Biden administration may sue over Korean airline merger

The Justice Department is considering suing to thwart Korean Air’s planned acquisition of Asiana Airlines, fearing it might harm competition on passenger and cargo traffic between South Korea and the United States, according to three people with knowledge of the deliberations.

If the department sues, it would be the Biden administration’s third attempt to prevent what it believes to be monopolistic practices in the airline sector, after suits to block a JetBlue Airways-Spirit Airlines merger and against a partnership between JetBlue and American Airlines. It would also be the first time the U.S. has sought to foil a merger between foreign airlines, a prospect that could tee up legal hurdles around how courts weigh foreign government decisions.

Though the United States does not have jurisdiction over the companies’ conduct inside South Korea, where both airlines are based, it can still seek to block the merger on the basis of harm to competition in the U.S. Because the U.S. is an important market for the airlines, they have a significant incentive to resolve the DOJ’s concerns prior to a trial.

No decision has been made on whether to bring a case, and nothing is imminent. The DOJ could ultimately not take any action, the people said.

But the DOJ has been investigating the November 2020 deal for roughly two years, and is concerned that it will implicate competition on overlapping routes to the U.S., said the people, who were granted anonymity to discuss a confidential matter. Both airlines fly to San Francisco, Los Angeles, Seattle, New York City and Honolulu.

And the administration is concerned that the merger would place too much control of cargo transportation of key goods like microchips in the hands of one company, which could harm supply chain resiliency, one of the people said.

A spokesperson for the DOJ had no comment. Korean Air and Asiana did not immediately respond to a request for comment after hours local time.

The investigation and potential for a lawsuit also brings up sensitive diplomatic issues, one of the people said. The DOJ’s antitrust division is solely concerned with the competitive impact of the deal, but is in touch with the State Department’s Bureau of East Asian and Pacific Affairs, that person said.

A State Department spokesperson did not immediately respond to a request for comment.

In addition, DOJ’s involvement in a state-sanctioned business transaction could prove complicated in court.

The airlines argue their merger could be protected by the Act of State Doctrine, said a fourth person with knowledge of the review, granted anonymity to discuss a confidential matter. The legal principle, stemming from past U.S. Supreme Court case law, bars U.S. courts from ruling on the validity of official acts by foreign governments done within their borders.

The South Korean government orchestrated the deal at the height of the pandemic in November 2020, and the country’s two flag carriers have been working their way through more than a dozen regulatory approvals around the world. Sign-off from antitrust regulators in the U.S., EU and Japan are the final hurdles.

EU regulators opened up an in-depth probe of the deal in February, and have until Aug. 3 to make a final decision. This week the European Commission issued preliminary objections to the deal, though they could ultimately decide not to take action as well. The EU is concerned about competition on passenger routes to Barcelona, Rome, Paris and Frankfurt as well as cargo services throughout the bloc.

There is no immediate need for the DOJ to make a decision, with EU action this week giving the DOJ some breathing room.

Antitrust agencies coordinate on global merger reviews, and if pending investigations in other countries prevent a deal from closing, U.S. enforcers are typically under less time pressure to act.

The $1.4 billion deal would give Korean Air a roughly 64 percent stake in Asiana, with significant funding from the Korean Development Bank. The Korean government supported the deal to bolster the struggling Asiana, whose struggling financial situation was exacerbated by the pandemic.

In approving the deal, however, the Korean antitrust regulator rejected the argument that a merger was justified to save a declining company, countering that Asiana is not insolvent and its financial condition was improving.

Regulators in countries including South Korea, China and the U.K. have already cleared the deal. The U.K.’s Competition and Markets Authority approved it in March after Korean Air offered to divest some of its London slots and partner with Virgin Atlantic.

Global antitrust regulators have been in close contact. According to the Korea Fair Trade Commission’s February 2022 decision to approve the deal, there were “approximately 30 rounds of conference calls with [eight] countries including the U.S., EU, China, Japan, UK, Australia, Vietnam and Singapore."

The Korea Fair Trade Commission said the combined company would control 100 percent of the passenger traffic between Seoul and New York City, Los Angeles and Seattle, and would have roughly an 80 percent share of the routes between Seoul and San Francisco and Honolulu. United Airlines and Hawaiian Airlines operate non-stop routes between Seoul and San Francisco and Seoul and Honolulu, respectively.

As part of their agreement with the Korean regulator, the airlines agreed to not increase prices, decrease seat capacity or make major reductions in quality for the 10 years after they close the deal. They also agreed to turn over airport slots in Korea upon request by new entrants to the market.

Since the deal was announced, however, new flights have emerged on the overlapping U.S. routes. Air PREMIA, a new Korean airline, has begun flying from Seoul to both Los Angeles and Newark, lowering the market shares of the combined company on flights to Los Angeles and the New York City metropolitan area. The two Korean airlines are pointing to that as evidence of a competitive market, according to the third person.

Air PREMIA also recently began flying from Seoul to Frankfurt.

After years of airline consolidation in the U.S., the DOJ and Department of Transportation reversed course under the White House’s July 2021 competition policy executive order. In 2021 the DOJ sued to unwind a partnership between JetBlue Airways and American Airlines, and is awaiting a court ruling following a trial last year. And in March, the DOJ and DOT moved to block JetBlue’s acquisition of low-cost rival Spirit, with the DOJ set to go to trial in October.

While most merger challenges have historically settled, Assistant Attorney General Jonathan Kanter who heads up the DOJ’s antitrust division repeatedly stated his preference for litigation. So far the track record has been mixed, with the DOJ losing three out of five merger challenges under his watch.

Much of the air travel between the U.S. and the rest of the globe is governed by bilateral Open Skies treaties, which permit carriers from the U.S. and other countries to operate in their respective air space. One such agreement exists between the U.S. and South Korea.

While the exact impact on any DOJ antitrust case is unclear, experts say it would be a stretch to argue the Open Skies agreement between the U.S. and Korea bars the DOJ’s merger challenge.

In fact, the most recent versions of the treaties typically have no limits on the number of carriers from each country, contrasting with earlier U.S. practice of prioritizing its own aviation industry, said Severin Borenstein, an economics professor at the University of California, Berkeley, who spent years consulting on airline competition issues.