Government’s suit against airline merger unlikely to change industry

Curtis Tate

In suing Tuesday to block the proposed $11 billion merger of US Airways and American Airlines, the U.S. Justice Department and six state attorneys general said they were acting to protect consumers from higher prices and fewer choices.

But antitrust regulators voiced few objections to a series of mergers during the past decade that helped create the conditions they now find problematic. And industry observers say stopping the latest deal won’t lower fares, eliminate bag fees or restore service to smaller and medium-size airports where major carriers have cut back.

Whether American and US Airways ultimately close the deal or not, the airline business has changed dramatically in the more than three decades since deregulation. The industry has weathered bankruptcies, terrorist attacks, fuel price increases and economic downturns. Now the remaining carriers are in much better shape.

“We talked for decades about how this industry can get profitable,” said Adie Tomer, a senior research associate at the center-left Brookings Institution. “Now they are.”

The challenge to the proposed merger comes six months after American and US Airways announced their intention to combine, and days before a federal bankruptcy court was expected to bring the deal a step closer to approval. It also appeared to be a reversal: The department had signed off on other big mergers in recent years, including United-Continental and Delta-Northwest.

“Why this merger and not the others?” asked Bob Poole, the director of transportation policy at the libertarian Reason Foundation. “It’s a strange time to close the barn door.”

Until very recently, airlines merged because their survival was at stake. All the major carriers have gone through bankruptcy, and American is the last. But in its filing Tuesday, the Justice Department said the two carriers had noted that they could stand on their own, making the merger one of choice rather than necessity.

“If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers,” Bill Baer, assistant attorney general in the Justice Department’s antitrust division, said in a statement. “Both airlines have stated they can succeed on a stand-alone basis and consumers deserve the benefit of that continuing competitive dynamic.”

The department laid out a litany of objections in Tuesday’s filing. Among them: whether the combined company would eliminate a popular fare discount program, would raise fees for checked bags and ticket changes, would increase fares on routes where the two carriers now compete and would have a near-monopoly on service to Washington’s Ronald Reagan National Airport.

It also questioned whether the three remaining “legacy” carriers – American, United and Delta – would choose to genuinely compete with each other.

Tom Reich, the director of air service development for AvPORTS, an industry consulting firm, said the department’s concerns reflected years of pent-up frustration with the negative effects of industry consolidation.

“DOJ now has been able to observe what happens when we allow carriers to merge,” he said.

The latest merger was expected to be the last in a wave of industry consolidation. The number of legacy carriers has fallen from 20 to four, including US Airways and American.

“It’s taken a long time for this to shake out,” Poole said.

The major airlines have overcome their financial difficulties in part by cutting less-profitable routes, raising fees and fares, and focusing more on international and business travelers, who tend to be less sensitive to price.

“Their focus is on higher-yielding business travel,” Reich said. “They look at leisure travelers as people who don’t cover their costs.”

The large carriers aren’t competing aggressively anymore in places such as Cincinnati and Pittsburgh. The real prizes, Reich said, are Los Angeles and New York, rich markets for travelers who pay a premium. Delta, for example, earlier this month announced a new hourly shuttle service between Los Angeles and San Francisco.

“Airlines have become less concerned with market share except when it comes to dominating America’s largest markets,” Reich said.

Leisure travelers, especially in smaller markets, either have switched to lower-cost carriers such as Southwest and Spirit, or they drive instead. Though it may not be as lucrative, Brookings’ Tomer said there was “a lot to fight over” in the U.S. aviation market, the world’s biggest. And more airlines might still mean more competition.

“Having a more consolidated industry is not going to lead to lower prices for consumers,” he said.

It’s far from clear whether the airlines could satisfy the Justice Department’s concerns and pull off the merger. But while the suit may put the deal on hold, it’s unlikely to alter the way airlines operate.

“It doesn’t really seem that the American consumer is going to see a change in how airline business is conducted,” Tomer said.

By Curtis Tate
McClatchy Washington Bureau