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

Date:
Matter Number:

971 0051

By: 
Robert Pitofsky, Former Chairman;
Roscoe B. Starek, III, Former Commissioner;
Christine A. Varney, Former Commissioner

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.
 

(File No. 971-0051)