be reason for serious concerns about "a substantial reduction of competition" on the East Coast, where both airlines operate.
"We are pleased and gratified that the judge agreed with our view of what the competitive situation is in today's airline marketplace," said John E. Gillick, an attorney who represented America West Airlines in its opposition to the merger. America West recently started service to the west from Baltimore Washington Airport and has expressed interested in starting service from Washington National.
America West had argued that allowing the two airlines to merge would give USAir 20 percent of the slots at La Guardia and 24 percent of the slots at National. Together, USAir and Texas Air Corp., the parent of Continental and Eastern Air Lines, would control more than 50 percent of the slots at each airport.
Yoder said that several factors could contribute to market power, including frequent-flier programs and computer reservation systems. He added, "In view of the existence of these barriers, a combination of the applicants would substantially reduce competition wherever they are actual or potential competitors if concentration at an airport is increased ... and this merger would substantially reduce competition in numerous relevant markets."
Colodny and industry analysts noted that Yoder previously approved the merger of Northwest Air Lines and Republic, despite opposition from the Justice Department's antitrust division, which argued that the merger would substantially reduce competition. In this case, the Justice Department said "it could not establish that the merger would eliminate substantial competition.