Justice Dept. Suit Signals End of Airline Consolidation, AA-US Airways Merger Said to Hurt Consumers

By Jonathan Spira on 14 August 2013
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American's Terminal 8 at JFK

American’s Terminal 8 at JFK

In the last century, the U.S. Department of Justice spent a great deal of time and energy on breaking up large companies that were behaving, in the view of regulators, in an anticompetitive and/or monopolistic manner, ranging from Standard Oil to AT&T to Microsoft.  In the current century, the agency’s modus operandi has been a bit more preemptive, moving to block mergers that it felt would create such entities.

On Tuesday, the Department of Justice announced it had filed suit to block the planned merger of American Airlines’ parent AMR Corp. and US Airways, saying the merger would threaten competition and drive up the cost of tickets.

If American and US Airways choose to have their day in court and fight, the battle will certainly last more than several months and could, with appeals, take well over a year.

During that time, the lack of certainty will without question have a negative impact on both airlines.

While we’ve drawn comparisons to the AT&T/T-Mobile merger in the past, it should be noted that AT&T folded only after the FCC took action against the merger.  While AT&T and T-Mobile had had some chance of prevailing in the case brought by the DOJ, that merger had almost no such chance of going forward before an FCC administrative law judge.

In the AT&T/T-Mobile case, both parties were worse off after the dust had settled.  AT&T had to pay a $4 billion breakup fee to T-Mobile, and T-Mobile found that it had lost countless customers in the period that ensued the merger’s announcement.

In the case of American and US Airways, the filing on Tuesday is not about the DOJ playing hardball over the Washington-Reagan (DCA) takeoff and landing slots, and it isn’t over possible Congressional furor that some members might lose non-stop flights from Washington to their home states.  Had this been the case, Tom Horton, American’s CEO, and Doug Parker, his counterpart at US Airways, would have settled the matter quicker than one could type the words “court filing.”

The Justice Department, along with six attorneys general and the District of Columbia, filed suit because this merger, more so than the ones that preceded it in the industry, would substantially change the face of the airline industry, the competitive landscape, and pricing.

“This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices,” U.S. Attorney General Eric Holder said in a statement.

The Department of Justice presented a very well thought out case, starting with the legal issues raised and using the defendants’ own words and analyses to bolster their argument.  It is an argument almost everyone can relate to: the merger will raise prices, increase fees, and reduce both a choice in service and the services offered.

Up until this point, US Airways and, to a lesser extent, American were banking on the fact that U.S. anti-trust regulators let both the Delta-Northwest and United-Continental mergers proceed with limited interference, if any.  Indeed, over the past decade, regulators have put up little resistance to airline mergers, having allowed four major combinations since 2005, thus bringing the total number of major carriers from seven to four. (For the curious, in addition to Delta-Northwest and United-Continental, the list includes Southwest-AirTran and US Airways-America West.  One deal that didn’t get approved was the 2001 $12.3 billion merger between US Airways and United Airlines, which collapsed after the Department of Justice said it would file suit to stop the deal.)

Click here to continue to Page 2Too Many Mergers – A Matter of Timing

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