Source: Portfolio.com

The boards of Delta Air Lines and Northwest Airlines are scheduled to meet today to approve a merger that would create the world's largest airline in terms of traffic.

The one hang-up, reports the Associated Press, is that negotiators for the two airlines' pilots unions have been unable to agree on how seniority for the 12,000 pilots would work under a merger.
Still, if the hurdle is overcome, that merger would certainly trigger another deal, a combination of United and Continental airlines. Then the consolidation long sought by the industry and by Wall Street may finally have arrived.

Not so fast.

The conventional wisdom holds that these deals are almost certain to be approved. The alternative for the high-cost, thin-margin industry is bleak. For some airlines, oil above $100 will book them another trip through bankruptcy.

But that may not be the view of regulators.

"Airline mergers haven't had great luck" at the Justice Department, says one antitrust lawyer in private practice. There are staff lawyers at Justice who are well versed in challenging airline mergers and there is ample precedent for rigorous review of these deals.

"Their history is that they have been concerned about a lot of these deals, and this is not an area in which they have been laissez-faire," said another antitrust lawyer in private practice.

In 2001, United Airlines abandoned a $4.3 billion takeover of US Airways based on its judgment that the deal would not make it through the antitrust review process at the Justice Department. Bush administration antitrust appointees removed themselves from review of the case because of conflicts of interest—a "bad break" according to one antitrust lawyer—and the case was handled mainly by staff lawyers.

Still, the Justice Department has given approval to smaller deals, such as a combination between America West and US Airways, whose networks barely overlap. But the proposed combinations by Delta and United "look more like" the UAL/US Airways deal, says one of these antitrust lawyers.

The Justice Department analyzes the competitive impact of airline mergers by examining "city pairs" and looking for overlaps. In the past, mergers have gotten through Justice by divesting of certain routes and gate rights. "What people have speculated, though, is that we are running out of room to do that because we are getting at a level of concentration," says one antitrust lawyer.

Indeed, concern about concentration was a factor in the Justice Department's review of the failed UAL/US Airways deal. In a 2005 speech outlining how Justice vets airline mergers, J. Bruce McDonald, then deputy assistant attorney general in the antitrust division, said Justice opposed the deal in part because it "increased concentration in large business centers along the east coast" and "would have lessened competition in several trans-Atlantic markets."

One factor favoring consolidation is that the market has changed significantly since 2001. Low-cost carriers such as Southwest Airlines, JetBlue, and AirTran Airways account for a much larger percentage of the domestic market than they did in 2001. At the same time, an agreement between the United States and European Union that takes effect this year promises to open airports and lower airfares for travel between U.S. and European cities that were historically restricted by pacts with a single country. Historically, for instance, only PanAm and TWA could fly into London's Heathrow airport, the rights purchased by American Airlines and United.

The agreement, hailed as "historic" by the Department of Transportation, means lower barriers to entry that will give the international dimension of these deals a better chance of clearing a review by the Justice Department.

"All of the important issues are international; none of the important issues is domestic," says Hubert Horan, an airline consultant who worked on the international alliances, but has authored a paper opposing the current wave of airline mergers. "The whole objective of this is to reduce the U.S.-to-continental-Europe market to a two airline oligopoly."

Kevin P. Mitchell, chairman of the Business Travel Coalition, who spent 14 months convincing regulators to oppose the UAL/US Air deal, would not comment on the deals until they are formally announced. But he said, "I will weigh in strongly against industry consolidation. If the Delta/Northwest deal happens, the others are going to find their own dance partners and we are quickly going to go down from six major carriers to three or four."

The airlines are trying to seize the moment with the Bush administration's antitrust division, according to conventional wisdom. But antitrust lawyers say there might not be enough of a window of opportunity. "Time is running out on these things. The review of an airline deal is not a short, quick thing to do," says one lawyer in private practice.