Justice Department failed to convince court that the largest U.S. global distribution system for airline ticket sales sought to eliminate a competitive threat posed by Farelogix’s "next-generation technology." A decision from the U.K antitrust agency remains pending.
After an eight-day bench trial held earlier this year, the federal district court in Wilmington, Delaware, has refused to enjoin Sabre Corporation’s proposed acquisition of Farelogix, Inc., concluding that the Department of Justice failed to meet its burden of proof that the deal violated Section 7 of the Clayton Act. The court found that, even though the government failed to properly define the market in which to analyze the transaction, the acquisition would neither increase prices nor deter innovation. The court noted, however, that the deal might reduce one source of airlines’ leverage in negotiating with the three global distribution sources (GDSs), including Sabre. The Department of Justice is considering its next steps (U.S. v. Sabre Corp., April 7, 2020, Stark, L.).
In August 2019, the Antitrust Division filed its complaint, alleging that Sabre was attempting to eliminate a disruptive competitor and that the proposed acquisition of Farelogix would eliminate competition that has substantially benefitted airlines and consumers. The government alleged that the proposed acquisition would eliminate an important alternative available to airlines when negotiating with Sabre and the other GDSs, giving Sabre more leverage to demand high fees. Airlines rely on GDSs to sell their tickets though travel agencies. The government contended that Sabre sought to prevent Farelogix’s next-generation technology standard called New Distribution Capability (NDC) from eroding its dominance. According to the government NDC technology, which powers Farelogix’s "Open Connect" product (FLX OC), is poised to transform airline distribution.
A bench trial was held for eight days in January and February. In addition to Sabre and Farelogix executives, the court heard from representatives from major U.S. airlines and expert economists. It found that most players in the "airline travel ecosystem" supported the transaction. Although the court did not believe Sabre’s contentions that Farelogix was not viewed as a competitor in some form and that Farelogix’s NDC did not pose a potential threat, it refused to enjoin the acquisition.
Relevant market. The government failed to properly define a relevant market in which Sabre and Farelogix competed for purposes of showing anticompetitive effects from the transaction, according to the court. The Justice Department posited a product market, consisting of "booking services" sold through online travel agencies and brick-and-mortar travel agencies. The defendants argued that no industry participant recognized such a market. The court agreed with the defendants and found that Sabre’s GDS is a two-sided transaction platform that provides services to travel suppliers and travel agencies.
"Sabre, a two-sided transaction platform, only competes with other two-sided, platforms, but Farelogix only operates on the airline side of Sabre's platform," the court explained, citing the U.S. Supreme Court’s 2018 decision in Ohio v. American Express Co., 138 S. Ct. 2274. The Justice Department unsuccessfully argued that the Amex decision did not apply to this case.
According to the court, "Amex established that two-sided transaction platforms such as the Sabre GDS supply ‘only one product:’ the transactions that link both sides of the market." Further, the Second Circuit had previously applied Amex to the very same Sabre GDS platform.
The court went on to say that, in any event, the government’s proposed booking services market did not accurately correspond to what actually was transacted in the market relevant to the transaction. Further, the government failed to identify a relevant geographic market limited to the United States.
Competitive effects. Because the Justice Department failed to properly define the market and offered evidence of likely harm only with respect to its flawed markets, it could not prove that the merger was likely to be anticompetitive, in the court’s view. However, the court went on to say that, even if the government had proven a relevant market, it failed to show that the merger was reasonably probable to substantially lessen competition.
The Justice Department did not prove that barriers to entry prevented adequate competition going forward or that Sabre would actually harm competition if it were permitted to complete the acquisition. The evidence did not suggest that Sabre was acquiring Farelogix to eliminate FLX OC. Rather, it supported the conclusion that Sabre intended to continue offering FLX OC by integrating it into the Sabre GDS platform. The court pointed out that it was not persuaded that the merger was likely to lead to higher prices for FLX OC, as Sabre’s rivals were likely to constrain Sabre’s ability to raise prices. Lastly, the court concluded that the merger might well promote innovation rather than harm innovation, as the government contended.
Impact of COVID-19 on market. The court acknowledged the impact that the COVID-19 pandemic was having on the travel industry; however, it did not consider the potential consequences of the virus in its "forward-looking analysis." It noted that no evidence was presented at trial about how the virus might transform the industry.
Antitrust chief’s reaction. "At trial, the Antitrust Division argued that Sabre’s acquisition of Farelogix would extinguish a crucial constraint on Sabre’s market power and would result in higher prices and less innovation," said Makan Delrahim, Assistant Attorney General in charge of the Antitrust Division, in response to the decision. "While we are disappointed with the court’s decision, we appreciate the court’s thoughtful consideration of this important case. We will closely review the court’s opinion and consider next steps in light of our commitment to preserving competition for the benefit of the American consumer."
Sabre statement. "This federal court ruling supports our view that the Sabre-Farelogix acquisition is not anti-competitive," said Kristin Hays, vice president of global communications for Sabre. "We now await a final decision from the UK Competition and Markets Authority (CMA), which previously stated that it has ‘provisionally decided that prohibition of the merger represents the only effective remedy’ to its competition concerns. We expect to receive the CMA’s final decision later this week."
The case is No. 19-1548-LPS.
Attorneys: Julie S. Elmer, U.S. Department of Justice, for the United States. Allen Davis (Skadden, Arps, Slate, Meagher & Flom LLP) for Sabre Corp. and Sabre GLBL Inc. Daniel Alan Mason (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Farelogix, Inc. and Sandler Capital Partners V, L.P.
Companies: Sabre Corp.; Sabre GLBL Inc.; Farelogix, Inc.
MainStory: TopStory AcquisitionsMergers Antitrust AntitrustDivisionNews GCNNews Covid19 DelawareNews
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