DOJ Challenge to AA-US Airways Merger May Not Be Pro-Consumer
Concerned that a proposed merger of US Airways and American Airlines would decrease competition and increase prices for consumers, the Department of Justice is challenging the $11-billion merger in court.
But the move may not be as pro-consumer as it looks.
Joined by six state attorneys general, as well as the District of Columbia, the DOJ on Aug. 13 filed a civil antitrust suit in federal court in D.C., seeking to enjoin, or stop, the merger.
“[T]he merger, which would result in the creation of the world’s largest airline, would substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service,” according to the DOJ.
The DOJ points to the billions in revenues that both airlines are making, indicating that they are doing just fine. American is expected to come out of bankruptcy as a much stronger competitor, says the DOJ, and a merger would remove “competitive constraints” on both it and US Air.
The DOJ’s move is surprising, since a federal judge approved the merger as part of US Air’s route out of bankruptcy in April.
“The DOJ had been reviewing this merger for almost a year, and I don’t understand why they waited until the 11th hour to enjoin the merger,” says Bernard Weinstein, an adjunct professor of business economics in the SMU Cox School of Business in Dallas.
“The same allegedly ‘anti-competitive’ arguments they make could be, and were, applied to the Delta/Northwest and United/Continental mergers,” notes Weinstein. “If the DOJ succeeds in preventing the AA/US Air merger, they should also look at breaking up the other combinations.”
Unions Support Merger
While it’s rare to see a union and an employer agree on anything, American’s pilots union, both the Allied Pilots Association and the US Airline Pilots Association support the merger, claiming that it’s necessary in order to compete with merged airlines created by Delta and United.
“The two airlines worked hard to get their respective unions behind the merger,” explains Weinstein. “Certainly for the American pilots, merging (really being acquired) by US Airways was viewed as job security since American faced the real prospect of being liquidated absent a merger partner.”
So why the surprise move by the DOJ? Weinstein says it’s political. “I assume there was pressure from the White House to present the Attorney General’s action as being ‘pro-consumer,’ which falls in line with other initiatives of the Obama administration in anti-trust and other areas,” he says.
“I wonder, though, if the anti-trust action would have been brought if the two airlines had been headquartered in ‘blue’ states rather than ‘red’ states.” American is based in Texas, and US Air in Arizona.
Weinstein says while ticket prices have risen in recent years, the mergers are not to blame. He points to higher fuel prices and increased demand for seats in the face of declining availability.
And while the DOJ points to the profits made by airlines, Weinstein says they have been “critical to restoring the financial health of the industry after a decade of losses.”
As for whether or not consumers will benefit or be harmed by the merger, Weinstein says it’s difficult to say because the airline industry is unique, with its high fixed and variable costs.
“In view of the high costs of operation, it’s difficult for the legacy carriers to earn profits absent combinations and global alliances,” he says. “Should the merger be consummated, the US will have three large carriers of roughly the same size. No other country in the world has three large domestic airlines competing on domestic routes.”
“Yes, there will be less competition on some routes, but the ‘little guys’ like Jet Blue, Spirit, Virgin America and Southwest (not so little anymore) will jump into those monopoly routes, offer lower prices, and help hold down fares at the big carriers,” Weinstein predicts.