American Airlines-US Airways Merger: Not Over Until the Fat Lady Sings

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One option is for American to revert back to its pre-merger strategy announcement and continue with organic growth, albeit in an accelerated fashion. Some industry experts contend that this would be a destabilizing move to the industry but it’s more likely to be destabilizing to other airlines, which would be forced to compete with a growing American.  Pundits have repeated on television and in newspaper interviews over the past week that greater overall capacity would translate into lower profits with airlines having fewer resources available to invest in the flying experience.

Ironically, those same analysts haven’t said much, if anything, about Delta’s expansion in the same markets.

The prevailing wisdom from analysts continues to contend that American must merge with US.  However, a reexamination of the reasons for the merger discloses little to support that position.

For starters, US Airways has a miniscule presence in New York, largely due to its slot swap with Delta, and relatively little presence in Chicago and Los Angeles compared to other carriers.  The airline is strong in Boston, has a very strong presence in Washington, D.C. as a consequence of its slot swap with Delta, has fortress hubs in Charlotte and Philadelphia, and a solid hub in Phoenix. Its lack of any presence in Asia would do little to strengthen the “new” American in that part of the world, a region where United and Delta are particularly strong. The lack of presence in New York, Los Angeles, and Chicago would also contribute very little to expanding the airline’s flying where it needs to be the most competitive.

It’s now clear, on examination of the DOJ filing, that US Airways’ executives saw the merger as the best way to stop American from expanding its service after emerging from bankruptcy. Indeed, rather than add capacity, their plan, according to documents cited by the DOJ, would be to cut capacity in the new American by 10%, the same pattern other airlines followed after their own mergers.

These cuts, which would be accompanied by fare increases, were likely the catalyst that prompted the attorneys general of five states, Arizona, Florida, Pennsylvania, Tennessee, and Texas, to join the suit seeking to block the merger.

The filing also showed that US Airways planned to generate $280 million in additional revenue from “fee harmonization.” Simply put, the airline would impose US Airways’ higher baggage fees and a $40 award redemption fee for frequent flyer awards on American’s passengers.  The DOJ’s lawyers gleefully contrasted this with quotes from an e-mail message from a senior US Airways executive complaining about the “exorbitant” fee that the New York Stock Exchange would charge the company for changing its stock symbol after the merger.

Another option for AA management to consider is whether it has to compete with Delta and United.  The two most consistently profitable airlines in the industry are Alaska Airlines and Southwest Airlines.  Both are niche players although Southwest has also become the third largest airline in the U.S. thanks to its merger with AirTran.  Bigger is not always better.

American Airlines, while it’s in a holding pattern for the time being with respect to the merger, has many things going for it.  Its new contracts with workgroups give it labor costs that are far lower than United’s and relatively on a par with Delta’s, and it has new planes being delivered to it on a practically daily basis.

The Department of Justice’s decision to block the merger – and by extension – further consolidation of the airline industry, is in line with its successful dismantling of AT&T’s purchase of T-Mobile and tough stance against Budweiser’s merger with Corona.

Clearly, what passed muster even two or three years ago, namely for companies to demonstrate that their combined entity would result in cost savings and increased efficiencies enhancing an already competitive marketplace, is no longer sufficient, especially in industries that have seen significant consolidation in recent years. The bar has been raised and the mood amongst antitrust regulators may be somewhat unwelcoming, particularly when an outcome of lower prices and more consumer choice is not immediately apparent.

(Photo: Andrea Balducci)

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