FTC's (majority) statement on Boeing Merger

[James Love <love@CPTECH.ORG>]

  This is today's (majority) FTC decision on the Boeing merger (it was
  approved).   Jamie
  
  
                   Statement of Chairman Robert Pitofsky and
            Commissioners Janet D. Steiger, Roscoe B. Starek III and
                              Christine A. Varney
  
                                in the Matter of
               The Boeing Company/McDonnell Douglas Corporation
  
                               File No. 971-0051
  
                      ------------------------------------
  
    After an extensive and exhaustive investigation, the Federal Trade
    Commission has decided to close the investigation of The Boeing
    Company's proposed acquisition of McDonnell Douglas Corporation. For
    reasons discussed below, we have concluded that the acquisition would
    not substantially lessen competition or tend to create a monopoly in
    either defense or commercial aircraft markets.
  
    There has been speculation in the press and elsewhere that the United
    States antitrust authorities might allow this transaction to go forward
    -- particularly the portion of the transaction dealing with the
    manufacture of commercial aircraft -- because aircraft manufacturing
    occurs in a global market, and the United States, in order to compete
    in that market, needs a single powerful firm to serve as its "national
    champion." A powerful United States firm is all the more important, the
    argument proceeds, because that firm's success contributes much to
    improving the United States' balance of trade and to providing jobs for
    U.S. workers.
  
    The national champion argument does not explain today's decision. Our
    task as enforcers, conferred in clear terms by Congress in enacting the
    antitrust statutes, is to ensure the vitality of the free market by
    preventing private actions that may substantially lessen competition or
    tend to create a monopoly. In the Boeing-McDonnell Douglas matter, the
    Commission's task was to review a merger between two direct
    competitors.
  
    We do not have the discretion to authorize anticompetitive but "good"
    mergers because they may be thought to advance the United States' trade
    interests. If that were thought to be a wise approach, only Congress
    could implement it. In any event, the "national champion" argument is
    almost certainly a delusion. In reality, the best way to boost the
    United States' exports, address concerns about the balance of trade,
    and create jobs is to require United States' firms to compete
    vigorously at home and abroad. Judge Learned Hand put the matter well a
    half century ago in describing the reasons for the commitment in the
    United States to the protection of the free market:
  
    "Many people believe that possession of unchallenged economic power
    deadens initiative, discourages thrift and depresses energy; that
    immunity from competition is a narcotic, and rivalry is a stimulant, to
    industrial progress; that the spur of constant stress is necessary to
    counteract inevitable disposition to let well enough alone."(1)
  
    On its face, the proposed merger appears to raise serious antitrust
    concerns. The transaction involves the acquisition by Boeing, a company
    that accounts for roughly 60% of the sales of large commercial
    aircraft, of a non-failing direct competitor in a market in which there
    is only one other significant rival, Airbus Industrie, and extremely
    high barriers to entry. The merger would also combine two firms in the
    U.S. defense industry that develop fighter aircraft and other defense
    products. Nevertheless, for reasons we will now discuss, we do not find
    that this merger will substantially lessen competition in any relevant
    market.
  
    The Commission reached its decision not to oppose the merger following
    a lengthy and detailed investigation into the acquisition's potential
    effects on competition by a large team of FTC attorneys, economists and
    accountants. The Commission staff interviewed over forty airlines
    (including almost every U.S. carrier, large and small, and many foreign
    carriers), as well as other industry participants, such as regional
    aircraft producers and foreign aerospace companies. Staff deposed
    McDonnell Douglas and Boeing officials responsible for marketing
    commercial aircraft, assessing their firms' financial conditions, and
    negotiating the proposed acquisition. Finally, the Commission staff
    reviewed hundreds of boxes of documents submitted by the merging
    companies and third parties, such as airlines and aircraft
    manufacturers.
  
    With respect to the commercial aircraft sector, our decision not to
    challenge the proposed merger was a result of evidence that (1)
    McDonnell Douglas, looking to the future, no longer constitutes a
    meaningful competitive force in the commercial aircraft market and (2)
    there is no economically plausible strategy that McDonnell Douglas
    could follow, either as a stand-alone concern or as part of another
    concern, that would change that grim prospect.
  
    The evidence collected during the staff investigation, including the
    virtually unanimous testimony of forty airlines that staff interviewed,
    revealed that McDonnell Douglas's commercial aircraft division, Douglas
    Aircraft Company, can no longer exert a competitive influence in the
    worldwide market for commercial aircraft. Over the past several
    decades, McDonnell Douglas has not invested at nearly the rate of its
    competitors in new product lines, production facilities, company
    infrastructure, or research and development. As a result, Douglas
    Aircraft's product line is not only very limited, but lacks the state
    of the art technology and performance characteristics that Boeing and
    Airbus have developed.(2) Moreover, Douglas Aircraft's line of aircraft
    do not have common features such as cockpit design or engine type, and
    thus cannot generate valuable efficiencies in interchangeable spare
    parts and pilot training that an airline may obtain from a family of
    aircraft, such as Boeing's 737 family or Airbus's A-320 family.
  
    In short, the staff investigation revealed that the failure to improve
    the technology and efficiency of its commercial aircraft products has
    lead to a deterioration of Douglas Aircraft's product line to the point
    that the vast majority of airlines will no longer consider purchasing
    Douglas aircraft and that the company is no longer in a position to
    influence significantly the competitive dynamics of the commercial
    aircraft market.
  
    Our decision not to challenge the proposed merger does not reflect a
    conclusion that McDonnell Douglas is a failing company or that Douglas
    Aircraft is a failing division. Nor does our decision not to challenge
    the proposed merger reflect a conclusion that Douglas Aircraft could
    maintain competitively significant sales, but has simply decided to
    redeploy or retire its assets. While McDonnell Douglas's prospects for
    future commercial aircraft sales are virtually non-existent, its
    commercial aircraft production assets are likely to remain in the
    market for the near future as a result of a modest backlog of aircraft
    orders. As a result, it is unlikely that the aircraft division would
    have been liquidated quickly. Moreover, the failing company defense
    comes into play only where the Commission first finds that the
    transaction is likely to be anticompetitive. Here, the absence of any
    prospect of significant commercial sales, combined with a dismal
    financial forecast, indicate that Douglas Aircraft is no longer an
    effective competitor, and there is no prospect that position could be
    reversed.
  
    The merger also does not threaten competition in military programs.
    Though both Boeing and McDonnell Douglas develop fighter aircraft,
    there are no current or future procurements of fighter aircraft by the
    Department of Defense in which the two firms would likely compete.
    Finally, there are no other domestic military markets in which the
    products offered by the companies are substitutes for each other. The
    Department of Defense, in a letter to the Commission dated July 1,
    1997, indicated that competition would remain in the defense industry
    post-merger.
  
    While the merger seems to pose no threat to the competitive landscape
    in either the commercial aircraft or in various defense markets, we
    find the twenty year exclusive contracts Boeing recently entered with
    three major airlines potentially troubling. Boeing is the largest
    player in the global commercial aircraft market and though the
    contracts now foreclose only about 11% of that market, the airlines
    involved are prestigious. They represent a sizeable portion of airlines
    that can serve as "launch" customers for aircraft manufacturers, that
    is, airlines that can place orders large enough and have sufficient
    market prestige to serve as the first customer for a new airplane. We
    intend to monitor the potential anticompetitive effects of these, and
    any future, long term exclusive contracts.
  
                      ------------------------------------
  
    1. United States v. Aluminum Company of America, l48 F.2d 416, 427 (2d
    Cir. 1945).
  
    2. Our colleague Commissioner Azcuenaga seems to speculate that these
    problems may be the result of "strategic behavior" to avoid government
    challenge, and that others in the future may pursue a similar strategy.
    Speculation is easy, but there is absolutely no evidence that any such
    behavior occurred here.
  
  
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  James Love | Center for Study of Responsive Law | P.O. Box 19367,
  Washington, DC 20036 | love@cptech.org | Voice 202/387-8030 | Fax
  202/234-5176 | Current Projects: Consumer Project on Technology:
  http://www.cptech.org | Antitrust: http://www.essential.org/antitrust
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